Corporate Governance of Condominium Corporations in Alberta; Director's Duties

     I have put off writing this blog about the responsibility and duties of Directors of Boards of Directors of condominium corporations for some time.  Whenever I tried to distill a principle worth communicating my mind wandered.  Today a basic principle coalesced.  From my experience as a lawyer I have concluded that many owners do not truly appreciate the basis upon which condominium corporations where developed.  This lack of appreciation forms the basis of many a misunderstanding between owners and in many cases is the source of many unnecessary disputes.  My objective in writing this blog is to summarize the statutory regime upon which condominium corporations are built and how they are managed and then offer some observations related to how boards of directors of condominium corporations can satisfy the legal obligations which the Condominium Property Act (Alberta) imposes on Directors and at the same time manage the expectations of owners of units. 

    The development of the legal concept of the condominium occurred in the second half of the twentieth century and as such it is a relatively new concept.  In respect of residential dwellings, the concept of a condominium ownership allowed owners to share responsibility for their dwellings and the property which was commonly used by owners (“common property”).  Notwithstanding the sharing of responsibility, at the root of all condominiums are individual owners who, like all persons, want to be heard and want to be respected.  However, the sharing of responsibility limits the ability of individual owners to directly influence the management of their dwellings.  In comparison to non-shared responsibility dwellings (ie. single detached homes), owners of condominium dwellings delegate responsibility for the management of their dwellings to a board of directors.  In Alberta the legislation which governs the creation of condominiums and the management of condominium dwellings is the:

Condominium Property Act, RSA 2000, c C-22 (the “CPA”)         

Section 25 of the CPA establishes that condominiums shall be constituted as corporations though not identical to corporations established for business purposes (condominium corporations are generally treated as non-profit corporations) and establishes that the condominium corporation shall consist of “owners of units”:

Condominium corporation 

25(1)  On the registration of a condominium plan, there is constituted a corporation under the name “Condominium Corporation No.         ” and the number to be specified is the number given to the plan on registration.

(2)  A corporation consists of all those persons

                             (a)    who are owners of units in the parcel to which the condominium plan applies 

(5)  The Companies Act and the Business Corporations Act do not apply to a corporation.

 

Though not a business corporation, every condominium corporation has a legal personality and is owned by the owners of the units.  In contrast to business corporations which issue shares to the business corporation’s shareholders and which shareholders liability is generally limited to their investment, ownership of the common property in a condominium corporations is a function of “unit factor”, also referred to as unit entitlement, and owner’s liability is not limited to their investment (ie. the purchase price paid for a condominium unit).  Section 6 of the CPA provides that:

Certificate to show share in common property 

6(1)  The Registrar, in issuing a certificate of title for a unit, shall certify on it the owner’s share in the common property.

(2)  The common property comprised in a registered condominium plan is held by the owners of all the units as tenants in common in shares proportional to the unit factors for their respective units.

Similar to business corporations where shareholders do not typically actively manage a corporation and shareholders instead elect or appoint a board of directors to control the corporation, condominium corporations also elect a board of directors to control the condominium corporation; the CPA states this in section 28:

Board of directors

28(1)  A corporation shall have a board of directors that is to be constituted as provided by the bylaws of the corporation. 

The board of directors is responsible for CONTROLLING, MANAGING and ADMINISTERING the condominium corporation and enforcing the condominium corporation’s bylaws; section 37 and 32 of the CPA address this:

Control and management 

37(1)  A corporation is responsible for the enforcement of its bylaws and the control, management and administration of its real and personal property, the common property and managed property.

                Bylaws 

32(1)  The bylaws shall regulate the corporation and provide for the control, management and administration of the units, the real and personal property of the corporation, the common property and managed property.

(2)  The owners of the units and anyone in possession of a unit are bound by the bylaws.

