SECTION 112 of the CONDOMINIUM ACT, 1998 & THE RIGHT OF A TURNOVER BOARD TO TERMINATE OR CANCEL A CONDOMINIUM’s CONTRACT WITH A SUPPLIER OF GOODS, SERVICES and or FACILITIES TO THE CONDOMINIUM
The Condominium Act, 1998 (“the Act”) is what courts have characterized repeatedly as “Consumer Protection Legislation”. While the meaning of this phrase is obvious, from a practical standpoint, this recognition compels judges to interpret the provisions of the Act in a broad and liberal manner so that the Act achieves this fundamental aim.
While there are many examples in the Act where consumer protection is the focus, section 112 particularly stands out. This section empowers the turnover board within 12 months of its election, to examine any contracts or agreements for goods, services and or facilities that the condominium is party to and cancel or terminate them should the turnover board believe the cancellation or termination to be warranted. The power to terminate also extends to leases of the common elements for business purposes but not to telecommunication agreements nor shared facilities agreements.
This is a rather extraordinary power when one considers the prevailing rule that any contracts for a lawful purpose, absent special circumstances like fraud or duress by way of example, must be honored by the parties to them, in accordance with their terms.
The drafters of the Act recognize that there is a period of time – between the registration of the condominium and the turnover meeting – where the condominium’s affairs are controlled by a board appointed by the declarant and that board may choose to cause the condominium to enter into agreements for goods, services and or facilities, that might otherwise not be in the best interests of the condominium and its owners. To enable condominium corporations and their owners to critically examine and reject, if they wish, contracts involving the corporation during a period when they are not in control of the condominium, the drafters of the Act created section 112.
These contracts that the declarant appointed board caused the condominium to enter into prior to turnover might be “sweetheart” deals with related or non-arm’s length parties, or they might not be. These contracts might be for necessary or beneficial goods, services and or facilities, but their terms may not be as favorable as they otherwise should or could be if they had been negotiated by a turnover board comprised of owners in the condominium site.
Accordingly, section 112 gives the turnover board no more than 12 months from its election to review these contracts and determine whether they should be cancelled or not. To cancel or terminate any given contract, the board need only do two things: (i) pass a resolution within the 12-month period resolving to terminate the subject contract and (ii) give the other party to the cancelled contract (ie. the supplier of the goods, services and or facilities) at least 60 days’ written notice of the cancellation.
Section 112 places no other limits or restraints on the turnover board’s decision-making. For example, section 112 does not require the turnover board to give reasons to the supplier for the termination, nor does it require the turnover board to show that the contract is commercially unreasonable or that the termination is in the best interests of the corporation as a whole. In making the decision to terminate or not, the board members must act diligently, prudently and with the care and skill expected of any reasonable board member in their shoes at the time. Of course, in performing this duty, the board members can and should, depending on the circumstances, seek out and reasonably rely on any professional advice.
While there is some question if the written notice of cancellation must be issued within the 12-month period from the turnover meeting, a plain reading of section 112 makes clear that at a minimum, the turnover board must pass the resolution terminating the contract within the 12-month period. The delivery of the written notice of cancellation may come after the 12-month period but out of an abundance of caution, it should be issued to the supplier before the end of the 12-month period.
The contracts that might be terminated by the turnover board might involve a broad range of contracts for goods, services and or facilities. For example, it might be a contract for the delivery of elevator maintenance and repair, snow removal, grounds maintenance, bulk metering services for water and or hydro, and or heating and or cooling to the units/common elements (including geothermal or renewable energy services).
However, in order to exercise its rights under section 112, it is critical that the turnover board ensure that the declarant discloses and provide copies of all existing contracts involving the corporation at the time of the turnover meeting. The declarant has a duty under the Act to disclose such contracts at the time of turnover and the corporation has the power under the Act to enforce this duty by applying to court and obtaining an order compelling compliance, amongst other available relief like damages, fines and costs.
