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.

The duty to perform a contract honestly and in good faith will now be implied as a term of a contract; this will likely apply to condominium corporation bylaws

The way in which the common law will look at contracts has changed dramatically with the decision of the Supreme Court of Canada in Bhasin v. Hrynew 2014 SCC 71.  The Honorable Justice Cromwell, concurred with by the Honourable Chief Justices McLachlin, Lebel, Abella, Rothstein, Karakatsanis, and Wagner, has found that the duty to perform a contract honestly and in good faith will now be implied as a term of contracts and will, subject to very careful drafting, not be precluded by an entire agreement clause.  This will likely be applicable to all condominium corporation's bylaws which have been determined by the Court to be a contract among owners.

 

What follows are quotes from this ground breaking case which will be a welcome relief to many contracting parties frustrated by what are alleged to be dishonest dealing motivated by male fides; two paragraphs, [33], [74] and [86], summarize the new obligations:

 

"[33] In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations."   

 

“[74] There is a longstanding debate about whether the duty of good faith arises as a term implied as a matter of fact or a term implied by law: see Mesa Operating, at paras. 15_19. I do not have to resolve this debate fully, which, as I reviewed earlier, casts a shadow of uncertainty over a good deal of the jurisprudence.  I am at this point concerned only with a new duty of honest performance and, as I see it, this should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.”

 

“[86] The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty.  A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests."

 

Justice Cromwell reflected on three circumstances which historically have attracted the duty of good faith and unpin the manner in which the Court will impose this duty; at paragraph 47 and 48:

 

[47] “By way of example, Professor McCamus has identified three broad types of situations in which a duty of good faith performance of some kind has been found to exist: (1) where the parties must cooperate in order to achieve the objects of the contract; (2) where one party exercises a discretionary power under the contract; and (3) where one party seeks to evade contractual duties (pp. 840_56; CivicLife.com Inc. v. Canada (Attorney General) (2006), 215 O.A.C. 43, at paras. 49_50).

 

[48] While these types of cases overlap to some extent, they provide a useful analytical tool to appreciate the current state of the law on the duty of good faith."

 

Justice Cromwell then went on to make it clear that this obligation will apply to real estate contracts and will be applied to prevent contracting parties who regret a bargain from reneging on the bargain:

 

"[49] The first type of situation (contracts requiring the cooperation of the parties to achieve the objects of the contract) is reflected in the jurisprudence of this Court. In Dynamic Transport Ltd. v. O.K. Detailing Ltd., [1978] 2 S.C.R. 1072, the parties to a real estate transaction failed to specify in the purchase_sale agreement which party was to be responsible for obtaining planning permission for a subdivision of the property. By law, the vendor was the only party capable of obtaining such permission. The Court held that the vendor was under an obligation to use reasonable efforts to secure the permission, or as Dickson J. put it, “[t]he vendor is under a duty to act in good faith and to take all reasonable steps to complete the sale”: p. 1084."

 

"[51] This Court’s decision in Mason v. Freedman, [1958] S.C.R. 483, falls in the third type of situation in which a duty of good faith arises (where a contractual power is used to evade a contractual duty). In that case, the vendor in a real estate transaction regretted the bargain he had made. He then sought to repudiate the contract by failing to convey title in fee simple because he claimed his wife would not provide a bar of dower. The issue was whether he could take advantage of a clause permitting him to repudiate the transaction in the event that he was “unable or unwilling” to remove this defect in title even though he had made no efforts to do so by trying to obtain the bar of dower.  Judson J. held that the clause did not “enable a person to repudiate a contract for a cause which he himself has brought about” or permit “a capricious or arbitrary repudiation”: p. 486. On the contrary, “[a] vendor who seeks to take advantage of the clause must exercise his right reasonably and in good faith and not in a capricious or arbitrary manner”: p. 487."

 

Justice Cromwell makes it clear that commercial parties reasonably expect what he referred to as a basic level of honesty and good faith in their commercial dealings:

 

"[60] Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While they remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce. The growth of longer term, relational contracts that depend on an element of trust and cooperation clearly call for a basic element of honesty in performance, but, even in transactional exchanges, misleading or deceitful conduct will fly in the face of the expectations of the parties: see Swan and Adamski, at §1.24." 

 

Justice Cromwell also suggests that the duty of honesty and good faith leads to the conclusion that contracting parties should have “appropriate regard” for their contracting parties “legitimate contractual interests and makes it clear that this duty is distinct from a fiduciary duty.  Justice Cromwell makes it clear that it is not okay to lie or mislead contracting parties but such obligation does not create a duty of disclosure:

 

“[65] The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. This general principle has strong conceptual differences from the much higher obligations of a fiduciary.  Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.”

 

“[73] In my view, we should. I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most widely recognized aspects of the organizing principle of good faith.”

 

The Bhasin case will have far reaching implications.  It will be interesting to see how creative lawyers try to limit the scope of the duty of good faith without suggesting that dishonesty is contemplated by the contracting parties.  I query if much of the attempt to exculpate such obligations may simply be unenforceable as against public policy in light of Bhasin.  More significantly litigating parties and their litigators will add this to their pleadings and it will create potential liability even in the face of the well drafted contracts often foisted upon less powerful contracting parties.