A condominium corporation’s first board of directors, after a turnover meeting, is often faced with a number of construction deficiencies. Deficiencies can range from minor items, like missing light fixtures, to significant issues such as structural defects.
The Ontario New Home Warranty Plan Act protects new condominium developments by providing a construction warranty, which includes coverage for common elements. The warranty covers defects in and non-completion of the common elements for one year, against water penetration and defects in the building for two years, and against “major structural defects” for seven years. Coverage for common elements begins on the day the condominium corporation is registered and the maximum coverage is $50,000 times the number of units, to a maximum of $2.5 million.
Most issues relating to construction defects are resolved between the builder and the condominium corporation. However, where a resolution cannot be reached the condominium corporation may ask Tarion Warranty Corporation, a not-for-profit corporation, to conciliate the dispute. The builder has ninety (90) days from the date of the condominium corporation’s request for conciliation to carry out the repairs or resolve the claim. The condominium corporation and builder can reach an agreement regarding the sum that the corporation is prepared to accept as compensation for deficiencies.
Nevertheless, many builders refuse to compensate the condominium corporation unless the corporation signs a Full and Final Release.
Releases prepared by builders are often broadly drafted and can have legal implications which go far beyond the deficiencies in question. For example, a condominium corporation might release the builder after resolving some minor deficiencies only to discover, several years later, more significant building deficiencies that were not discoverable at the time the Release was executed. A broadly drafted Release can preclude a condominium corporation from seeking recourse against not only the builder but also the professionals and contractors who worked on the construction project and who may (and likely do) have insurance coverage.
Boards of directors often wonder: Do we have to sign a Release? What benefits are associated with the Release? What happens if we refuse to sign the Release?
The Tarion conciliation process does NOT require the condominium corporation to deliver a Release. The builder often demands a Release to ensure that the condominium corporation has no rights in the future against it or any of its principals, employees, agents, etc. The condominium corporation is not obligated to provide a Release. The scope of the Release should be part of the negotiations between the builder and the condominium corporation, and should reflect the compensation being provided by the builder.
Although a Release generally benefits the builder, it may also benefit the condominium corporation in negotiating compensation. For example, a condominium corporation might want to sign a Release if significant dollar amounts are at issue and the builder is prepared to pay a premium in exchange for the Release.
When asked to sign a Release, the condominium corporation’s board should first ask its Performance Audit engineers to provide an opinion on what, if any, matters, which are considered “minimal” at this time, could present a risk of failure or defect going forward. A comprehensive Release should not be signed until this review has been conducted.
The condominium corporation’s board should then determine whether the monetary compensation being offered by the builder adequately reflects the scope of the proposed Release. If the Performance Audit review raises concerns, the builder should be asked to pay a premium in exchange for the Release or the Release being provided should be limited to the specific defects at issue. Builders might not accept an amended Release, and the board will have to decide if the compensation being offered is enough to give up any future rights.
Condominium corporations should never sign a general Release unless the compensation reflects the possibility that future defects may be discovered. As a general rule, the smaller the compensation the more limited that the Release should be.
If negotiations with respect to the Release break down, the condominium corporation can simply refuse to provide a Release. If the builder fails to repair or resolve the claim, Tarion will compensate the condominium corporation from the guarantee fund or effect the necessary repairs. In our practice we have not yet come across an instance where the conciliation process breaks down over the Release.
As evidenced by the recent amendments, the Tarion conciliation process is an area of law that continues to develop. Nevertheless, one thing is certain; condominium corporations should ALWAYS get an engineering opinion and a legal opinion before signing a Release.