A closer look at the Report on Complex Stratas—should sections be retained or repealed?
27 June 2017
By Kevin Zakreski
This post is the first in a three-part series highlighting key recommendations in the Report on Complex Stratas (PDF). For other entries in the series, click here.
One of the issues taken up in the report that heavily engaged the Strata Property Law Project Committee’s attention was whether to retain or repeal legislation enabling the creation of sections. The committee wrestled extensively with this issue, ultimately recommending that sections be retained. Here is a closer look at the committee’s reasoning.
Brief description of the issue
Sections provide a means for complex strata corporations to address difficult issues relating to cost sharing, control of property, and governance. But they also impose significant costs and administrative burdens on strata corporations. Do the benefits of sections outweigh their costs?
Discussion of options for reform
There are essentially only two options for this issue. Either sections are maintained or they are abolished.
In order to decide whether sections should be retained, it’s necessary first to get a handle on what purposes they are meant to serve. Earlier on, the report noted that sections are intended to advance one of the three fundamental policy goals of the act, which is to provide flexibility in governance for an increasingly diverse range of strata corporations and to provide tools to ensure that different interests in complex stratas are given fair representation. This general goal plays out in a number of specific areas, most notably in connection with cost sharing and control over strata facilities.
The most common rationale for employing sections within a strata corporation concerns cost sharing. Creating sections can provide a strata corporation with tools to share expenses in ways that differ from the act’s general rule, which requires all strata-lot owners to contribute to the strata corporation’s operating fund and contingency reserve fund, and to any special levies, in accordance with their strata lots’ unit entitlements. Sections allow strata corporations to manage the tensions that can arise in a complex strata that doesn’t fit into the act’s default model of cost sharing, which emphasizes the principle that owners “are all in it together.” The classic example is a mixed-use strata property, where some expenses (say for items such as an enterphone or an elevator or for services such as landscaping) only benefit the owners of the residential strata lots, while other expenses (say for services such as additional trash pickup or enhanced security patrols) only benefit the owners of the nonresidential strata lots. Allocating such expenses strictly by unit entitlement can lead to overcharges for some owners and undercharges for others, a situation that can be viewed as unfair. While there are other means of displacing the act’s general rules on cost sharing, the primary means requires a resolution passed by a unanimous vote, which is a very high threshold to meet. The voting threshold to implement sections (a resolution passed by a 3/4 vote) is much lower, making sections a more realistic option for changing the default cost-sharing formula.
The other main rationale for creating sections goes hand-in-hand with concerns about cost sharing. Since sections are corporations, section members also get a measure of control over facilities that come under the section’s sphere of authority. This means that sections, unlike other devices for managing cost sharing under the act, can also provide tools for managing other aspects of collective decision-making. So sections can amend and enforce bylaws on topics that solely concern that section. A section must have its own executive and can set its own priorities through its budget. Finally, sections can deal with third parties on a contractual basis and they can manage dispute resolution in the courts or through arbitration. These powers, among others, add up to a limited form of autonomy under the umbrella of a section’s corporate status. This limited autonomy may be as attractive to some section members as the tools to modify cost sharing provided by sections. It might even, in some cases, be essential to the ongoing operations of a strata. As one commentator has put it, “[w]ithout sections, strata corporations that are composed of mixed ownership might well bog down and become dysfunctional.” Some stratas that are denied access to sections under the act might even end up trying to recreate their elements outside the act’s purview, by using contractual or other devices.
Interestingly, one of the main lines of criticism of sections also focusses on their corporate status. Critics of sections often point out that the price paid for the autonomy afforded by sections is administrative complexity, duplication in procedures, potential conflicts of interests for service providers, and added costs. A strata corporation with sections will have two levels of government. And, in many cases, there will be more than one section, creating additional branches to that government. On paper, it might seem that the sphere of authority covered by each of these bodies of government is correspondingly smaller, but in practice it tends not to work out that way. Each section, and the strata corporation, will have to hold an annual general meeting, prepare and adopt a budget, and elect a strata council or section executive. Because the sections (and the strata corporation) are considered separate entities under the act, and because the rationale for creating sections expressly raises the prospect that these distinct entities will have different interests, strata managers and professionals dealing with the strata corporation and its sections will have to take care to avoid conflicts of interest. If a conflict can’t be avoided, then a section or the strata corporation will have to seek alternative representation or service providers, which further increases delays and costs.
At this point it may be tempting to conclude that these added complications and costs are simply trade-offs that strata-lot owners knew, or could reasonably be expected to know, would be one of the consequences of creating sections. But this conclusion might miss the mark. In fact, sections are in most cases created by the strata’s owner-developer. An owner-developer often has its own motivations for creating sections, or it creates them with a speculative eye cast toward the strata property’s future needs. If the owner-developer’s projections turn out to be inaccurate, or if circumstances change, subsequent strata-lot owners may find themselves managing the complex realities of sections. And it isn’t a simple matter to dissolve sections: it requires the approval of the section and the strata corporation.
This point leads into a broader complaint about sections. The frustrations that arise from the administrative complexity of sections apparently cause many stratas to flout the rules governing sections. While non-compliance shouldn’t be excused, if it takes place on a large enough scale it may be a sign of deeper problems. While the concept of corporations within corporations might make sense on paper, in practice this difficult idea can leave people without legal training at a loss. As one commentator has noted, one of the most troublesome provisions from the point of view of compliance also features relatively clear rules. Taking this point a step further, this may be a sign that improving and clarifying the legislation might not be enough to tackle all the problems associated with sections. These problems may exist at a conceptual level, and may point to a fundamental mismatch between the problems that sections are most often adopted to solve (cost sharing, control over facilities) and the tool selected to solve those problems (creating semi-autonomous corporations).
The committee’s recommendation for reform
The committee struggled mightily with this issue. It has considerable sympathy with the criticisms of sections. But simply abolishing sections would leave a hole in British Columbia’s strata-property law when it comes to addressing cost sharing (particularly allocation of capital expenses) and control of property. Despite considering numerous options, the committee was unable to hit upon an effective device that would fill that hole. So a sizeable majority of the committee decided that the only realistic way forward is to continue with sections and to propose reforms to improve the law governing them. A minority of the committee remains unconvinced that the benefits of sections can ever make up for the burdens they impose on strata corporations.
The committee recommends:
The Strata Property Act and the Strata Property Regulation should continue to contain provisions enabling the creation and operation of sections.