Lender Communiqué New Condominium Act and Case Law Update By: Leor Margulies, Partner As most of you are aware, the new Condominium Act received royal assent on December 17, 1998 and will be proclaimed sometime in March 1999 when all of the supporting regulations will have been completed. Although it is beyond the scope of this report to give you full details, the legislation should be regarded as consumer legislation and as such, the bulk of the amendments are aimed at assisting consumers and condominium owners. This of course means that once the new regime comes into force, selling new condominiums will be somewhat more difficult and expensive, and extreme care will have to be exercised in preparing all condominium and purchase documentation. On the other hand, there are a number of improvements to the Act which will be of benefit to the development community. Some of the key changes in the Act include the following: 1. significantly increased disclosure and turnover requirements; 2. a requirement for a performance audit to be conducted no earlier than 6 months and no later than 10 months after closing, the details of which are still being negotiated between the Ministry and the development community; 3. elimination of the need for "phantom" mortgages as interest will cease to accrue and be payable to purchasers from and after interim occupancy, with purchasers being responsible to pay the developer interest from and after that date on any unpaid balance. The use of purchaser's deposits is still subject to trust requirements or the use of prescribed security (e.g. London Guarantee bonds or similar instruments); 4. a requirement for a reserve fund study to be conducted even for new condominiums. This requirement will apply to all condominiums unless they are registered prior to the date the new Act is proclaimed. Accordingly, developers will have to incur this cost as it presumably would not have been included in the first year's budget. Failure to include this cost, however, would not be considered a material change to the disclosure statement; 5. creation of leasehold condominiums, vacant land condominiums and common elements condominiums will now be permitted which should allow flexibility in certain circumstances, particularly when dealing with hospital and university lands which generally cannot be sold; 6. new phased condominiums will be permitted. However, it is unlikely that these provisions will be utilized extensively, given the potential for liability to the developer if changes are made to the original disclosure materials; 7. changes in the turnover procedures which could result in new directors being appointed before the declarant has lost control of the Board; 8. priority of Commercial Condominium Liens over prior charges; 9. the transition provisions provide that the new disclosure requirements will only apply to condominiums where no Agreements of Purchase and Sale have been entered into. Accordingly, for any new projects, as soon as one agreement of purchase and sale has been entered into, the entire project would be grandfathered, provided the agreement is accepted prior to the new proclamation date. To get an idea of the degree of change and complexity of the new Act, the original Act was 60 sections whereas the new Act contains 189 sections. This will be a whole new learning experience for the development community. Recent Case Law
10. Can the use of a Trustee shield an Owner from Liability? There has been a line of cases over the last decade which have held that where a trustee holds title to a property as a bare trustee on behalf of an owner or co-owners, without any discretionary ability to deal with the property on its own, it is really acting as an agent for an undisclosed principal or principals. In such a case, where the trustee enters into contracts or incurs liabilities, the creditor can look to the underlying beneficiaries as undisclosed principals to enforce their respective liabilities. We reported in one of our recent Communiqués the case of Edelstein Construction, where underlying beneficial owners were held liable for the obligations of their trustee which had assumed existing mortgages. One of the key defences available to beneficial owners to a claim by a creditor in this situation has been the use of a seal where the trustee executed the Agreement. There has been a long line of cases dating back to the medieval times which have held that contracts executed under seal can only be enforced against the parties who have signed a contract. This applies not only to undisclosed principals but also partners in a partnership. In a recent unreported case known as Friedmann Equity Developments Inc. v. Final Note Limited, Ontario Court of Appeal Docket No. C27293, released May 26, 1998, the court held that where the bare trustee executed a mortgage under seal, the beneficial owners could rely on the seal to shield them from any liability. The Court also looked at section 13(1) of the Land Registration and Reform Act which confirmed that no Transfer or Charge is required to be executed under seal and even if it is not under seal, the document has the same effect for all purposes as if it were executed under seal. The Court then concluded that even if the mortgage had not been signed under seal, section 13 would imply same and the beneficial owners could benefit from the deemed seal effect of section 13(1). The mortgagee has sought leave to appeal from the Supreme Court of Canada and accordingly, further judicial interpretation may be forthcoming. s This case should be of interest to joint venture owners who utilize trustees as the vehicle to handle their developments and execute loan documentation. While it is true that the lenders will quite often require guarantees of the co-owners, this may not always be the case and in any event the guarantees may well be limited. Based on the Final Note case, it would appear that whether or not the Charge is under seal, the beneficial owners can rely upon the deemed seal rule under section 13 of the Land Registration and Reform Act. However, please note that in the Final Note case, all of the liabilities relating to the Charge flowed out of the Charge and the mortgagee was relying upon its terms for enforcement of the debt. In conventional loan situations, there is usually a loan commitment which establishes the liability of the trustee and that is usually not under seal. The fact that there is a collateral charge which is executed under seal or deemed to be executed under seal will not prevent lenders from having the right to go after beneficial owners. Accordingly, in these situations, we would recommend that the documents evidencing the loan arrangements be executed under seal. 11. Waiving Contractual or Other Rights by Failing to Take Action The case of Sampson v. Lockwood (1998) 40 O.R. (3d) 161, (Ontario, CA) is a good reminder that where a party to an agreement becomes aware of contractual breaches or misrepresentations which bind the parties and proceeds with the agreement without complaint, the aggrieved party may be deemed to have waived his rights to complain of the breach of contract or misrepresentation and affirmed the contract as a result.