 

All owners of units and anyone in possession of a unit are bound by the bylaws of a condominium corporation.  The duties and responsibilities of directors of condominium corporation’s board of directors is prescribed by section 28(2):

 

Board of directors

28 (2)  Every member of a board, in exercising the powers and performing the duties of the office of member of the board, shall

                             (a)    act honestly and in good faith with a view to the best interests of the corporation, and

                             (b)    exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

 

Ironically, even though a condominium corporation is expressly stated to not be subject of the Business Corporations Act, this language mirrors that of section 122 of the Business Corporations Act (Alberta):

Duty of care of directors and officers 

122(1)  Every director and officer of a corporation in exercising the director’s or officer’s powers and discharging the director’s or officer’s duties shall

(a) act honestly and in good faith with a view to the best interests of the corporation, and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

In summary, the CPA provides that the owners of units are to elect a board of directors who are delegated responsibility for the enforcement of the condominium corporation’s bylaws and delegated responsibility for the control, management and administration of the condominium corporation’s real and personal property, the common property and any applicable managed property (this concept emerges from bare land condominiums which is beyond the scope of this blog).

Board members, and in aggregate the board of directors upon which they serve, must act honestly and in good faith (this obligation being informed by the obligation to act in the best interests of the condominium corporation) and must not act negligently (that is, exercise the care diligence and skill of a reasonably prudent person in comparable circumstances).  Often disputes between owners and Boards of Directors (or the property managers retained by the Boards of Directors to assist in the enforcement of the condominium corporation’s bylaws and the control, management and administration of the condominium corporation’s real and personal property, the common property and managed property.

Section 67 of the CPA establishes the boundary of “improper conduct” by which all Board members and boards of directors must govern their conduct, by which all owners must govern there conduct and provides that an “interested party” may make application to the Court for relief in respect of the “improper conduct” of, amongst others, a board member, board of directors or an owner:

Court ordered remedy

67(1)  In this section,

                             (a)    “improper conduct” means

                                     (i)    non‑compliance with this Act, the regulations or the bylaws by a developer, a corporation, an employee of a corporation, a member of a board or an owner,

                                    (ii)    the conduct of the business affairs of a corporation in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of an interested party,

                                   (iii)    the exercise of the powers of the board in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of an interested party,

                               (iii.1)    the conduct of an owner that is oppressive or unfairly prejudicial to the corporation, a member of the board or another owner,

                                  (iv)    the conduct of the business affairs of a developer in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of an interested party or a purchaser or a prospective purchaser of a unit, or

                                   (v)    the exercise of the powers of the board by a developer in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of an interested party or a purchaser or a prospective purchaser of a unit;

                             (b)    “interested party” means an owner, a corporation, a member of the board, a registered mortgagee or any other person who has a registered interest in a unit.

 

(2)  Where on an application by an interested party the Court is satisfied that improper conduct has taken place, the Court may do one or more of the following:

                             (b)    direct that the person carrying on the improper conduct cease carrying on the improper conduct;

                             (c)    give directions as to how matters are to be carried out so that the improper conduct will not reoccur or continue;

                             (f)    give any other directions or make any other order that the Court considers appropriate in the circumstances.

To be clear section 67 does not just impose obligations to act properly on board members and Boards of Directors but also provides, among other things, that the failure of an owner of a unit to comply with the CPA, the regulations or a condominium corporation’s bylaws or actions of an owner of a unit which are “oppressive or unfairly prejudicial to the corporation, a member of the board or another owner”  are “improper conduct”.  This is a very significant point and one which is not appreciated by many owners of units.   Owners of units expecting to be treated reasonably by boards of directors owe a reciprocal duty to be reasonable towards board members and boards of directors.

Owners of unit must understand that, generally speaking, the Courts in Alberta will defer to decisions made by Boards of Directors [see 934859 Alberta Inc. v. Condominium Corporation No. 0312180, 2007 ABQB 640 (CanLII)]:

 

[55]            In my view, as a matter of general application, Courts do defer to duly elected condominium boards. However if improper conduct is alleged and a Court is satisfied that improper conduct has taken place, the Court, pursuant to Section 67(2) of the Condominium Act, may then direct and/or grant any of the remedies set out therein.

 

The CPA thus imposes clear obligations on boards of directors and individual directors to act reasonably and in good faith.  If this obligation is not satisfied the Court can conclude that “improper conduct” has occurred.   This obligation is matched by the obligation on owners of condominium units to not act in a manner which is in breach of the bylaws or is  oppressive or unfairly prejudicial to the corporation, a member of the board or another owner. 