While the foregoing gives the turnover board substantial rights, not all contracts that the corporation became party to prior to turnover, may be open to termination under section 112. For example, if the contract in issue was fairly disclosed by the declarant to owners in the disclosure package issued, and if the corporation’s registered declaration obliges the corporation to abide by, honor or adhere to this contract, the turnover board will likely not be able to successfully resort to section 112. Instead, the contract will have to be terminated by its terms or for any other lawful justification (ie. fundamental breach of the contract by the supplier).
These principles were established in a Court of Appeal decision from 2010 that involved an attempt by a turnover board to terminate under section 112 a purchase and mortgage of a resident manager’s suite from the declarant of the condominium. The Court of Appeal concluded that section 112 was not available for this purpose since the terms of the purchase were fairly disclosed to all purchasers by the declarant and the condominium’s declaration clearly required the corporation to abide by these terms. There was no lawful basis for the Court of Appeal to exempt the corporation from complying with this obligation prescribed by its own declaration. That being said, there are amendments to section 112 that are not yet enacted, that would enable a condominium to terminate an agreement despite disclosure of the agreement and the terms of a declaration requiring compliance with the agreement.
Contracts often contain clauses that prescribe certain consequences on their termination in favor of the party whose contract is terminated. These clauses may require the terminating party to pay certain amounts to compensate the other party or to penalize the terminating party, depending on the circumstances. There is an open question whether a condominium exercising its rights under section 112 can avoid liability under such clauses of an agreement that it terminates. Given the consumer protection focus of the Act, it is reasonable to believe that such clauses would not be given effect by the courts as to do otherwise, would undermine the purpose of section 112 and possibly chill turnover boards from exercising their rights under this section. This appears to be the view of the Legislature as there are amendments to section 112 that make this plain, but they too have yet to come into force.
In late 2015, an Ontario Superior Court decision found that for a turnover board to terminate under section 112 a heating and cooling contract with a geothermal or renewable energy supplier (who was related to the declarant), the condominium had to first ensure compliance with section 97 of the Act. The interplay between section 112 and 97 of the Act was a case of first impression for the Court. Section 97 governs changes to the common elements and or services of the corporation that may be made by a board. Where the change is major or substantial in nature, section 97 will require written notice to the owners of the proposed change and a vote in favor of at least two-thirds of all the owners at a meeting duly called for such purpose. However, interestingly, the parties to this case agreed that an arbitrator would decide the condominium’s appeal of this decision in the context of a valuation and sale of the renewable energy equipment to the condominium by the supplier. The arbitrator concluded that this procedure is not required to terminate a contract, as section 112 acts independently of section 97.
Section 112 confers a power on the turnover board that is exceptional but at the same time, must be deployed correctly for it to have its intended effect. Since some contracts as described above may be “section 112 resistant” so to speak, a purported termination of such contracts may result in a breach of those contracts, thereby inviting potentially a set of negative consequences for the condominium corporation. Other contracts subject to section 112, may coincidentally contain termination clauses that are consistent with section 112 (ie. no cause termination on providing the supplier 60 days’ written notice). In every case, in examining any given contract that the condominium entered into prior to turnover, the turnover board should consider whether to seek and obtain legal advice.
Sometimes, the turnover board will be in favor of the particular supplier and what it supplies to the condominium but not be as much in favor with the supplier’s terms. In such cases, the condominium might not want to terminate the relationship with the supplier but rather, continue the relationship on more favorable or equitable terms. In such case, the condominium may want to reference the potential to terminate under section 112, so as to leverage a re-negotiation of the supplier’s contractual terms. Every case is different and the turnover board should always look to find ways it can advantage itself in the interests of the condominium corporation as a whole and its unit owners.
At Hummingbird Lawyers LLP, we have a vast amount of experience at advising condominium corporations in navigating section 112 matters. We have helped condominiums achieve many millions of dollars in savings by using section 112 of the Act to their advantage. For any questions or to arrange a consultation, please contact partner Erik Savas and Lead for the Firm’s Litigation and Condominium Legal Services Department at 905-731-1911 ext. 201, erik@hummingbirdlaw.com or complete the form below.