In the Sampson case, misrepresentations were made by the vendor's agent to the purchaser that under the Official Plan Amendment, a proposed rezoning would permit a substantially larger density of the building than actually was permitted under the O.P.A. When the purchaser learned of misrepresentations, he did not consult a lawyer but continued to seek investors in this project and made no attempt to complain of the misrepresentation. Ultimately, the transaction did not close and the purchaser refused to close on the basis of misrepresentations and was sued by the vendor for breach of contract. The vendor also claimed over against the real estate agents for negligent misrepresentation. At trial, the court held that although the misrepresentation, which was actionable, had been waived by the purchaser because of his actions, the purchaser was unaware of the legal consequences of the misrepresentation and, therefore, had not lost his right to rescind. The Court of Appeal on the other hand held that whether or not the purchaser was aware of the legal consequences, he knew that there had been a factual misrepresentation and by his actions had clearly waived any right to complain of same. The moral of the story is clearly that even if a purchaser is prepared to continue with the transaction at that time when a breach or misrepresentation is learned of, the purchaser should clearly set out in writing to the vendor that it is aware of the breaches and that it is not waiving any of its rights in respect of such breaches, irrespective of any action it may subsequently take. 12. Registration under the Ontario New Home Warranties Plan Act An earlier trial decision which held that a vendor who sold a condominium prior to registration under ONHWP but which subsequently did complete registration, could enforce the Agreement of Purchase and Sale and was upheld by the Court of Appeal in Beer v. Townsgate I Ltd. (1998) 12 R.P.R. (3d) 193. The Court held that where the parties intended to make a legally binding contract and the vendor had taken all necessary steps to register, it was not against the public interest to enforce this agreement, notwithstanding that the vendor was otherwise prohibited under ONHWP from selling without registration. A very fair and reasonable result indeed. 13. Enforceability of Condominium Purchase Agreements where Municipal Approval is Unavailable The Ontario Court of Appeal has upheld the case of Dinicola v. Huang & Danczkay Properties (1998) 40 O.R. (3d) 252. In this case, Huang & Danczkay were held liable for damages for failure to complete new condominium Agreements of Purchase and Sale, notwithstanding that the Municipality had passed an Interim Control By-law and indicated its intent to downzone the property, thereby preventing the development from proceeding. The developer alleged that these were unforeseen external circumstances that frustrated the contract and should have relieved it from any liability of the purchasers. The purchasers took the position, which was supported both at trial and at appeal, that these circumstances had been envisaged under the original Agreement of Purchase and Sale, particularly in light of the fact that there was an escape clause in the Purchase Agreement which permitted Huang & Danczkay to terminate the Agreement without any liability in the event that Municipal approval for development was not obtained by a certain date. Huang & Danczkay waived this condition but then subsequently found itself in a war with the City over development philosophy for the entire Harbourfront property. The developer, however, could have used its rights under the Agreement and failed to do so within the permitted time frame. The Court was therefore not prepared to accord the developer any additional rights to escape liabilities
based on the doctrine of frustration. The Court also assessed damages as of the date of the intended possession. The Court could have used the extended possession date (the vendor having the right to extend possession dates under the Purchase Agreement) or the date of breach of the Agreement, i.e. failure to close on the original anticipated closing date, which have resulted in lower damages being assessed against the developer (due to a falling market). Unfortunately, the Court chose to use the earliest possible date, being the original proposed date of possession which resulted in significant damages of approximately $4,976,134.00 to the Purchasers who were parties to the action. Most prudent condominium developers provide for an escape clause for both development approvals and economic viability. These clauses should normally contain a right to extend by the developer for at least one or two 6-month periods in order to provide the developer with maximum flexibility. Developers should ensure that their Agreements of Purchase and Sale contain such flexible clauses and that they rely upon same when choosing to firm up their Purchase Agreements. 14. Tenants Liable for Environmental Cleanup A recent decision of the Alberta Trial Court, Darmac Credit Corp. v. Great Western Containers Inc. confirms that unless there is specific language to the contrary, all commercial leases will contain an implied covenant that the tenanted premises will be returned to the landlord uncontaminated. In this case, there was no express environmental condition but the lease did provide that the premises were to be restored to the physical condition existing when the lease began. Upon termination, the tenant, which was a recycler of chemicals and who stored drums that leaked into the ground contaminating soil and ground water, conducted a limited environmental study and consequently a limited cleanup. The landlord demanded a full environmental audit and cleanup to government standards, repair of the roof and years of lost rent while the property remained contaminated (after the expiry of the term). The landlord was entitled to recover its losses as aforesaid, save and except for lost rental costs, as the landlord had not been diligent in mitigating its damages to conduct an environmental audit and cleanup for over a year. This case should assist landlords operating under older leases which did not have specific environmental responsibility clauses, to the extent that the tenant is solvent at the end of the term of the lease. As well, landlords should continue to be vigilant when dealing with high risk tenants, to ensure that operations of the tenant are not causing contamination and that any such contamination is remediated forthwith. This could be done through regular and at least annual inspections of the property and perhaps even environmental audits where appropriate. Even if the lease does not specifically permit same, it usually provides for inspections by the landlord and the landlord could rely upon this right to engage consultants to assist in an environmental review of the property on an ongoing basis. Further Particulars The articles and comments contained in this Communiqué provide general information only and should not be relied upon as legal advice. Further particulars on the case summarized in this report, its implications and suggested courses of action, can be obtained from Leor Margulies of our real estate group at (416) 360-3372.