Canada: Individual Board Member Liability Is Not A Remote Possibility

A recent Ontario court decision highlights the responsibility of boards of directors to act reasonably in dealing with issues raised by unit owners.

The dispute arose because a group of owners were concerned about the actions of the board of directors, who had obtained only one quotation to carry out envelope repairs to the building, to prevent water penetration. The one estimate was for $1.6 million. Due to cost concerns, the board obtained further reports and eventually four options for repairs were presented to the owners at an information meeting. After the owners' information meeting, the board elected to proceed with an option estimated to cost $755,000. The corporation would need to borrow $600,000 to fund the repairs and the owners were to approve a borrowing by-law for that purpose at the next AGM. The owners acknowledged the need for the repairs but felt the board had not done adequate due diligence.

A group of owners requisitioned a meeting, to be held concurrently with the AGM, to defer the vote on the borrowing by-law and, if that motion failed, to remove the board and replace it with a new one. At the AGM, the borrowing by-law was not approved and the board ended the meeting before the scheduled elections and without holding the vote on the owners requisition to remove the board.

The board then applied to court for the appointment of an administrator and an injunction to prevent the requisitioned meeting from occurring. Notwithstanding the injunction application, the owners called and held the requisitioned meeting. The board members were removed and a new board was elected. Two days after the requisitioned meeting, the court released its decision denying the injunction. The court held that the sole purpose of the application for an injunction was to prevent the owners from holding a meeting to which they were entitled by statute and refused the application.

Instead of complying with the results of the requisitioned meeting and acknowledging their removal and replacement, the former board refused to recognize the newly elected board of directors and continued to seek the appointment of an administrator on the basis that the building was stumbling into the "abyss" and could not be governed.

On the motion to appoint an administrator, the court held that the newly elected board members were very capable of governing themselves without an administrator. Section 131 was not intended to be used to allow a board which has lost the confidence of the majority of owners to get their way regardless of the democratic will of the owners.

The court further held that the requisitioned meeting held by the unit owners was valid and stated the following:

The court found that the former board members were not acting in good faith. They pre-orchestrated the early termination of the AGM and in effect tried to use their refusal to accept the democratic will of the majority of owners as a reason to appoint an administrator. On the issue of costs and who was responsible for them, the court found that it would be unfair to have the majority of residents who opposed the arbitrary measures of the former board pay for their actions out of the corporation's funds. The court held that the "former board members were in effect the true litigating parties" and held the five former board members personally responsible, jointly and severally, for the costs incurred.

The court stated that the board members' behaviour had been "deliberate, egregious and required sanction" and that granting full indemnity costs would be the only way to prevent the unit owners from being unfairly penalized. S. 38 (2) of the Condominium Act provides that when board members have been found to have acted in bad faith they are not entitled to be indemnified by the corporation.

This decision should remind board members that they cannot use court proceedings to thwart the rights of unit owners. As the fourth level of government, boards must respond to their constituents in a reasonable and "honest" manner.

Newsletter Tip #1 - Condominium Corporation's Budget

A condominium corporation's budget should be developed methodically, by taking into account past budgets and financial statements. Every budget line should be reviewed to ensure the most realistic and reasonable budget. Where an anticipated expense has not arisen in the past, professionals and/or contractors should be contacted to obtain an estimate of the likely cost. Guess work should be avoided as much as possible. Boards and managers must also budget for the use of expert services such as engineers and lawyers. These are often annual costs which many boards do not allow for in their planning.

Newsletter Tip #2 - Accessibility for Ontarians with Disabilities Act

Condominium corporations would be wise to ensure that the engineers incorporate any necessary common element accessibility modifications into their next reserve fund studies, as this may be required by the Accessibility for Ontarians with Disabilities Act, 2005 ("AODA"). AODA requires that condominium corporations use reasonable efforts to remove physical barriers to access. In our view, it would be unreasonable to require a condominium corporation to carry out common element modifications immediately, without consideration to the corporation's finances and its reserve fund study. However, as AODA is relatively new legislation, it is possible that "reasonable efforts" may be interpreted by courts to mean that condominium corporations should develop a plan for the future funding of barrier-removal modifications to the common elements over a reasonable period of time. It is expected in the new Condominium Act, that these measures will be acceptable Reserve Fund expenses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.