Ksena J. Court and Francis N.J. Taman
In our initial blog article, Not All Condo Fees Are Created Equally, we reviewed the decision of Master Prowse in King. In that decision, Master Prowse decided whether certain charges, such as legal costs incurred by the condominium corporation for enforcement of condominium fees, should be given priority over a mortgagee’s security interest in the condominium. In the end, Master Prowse found that if the condominium bylaws stated that such charges constitute and form part of an “assessment” or “contribution” then they would be given priority over the mortgagee.
The unfortunate aspect of this decision is that it has, in some instances, given the condominium owner a “pot of money” to play with to the detriment of the mortgagee. Consider the following actual fact scenario:
- The lender holds a first mortgage against the condominium unit.
- The security is a home equity type of collateral security, and as such it is questionable whether the lender will be able to obtain a deficiency judgment (for further discussion on this topic, refer to our blog post Are Lenders Giving Up Too Much?).
- The condominium corporation renders a special assessment for repairs to fix leaks in the condominium building envelope.
- The condominium owner disputes the special assessment and there is extensive litigation between the condominium corporation and the condominium owner.
- The lender is given information from the condominium owner that there is good cause to dispute the special assessment.
- Years later the dispute between the condominium corporation and the condominium owner is resolved in favour of the condominium corporation.
- The condominium bylaws state that the condominium corporation is entitled to solicitor and client legal costs, and the condominium corporation is awarded these costs.
- The legal costs claimed by the condominium corporation are approximately $80,000.
- The owner still doesn’t pay the special assessment and is therefore in breach of the mortgage.
In this instance, the amount of the special assessment essentially eats up any equity there is in the property. If the legal costs also take priority over the mortgage, the lender is in a significant deficiency position. But for the condominium owner’s actions of disputing the special assessment, the lender would not have been in such a deficiency position.
Since King, the Court of Queen’s Bench has approved its rationale of looking to the bylaws to determine priorities in two Justice level decisions, Rajakaruna and Seehra. Is this fair to the lender to be put into a deficiency position where it may have no ability to obtain a deficiency judgment against the condominium owner, or even if it could, collect on such deficiency judgment from the owner? Is it fair that the condominium owner gets to use the property’s equity to fight a losing battle?
In the most recent decision, Bank of Montreal v. Bala, Master Schulz disagrees with the approach in King, Rajakaruna and Seehra. Rather, Master Schulz finds that the Francis principle of interpretation applies.
The Francis principle states that the condominium corporation does not have the same powers of a natural person. Nor does it have the same powers as a corporation incorporated under the Business Corporations Act. A condominium corporation is a creature of statute and as such only has the powers that it is given under the Condominium Property Act (the “CPA”). If the CPA doesn’t state that an act can be done, the condominium corporation can’t give itself powers to do such an act in the bylaws.
Section 42(a) of the CPA states that a condominium corporation can collect solicitor and client costs from the condominium owner. However, this is a collection remedy only against the condominium owner as a person, not against the condominium unit itself. Section 42(b) of the CPA gives the condominium corporation the right to collect certain legal expenses against the condominium unit, but these are legal expenses incurred only for the preparation, registration, enforcement and discharge of a caveat for condominium arrears. According to Master Schulz, this does not give the condominium corporation a blanket power to be able to collect all legal costs incurred by deeming them to be an “assessment” or “contribution” under the bylaws.
In the fact scenario above, if the condominium corporation had registered a caveat for the special assessment, arguably the legal costs incurred by the condominium corporation related to the enforcement of that caveat. This would put the condominium corporation in a priority position over the lender for its legal costs.
Whether it be the Court interpreting the bylaws or applying the strict wording of the CPA, lenders should be aware that they face a significant risk in lending to condominium owners. Lenders’ equity in the property can be eroded by the condominium owner entering into a dispute with the condominium corporation, with the lender essentially indirectly financing the dispute. Lenders may wish to consider lobbying for changes to be made to the CPA in order to ensure that they have priority over legal costs incurred by the condominium corporation.
Ksena J. Court and Francis N.J. Taman practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.
 Condominium Plan No. 8210034 v. King, 2012 ABQB 127 (Alta. Q.B.) (“King”).
 Condominium Plan No. 0526233 v. Seehra, 2014 ABQB 588 (Alta. Q.B.) (“Seehra”)
 Taken from Francis v. Condominium Plan No. 8222909, 2003 ABCA 234 (Alta. C.A.) (“Francis”).