Amendments to Strata Property Act affect Developers

By Clark Wilson LLP's Strata Property Group

December 10 update: sections 2, 3, 4, 6, 7 (b), 8, 9, 11, 13, 14, 17, 18, 20 to 24, 26, 28, 29, 32, 33 (b), 35 and 36 of the Strata Property Amendment Act have been brought into force. (See Order in Council No. 707).

Following consultation with industry organizations and law firms, the provincial government introduced changes to the Strata Property Act during the fall sitting of the legislature. Bill 8 has passed all three readings and received Royal Assent. Although the amendments are not yet in force, the Government has made it clear that the rental prohibition/restriction issues are foremost and will be law by January 1, 2010. It is likely that different portions of the legislation will come into force at different times as the regulations are developed.

Highlights

For developers, there are a number of policy changes worth noting:

Interestingly, none of the amendments relate to phased strata plans, consolidation or amendment of strata plans and the like. In summary, there are not many amendments that appear to adversely affect developers.

Analysis of Significant Sections

Rentals

[Bill 8, Section 23]: The government considers the amendments to section 143 of the Act to be the most significant policy change, and it is generally favourable to developers. The new subsection (2) reads as follows

(2) Subject to subsection (1), if a strata lot has been designated as a rental strata lot on a Rental Disclosure Statement in the prescribed form, and if all the requirements of section 139 have been met, a bylaw that prohibits or limits rentals does not apply to that strata lot until,

(a) in the case of a Rental Disclosure Statement filed before January 1, 2010, the earlier of

(i) the date the strata lot is conveyed by the first owner of the strata lot other than the owner developer, and

(ii) the date the rental period expires, as disclosed in the Rental Disclosure Statement as it read on December 31, 2009, and

(b) in the case of a Rental Disclosure Statement filed after December 31, 2009, the date the rental period expires, as disclosed in the Rental Disclosure Statement.

(3) Even if a Rental Disclosure Statement filed before January 1, 2010 is changed under section 139 (2) after December 31, 2009, subsection (2) (a) of this section applies.

(4) Subsection (1) (b) does not apply to a bylaw that is passed under section 8 by the owner developer.

We believe the addition of subsection (4) is intended to ensure that the period of grace does not apply to a rental restriction bylaw passed by a developer. Subsection (1)(b) only addresses the applicability of a "bylaw that prohibits or limits rentals" to a strata lot. Therefore, even if there were a bylaw that allows anyone to rent, subsection (1)(b) and (4) would not apply to it. Hence, we read subsection (4) as saying: "If, when you buy it, the bylaws prohibit or limits rentals, and that bylaw prohibiting or limiting rentals was passed by the developer, there is no grace period and the bylaw applies to all owners".

Owner-developers (as developers are referred to in the Act) do not typically pass rental restriction bylaws, because their market includes investors. However, given the changes to section 143(2), a market may now exist for complexes that limit or prohibit rentals, much like there is a market for age-restricted complexes. As a result, we may end up seeing new strata corporations where the developer has passed a bylaw that limits or prohibits rentals.

The key change to section 143 appears to be with respect to the Rental Disclosure Statement of the developer. Currently, section 143(2) provides that if a strata lot has been designated as a rental strata lot, then a bylaw prohibiting or limiting rentals does not apply to that strata lot until the earlier of the date the first purchaser conveys the strata lot and the expiry date noted in the statement. That has been changed by Bill 8.

The amendment creates two situations – those before January 1, 2010 and those after December 31, 2009:

In other words, for disclosure statements issued after December 31, 2009, the number of subsequent owners of the strata lot is irrelevant and the ability of all subsequent owners to rent continues until the date the rental period set out in the statement expires. Clearly, it is in the best interests of a developer to determine that expiry period well into the distant future, since the number of subsequent purchasers no longer affected by the adoption of a rental restriction can be endless. This would mean that developers can now create complexes that effectively have no ability to prohibit or limit rentals.

