Closing Down the Condo: When Developers Want In and Owners Want Out

September 06, 2022

Written By Craig Garbe, Leonard Gangbar, Andrew Jeanrie and Natalia Iamundo

It is becoming more common for condominium owners to consider terminating a condominium in order to recover capital and (potentially) make a profit. In this post, we address some of the key points that condominium owners, condominium board members and prospective purchasers of condominium lands should keep in mind when planning the termination of a condominium and sale of the entire condominium land for redevelopment.

Background

Historically speaking, condominium development is a relatively new phenomenon. Freehold and leasehold tenure has existed for centuries (or millennia, depending on how picky you are with your definitions), but it wasn't until the 1960s that Ontario statutes allowed for the unique form of land ownership that we now take for granted—collective ownership of certain common areas which is (typically) coupled with individual ownership of a specific defined area.

Accordingly, we are still in the early stages of life with condominiums—most of our dealings with condominiums to date relate to their creation, transfer, management and operation. Only recently have we started to consider the question that looms large in condominium law and ownership: What happens when a condominium has reached the end of its useful life and needs to be terminated?

As condominiums in Canada begin to show signs of obsolescence (whether due to building age, style or simply because the land value has outstripped the individual unit value), we are seeing more instances where condominium owners are looking for an exit mechanism to allow them to recover their capital and, where the land value has increased, make a profit.

Likewise, developers are eager to acquire aging condominium sites but don't want to deal with myriad unit owners in order to do so. Individual unit sales don't do the trick. They don't maximize value to individual unit holders, and they don't give buyers certainty that they will be able to acquire all of the units in order to proceed with site redevelopment. This leaves owners and developers looking for a collective sale mechanism to do the job.

Ontario's Condominium Act

Helpfully, condominium legislation across the country provides these mechanisms. Unhelpfully, the legislation tends to be decades old with little, if any, use having been made of it. Given the scarcity of treatment and guidance, we set out in this blog some points for parties to keep in mind when considering the use of one of those termination mechanisms—the mechanism that permits termination of a condominium upon the sale of the entire condominium property. In Ontario, this is addressed primarily under section 124 of Ontario's Condominium Act, 1998 (Act).1

Consideration 1: Owner (and Spousal) Consent

Do the owners actually want to sell? The Act requires that the consent of 80 percent of the unit owners be obtained in order to proceed with a section 124 sale process. It is advisable that the owners hold at least one formal vote to determine whether this threshold is likely to be met before spending time and money running a sale process. In a condominium with multiple types of units, be mindful, in calculating this threshold, of section 49(3) of the Act which limits the voting rights of owners holding title to certain (i.e., parking/storage/mechanical) units, assuming the condominium is not comprised solely of such units.

It is also worth noting that while section 124 of the Act speaks only to the consent of unit "owners", section 48(1)(b) of O. Reg. 49/01 under the Act provides that a transfer deed under section 124 will not be accepted unless it is accompanied by written consent from an owner's spouse (or certain alternatives to spousal consent, as set out in those rules). Accordingly, owner consent itself, unaccompanied by a parallel spousal consent, will ultimately be insufficient to successfully complete a sale under section 124. Buyers and sellers beware. Yes, this regulation does appear to impose a burden not necessarily permitted by (and potentially ultra vires) the Act.² However, in the context of section 124 the provisions create a restraint on alienation parallel to what exists for typical real property transfers of matrimonial homes, and so may not be struck down so easily if challenged. Perhaps better to comply than to make a stand on this hill.

Consideration 2: Claimant Consent

Owner (and spousal) consent alone is insufficient. In order to proceed with a section 124 sale process the Act also requires the consent of 80 percent of all persons having, as of the date of the vote, "registered claims" which were registered against the property after the condo declaration. The wording of the Act is important in determining this threshold.

First, this calculation requires the owners to know the date of "the vote", being the date on which the owners' vote occurred (see comments on timing below). Second, the term "registered claims" is not limited to mortgages—it includes any registered claim, be it an easement or other interest (though only those created after the registration of the declaration—which makes sense given the language in section 127(2)). A careful case by case consideration of each registration on each unit should therefore be conducted to determine who, if anyone, holds an interest under such registration. Third, this consent threshold is not determined on a 'unit by unit' basis, as with the case with the owners' consents. Instead this 80 percent threshold uses, as its denominator, the number of persons holding such claims. In the owner consent section the language used is "the owners of at least 80 per cent of the units" and in the claimant consent section, "at least 80 per cent of those persons".