This blog is being written in August of 2020.  Condominium corporations are facing a changed operating environment because of the impact of Covid-19 on our society generally and economically.  Recently I have seen the expectations of owners increase due to this dynamic.  Owners must appreciate that board members and boards of directors have obligations which take priority over the interests of any particular owner.   That is, directors and boards of directors must act in the best interests of the condominium corporation which the board of directors serves. 

For example, it would not be appropriate for a board of directors to permit owners to not pay the monthly condominium contribution required by an owner of a unit; payment of condominium contributions by owners is the economic life blood of condominium corporations.  Failure to require owners to pay may be considered to be a breach of the obligation to act in good faith, negligent and, accordingly, improper conduct.  This does not preclude a board of directors agreeing to a deferral on arrears in condominiums contributions which have accrued.  However, boards of directors must impose a reasonable timeline (usually not more than 6 months) to allow owners of units in arrears to bring the owner’s contribution account into good standing.

By way of one further example, boards of directors must be sure to review the bylaws of their condominium corporation prior to making decisions which impact any particular owner.  The bylaws of a condominium corporation, supplemented by the CPA and the regulations, provide instruction on how various issues are to be handled; ie. breach of rules, breach of bylaws, chargebacks for damages due to insured and uninsured perils which are in breach of a condominium corporation’s bylaws, collection of insurance deductibles.  Often important steps are missed by boards of directors and could lead to owners suggesting that boards of directors have acted improperly.

Boards of directors must understand that decisions of boards of directors are either made by an ordinary resolution at a duly convened meeting of the board of directors or by a resolution in lieu of a meeting signed by all board members.  Boards of directors cannot enforce the bylaws of the condominium corporation without satisfying this basic corporate governance principle; boards of directors make decisions by resolution.   Too often boards of directors act causally and make decisions by circuitous email chains or verbally; if decisions are made in this manner, which is not recommended but specifically discouraged, then such decisions should be ratified at a duly called board meeting or by a resolution in lieu of  a meeting signed by all board members.

If boards of directors govern themselves as I have encouraged the likelihood of a dispute occurring with owners will be reduced, not eliminated.  Moreover, it behooves boards of directors to carry on in a manner which satisfies the basic principles of corporate governance and to act in the best interests of the condominium corporation.

Beyond removing Board Members at a Special Meeting; Establishing and applying a Board Code of Ethics

The Ontario Court of Appeal recently considered a situation where a Board of Directors of a Condominium Corporation removed a Director for breach of the Code of Ethics adopted by the Board of Directors; Gordon v. York Region Condominium Corporation No. 818, 2014 ONCA 549.

In the Gordon case the bylaws contemplated the removal as a consequence of three breaches of the Board approved of Code of Ethics.  The removal of the subject Board member was done in accordance with the Rules of Natural Justice.  Accordingly, the Ontario Court of  Appeal upheld the resolution of the Board to remove the subject Board member.  

This decision sheds light on a mechanism which allows condominium Boards to control their own decorum.  As was the case in Gordon, the subject Board member had become obstructionist and somewhat intransigent.  It is in exactly these circumstances that a Code of Ethics may, if supported by the  bylaws, create a more civil Board environment. Though not binding on our Alberta Courts the decision of the Ontario Court of Appeal in Gordon is highly persuasive and may well be adopted.  Alberta condominium corporations may wish to amend their bylaws to add breach of a Board adopted Code of  Ethics as an additional basis for removal of a recalcitrant Board member.

Deficiencies in Common Property, Technical Audits and New Home Warranty Insurance

I always enjoy hearing Michael Ball, P.Eng. from Morrision Hershfield speak.  On January 22, 2013 Mr. Ball presented on the topic of "Technical Audits" at the CCI-SAC luncheon.

This topic has become more timely as a consequence of the changes being proposed by the Alberta Government to require all developers and builders of condominium projects to obtain insurance through a New Home Warranty Programs.  Mr. Ball made it abundantly clear to those present that failure to conduct a timely technical audit leads to it being a strong possibility that condominium corporations will be outside of the tight timelines imposed by the New Home Warranty Programs (1 year for all but structural issues and 5 years for structural issues) to make a claim on this insurance.  The proposed changes by the Alberta Government may also extend these timelines but in no way will these changes diminish the importance of a condominium corporation vigourously assessing the state of the common property. This is what a technical audit does.

