With the value of the land exceeding the collective worth of some units, usage may increase
Condominiums, albeit a relatively new legal phenomenon, are showing their age. The value of the land on some older developments now exceeds the collective worth of the individual units.
“It was only in the 1960s that Ontario law allowed for this unique form of land ownership,” says Craig Garbe, a corporate and commercial partner in Bennett Jones LLP’s Toronto office focusing on commercial real estate transactions. “So it’s just recently that we’re seeing condo owners looking for an exit mechanism where the buildings are showing signs of obsolescence and land values have increased.”
Buying individual units in the hope that all owners will eventually sell is a process too cumbersome and risky for those interested in redevelopment. Fortunately, s. 124 of Ontario’s Condominium Act, 1998 provides a mechanism that permits the termination of a condominium with the sale of the entire property.
But s.124 is relatively untested.
“I know of only one small development that’s gone through the process,” says Mark Karoly, a commercial real estate land development lawyer at Harris, Sheaffer LLP in Toronto.
There’s also a shortage of jurisprudence.
“The one case I’ve heard of that touches on the subject is a decision under Nova Scotia’s condominium legislation,” Garbe says.
Section 124’s key requirement is that 80 percent of the unit owners must consent to the sale process, and written spousal consent must accompany that.
“This section is owner-driven, not court-driven, and the difficulties in achieving consensus may be one of the primary reasons why we haven’t seen more of these,” Garbe says. “Where we’re most likely to see these applications going forward is in the older developments, which tend to have fewer stories and fewer units.”
Making the process even more complex is s. 124’s additional requirement for the consent of 80 percent of all persons with “registered claims” as of the vote date.
“‘Registered claims’ is not limited to mortgages and can include easements or any other interests created after the registration of the condominium declaration,” Garbe says.
This particular threshold is also not determined on a unit-by-unit basis as it is for owners’ consent. Instead, the threshold uses the number of persons holding such claims as its denominator.
“This fundamentally changes the calculation of the threshold,” Garbe says.
By way of example, Garbe posits a case where eight of 10 residential units in a condominium are subject to a Royal Bank of Canada mortgage, and two are subject to a Toronto-Dominion mortgage.
“The consent of the Royal alone is insufficient because it represents only one of the two entities, or just 50 percent, of the persons having registered claims.”
As for the practicalities of obtaining consent, Garbe suggests that owners hold at least one formal vote before dedicating the time and money to a sale process. That said, one vote may not be enough, as owners’ opinions may change depending on the ultimate terms of any offer.
“What may be required is a first vote to approve the sale process conceptually, perhaps within an approved price range, followed by a second vote to approve the purchase agreement,” Garbe explains.
Then there are the nuances of any purchase agreement.
“It’s important to understand the differences inherent in this process, given its distinct form, from regular purchase and sale,” Garbe says. “To start with, both buyers and sellers will need conditions that ensure the requisite statutory approvals are obtained.”
And while buyers will need to ensure that typical requirements such as due diligence, property access and possession on closing are met, the seller – the condominium corporation itself, as opposed to the individual unit owners – will have to ensure that it does not promise things it can’t provide because it does not own the land it is purporting to sell.
Access to condo units, for example, depends on individual unit owners’ approval; and payment of realty taxes until closing can only happen if the vendor can compel the owners to do so. Otherwise, residential tenancies within the building represent yet another complicated ball of wax.
“All areas of the typical real property purchase agreement need to be revisited in the context of a s. 124 sale,” Garbe says.
Yet despite the complexities, Garbe and Karoly agree that the process does not require legislative amendment.
“When people start to use s. 124, the case law will fill in the gaps,” Garbe says.
And when is that likely to happen?
“There are many examples of deteriorating buildings where putting money into fixing them up doesn’t make sense,” Karoly says. “And though we haven’t seen s. 124 much yet, it will definitely pick up in the next 10 years.”