Newfoundland and Labrador condominium corporation fails to meet standard of honesty and good faith in imposing conditions on approval


14 June 2016

By Kevin Zakreski

Summer Services Ltd v Karwood Commercial Condominium Corp, 2016 CanLII 34954, a recent decision of the trial division of the Supreme Court of Newfoundland and Labrador, illustrates how a condominium corporation’s board of directors (the equivalent of a BC strata council) may fail to meet its statutory duties of honesty and good faith in responding to an owner’s request to approve a modification to a condominium unit (BC strata lot). The court found that it is acceptable to impose a condition to approval, but it must be done in a way that respects the duty to act honestly and in good faith.

Facts and issues

The case involved a 13-unit condominium located in the town of Paradise, Newfoundland and Labrador. The respondent was the condominium corporation. The applicant operated “massage therapy and pre-natal ultrasound businesses.”

In December 2013, the applicant agreed to purchase a unit in the condominium. At the time of purchase, the respondent inquired into the nature of the applicant’s business, attempting to address any conflicts that could arise with existing businesses located in the development. The applicant promptly notified the respondent of its intention to operate a massage-therapy business.

In June 2014, the applicant’s purchase of the unit closed. In September 2014, the respondent approved the applicant’s proposed signage for its unit, which disclosed (among other things) that it provided massage therapy.

In August 2015, the applicant sought the respondent’s consent to the installation of air conditioning in its unit. At the time, the respondent was in receipt of a complaint from another unit owner. The complaint alleged that the applicant was in breach of a provision in the condominium’s declaration that restricted unit owners from carrying on a business that was in competition with the core nature of the business of another unit owner.

In September 2015, after an investigation, the respondent decided the applicant was in breach of the declaration and advised the applicant “to cease operation of its massage therapy business from the Unit.” In January 2016, the respondent informed the applicant that it had refused approval of the applicant’s request to install air conditioning “because it was not approving any modifications to the exterior of the building at that time.” The respondent’s message didn’t mention “the massage therapy issue.”

In March 2016, the applicant commenced proceedings in court. In April 2016, the respondent wrote to the applicant “and advised that it would approve the installation of air conditioning in the Unit conditional upon the Applicant first becoming compliant with the non-competition provision of the Declaration, i.e. by the Applicant ceasing operation of its massage therapy clinic.”

The parties agreed to limit the issues before the court to the following two:

  • Has the respondent complied with the declaration’s requirements for considering requests to approve modifications to a unit?
  • If the respondent has complied with these requirements, then “was it entitled to impose, as a condition of its approval, a requirement that the Applicant become compliant” with the declaration’s non-competition provision?

Has the respondent complied with the declaration’s requirements for considering requests to approve modifications to a unit?

The court began its consideration of this issue by noting the general principle that “[s]ignificant deference to the decisions of condominium boards is granted by courts given their status as duly elected bodies, leading to the recognition of a wide scope of discretion in granting or withholding consent to a unit holder.” The court observed that this principle can be seen as a part of the broader corporate-law concept called the business-judgment rule. So courts tend not to interfere with a condominium board’s decision “unless it is ‘clearly oppressive, unreasonable and contrary to legislation’ or there is evidence of improper conduct.”

The court “boiled down” the parties’ arguments to the following:

The Applicant says that the allegation of contravention of the non-competition provisions of Article 4.08(c) of the Declaration is distinct from, and should not be considered in conjunction with, its application pursuant to Article 4.05(d) for consent to the installation of air conditioning in the Unit.

The Respondent says that it has an overarching obligation pursuant to section 19(1)(c) of the Act to take all reasonable steps to ensure that the owners of units comply with the Declaration; this means that the Board acted reasonably when it made its consent to the installation of the air conditioning conditional on the Applicant bringing itself into compliance with Article 4.08(c) of the Declaration.

The court found that both arguments could be considered to be reasonable:

As to the position of the Applicant, it would be reasonable to read Article 4.05(d) narrowly so that any condition imposed by the Board for an alteration to a unit would have to be confined to matters pertaining to the nature of the alteration proposed. Such an interpretation would give the words used their plain and ordinary meaning, and not an expanded meaning, as a reasonably informed unit holder would read them.

***

The Board was entitled to consider the Applicant’s request for the air conditioning in the context of the obligations imposed upon it by the Act and the duties and obligations imposed upon the Applicant by the Declaration. To the extent that the Applicant was not compliant in a material manner with the Declaration, it was reasonable for the Board to make compliance a condition precedent to proceeding with the installation of the air conditioning in the Unit. That is not to say that a refusal to grant permission to repairs or alterations to a unit would be reasonable based upon any violation of the Declaration, no matter its significance. Subject to the deference afforded to decisions of the Board as discussed above, each such decision would have to be evaluated based upon its particular circumstances. One would expect, though, that proportionality would factor into the analysis.

In the court’s view, the respondent’s board was entitled to “impose a condition on the approval that the unit holder otherwise bring itself into compliance with the Declaration.”

If the respondent has complied with these requirements, then was it entitled to impose, as a condition of its approval, a requirement that the Applicant become compliant with the declaration’s non-competition provision?

But the court held that its decision on the previous issue “does not end the matter”:

The imposed conditions for granting consent must nevertheless withstand a reasonableness inspection. The Board must act honestly and in good faith.

The court gave detailed consideration to this issue and concluded that the respondent didn’t meet this standard.

I have no direct evidence that the Board honestly held a belief that it could not grant consent to a non-compliant unit holder. Nor can I infer such an honestly held belief from the totality of the evidence. Given the requirement that a condominium board act honestly in good faith, one would expect that belief to have been stated expressly in the Board’s September and January correspondence. I do not find that the notice in September of 2015 of determined contravention of Article 4.08(c) was sufficient to alert the Applicant to a link with the requested approval for air conditioning. Furthermore, it was disingenuous of the Board to deny approval of the air conditioning in January of 2016 based upon a manufactured reason unrelated to either the objective criteria for consideration of the approval application or its real reason for doing so—the business conflict. In the circumstances, therefore, it was oppressive and unreasonable for the Board to deny approval of the air conditioning as it did.

***

The unreasonableness of the Respondent’s actions is exacerbated by the passage of time. Following receipt of the January 2016 letter it was reasonable for the Applicant to apply to this Court to seek a declaration that the Respondent had failed to comply with its duties under Article 4.05(d). The Respondent’s attempt to cooper up its position by sending the letter of April 20, 2016 established clearly that it had no reasonable basis to deny approval for the air conditioning other than for the initially unstated reason of the massage therapy business issue. For the first time, the Applicant learned what resistance was really being applied. The application for approval of the air conditioning was made at the height of last summer. The Applicant will now have to act quickly to get air conditioning installed in time for this summer. Had the matter been dealt with by the Board from the outset in an honest and forthright manner, the issue concerning the non-competition provision may have been resolved long before now.

Result

In the result, the applicant was granted a declaration that “the Respondent failed to act honestly and in good faith in the manner by which it denied the Applicant approval for the installation of air conditioning in the Unit.” As a consequence, “given [the court’s] finding of an absence of honesty and good faith, there is no reason why the application for air conditioning should not be approved.” The applicant was also awarded its costs for the proceeding.


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