Fiduciary Failure – Who Pays?

January 2018

Your condo building is more than 25 years old and looks great.

Recently you have noticed signs of age.  Elevators have required more repairs.  Neighbours are finding water leaking into their suite from outside.  Most recently, your board announced that the reserve fund was insufficient to pay for necessary elevator and roof work.  Underground garage repairs are also needed.  It was recently announced that a former employee stole $200,000 from your condo corporation accounts over the past five years.  These funds are not recoverable.

In total, the condo corporation requires $2.8 million dollars to undertake necessary work, replenish the missing funds and cover legal expenses.  There are 300 suites in the building and the special assessment is for $9,500 per suite.

This fictional scenario is not far from reality for some condo corporations.

A condo corporation directorship is a position involving trust.  Directors are fiduciaries because they manage other people’s assets.

A director’s job requires more than attending monthly board meetings, approving annual budgets and determining condo fees.  They have a duty to oversee and supervise association vendors and employees.  They monitor accounts payable and receivable.  The board position of treasurer is a crucial one when it comes to monitoring the ongoing financial condition of the corporation.

Boards have an obligation, as do the owners on whose behalf the board works, to adequately prepare for these projects with proper funding.  It should also be noted that elevator replacement and roof repairs are not unexpected after 25 years.

In the above scenario directors, past and possibly present, failed in their duty.  They allowed a situation where the reserve fund was inadequate to pay for work that was or should have been anticipated.  Major structural and mechanical problems do not simply appear.  They tend to start small and worsen over time.  Condo fees should have been maintained at a level that could have paid for this work without the need for a special assessment.

With regard to the stolen funds, directors failed in their duty to monitor the assets of the corporation and to adequately supervise employees.

The special assessment can be viewed as formal recognition of these failures.  Had directors done their duty, the special assessment might not have been necessary.

Owners in the building are not without fault.  The Condo Act allows each owner an opportunity to review corporation books and records.  Owners voted individuals into the role of director where they failed in their fiduciary duty.

Owners who sit back, think the board is handling everything and believes everything is OK are at fault.  Each owner should participate in monitoring corporation resources and waste.  Choosing not to make regular document requests is a failure to monitor what is, for most people, their most important and valuable asset.

When owners choose to purchase a condominium, they do so with the understanding that additional assessments may be required to pay for whatever financial commitments are required of the corporation.

Special assessments are intended to deal with unexpected costs.  Owners are mandated to pay these special assessments.  Failure to do so may result in liens and foreclosure.