REAL ESTATE LAW: Condominium Basics
WHAT IS A CONDOMINIUM?
- The term “condominium” refers to a specific, legal form of owning real estate; not to the physical style of the building, or the particular use of the building.
- Condominiums are a means of dividing property into some parts which are individually owned, and some parts which are owned in common.
- A “condominium” can be any kind of building, including a highrise apartment, a low rise apartment, a semi-detached house, a townhouse or commercial unit such as a store or an office.
- Owners can sell their units, along with their share of the common property.
- The property taxes, and mortgage, as well as a proportional share of common expenses for each unit, are the responsibility of the owner.
- The purpose of the condominium corporation is to manage the property and the assets of the corporation, on behalf of the owners.
HOW DOES A CONDOMINIUM COME INTO EXISTENCE?
- It is not enough to simply build townhouses or apartments, and call them condominiums. Certain things have to happen before the condominium corporation comes into existence.
- A condominium comes into existence when the developer registers in a government office called the Registry Office, two documents – a Declaration, and together with that, a Description.
- Once a development is registered as a condominium, the owners have a set of rights and responsibilities.
- Many of those rights and responsibilities are detailed in documents such as the Condominium Act, the Declaration, the Description, the by-laws, and the rules and regulations of each individual condominium.
WHAT IS THE CONDOMINIUM ACT?
- The Condominium Act is a law passed by the Province of Ontario which governs the formation and governing of condominiums in Ontario.
- It is perhaps the most important document which owners and Directors of condominiums should be familiar with.
- Among the things it deals with are such matters as the registration and creation of condominiums; the ownership of condominiums; the roles and responsibilities of the Board of Directors and the owners; what can, and cannot be in the condominium’s by-laws; and what the financial management and reporting functions are.
- There are other documents which govern how condominiums operate, including: the Declaration, the by-laws, and rules and regulations, but the Condominium Act takes precedence over all of them.
- In other words, where there is a conflict between what the Condominium Act says, and what the Declaration, by-laws, rules, and regulations say, the Condominium Act always prevails, or comes first.
- In fact, if any provision in the Declaration or by-laws is inconsistent with the Act, the Declaration or by-laws are deemed to be amended.
- The Condominium Act is the law – Owners have to follow it. The Board of Directors has to follow it. The property management company has to follow it.
WHAT IS THE DECLARATION?
Items usually included in the Declaration include:
- a statement of the share of common expenses which must be paid by each unit owner;
- a description of what common elements, if any, are for the exclusive use of owners of particular units;
- a schedule setting out the legal description of the land;
- the consent of the persons holding the mortgages on the property;
- the boundaries of each unit; and
- a certificate of an architect or an engineer stating that the buildings have been constructed in accordance with any applicable regulations.
- The declaration may also deal with other matters including, but not limited to:
- the duties of the condominium corporation and the allocation of repair and maintenance obligations.
WHAT ARE THE BY-LAWS?
- By-laws deal with a range of matters listed in the Condominium Act, generally related to corporate governance and management.
- Among the things which by-laws can deal with include the number, qualifications, nomination, election, resignation, removal, term of office, and remuneration of Directors; meetings; and the function of the Board of Directors.
- By-laws may also deal with such things as the assessment and collection of common expense contributions, the maintenance of units and common elements, and the management of the property generally.
- By-laws must be reasonable, and must be consistent with the Condominium Act and the Declaration.
- By-laws come into existence after they have been first approved by the Board of Directors; then approved by the owners of a majority of the units of the corporation voting in favour of them, with or without amendment; and then are registered in the Land Registry office.
- Like the Condominium Act, owners and the Board of Directors need to be familiar with the by-laws of the condominium corporation.
WHAT ARE RULES AND REGULATIONS?
- Rules and regulations tend to address how the units and the common elements are to be used by the owners and residents.
- Rules must be reasonable, and consistent with the Declaration and the Act.
- The Board may make, amend, or repeal rules respecting the use of common elements and the units to promote safety, security and welfare of the owners and the property.
- The Board of Directors may also make rules to prevent unreasonable interference with the use and enjoyment of the common elements and the units.
- Upon making, amending, or repealing a rule, the Board shall give notice of it to the owners.
- A rule is not effective until the owners approve it at a meeting of the owners if the Board receives a requisition for a meeting, or 30 days after the Board has given notice of the rule to the owners and does not receive a requisition for a meeting.
