Court of Appeal rules on Developer’s operation of clubhouse

The Ontario Court of Appeal recently dismissed an application by various condominium corporations against one of our clients in connection with a residential condominium project located in Collingwood. At issue, in this case, was the ownership and control of the clubhouse located within the project. Specifically, the applicants were seeking a declaration that they had an equitable ownership interest in the clubhouse and that the existing mortgage was therefore subordinate in interest. In addition, the applicants requested that the Court order the developer to provide an accounting of clubhouse finances. The applicants also made a claim seeking an oppression remedy under the Condominium Act arising from the developer’s conduct in failing to convey the clubhouse to them, in mortgaging the clubhouse without the consent of the condominium corporations and in failing to account for the clubhouse revenues.

The applicants argued that the disclosure statement constituted an executory contract, which entitled them to an equitable interest in the clubhouse. The Court dismissed this argument on the grounds that it was clear from the disclosure statement that the developer maintained ownership of the clubhouse until all of the lands owned by it within the project were sold to third parties. Alternatively, the applicants argued that they had an equitable interest in the clubhouse based on case law, which established that a developer of a condominium held the common elements and fixtures in trust for the benefit of the condominium corporation. However, this argument was rejected on the basis that the clubhouse in question was not a fixture or a common element since the purchasers had not obtained an interest in the clubhouse with the purchase of their condominium unit based on the terms of the purchase agreement and disclosure statement.  The Court also ruled that the mortgage was a valid first priority charge since the developer continued to retain ownership of the clubhouse.

The Court also dismissed the applicants’ request for an order requiring the developer to provide an accounting of all membership fees paid and expenses incurred in operating the clubhouse. In its reasoning, the Court analyzed the cost-sharing agreement between the developer and the condominium corporations, which provided for a monthly fee plus annual increases without regard to the clubhouse’s actual operating costs.

The Court also confirmed the limitation period for a legal challenge regarding the terms of the cost-sharing agreement, which must be brought within 12 months of the turnover meeting in accordance with the provisions of the Condominium Act.

Finally, the Court dismissed the oppression remedy claim on the grounds that the conduct of the developer throughout the dispute was within the reasonable expectations of the applicants.  Since there was no breach of the applicants’ reasonable expectations, the Court did not find that the developer’s conduct was prejudicial or that it unfairly disregarded the interests of the applicants.

In summary, Stephen Schwartz of Chaitons was successful in both the Superior Court and the Court of Appeal in confirming our client’s interpretation of the cost-sharing agreement which governed the operation, costs and use of the clubhouse. While it is our position that the result is consistent with the original expectations of the developer and its purchasers, the case provides clarity regarding the legal structures relating to income-producing assets in condominium developments. In this instance, the courts have confirmed that if properly drafted and disclosed, developers may collect fees from unit owners regardless of the frequency of use of such asset by the owners and the actual cost of operations. The Court also accepted our argument concerning the failure of the Condo Corps to establish that the clubhouse was a common element. Further, we were successful in our submissions that the Applicant’s oppression claim should be dismissed.