Can a Developer-Appointed Board of Directors Agree to Cap Developer’s Own Liability?  — Buyers Take Note!

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By Martin Rumack

January 5, 2015

A recent case from the Ontario Court of Appeal answers an interesting question, and one that will be of interest to potential buyers of a new condominium unit.  The question was this:

Is it appropriate and legal for a Board of Directors to agree to limit the developer’s liability for common-element repairs and maintenance?  And does it matter if the Board is appointed by the developer itself?

The background to the dispute was this:  A new condominium development was completed in 2010, and the developer appointed a first Board of Directors.    The developer and that Board then entered into an agreement, which in connection with the common elements limited the warranties provided by the developer to only those minimum repairs and maintenance required under the Tarion Warranty program.   The agreement also prevented the condominium corporation from suing the developer in this regard; instead, the corporation was only able to pursue its remedies through the New Home Warranty process.   The Board also enacted a by-law corresponding to this agreement, and both documents were registered on title and disclosed to all buyers.

When the developer-appointed Board was duly replaced by a new, elected Board comprised of unit-owners (in the customary manner after a turnover meeting), that new Board felt the agreement was unreasonable and in breach of the provisions and intent of the Condominium Act.  In particular, it claimed that the old developer-chosen Board had no authority to agree to limit the developer’s own liability in this regard, since it had the effect of undermining the condominium corporation’s ability to ensure that the repairs and maintenance were done by the developer.   In the new Board’s view, this was a self-serving attempt by the developer – using the agreement with its own hand-picked Board – to limit its legal and financial liability in respect to common elements.

The new Board sued, and was unsuccessful both at trial and on appeal.   According to the court, the old Board had not overstepped its power under the Condominium Act; rather – in keeping with the terminology of the legislation – the agreement and by-law were merely intended to “arrange the affairs of the corporation”.   True, the effect was to release the developer from all liability other than the statutory minimum imposed by the Ontario New Home Warranty Act, but this was not beyond the old Board’s powers.   The condominium corporation still had recourse under the Tarion Warranty program, and the by-law and agreement had been disclosed to individual unit buyers and placed on title.   Furthermore, there was nothing to suggest that the developer-appointed Board breached any duty under the Act to act with reasonable care and honesty.   

In short, the court found “[t]here was nothing inherently unreasonable in the developer limiting its liability for construction deficiencies in the manner done here.”

See Toronto Standard Condominium Corp. No. 2095 v. West Harbour City (I) Residences Corp. 2014 ONCA 724 (CanLII).

What are your thoughts?  Should a developer be allowed to limit its liability in this manner?

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