June 13, 2012
Parking spaces and legal cases
Harper Grey LLP Lawyers:
Wesley McMillan
Selling common property in stratas
Developers of strata complexes often "sell" parking stalls and storage lockers to condo purchasers. One of the most common sales processes is to register a lease to a related company over the common property parking for a nominal amount (usually $10). For a price (usually thousands of dollars), the related company then sub-leases or provides a license to individual owners to use certain stalls.
And so, the developer essentially sells owners their own property.
Developers also enter into regular leases with telecommunications companies for antenna towers and related equipment on common property. The companies pay the developers for this privilege. None of the proceeds are given to the strata corporation.
The developers' right to enter into these agreements has largely gone unquestioned. Perhaps this is because most people are naturally trusting; if the developer is entering into these agreements, that's because it can. Right?
Not necessarily.
A strata corporation is a legal entity. It is separate and distinct from the individual owners. It is created upon the deposit of the strata plan, at which time all the strata lots are owned by the developer.
As such, the developer functions as strata council. Section 6 of the Strata Property Act (the "Act") states that the developer, in functioning as a strata council, must "act honestly and in good faith with a view to the best interests of the strata corporation" (i.e. the owner has a fiduciary obligation to the strata corporation).
Leasing all of the common property for $10 and then selling portions for thousands of dollars each is neither a good faith transaction nor in the best interests of the strata corporation.
Owner developers have attempted to get around this fiduciary obligation by entering into and registering a lease prior to deposit of the strata plan.
The Act clearly stipulates that once a lease of more than three years[1] is placed on common property, that property becomes a common asset. It also mandates that parking stalls and other specific property must be identified on the strata plan as common property or part of a strata lot; not a common asset. A pre-existing lease precludes the possibility of the parking stalls being common property and is therefore (in my view), not permissible.
This is supported by reference to s. 258 of the Act, which sets out how a developer may allocate parking stalls. In my view, it provides a complete code as to how the developer may deal with parking space.
A recent case in Ontario indicates that a developer's fiduciary duties may arise before the deposit of the strata plan, not after. The Ontario Court of Appeal [2] held that the fiduciary obligation between the developer and the owners arises
A fiduciary (in this case, a developer) is obliged to "disclose all material facts, including the conflict itself, in order to obtain the informed consent of the principal." [3]
I have read a lot of disclosure statements, for a lot of developments. None of the statements I have read refer to a conflict of interest with respect to parking. Most of them do not even disclose the nature of the legal arrangement that will be in place. Anyone reading a typical disclosure statement would not know whether the parking had been leased or licensed or the terms of any such agreement.
The disclosure defence raises a more fundamental question about the nature of strata ownership: does disclosure to individual owners comply with the obligation of disclosure to the strata corporation?
In 2002, the BC Supreme Court [4] held that an individual owner had no right to sue a developer to challenge the validity of parking leases. Since the property in question was common property, the only party who could bring the lawsuit was the strata corporation. Conversely, in my view, it is not a good defence for a developer being sued by a strata corporation to rely on disclosure to purchasers. Disclosure must be made to the strata corporation, which does not usually exist at the time of disclosure to purchasers.
The disclosure defence also raises an issue of public policy concerning the enforceability of contracts. If the disclosure defence is valid, the developer has effectively created a false choice. Purchasers are not given a real option as to whether to accept the developer's breach of fiduciary duty. A purchaser can either accept the breach or not purchase at all. There is not middle ground.
The courts have acknowledged that one of the Act's purposes is to protect consumers. [5] Permitting such a scheme effectively negates the intent of the legislation and does little to protect the interests of purchasers.
Unless successfully challenged, developers practice of leasing strata corporations' common property for a profit will continue. When this happens, strata corporations not only miss out on the revenue to be gained from the use of their property, they also lose the right to control its use.
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1. The typical lease is for 99 years
2. York Condominium Corp. No. 167 et al v. Newrey Holdings Ltd. et al, 32 O.R.(2d) 458 (C.A.)
3. Michael Ng, Fiduciary Duties: Obligations of Loyalty and Faithfulness, looseleaf (Aurora, Canada Law Book Inc., 2003) at 10:20.10.
4. Ang v. Spectra Management Services et al., 2002 BCSC 1544
5. The Owners, Strata Plan VIS2968 v. K.R.C. Enterprises Inc., 2007 BCSC 774
