Can Developer’s Hand Picked Condo Board Limit its Liability for Deficiencies?

In a recent Ontario Court of Appeal case, the question was whether it was appropriate and legal for a condominium Board of Directors to agree to limit the condo developer’s liability for common element repairs and maintenance, and whether it mattered that the Board was appointed by the developer itself.

A new condo development was completed in 2010 and in the ordinary course, the developer appointed the first Board of Directors. Together they entered into an agreement to limit the developer’s financial exposure for common element repairs and maintenance to only those minimum warranty-covered items allowed under the Tarion Warranty program. That agreement also purported to prohibit the condo corporation from suing the developer for such items, and stipulated that the corporation’s only remedy would be through the New Home Warranty process. To bolster this arrangement, the Board enacted a by-law to the same effect, registered it on title, and disclosed it to all buyers.

Later, the developer-appointed Board of Directors was replaced by a newly-elected Board consisting of unit-owners. This second Board decided that the agreement between the developer and the former Board was both unreasonable and in breach of the Condominium Act. It claimed that by agreeing to limit the developer’s liability, the first Board had tied the hands of the second Board in terms of its ability to force the developer to do repairs and maintenance to the common elements. Moreover, the second Board contended that the agreement was a patently self-serving arrangement orchestrated by the developer to limit its own legal and financial liability, given that the first Board had been chosen by the developer itself.

At both the trial and appeal levels, the second Board failed to have the agreement overturned. Even though the first Board had been hand-picked by the developer, there was nothing to suggest that its choice of Directors breached its duty under the Condominium Act to act with reasonable care and honesty nor was there anything illegal in the developer limiting its liability in this way. Rather, the first Board had acted within its Act-imposed mandate to “arrange the affairs of the corporation”; the agreement and by-law did not overstep those parameters. It was also noteworthy that the condo corporation’s recourse under the Tarion Warranty program was still preserved, and the existence of the by-law and agreement had been disclosed to buyers. The agreement was upheld. See Toronto Standard Condominium Corp. No. 2095 v. West Harbour City (I) Residences Corp., 2014 (ONCA).