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Should the Condominium Act be amended to encourage developers to include green energy and energy conservation in condominium projects?

This was the subject of a fascinating and passionate exchange between members of the Ontario Bar Association’s Real Property Section, which some of you will enjoy reading:

 
Dear Chris,

Further to our conference call yesterday afternoon with Jamie James and Tim Stoate, I wish to follow up our conversation with this e-mail, in an attempt to formally address the concerns you’ve raised with the proposed amendments to the Condominium Act (which amendments are supported by both the Toronto Atmospheric Fund and the condominium development industry, for the reasons discussed yesterday afternoon, and articulated below).  I have copied Dianne Saxe and her colleagues on the OBA who are part of the GEA working group, because I wanted each of them to know the reasons underlying my strong support for the proposed amendments to the condominium legislation, even though its too late to be part of the OBA submission before the standing committee.

Before I address the concerns you’ve raised on your blog, I wish to point out that the Green Energy Act that was recently-tabled by the Provincial government includes a variety of consequential amendments to other statutes, with the aim of advancing sustainable energy initiatives.  I have recently had the good fortune of working with Tridel  Corporation and the Toronto Atmospheric Fund on a green loan for a condominium project (where the loan to the condominium corporation was used to reimburse the declarant for the costs it had expended in acquiring and integrating energy-efficient building components, materials and features in the final construction of  the condominium project, in order to attain LEED certification, with the resultant energy savings being utilized to fully repay the green loan indebtedness over a 7 year period, and with the residents of the condominium getting the positive benefits of these energy savings for the remaining useful life of the building … with the estimated savings amounting to over $100,000 per annum, in a 250+ unit project).  However,  my recent green loan experience quickly  revealed  that the Condominium Act does not make things easy for environmentally-friendly and energy-efficient initiatives that are financed by green lenders, and that several amendments to the Condominium Act would definitely facilitate green loans for condominium projects, to the collective benefit of condominium builders, lenders, condominium residents and the overall  community (as a result of more energy-efficient buildings that use less greenhouse gases, and correspondingly leave a smaller carbon footprint).

The first amendment that has been suggested is intended to clarify that loans to a condominium corporation cannot be terminated or rescinded by the post-turnover board under section 112 of the Condominium Act.  Since section 112 only addresses the termination of service contracts, this amendment really isn’t  absolutely necessary, and this is especially so in light of  Justice Paul Perel’s decision in the case of PSCC No. 668 v. Dayspring, cited at 2006 39 R.P.R.(4th) 224 [which clearly confirmed that a loan  arranged by the declarant for assumption by the condominium corporation (and the corresponding loan security documents) will be enforceable against the condominium corporation by the lender, provided that the loan is for legitimate purposes falling within the objects and duties of the condominium corporation, and provided that all requisite steps to authorize the loan have been implemented].  The rationale behind the proposed amendment, however, was to give  added assurance to condominium lenders that their loan security documents would be enforceable and unassailable, particularly those whose legal counsel were unaware of the prevailing case law, and so that  one could simply point to the statute for comfort.  Chris, on your blog, you confirm the fear that loans could be made for any purpose and could contain improvident and unfavourable terms.  However, in my respectful opinion, the declarant is obliged to fully disclose the terms of the loan in the disclosure statement, and to correspondingly reflect same in the proposed first year budget … therefore, irrespective of the purpose of the loan and/or its terms, all prospective unit purchasers would be buying into the project with their eyes wide open.  Accordingly, if the loan is perceived as an attempt by the declarant to scam more money out of the project, purchasers will balk at the deal, and rescind the transaction within their 10 day cooling off period, and the marketplace will  thereby dictate whether the loan is improvident or unfavourable.  To require that only loans for green energy projects will be statutorily enforceable, will take away from the prevailing case law that upholds all other types of legitimate loans that further the performance of the condominium corporation’s objects and duties.  Your blog also states that the justification for the amendment is flawed, because a developer may wish to download an equipment/asset purchase or finance agreement that should otherwise be borne solely by the declarant, and should not be passed onto the condominium residents.  However, in my respectful opinion, full and frank disclosure of the loan obligation being assumed by the condominium corporation (and its financial impact on the condominium’s bottom line budget, and each unit owner’s monthly common expense payments) is the panacea for curing all perceived ills and potential abuses.  More importantly, when it comes to green energy initiatives, the prevailing purchase price in the market place does not necessarily increase ratably with the degree of energy-efficient features installed in the project, and therefore conventional condominium construction lenders are reluctant to participate in the financing of green energy systems and related initiatives.   That is precisely why TAF has stepped up to the plate to assist Tridel in funding energy upgrades  and improvements to its projects that will ultimately benefit (solely and exclusively) the condominium and its residents, and the neighbouring community.  The loan simply repays the declarant for the capital costs actually expended to incorporate these extra energy-efficient components and upgrades (above and beyond the Ontario Building Code requirements), and the condominium will repay the loan from out of the energy savings arising from the implementation of these energy upgrades and initiatives.  Therefore, its not just the fact that a green energy project is desirable for the community, but the fact that it will give rise to energy savings for the benefit of the condominium residents, that makes our proposed amendments strongly (if not exclusively) consumer-oriented.

