In a recent decision, TSCC No. 2051 v. Georgian Clairlea Inc., the Ontario Court of Appeal confirmed a lower court decision that found that a condominium developer failed to make adequate disclosure to purchasers of material changes relating to two vendor take-back mortgages entered into before turnover when the developer controlled the board of the condominium corporation. The Court of Appeal also confirmed that the creation of these mortgages was oppressive, as the developer unfairly disregarded the interests of the condominium corporation and the purchasers.
One mortgage in the amount of $2,228,100 related to HVAC equipment that the developer sold to the corporation as service units. The original disclosure stated that the HVAC units would be leased to the purchasers by a third-party supplier. The second mortgage in the amount of $1,026,000 related to unsold storage and parking units that were conveyed to the corporation.
The Court had no problem finding that these mortgages were material changes that the developer was required to disclose to the purchasers. While the developer did deliver a revised disclosure statement, the Court of Appeal agreed with the lower court that the revised disclosure relating to the service units were confusing and did not clearly indicate to the purchasers what they were buying. As for the parking/storage unit mortgage, the revised disclosure statement was inadequate, as it did not indicate the amount of the mortgage or the amount of the mortgage payments in the corporation’s budget and did not disclose to the purchasers that there was no market for the unsold units, as almost all of the residential condo purchasers had only bought one parking unit.
The Court of Appeal also agreed with the lower court findings that the creation of the two mortgages was oppressive as the purchasers’ reasonable expectations were violated and the interests of the purchasers and the condominium corporation were unreasonably disregarded. The service unit mortgage covered HVAC appliances that cost the developer $575,000, as well as pipes and wires that the purchasers had reason to believe were included in the purchase of the individual residential units. For this reason, the amount of the service unit mortgage was reduced by the Court to $625,050 for the appliances plus some margin of profit.
The parking/storage unit mortgage was also determined by the Court to be oppressive on the basis that the unsold units were conveyed at inflated prices and the developer concealed the cost of servicing the mortgage. The developer also did not share with the purchasers the information that there was no market for the unsold units and that consequently they were almost worthless. For this reason, the amount of the parking/storage unit mortgage was reduced by the Court to $73,000.
The sale of building components such as HVAC equipment by a developer to a condo corporation, as in the above-noted case, is not unique. This is a practice that has increased in recent years. When the Protecting Condominium Owners Act, 2015 was enacted, the Government of Ontario announced that new regulations would be created that would prevent developers from separately selling or leasing essential building components to condo corporations, subject to certain exceptions, such as for example energy-efficient equipment. The new regulations would also prohibit corporations from acquiring property such as parking and storage units unless agreed to by the post-turnover board of directors. However, to date there are no such regulations in place, nor are there any draft regulations that deal with these issues.