It is easy to understand where the government was coming from in making this policy change. Minister Coleman stated that the amendment will allow new strata developments to better meet the market demand for rental units and thereby limit the number of situations where strata corporations pass rental restriction bylaws that negatively affect both the rights of owners and purchasers and the marketability of the units.

Court jurisdiction

[Sections 5, 10 and 25]: The requirement that the Provincial Court only has jurisdiction for debt claims not exceeding $25,000 has been significantly changed. With the exception of section 174 (appointing an administrator), an owner or the strata corporation can commence proceedings in the Small Claims division of Provincial Court seeking relief under the Strata Property Act. This will have a profound effect on the court adjudication of disputes especially in terms of strata corporations having issues with owners and tenants after the passing of control from developer to strata council. However, it also seems inevitable that, given the much lower cost for individual plaintiffs in Provincial Court compared to Supreme Court, disgruntled owners will be suing developers much more often for alleged contraventions of the Act.

[Section 25]: Section 173 of the Act is the section that permits the strata corporation to apply for an injunction enjoining an owner from contravening the Act. Currently, such injunctions must be obtained in the Supreme Court. This amendment permits the application to be made in Provincial Court.

There is an interesting additional amendment to section 173. If a special levy is tabled and it does not get the required 3/4 majority, the strata corporation may apply to either level of court for an order approving the resolution as long the resolution receives at least one-half of the votes cast. There was no discussion with the minister on this issue, but it is clear to us that this provision is designed to ensure that a strata corporation is able to address the significant expenses of maintaining and repairing buildings, which forms part of the statutory obligation of the strata corporation.

This new provision should have no application to actions commenced against developers for deficiencies and related matters as it appears to address obligations to repair, not lawsuits to recover cost of repair.

Votes before first AGM

[Section 2]: This amendment to section 11 of the Act clarifies the provisions in the current legislation with respect to 3/4 votes conducted after the first conveyance and before the first AGM. More particularly, a unanimous vote is necessary unless the resolution is to amend the bylaws of a non-residential complex or a change to section 139 Rental Disclosure Statement of the developer.

Conflict of interest

[Section 4]: Section 32 of the Act has been amended to include matters being addressed in a council meeting in which a strata council member might have a conflict. The amendment includes the following:

A council member who has a direct or indirect interest in

(b) a matter that is or is to be the subject of consideration by the council, if that interest could result in the creation of a duty or interest that materially conflicts with that council member's duty or interest as a council member …..

Concerns that arise from this amendment include:

Records

[Sections 7 and 8]: Sections 35 (record preparation and preservation) and 36 (access to records) of the Act have been changed to include audit reports and depreciation reports. More on these changes will be addressed by separate paragraph. A significant change that developers should be aware of is the ability of a former owner or tenant to access records of the strata corporation that, whenever created, relate to the time they were an owner or tenant. Those records could include records received or produced by the developer when it was the council. What a draconian way for a former displeased owner to get retribution!

Information certificates

[Section 12]: The requirements set out in section 59 of the Act for a Form B Information Certificate have been extended to include identification of which parking stalls and storage lockers, if any, have been allocated to a strata lot. This will require the managing agent to accurately determine which lot has an assigned numbered stall and/or locker. Developers can expect that property managers will look to them for that information. Since this requirement will create a potential liability for the property manager where such a disclosure is incorrect, we suspect that the agent would look to the developer for indemnification in such situations.

Email communications

[Sections 13 and 14]: The notice provisions set out in sections 61 and 63 of the Act are being amended to provide for communication by email. Email will be considered effective service if an owner or tenant has provided an email address for the purpose of receiving notices, records or documents, and a strata corporation will receive notice by email if the strata corporation or a council member has provided an email address. As the council before the first AGM, developers will be entitled to send out documents, such as the Notice of AGM packages by email, if an owner has provided an email address.

Depreciation reports

[Section 15]: Section 94 of the Act is the provision dealing with depreciation reports. The old section 94 has been repealed and in its place the following substituted.

94 (1) In this section, "qualified person" has the meaning set out in the regulations.