Property Managers should be mindful of the possibility that failure to recommend in writing to Boards of Directors of condominium corporations to conduct a technical audit may lead to owners and others affected alleging that the Property Manager was negligent in not so advising.  More significantly, Boards of Directors should also understand the seriousness of the deadlines imposed by the New Home Warranty Programs and understand that the failure to conduct a technical audit could very well leave a condominium corporation on the wrong side of the deadline and leave Board Members exposed to similar allegations.

Imposing Fines Against Owners in a Condominium

A more illustrative case of how NOT to impose fines may not be found.  In the case
Condominium Corporation No. 042 5636 v. Chevillard, 2012 ABQB 131 Master Smart denied a condominium corporation the right to collect fines imposed and legal fees incurred in respect of fines imposed based on an owner's not cleaning up after the owner's dog.  Amng other things, Master Smart took issue with the failure of the condominium corporation to follow its bylaws.  Particularly, Master Smart stated that the Board of the condominium corporation was required to and failed to:

1. Pass a resolution declaring the owner in default of the bylaws based on the owner's failure to clean up after the owner's dog;
2. Provide written notice to the owner to rectify the breach of the bylaws; and
3. Check to see if the dog had been removed prior to filing its Application in the Court of Queen's Bench.

As a result of these three failures Master Smart dimissed the application and did not award costs to the condominium corporation for the legal fees incurred by the condomnium corporation.  Hence, how does a condominium corporation properly impose and collect fines?  The following list is suggested as good practice:

1. Make sure the condominium bylaws comply with section 35(2) of the Condominium Property Act (Alberta); 35(2)  A bylaw under which sanctions are imposed must (a) set out the sanctions that may be imposed, and (b) in the case of monetary sanctions, set out the amount of the monetary sanctions   or the range of monetary sanctions that may be imposed.
2. Look to both the Condominium Property Act  and the bylaws of the condominium corporation for guidance.
3. The Board of Directors should gather the evidence that an owner has breached the bylaws; this should be done in writing and it is not sufficient, in this blogger's opinion, to rely on verbal/spoken evidence.
4. The Board of Directors should meet to discuss the allegation of breach and review the evidence which has been gathered; the Board of Directors should then make a decision whether the bylaw has been breached and evidence this by way of resolution in the Minutes of the Board of Directors (the resolution should reflect a summary of the nature of the complaint and the conclusion of the Board.
5. The Board of Directors should be guided by the requirements of the bylaws; many bylaws require that the condominium corporation give the offending owner notice of the breach and an opportunity to rectify the breach before proceeding with fining an owner.  The bylaws may be even more detailed in respect of steps which need to be taken prior to collecting the fines (this blogger suggests that condominium corporations obtain independent legal advice on the requirements of their specific bylaws to avoid a result such as occurred in the Chevillard case).
6. The Board of Directors should be sure to inspect the unit or common property prior to proceding to Court and the Board of Directors should utilize the services of a lawyer familiar with the area of condominium law.

Obligations of Boards of Directors and Property Managers

It has been some time since I lasted posted to my blog.  My not regularly blogging is unfortuneately illustrative that "the road to hell is paved with good intentions".  On a go forward I will try to be more diligent.

I am proud to say that I am still not too old a dog to learn new tricks and recently learned how to set up RSS feeds.  From this the Morris v. Condominium Corporation No. 074 0215, 2012 ABQB 265 decision was delivered to me via my reader Feeddler.

This case is noteworthy because Master Smart appointed an inspector pursuant to section 67 of the Condominium Property Act (Alberta) (the "CPA").  The case now clearly establishes the principle that if condominium corporations fail to honor the obligations imposed by the CPA that the Court will intervene by appointing an inspector.  This is a serious remedy which Boards and Property Managers should avoid.
There is curious language in the Morris case indicating that property managers should not stand by and allow the obligations under the CPA to be ignored.  Though no relief was granted against the property manager the case may be relied on to establish the standard of care which a property manager owes to owners in condominium corporations.  I would encourage property managers to review the case and be careful to advise their condominium corporations accordingly.

