NEW STRATA
CORPORATIONS AND THE OWNER DEVELOPER
By Shawn M. Smith
B.A., LL.B.
The owner-developer of a strata corporation
can have a significant influence (and impact) on how that strata corporation
functions in the future, particularly its early days. This influence stems from
a number of things such as:
·
Design of the
complex
·
Allocation of
parking
·
Creation of bylaws
·
Upgrades and
alterations permitted
·
Control of the
council
·
Promises made to
buyers
·
Benefits retained
by the owner-developer
How an owner-developer
approaches these matters can dramatically alter the character of a strata
corporation. The owner-developer can leave a strong foundation to build on or a
legacy of problems and disputes. I have seen and dealt with both.
From the time that
the strata plan is filed in the Land Title Office until the date of the first
Annual General Meeting the owner-developer acts as strata council. Up until the
date upon which the first strata lot is conveyed, the owner-developer, by
virtue of being owner of all the strata lots, can approve virtually whatever
resolutions it wishes. The potential problem is that by this time either all or
nearly all the strata lots have been sold to purchasers. Hence the decisions
made by the owner-developer will have an almost immediate and perhaps very
direct impact on those purchasers. As such, the Strata Property Act (the
“Act”) places certain duties and obligations on the owner-developer.
The basic duty of
the owner-developer is found in Section 6(1) of the Act which reads as follows:
6 (1) In exercising the powers and
performing the duties of a council, the owner developer must
(a) act honestly and in good faith with
a view to the best interests of the strata corporation, and
(b) exercise the care, diligence and
skill of a reasonably prudent person in comparable circumstances.
The remaining duties and obligations of the
owner-developer (i.e. the duty to prepare an accurate interim budget) are found
in Part 3 of the Act, but there is not space to discuss those in detail here.
The typical situation,
which is encountered, is one wherein the owner-developer agrees to do certain
things in order to entice a particular purchaser to enter into a contract to
buy a strata lot. This can range from the assignment of additional parking
spaces to the enlarging of a patio to installing a hot tub in a backyard. Often
(but not always) these are embodied in the contract of purchase and sale
entered into between the owner-developer and the purchaser. Sometimes they are
simply statements made by a sales person (of which I have more to say later).
It is important for a purchaser in such a situation to be aware of a couple
things.
Firstly, even though the
promise is written in the contract of purchase and sale, it is not binding on
the strata corporation. The contract is between the owner-developer and the
purchaser. The strata corporation, being a separate legal entity, is not bound
by the terms of the contract. It is important therefore for purchasers to
ensure that the owner-developer (as council) takes the appropriate steps to
ratify whatever promises have been made on behalf of or involve the strata
corporation.
Secondly, the
owner-developer, despite being the council and owning all (or the vast bulk) of
the strata lots cannot do whatever it wishes. It is obligated under s.6(1) to
act “in good faith with a view to the best interests of the strata
corporation”. Note that the Act refers to the best interests of the strata
corporation, not the owner-developer’s profit. (Of course this does not
mean that the owner-developer cannot benefit at all, but it must not act
contrary to the interests of the strata corporation).
For example, in Matthias
v. The Owners, Strata Plan VR2135 2000 BCSC 519 the court set aside a
lease of common property which the owner-developer had entered into with a
purchaser. (The lease in question expanded the area of that strata lot’s deck,
thereby allowing for a greater sale price to be obtained). In doing so the
court held that such a lease was not to the benefit of the strata corporation
as a whole and was not valid.
Along that same line, in Hill
v. Strata Plan NW2477 Owners (1991), 57 B.C.L.R. (2d) 263 (CA) it was
held that the owner-developer’s promise that the purchaser would be assigned
exclusive use of a second parking stall (where such stalls were common
property) was not binding on the strata corporation as it was up to the strata
corporation to manage the common property for the benefit of all owners.
What these two cases
illustrate is that where a purchaser enters into an agreement with an
owner-developer for a certain privilege or benefit which relates to the common
property, the purchaser should consider whether or not such a situation is in
the best interest of the strata corporation and will be enforceable. If not,
that purchaser may well loose the right or privilege they thought they had.
Owner-developers should give the same degree of consideration to such
transactions lest they find themselves faced with a lawsuit from a disappointed
purchaser.
One of the situations
most often encountered is that of representations made by the owner-developer’s
sales staff. These are typically never in writing but are usually a primary
reason for the purchaser having bought their strata lot. Examples range from
the use of visitor’s parking for overflow parking, to being able to do whatever
one wishes to their backyard, to enclosing parts of a garage. Purchasers,
relying on what they were told, do such things only to discover later that they
are not permitted to do so. A dispute with the strata council often ensues and
everyone is left with a bitter taste in their mouth (particularly the poor
owner who has discovered a state of affairs different from what they expected).
Such oral assurances are
often hard to prove. However, even if they could be proved they are no more
binding than if they were in the contract of purchase and sale if they are not
in the best interest of the strata corporation or contrary to the provisions of
the Act. If they are permissible under the Act, then they need to be duly
ratified by the strata council or the owners (i.e. the owner-developer and
those other registered owners) as the case may be.
Even statements made in
the Disclosure Statement filed by the owner-developer are not binding on the
strata corporation (see Strata Corp KAS 1021 v. Fischer 1998
Carswell BC 237). (The contents of a Disclosure Statement do, however, affect
the relationship between owner-developer and purchaser and there is a
significant body of case law on that subject which I do not intend to review
here).
On occasion the
owner-developer will reserve certain benefits to itself. Such was the case in The
Owners, Strata Plan VIS2968 v. K.R.C. Enterprises Inc. 2007 BCSC
774. In that case the owner-developer had retained, through a registered Right
to Purchase, the right to buy a certain portion of the common property should
it no longer be required to be used for a septic field. (That right was
assigned to K.R.C.). Eventually the strata corporation was connected to sewer
and the field was no longer needed. K.R.C. attempted to exercise the Right to
Purchase and the strata corporation applied to have it set aside.
The right of the
owner-developer (and subsequently K.R.C.) to buy the area in question had been
disclosed in the Disclosure Statement filed by the owner-developer and given to
all first purchasers. All subsequent purchasers should have known about the
right from a search of the Common Property Record, which would have shown the
same. These were two important factors in the court’s deciding to uphold
K.R.C.’s right to purchase the portion of the common property in question. The
court clearly considered that all owners knew or ought to have known about the
Right to Purchase. Therefore they cannot object to it. The right was put in
place in accordance with the Disclosure Statement thus no one was prejudiced.
Although the court concluded that the Right to Purchase did not contravene the
owner-developer’s duty to act in the best interest of the strata corporation,
it did not spend any time analyzing why that was the case. Perhaps this means
then that any arrangement, which is disclosed to all prospective purchasers, is
“in the best interest of the strata corporation”. Only time will tell.
These, of course, are
broad statements of the law and any particular set of facts needs to be
reviewed against the actual language of these cases and well perhaps as other
sections of the Act such as s.164 (significant unfairness). No matter what the
situation, the strata corporation when dealing with a situation it has
inherited from an owner-developer and which might not be agreeable to the
owners as a whole must take care.
This article is intended for information purposes only and
should not be taken as the provision of legal advice. Shawn M. Smith is a
partner with the law firm Cleveland Doan LLP and can be reached at
(604)536-5002 or shawn@cleveland-doan.com.