(2) Subject to subsection (3), a strata corporation must obtain from a qualified person, on or before the following dates, a depreciation report estimating the repair and replacement cost for major items in the strata corporation and the expected life of those items:

(a) for the first time, the date that is 2 years after the coming into force of this section;

(b) if the strata corporation has, before or after the coming into force of this section, obtained a depreciation report that complies with the requirements of this section, the date that is the prescribed period after the date on which that report was obtained;

(c) if the strata corporation has, under subsection (3) (a), waived the requirement under this subsection to obtain a depreciation report, the date that is the prescribed period after the date on which the resolution waiving the requirement was passed.

(3) A strata corporation need not comply with the requirement under subsection (2) to obtain a depreciation report on or before a certain date if

(a) the strata corporation, by a resolution passed by a 3/4 vote at an annual or special general meeting within the prescribed period, waives that requirement, or

(b) the strata corporation is a member of a prescribed class of strata corporations.

(4) A depreciation report referred to in subsection (2) must contain the information set out in the regulations.

This provision will have a dramatic effect on property managers. Note that, in order to opt out of the report requirement, a 3/4 vote resolution must be passed unless the strata corporation is a member of a prescribed class of strata corporation. The regulations will determine who is a "qualified person". Minister Coleman indicated in Legislature discussion that consultation for the regulations would include engineers, quantity surveyors, architects, and accountants. It is possible that they may also include developers or trades employed by developers.

Annual financial audit

[Section 16]: Section 103 of the Act has been amended to require an annual financial audit. This new provision states the following:

(5) The financial statement to be distributed with the proposed budget must be audited by a qualified person in accordance with any standards prescribed for the purposes of this subsection unless

(a) the strata corporation, by a resolution passed by a 3/4 vote at an annual or special general meeting within the prescribed period, waives the requirement for the financial statement to be audited, or

(b) the strata corporation is a member of a prescribed class of strata corporations.

(6) In subsection (5), "qualified person" has the meaning set out in the regulations.

This new requirement is going to create headaches. One of those likely headaches is the need for a developer to either have an audit conducted for the first AGM or to prepare a 3/4 vote (and hope that the owners approve such a vote) to opt out of the audit requirement for that fiscal year. Other headaches?

An AGM must be held within two months of the end of a fiscal year. Notice of the AGM requires a minimum of 19 days. Proposed budgets must be circulated with the AGM Notice Package. First, knowing how long it takes to get an audit, it will be virtually impossible to obtain an audit that is current in time for an AGM. Second, if the 3/4 vote resolution opting to not have an audit must be passed at a general meeting within the prescribed period, does that mean such a resolution can only be made with respect to the projected fiscal year? Or must an SGM be held immediately before the delivery of an AGM Notice Package, since that package will not include an audit report?

More headaches and cost to property managers and perhaps developers can be expected. Is a "qualified person" a CA or CGA? Minister Coleman stated it would not be expected to be a full-blown audit on an annual basis; however he does expect it to be done by a CA or CGA, at a cost of about $2,000 – $4,000. Minister Coleman stated that the audit was necessary "to address concerns for strata corporations that accounts aren't being properly kept."

Minister Coleman stated that the exempt class of strata corporations would be bare land strata corporations and small projects. He commented small projects would be "duplex … or four, or whatever" and the government would be working with the industry to come up with a number.

Bylaw amendments

[Section 20]: Section 127 of the Act as it exists now provides that no bylaws can be amended before the first AGM unless by unanimous resolution. That limitation has been amended so any amendment to the bylaws before the second AGM will require a unanimous resolution. The stated intention is to ensure that developer-controlled strata corporations will get some breathing room, although Minister Coleman also said that the change would bring "stability" to the buildings. The "anti-developer lobby" was successful on this issue.

Conclusion

For the most part, the changes are not dramatic. However, depending on the particular circumstances of the developer and project (including, for example, whether the developer will continue to own strata lots) some may have a potentially significant impact. Developers and their counsel should consider their applicability at various stages, including most notably when a disclosure statement is being prepared, before the strata plan is filed, and prior to the hand over of control to the new strata council at the first AGM.

– Clark Wilson LLP's Strata Property Group