Now Reading
Common Expense Deferrals ?

Common Expense Deferrals ?

Published by Shibley Righton LLP, Condo Newsletter
Important factors when considering common expense deferrals
Many condominium corporations are considering entering into “payment plans” with unit owners who are unable to pay common expenses due to COVID-19. A payment plan can be arranged on compassionate grounds on a case-by-case basis. A standard term of such an agreement is that the condominium agrees not to register a lien within three months of common expense default, in return for which the unit owner agrees not to challenge the non registration within the three month specified time lines if a lien is registered in the future.

Condominiums contemplating payment plans must consider the following factors:
The mortgagee!

It is questionable whether a condominium and a unit owner can by agreement, delay the three-month lien period under the Condominium Act.

Things become even more problematic when the unit owner in default has a mortgage. A lien registered within three months of default it gives the condominium corporation priority to receive the unpaid common expenses over almost all other creditors that have security against that unit. A payment plan entered into by a condominium and a unit owner, to which the mortgage lender or other secured creditor on title is not a party will result in the condominium losing its priority against these creditors.

If an owner can obtain their lender’s consent to the payment plan, then at least there is an argument that all parties agreed to suspend the lien period. However, one may suspect that during these uncertain financial times, lenders will be more careful than usual to preserve their rights. If a lender’s consent cannot be obtained, then a payment plan, if granted in our opinion will not be worth much.

Condominium directors and managers are ill-suited to judge individual need

Unit owners will have a variety of different circumstances, which they say entitle them to a deferral. Short of undertaking a full financial and credit analysis of each applicant, for which a condominium does not have resources, this is an extremely difficult determination. Even if a thorough process were possible, it could still be subject to criticisms such as board favouritism.

The condominium must make up that money somewhere

For every deferral granted, a condominium will have to make up that contribution by other means. For many corporations this may come in the form of deferred contributions to the reserve fund in the near-term. However, doing that only delays the hurt and can cause troubling ripple effects in the condominium’s future finances.
Condominiums should not dip into Reserve Funds to finance operating costs. To clarify, this does not refer to an across-the-board common expense deferral implemented by the Board passing a revised budget. It remains our opinion that, in the absence of a major development such as a government subsidy to condominium corporations, across-the-board deferrals of common expenses are not appropriate for most sites. The condominium must have cash flow to maintain the basic operations at the property.

It is our view that individual common expense deferrals will not be an appropriate option in most cases. Even if there is no mortgage lender, it is not practical to ask the other owners to make up the shortfall created by deferrals. Instead, unit owners in need should be encouraged to avail themselves of programs like government wage replacement and mortgage payment deferrals, where available. These are scary times, and no one is mistaken that these programs are magic bullets, but boards must make decisions that protect the viability of the condominium corporation.

Copyright 2020 Royale Grande Property Management Ltd. All Rights Reserved.