The second amendment proposed is to ensure that servicing agreements, leases and easements for green energy systems involving condominium projects, are not terminable by the post-turnover board.  This amendment is absolutely essential to ensure that the upfront infrastructure costs of installing and servicing an energy-efficient system like a geo-thermal, solar or wind power system, are not lost upon the early termination of the servicing agreement, but rather are recouped over a  period of time  throughout the duration of the servicing agreement.    We could have drafted the amendment so that only agreements, easements or leases entered into with a party or parties dealing at arms’ length with the declarant are not terminable, but in the context of multi-phased projects, the declarant may wish to participate in the maintenance and servicing of the energy system, in order to ensure that same is working properly, particularly so that other subsequent phases can connect to (and be serviced by) the energy system, for the benefit of the entire condominium community being developed.  That is precisely why the amendment is not limited to third parties dealing at arms’ length, because the declarant may wish to retain a vested interest in the third party servicing contractor who’s responsible  for installing and maintaining the energy system.  Moreover, the cost of some of these systems is so significant (ie. a co-generation plant that converts cheap natural gas into more expensive electricity) that it may not be possible to fund the entire cost of installing same from third party sources, without the declarant contributing some of its own funds to do so, and therefore the declarant may want to maintain or acquire an interest in the energy system provider.  All of this would have to be fully disclosed in the disclosure statement, so that all prospective unit purchasers would know that the declarant retains an interest in the third party energy system provider.  Moreover, I do agree with you Chris that we could put in additional language in the proposed amendment to require that all terms of the proposed agreement, easement or lease must be commercially-reasonable, and all rates, fees or charges must be at prevailing rates (to ensure that the condominium corporation is not being gouged), and I also agree that these agreements can (and should) be subject to section 113 of the Condominium Act, so that if the condominium corporation still feels aggrieved, it can apply to court for an order amending or terminating the agreement, if there was not adequate disclosure about its provisions, and the provisions produce a result that is oppressive or unconscionably prejudicial to the condominium corporation or its residents.  I believe the foregoing to be an excellent compromise,  that fully protects condominium corporations from any potential abuse arising from our proposed amendment.

Finally, with respect to the last amendment which purports to give creditors of the condominium the right to obtain a compliance order (or to appoint an inspector or administrator) in the event that the condominium fails to repay the loan indebtedness for no legitimate reason, I wish to point out that this amendment is sorely needed to overcome the reluctance that conventional lenders currently have about loaning  money directly to condominium corporations.  Condominiums have no property or other security which can be charged or pledged to the lender, and all the lender has going for it is section 23(6) of the Condominium Act, which provides that a judgment against the condominium corporation is a judgment against each unit owner for a proportion of the judgment, determined by each owner’s proportionate interest in the common elements.  Unfortunately, the foregoing  may result in the lender getting repaid over a very long period of time, and same is not acceptable to most conventional lenders.  That is precisely why there are currently only a handful of  lenders who regularly provide loans to condominium corporations to upgrade and retrofit their building heating and cooling systems, or to repair and replace worn out common element components (ie. when the reserve fund is insufficient to do so).  None of these lenders are conventional schedule “A” banks, and the security they take is a general security agreement, with an assignment of the condominium’s right to levy a special assessment and to lien a delinquent unit owner’s unit (and which assignment may arguably not even be enforceable).  There is no other security that a condominium corporation can provide a lender, because the condominium corporation ordinarily has no lands or other specific assets to charge or encumber.  Therefore, the conventional lending community needs to be assured that if the condominium defaults on the loan, it can apply on a summary basis for a compliance order to ensure eventual repayment in a timely fashion.  There is no point in having to pursue mediation or arbitration with the defaulting condominium corporation, because there is no argument or dispute  about the terms of the loan or its enforceability, but rather the sole issue is the non-payment of the indebtedness as and when due.   Our proposed amendment was drawn broadly in favour of all creditors to a condominium corporation, because the logic behind the proposal applies equally to all lenders of money to condominiums, regardless of whether it’s a green loan or not.  However,  as a compromise solution, I would certainly be willing to live with the amendment (for now) being limited to lenders of green loans and related energy initiatives. 

In conclusion, our proposed amendments are not anti-consumer nor anti-condominium corporation, but in fact, will facilitate and encourage more available funding (and conventional lending) for the development of  energy-efficient initiatives and systems involving condominiums that will reduce energy costs for the benefit of the condominium’s residents … in other words, it will help the people in most need, namely first-time homebuyers who buy into condominium projects because they are generally more affordable than freehold housing, by reducing their ongoing costs of energy consumption.   Furthermore, the criticism that was levied against TAF was, in my respectful opinion, totally unfair … TAF’s goal is (and has always been) to assist in the development of green energy initiatives that reduce greenhouse gas emissions and energy consumption costs, for the benefit of homeowners and the surrounding community.  However, because of the shortness of time following the announcement of the Green Energy Act, TAF was unable to meet with the condominium corporation bar and canvass their views, before making a formal submission to government on proposed amendments.

I sincerely hope that the foregoing clarifies our proposed amendments, and I would be willing to discuss the foregoing with you and your colleagues in the condominium corporation bar at any time in the future.

Best regards.

P.S.  I’ve also attached some slides prepared by Jamie James, Tridel’s environmental consultant, highlighting the overall proposal to create energy-efficiency in new condominium projects and green loans.
Harry Herskowitz

harry@dzlaw.com

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