- It’s very important that all owners familiarize themselves with the rules and regulations of the condominium, and make sure that they are following the rules and regulations carefully at all times.
WHO OWNS WHAT?
- The condominium property is divided into units and common elements.
- Everything which is not a unit is part of the common elements.
- The boundaries of the units are described in the Declaration and the by-laws.
- The units are owned by the owners; owners have exclusive ownership of their units.
- The common elements are owned by all the owners of the proportion described in the schedule attached to the Declaration.
- Typically, the boundaries of the units are the unfinished surfaces of the floor and ceiling slabs and the backside surfaces of the drywall of outside walls.
- The unit consists primarily of space within these boundaries.
- The space includes the interior partitions and doors, cabinets, interior stair cases and similar items.
- Driveways, backyards and patios are usually exclusive use common elements.
- Exclusive use common elements are subject to many of the rules applicable to other common elements and owners require approval of the Condominium Corporation to modify exclusive use common elements.
- The ownership of a unit shall not be separated from the ownership of the common interest.
THE BOARD OF DIRECTORS AND OFFICERS
- A condominium is like a small village, and like a small village, it needs a village council to make decisions on a month-to-month basis, between meetings of the owners. In a condominium, that council is called the Board of Directors.
- The Board of Directors is elected by the owners.
- According to the Condominium Act, each unit in a condominium gets one vote, which means that if there is more than one adult living in a unit, they need to decide how their one vote will be cast.
- The number of directors cannot be fewer than three, and their term of office cannot exceed three years (without being re-elected by the owners.)
- A director must be at least 18 years of age and cannot be in an undischarged bankrupt or mentally incompetent.
- A person immediately ceases to be a director if a lien for common expense arrears against his or her unit is not discharged within ninety days following its registration.
- The Condominium Act requires that the directors elect from amongst themselves a president, and that there must also be a secretary (who may be appointed by the Board from the outside or elected from amongst the remaining other directors.
- Depending on the by-laws the directors may also elect other officers such as a Treasurer and Vice-President.
- Commonly the Board of Directors meets at least once a month and is responsible for making decisions between meetings of the owners.
- A budget is prepared every year prior to the beginning of the condominium’s fiscal year.
- The board, typically assisted by its manager, and often by its auditor, estimates expenditures for the following year.
- The budget should include all the expenses that the condominium corporation will be required to pay in the coming year.
- On a townhouse project, a typical operating budget would include repairs and maintenance of the common elements; grounds maintenance including snow plowing and lawn care; utilities for lighting; insurance; professional services such as the auditor and lawyer; the property manager’s management fee; the reserve fund contribution (which is required by law); and miscellaneous office expenses.
- As noted in the materials related to common element fees, these expenses are then paid by all the owners as common element fees.
COMMON ELEMENT FEES
- Common element fees are defined in the Condominium Act as the expenses related to the performance of objects and duties of a corporation and all expenses specified as common expenses in the Act or the Declaration.
- Common element fees are sometimes referred to as maintenance fees.
- The Declaration of the corporation sets out the percentage of the common expenses which the owner of each unit is to contribute. The Act stipulates that each owner must pay his or her share.
- A budget is prepared from the beginning of the Corporation’s fiscal year.
- The budget encompasses all expenditures for the following fiscal year.
- The net amount of the budget is divided by twelve to produce an estimate of the corporation’s financial requirements. This is the amount which all the owners need to contribute each month, usually on the first day of the month.
- Each owner’s contribution is determined by multiplying the total monthly amount by each owner’s percentage of the common expenses as set out in the schedule of the Declaration.
- If the Board has over estimated the common expenses, there can be no direct refund to the owners after the end of the fiscal year. The surplus must either be applied against the future common expenses or paid into the reserve fund.
- If, on the other hand, the Board of Directors has under estimated the common expenses, the Board can be obliged to assess each owner his or her portion of the deficiency. This is called a special assessment.
- Common element fees are used to pay for expenditures including utilities, maintenance and repairs, management fees, insurance, legal, and accounting expenses.
RESERVE FUNDS AND RESERVE FUND STUDIES
- The Condominium Act requires condominiums to maintain a reserve fund which is funded through the money collected from the owners as part of their common expense.
- The condominium must collect enough money to pay for the expected costs of major repair and replacement of the common elements and assets of the corporation, based on the anticipated life expectancy.
