As we know, when a purchaser buys a new condo unit the developer must provide the purchaser with a disclosure statement, the contents of which are mandated by the Condominium Act, 1998 and its Regulations (the "Act").
Over the last couple of years we have see some interesting case decisions that relate to the disclosure obligations of the developer. The reason that the courts are now dealing with these matters is because many condo owners never review their disclosure documentation at the time of purchase and then become aware of certain matters that they feel are material, once the condominium corporation is in operation in its first or second year.
The problem is that purchasers rarely ask their lawyers to review the disclosure documentation usually because they don't want to pay the cost of such a review to their lawyer.
It is important that purchasers (including owner elected board members) begin to understand the importance of reviewing the disclosure documentation so that the newly elected board will be able to carry on the operation of the condominium corporation in the first and second year with an understanding of the condominium corporation's financial obligations.
Over the last few years many developers are introducing such items as:
- unitizing parts/rooms of the building and then requiring the condo corporation to buy it with a vendor take back mortgage;
- requiring the corporation to lease equipment from the developer on a long term lease;
- passing on certain capital costs of some construction or equipment to the condo corporation, such as greening initiatives.
Sometimes costs (e.g. interest and/or principal on the mortgage; full amount of lease payments, etc.) are shown in the first year budget as zero or a lower amount than what they truly are and are deferred until the second or third year of the corporation. This deferral of carrying costs in the first year is designed to keep the common expense fees as low as possible when marketing the units to the public so as to make the units more attractive to purchase and also to reduce the possibility a first year budgetary shortfall (which under the Act the developer would be responsible for). Then owners, if not previously informed, will soon become surprised when in the second or third year their common expense fees have to increase significantly to cover the shortfall without recourse against the developer.Some examples of this are:
- the developer maintains ownership of the guest suite or superintendent suite and the corporation must buy it with a vendor take back mortgage to the developer at a fairly high interest rate, but the interest payments, and in some cases both principal and interest payments are not to start until year two (a one year holiday).
- developer retains owners of certain units and for as for as long they own them they do not have to pay any common expense fees to the corporation. This means that the other owners pay for 100% of the costs of operating the corporation. This has been reviewed by the Court of Appeal which has held that since it was disclosed in the disclosure statement, purchasers are deemed to have known about it and could have rescinded their deals within the 10 day cooling off period. What was unusual about the decision was that the court also made comments that suggest that they viewed the Condominium Act as commercial legislation and not consumer protection legislation (i.e. all purchasers were adults and had to take responsibility for their own decisions, etc.).
- The developer discloses that there might be a financing in place for certain equipment which financing the corporation had to be responsible for, but the financial terms and amounts are not disclosed. Only much later is it discovered that for the first year the payments were about one half of what they would be for the remaining 14 years of the financing.
Most of those on the development side of the table will say that as long as something is disclosed, purchasers should take the responsibility for their failure to review or understand what they are buying. While this is understandable and to a certain degree completely acceptable – it must not be forgotten that the Condominium Act is consumer protection legislation, and given the nature and extent of the documents it may not be reasonable for purchasers to have understood all the ramifications of what is stated. This only breeds mistrust of developers and anger in condo owners.
The issue is what can be done to provide better disclosure to purchasers, particularly on material financial issues to the corporations.
We accept that there will always be some purchasers who regardless of the amount of disclosure will not bother to read it or seek advice on it and these people should not be protected. However, in our view there has to be more visible and clear disclosure of certain key financial terms set out in the documents so that the purchaser can make a more informed decision.
It has been my suggestion that developers should produce a one or two page material financial summary that is attached to the front of the disclosure statement.
As an industry we can develop a common summary of key financial issues, sauch as those discussed above. Let the purchasers know of these financial burdens that will be undertaken by their condominium corporation and the exact financial impact. Disclose that interest or lease payments are deferred to year two or three. I can envisage that this type of summary can be similar, but shorter, than the Mortgage Disclosure Statement used in standard mortgage transactions.
It is with this type of clear, unambiguous and understandable disclosure that we can fulfill the objectives of the Act and start to rebuild the trust with developers.