Board Decisions and Judicial Deference

When might a Court exercise its discretion in place of the discretion exercised by a Board of Directors?  Amongst other sections in the Condominium Property Act (Alberta) [the “CPA”], section 67 of the CPA allows the Court of Queen's Bench of Alberta to review decisions of a Board of Directors and grant relief to an aggrieved party.

Boards of Directors are creatures of statute; that is, the CPA allows for the delegation of authority for the operation of a condominium corporation to the Board of Directors (without limitation see section 28, 37, 38, and 39).  The overarching principal is that "Every member of a board shall exercise the powers and discharge the duties of the office of member of the board honestly and in good faith".  This authority is usually amplified by the bylaws of a condominium corporation (see section 32).  In legal terms the CPA and the bylaws are the governing documents which grant authority and limit the conduct of a Board of Directors.  Policy passed by Boards of Directors, though enforceable, does not carry the same weight as a bylaw and invites scrutiny of the Court and application of section 67; see Maverick Equities Inc. v. Owners: Condominium Plan 942 2336, 2008 ABCA 221.

Section 67 of the CPA has been interpreted by the Court of Queen’s Bench of Alberta to be analogous to section 242 of the Business Corporations Act (Alberta).  That is, “improper conduct” as indicated in section 67 of the CPA is analogous to conduct which in a corporate context is “oppressive or unfairly prejudicial”; see 934859 Alberta Inc. v. Condominium Corporation No. 0312180, 2007 ABQB 640.  Thus section 67 of the CPA imposes an obligation on Board of Directors, among other parties, to not act in a manner which is oppressive or unfairly prejudicial to owners of condominium units; that is to not act improperly.

The application of section 67 of the CPA must be balanced against the general rule that the Court should provide considerable deference to decisions made by a Board of Directors. Hence, the application of section 67 of the CPA begs the question as to what types of decisions made by Boards of Directors will attract the scrutiny of the Court? The obvious answer is when a decision of a Board of Directors is improper or otherwise oppressive or unfairly prejudicial to an owner of a condominium unit.  However, this is not a clear answer because the conduct of Boards of Directors is not obviously improper or oppressive or unfairly prejudicial and is usually open for argument.  I declare my conflict in this regard because as a lawyer I benefit from this uncertainty and ambiguity.  Following this paragraph I have made reference to a few cases which illustrate some of the responses of Courts to an application by an aggrieved owner and provide guidance to the limits of Board action (the provisions in provinces other than Alberta are not identical but similar enough to be applicable).

  

• Master L.A. Smart in the case Condominium Plan No. 772 1806 v. Gobeil, 2011 ABQB318 applied section 67 of the CPA to impose an obligation on a Board of Directors to reconsider a decision which directed on owner remove a shed which had been built.
• In Chan v. Owners, Strata Plan VR-151, 2010 BCSC 1725 the Honourable Mr. Justice N. Smith of the British Columbia Supreme Court dismissed an application of an owner who sought an order barring the strata corporation from having a tree cut and seeking a declaration that she has been treated unfairly.
• The Honourable Madam Justice D.L. Shelley in the case Owners Condominium Plan 7722911 v. Marnel, 2008 ABQB 195 ordered an owner to remove the bronze-tinted film which the owner had placed on the owner's windows failing which the condominium corporation was authorized to enter the owner’s unit upon seven clear days’ notice for the purpose of effecting the removal of the bronze-tinted film.
• Sometime the Court is not as sympathetic to condominium Boards.  In The Owners: Condominium Plan No. 8111679 v. Elekes, 2003 ABQB 219 the Honourable Mr. Justice Peter M. Clark refused to find that an owner who had installed a satellite dish had acted improperly.

It behooves Boards of Directors to act with an even hand when exercising their authority.  If the decisions of a Board of Directors comes before a Court to be reviewed Boards of Directors will always be best served if every member of the Board of directors has exercised their power and discharged their duties as a member of the board honestly and in good faith, in accordance with the bylaws, and in the best interests of all of the owners in the condominium.

