A recent decision by the Ontario Superior Court, which dealt with the developer’s liability for the first-year budget deficit, will be well-received by condominium board members and owners.

Section 75 of the Condominium Act (the “Act”) provides that the condominium developer is accountable to the condominium corporation for any shortfall between the first-year budget statement provided by the developer to prospective purchasers as part of the disclosure package and the actual amount of expenses incurred by the condominium corporation (excluding costs incurred to terminate agreements under sections 111 or 112 of the Act).

In the case of 90 George Street Ltd. v. Ottawa-Carleton Standard Condominium Corporation No. 815, the condominium corporation claimed a shortfall of $115,659 from the developer. The developer disputed the amount payable. The largest items in dispute were the costs of security and superintendent/concierge services. The costs of these services were higher in the first year because many people were moving into the building. After mediation failed, the parties went to arbitration. The arbitrator awarded the condominium corporation the full amount claimed, plus interest at the rate specified in the corporation’s by-law as the rate applicable to unpaid common expenses, plus legal costs of both the mediation and arbitration on a substantial indemnity basis. (A costs award on a substantial indemnity basis provides the greatest recovery of legal costs to the winning party.) In reaching his decision, the arbitrator said that the legislation did not give him the authority to examine the first-year expenses on a line-by-line basis to determine if the individual cost elements were reasonable and that he was restricted to a review of the total expenditures only: “the proper determination of the shortfall is the bottom line, not an item by item evaluation.”

The developer appealed the arbitrator’s ruling to the Superior Court on the basis that the arbitrator’s decision was both incorrect and not reasonable, as the claim by the condominium corporation was based on expenses that were excessive and unreasonable.

While the Superior Court concluded that the arbitrator is in fact entitled to consider “the propriety and reasonableness of any of the elements contained in the shortfall,” the decision of the arbitrator in favour of the condominium corporation was upheld. “The Arbitrator’s reasons nevertheless indicate that he considered the evidence and submissions of the Appellant regarding the propriety and reasonableness of certain expenses included in the shortfall.” It had been noted by the arbitrator that the developer’s President sat on the condominium board of directors for over a year and failed to object to or complain about the disputed expenses. While reviewing Section 75 of the Act, the Superior Court also noted that the purpose of the Condominium Act was consumer protection legislation to address the imbalance of expertise and bargaining power between the developer and the unit purchasers.

The developer had also argued that the inclusion of the costs of the mediation in the arbitrator’s cost award was not proper as these costs were incurred prior to the commencement of the arbitration proceedings. As the Condominium Act makes mediation with respect to budget disputes mandatory, the Superior Court concluded that that the mediation costs related to the arbitration and thus were proper and appropriate.

The Superior Court also dismissed  the developer’s appeal to reduce the costs award, as the condominium corporation had made two offers to settle, which were refused by the developer, both of which offers were for amounts less than what was ultimately awarded by  the arbitrator. Parties to a dispute should seriously consider all offers to settle – they act at their own risk in refusing to accept a reasonable offer.