The difference in language is subtle, but important, as it fundamentally changes the calculation of the threshold. If, for example, there are 10 residential units in a condominium, 8 of which are subject to a mortgage in favour of the Royal Bank of Canada, and 2 of which are subject to a mortgage in favour of The Toronto-Dominion Bank (with no other registered claims), the consent of the Royal Bank of Canada alone (notwithstanding that it holds mortgages on 80 percent of the units) is insufficient to reach the 80 percent threshold, as the consent of the Royal Bank of Canada is the consent of only 50 percent of the persons holding registered claims. Rather, the consent of both the Royal Bank of Canada and The Toronto-Dominion Bank (collectively 100 percent of claimants) is required to meet or exceed the 80 percent threshold. While this result is, as some have pointed out,³ arguably somewhat inequitable, it is likely the correct approach given the drafting of the Act. It also makes sense if you consider that someone having an easement over the common elements of the condominium would have a registered interest over each unit, and should probably not be afforded one consent for each unit over which it has a claim.

Consideration 3: Content, Format and Timing for Consents

As mentioned above, it is advisable that the owners hold at least one formal vote to determine whether the 80 percent owner-consent threshold is likely to be met before spending time and money running a sale process. But how can the owners consent without knowing the terms that a buyer will offer? While the ultimate approach is up to the owners, the owners may find that at least two votes are ultimately necessary. One vote to approve the sale process in concept, perhaps with an approved price range, followed by a second vote to approve the terms of a formal purchase agreement for a fixed price. And while this/these votes themselves (conducted in person or electronically in accordance with the Act) are necessary (recall the requirement to determine claimants as at the date of a vote), these votes are also insufficient to complete the sale. As discussed above, the pursuant to O. Reg. 49/01 under the Act, written spousal consent will ultimately be required by the land registry office in order to complete the section 124 sale, in addition to the certificate under section 124(3) confirming receipt of owner consent. While not technically required, if you are going to get the written consent of owners' spouses, it may be worthwhile to get written consent of the owners at the same time; possibly including confirmation from each such owner about their spousal status and the name of such spouse.

Consideration 4: Structuring the Purchase Agreement

The requirements for owner and claimant consent are the tip of the iceberg when considering the nuances of a section 124 sale. Each of the seller and buyer will need conditions in its favour to ensure that the requisite approvals and consents under section 124 of the Act are obtained. Beyond that a buyer will need to ensure its typical requirements (to complete diligence, access the property and receive possession on closing, etc.) are met and a seller will need to ensure that it does not promise to a buyer those things it cannot necessarily provide.

In a section 124 sale the seller is the condominium corporation itself, but the condominium corporation does not own the land that it is purporting to sell, which gives rise to problems when considering any number of typical purchase agreement provisions. Access to condo units for diligence purposes? Only if the specific owner has approved it. Payment of realty taxes up until closing? Only if the vendor can compel the owners to do so. Discharge of encumbrances on closing? Only if section 127(2) of the Act will operate to extinguish them. Non-Canadian resident withholding tax? Buyers need to consider who their seller is and what their obligations are. All areas of the typical real property purchase agreement need to be revisited in the context of such a sale.

One particularly thorny issue is how residential tenancies within a condominium are to be addressed. Residential tenants benefit from the security of tenure provided by the Residential Tenancies Act (Ontario), and in the case of a developer-buyer, the provisions of section 49(1) of that Act (termination to permit personal residential occupation by the buyer) will not apply. Accordingly, developer-buyers will need to be satisfied that any residential tenancies in the property have been terminated prior to closing or be comfortable assuming the obligations of a landlord post-closing. Likewise, seller condominium corporations need to be mindful of their limited abilities to compel owners to terminate residential tenancies, to prohibit owners from creating new residential tenancies and to ensure vacant possession of the condominium units on closing. These are all areas of concern for each party which should be carefully and specifically negotiated in the purchase agreement to ensure there is an alignment on the risks to be assumed.

As Canadian condominiums age the provisions of section 124 of the Act are likely to become more relevant. We are likely to see even more instances where developers and owners alike turn to section 124 of the Act to facilitate a land sale advantageous to both parties.

How Bennett Jones Can Help

Please contact the authors of this blog for more information on the issues discussed in this post, or for assistance as you look to identify and implement these transactions.

Authors