Managing the Risks of Board Responsibility for Deficiencies in the Common Property; Requesting Reports In Contemplation of Litigation

A Board of Directors of a condominium corporation is, with some limited exceptions, responsible for the common property located within their condominium project.  This obligation is created both pursuant to the Condominium  Property Act  (Alberta) and the bylaws of the condominium corporation.  When concerns arise with elements or aspects of the common property it is prudent for the Board of Directors, usually through the assistance of the condominium corporation's property manager, to have a third party contractor assess the elements and aspects of concern.  It is best if the contractor who provides the report is not also offering to do any required work and perhaps quoting on doing the work.  The addition of the prospect of being hired to do the work creates can create a conflict of interest and can lead self interested contractors to exaggerate the conclusions reached simply to scare the Board of Directors into hiring the contractor.


When an independent contractor inspect the elements and aspects of concern in the common property the contractor will usually produce a written report or summary of the results of the assessment.  The third party contractor report will often include recommendations in respect of steps which could or should be taken to deal with the elements of the common property which are of concern.   The provision of the report by the contractor provides knowledge to the Board of Directors.


This transition from a Board of Directors with a concern about the common property to one with knowledge of a deficiency usually brings with it a concomitant obligation.  That is the Board of Directors must follow the recommendations in the report or they run the risk that they have breached their fiduciary duty which they owe to the owners in the condominium corporation.  If the Board of Directors acts on the recommendations and remedies the deficiencies then the obligation of the Board of Directors has been satisfied.  However, what happens if the Board of Directors ignores the recommendations and does nothing to remedy the deficiences?  The recent case of Guenther v. The Owners, Strata Plan KAS431 out of the Supreme Court in British Columbia demonstrates this dynamic well.


The failure to follow the recommendations could give rise to the Board of Directors and individual Directors being sued by owners or mortgagees.  In this legal action the report of the third party contractor is required to be disclosed by the Board of Directors and forms the basis of the evidence which supports the allegation of breach of fiduciary duty.  In this regard the report is usually discussed at a meeting of the Board of Directors and the Minutes of that meeting will usually make reference to the report.  This process of receipt by the Board of Directors and reflection in the Minutes creates a record, available to all owners and mortgagees, that the Board of Directors are now aware of the deficiencies with the common property. 


It is not prudent for a Board of Directors to put themselves in this situation.  In legal actions the obligation to disclose documents is limited if a document is protected by privilege.  For those of you interested in exploring privilege beyond the scope of this blog entry you may wish to review the recent report prepared by Adam Dodek B.A., J.D., LL.M., of the University of Ottawa for the Canadian Bar Association.  One of the types of privilege which would be helpful to a Board of Directors is to retain the third party contractor to assess the elements and aspects of the common property in contemplation of litigation.  This form of privilege is associated with the general proposition that consultation by a client with the client's lawyer is protected communication.  To come within this type of privilege the Board of Directors should consult with a lawyer about the potential legal issues related to the elements and aspects of the common property of concern.  Following from this the Board of Directors should instruct their lawyer to retain the third party contractor on behalf of the Board of Directors.  The third party contractor then delivers the report to the lawyer.  The lawyer in turn provides the report to the Board of Directors.  When the report is discussed at the meeting of the Board of Directors this context is clearly stated in the Minutes and the Board would be wise to go in camera (that is off the record) to discuss the report.  This minimizes the reference to the report in the Minutes and makes it clear that the Board of Directors will be treating this report as privileged.


The result of this process and treatment is that the Board of Directors can argue that the report need not be disclosed if litigation is commenced from a failure of the Board to remedy the deficiencies. Moreover, the protection of the document allows the Board of Directors to respond to the recommendations in a more orderly manner rather than becoming panicked by strong recommendations of the third party contractor or even worse by a self interested contractor.


In situations where there is a possibility that a Board of Directors will not follow or not follow the recommendations provided by an independent contractor in a timely manner, Directors and Boards of Directors would be wise to consider retaining a lawyer to do their best to cloak the production of the contractor's report under the privilege of the report being made in contemplation of litigation.