- In order to establish how much to contribute, the condominium is required to conduct a reserve fund study covering at least thirty years from the date of the study for each item of the common elements and assets of the corporation having a replacement cost of $500.00 or more.
- A comprehensive study includes both a physical and financial analysis.
- The physical analysis includes an assessment of the life expectancy and expected date and cost of replacement of each element.
- A financial analysis includes a description of the financial status of the reserve fund at the date of the study; the estimated future repair and replacement costs the estimated interest to be earned on the fund; and recommended increases in previous years’ contributions to the fund.
- Reserve fund studies can only be carried out by certain prescribed classes of people, including Architects and Engineers.
- Within 120 days of receiving a reserve fund study or update, the Board must propose a plan for funding the reserve fund.
- Reserve fund studies need to be updated at least every three years.
ANNUAL FINANCIAL AUDIT
- A condominium corporation must have financial statement prepared in accordance with the accounting principles specified in the Handbook of the Canadian Institute of Chartered Accountants.A financial audit is done on a yearly basis.
- The auditor is appointed by the owners at the owners’ meeting.
- At each Annual General Meeting, the auditor is either re-appointed or a new auditor is selected.
- The owners appoint the auditor and the auditor reports to the owners.
- The Board of Directors recommends an auditor who is licensed under the Public Accountancy Act.
- Only the owners can remove the auditor.
- Removal of the auditor requires the majority of votes cast by owners who are present at the meeting in person or by proxy.
- The auditor is paid by the condominium corporation from the operating expenses.
- The Condominium Act requires the condominium corporation to obtain, and maintain insurance on its own behalf, and on behalf of the unit owners, for damage to both the units and the common elements.
- The insurance must cover major perils including fire, lighting, smoke, windstorm, hail, explosion, water escape, strikes, riots, or civil commotion, impact by aircraft or vehicles, vandalism, or malicious acts.
- A condominium’s insurance obligation does not extend to any improvements made by an owner to a unit.
- The insurance that the condominium covers must be for replacement cost, and not for the depreciated value of the property.
- The condominium corporation is required to carry other kinds of insurance including liability insurance, Directors and Officers Liability insurance, and boiler and machinery coverage.
- Condominium corporations are not required to carry, but should seriously consider carrying, other kinds of insurance including business interruption coverage.
- Owners should carry their own insurance for such things are replacement of their own belongings and any improvements and liability insurance.
- The condominium corporation is responsible for maintaining the common elements.
- The unit owners are responsible for maintaining their units.
- The Declaration and Standard Unit By Law stipulates who should repair what.
- The unit owner may repair and maintain exclusive use common elements.
- The Act requires a condominium corporation to carry out repairs which are the obligation of a unit owner if the owner fails to do so within a reasonable amount of time. The costs incurred are to be added to the unit owner’s common expenses.
- The condominium corporation is not obliged to repair damage to improvements done by a unit owner.
- An owner may not make an addition, alteration or improvements to the common elements without the prior written approval of the condominium corporation.
- The management of a condominium is extremely challenging, and there are very serious legal, financial, and maintenance management requirements.
- Although some condominiums choose to manage the condominiums themselves in order to save the cost of the monthly management fees the vast majority of condominiums recognize that this is a short-term saving which can generate long-term problems.
- Accordingly, most condominiums choose to pay a modest monthly fee in order to ensure that the condominium runs smoothly and the legal, financial, and maintenance responsibilities are met.
- The common responsibilities of a property management firm include:
- ensuring that the condominium has adequate insurance in place;
- ensuring that there are lawn care and snow removal contracts in place;
- ensuring that the common elements are maintained and repaired;
- arranging for updates of the reserve fund study;
- organizing the technical audit;
- ensuring that the appropriate warranties are in place;
- arranging for the preparation of the annual financial audit;
- preparing annual operating budgets;
- ensuring that all condominium corporate filing requirements are met.
- Annual General Meetings are to be held not more than six months following the end of each fiscal year.
- The Board of Directors may call owners’ meetings at any time.
- Notice of an owners’ meeting must be given to owners 15 clear days before the date of the meeting.
- The quorum of owners’ meeting is 25% of owners represented in person or by proxy.
- Each unit has one vote at meetings.
- The Auditor’s report is presented at the Annual General Meeting.
- Vacancies on the Board of Directors are filled at the Annual General Meeting.