Ontario Court of Appeal: Business judgment rule applies to condo board decisions
31 August 2016
By Kevin Zakreski
In a decision released yesterday, Ontario’s top court has made it clear that decisions taken by a condominium’s board of directors (what in British Columbia is called a strata council) are covered by the business judgment rule. “This rule,” as the court defines it, “recognizes the autonomy and integrity of corporations, and the fact that directors and officers are in a far better position to make decisions affecting their corporations than a court reviewing a matter after the fact.” So, “where the rule applies, a court will not second-guess a decision rendered by a board as long as it acted fairly and reasonably.”
3716724 Canada Inc v Carleton Condominium Corporation No 375, 2016 ONCA 650, involved “a mixed-use condominium building, containing both residential and commercial units, located in the ByWard Market area in Ottawa, Ontario.” The respondent “owns a number of commercial parking spots in the condominium. It rented out the parking spots on monthly basis since it purchased them.” Citing a drop-off in this business’s profitability, the respondent advised the appellant condominium corporation that it “wanted to convert its business to a ‘pay and display’ hourly parking operation.”
The condominium’s declaration expressly permitted such an operation. But bringing it into existence would entail “a number of changes to the condominium’s common elements.” Going ahead with these changes would require, at a minimum, the board’s approval.
The board “refused to approve the requested changes, citing security concerns.” These concerns were tied to the fact that “[t]he condominium is located in a high-crime area with a significant transient population. The parties recognized that some of the changes requested by the respondent would increase the risk of trespassers gaining access to the garage, which has security implications for both unit owners and anyone using the parking spots.”
There was some back-and-forth between the parties on the security question. In the end, “[t]he Board advised the respondent . . . that it would not approve the requested changes unless the respondent agreed to provide either (i) a parking booth at the parking lot entrance with a full-time attendant; or (ii) a full-time security officer who would patrol the area with the parking spots.”
The respondent was unwilling to bear the full cost of these security measures, so it “brought this application [to court] in May 2014, alleging that the appellant’s refusal to approve the requested changes was unfairly prejudicial and unfairly disregarded its interests, contrary to s. 135 of the [Condominium Act, 1998].” [NB This provision is the equivalent of section 164 of BC’s Strata Property Act.]
The court of appeal characterized this stage of the proceeding as follows:
Then the application judge turned to s. 135 of the Act. He did not explicitly refer to the applicable two-part test, namely that the claimant must establish (i) a breach of their reasonable expectations; and (ii) that the impugned conduct amounts to “oppression,” “unfair prejudice,” or “unfair disregard”: Metropolitan Toronto Condominium Corporation No. 1272 v. Beach Development (Phase II) Corporation, 2011 ONCA 667 (CanLII), 285 O.A.C. 372, at para. 6. However, neither party argues that the application judge failed to identify the correct test and, when his reasons are read as a whole, it is clear that he considered this two-part test.
The application judge ruled in favor of the respondent:
The application judge “had no doubt” that the Board’s concerns were reasonable. However, he concluded, at para. 37, the appellant was not being reasonable by insisting on a full-time security guard.
While acknowledging that a dedicated, full-time security guard would be the best option, the application judge found that “based upon the evidence” it was not a viable option. And, he further noted, it was not the only option as the respondent had “put forward a combination of other proposals that significantly [lowered] the safety risks to a point at which . . . insisting [on] a full-time security guard becomes unreasonable”: para. 39 [ellipsis and words in brackets both in original].
The court of appeal overturned the application judge’s ruling on this point. The court agreed with the appellant’s argument that the application judge “erred by assessing the Board’s decision on a subjective basis and substituting his judgment for that of the Board, which had been exercised following a fair process and having regard to reasonable safety concerns.”
In reaching this conclusion, the court of appeal had a number of interesting things to say about judicial review of condominium board decisions. It began by noting that “[t]he jurisprudence has occasionally recognized that decisions rendered by boards of condominium corporations should be shown some deference . . . . However, the topic has not been addressed in great detail.”
This gap in condominium jurisprudence led the court to consider a concept that is well developed in corporate law: the business judgment rule. While this rule has primarily been considered in connection with for-profit corporations, the court observed that:
it has been applied to not-for-profit corporations as well: see, for example, Hadjor v. Homes First Society, 2010 ONSC 1589, 70 B.L.R. (4th) 101, at paras. 47–52. And courts in other jurisdictions have applied the rule when reviewing decisions rendered by condominium boards: see, for example, Yusin v. Saddle Lakes Home Owners Ass’n, 73 A.D.3d 1168 (N.Y. App. Div. 2010); and Black v. Fox Hills N. Cmty. Ass’n, 599 A.2d 1228 (Md. Ct. Spec. App. 1992).
“Moreover,” the court continued, “the rationale underlying the business judgment rule in the corporate law context is also applicable to condominium corporations”:
As representatives elected by the unit owners, the directors of these corporations are better placed to make judgments about their interests and to balance the competing interests engaged than are the courts. For instance, in this case the security concerns arose in part as a result of the condominium’s location, and the Board members’ knowledge of that area is clearly an advantage that they enjoy over any court subsequently reviewing their decision.
The Act provides that the directors are the ones responsible for managing the affairs of a condominium corporation: s. 27(1). They are also required to act honestly and in good faith, and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances: s. 37(1). Like their counterparts in corporate statutes, these provisions suggest that courts should be careful not to usurp the functions of the boards of condominium corporations. [NB British Columbia’s Strata Property Act contains equivalent provisions: sections 4, 26, and 31.]
Therefore, to summarize, the first question for a court reviewing a condominium board’s decision is whether the directors acted honestly and in good faith and exercised the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. If they did, then the board’s balancing of the interests of a complainant under s. 135 of the Act against competing concerns should be accorded deference. The question in such circumstances is not whether a reviewing court would have reached the same decision as the board. Rather, it is whether the board reached a decision that was within a range of reasonable choices. If it did, then it cannot be said to have unfairly disregarded the interests of a complainant.
Applying these principles to the case at hand, the court found:
the real question was whether the Board reached a decision that was within a range of reasonable choices. Respectfully, the application judge did not focus on that question. In my view, he found in favour of the respondent because he disagreed with the balance between competing interests struck by the Board.
The Board did not prohibit the appellant from engaging in this business or changing its business model. The Board merely put in place certain preconditions for approving changes to the condominium’s common elements in order to address the increased security risk that would be caused by the changes that the respondent wanted to make.
The Board considered the respondent’s desire to increase its profits, and balanced that interest against the competing security interests of other unit owners. It also considered the security implications for persons using the parking spots. The term “balancing” in these circumstances is used only as a metaphor because the Board was not balancing “like against like,” but competing interests of different natures—the economic interests of the respondent and the personal security interests of others. A condominium board sometimes will be faced with different interests that cannot be reduced to a common unit of measurement, yet still must attempt to balance them.
In this case, the Board’s decision had the effect of rendering the respondent’s proposal less profitable. But that does not mean that the Board unfairly disregarded the interests of the respondent. The Board was entitled, indeed required, to consider the impact of the changes on the interests of other unit owners. And as the deemed occupier of the common elements of the condominium, it was also entitled to consider the security implications for users of the common elements. It did not ignore or treat the interests of the respondent as being of no importance. It simply—in good faith and after a fair process—determined that legitimate and reasonable competing interests were more important. Its decision not to approve the requested changes to the common elements unless the respondent hired a security guard was within a range of reasonable choices.
In the result, the court allowed the appeal, dismissed the application against the respondent, and awarded the appellant costs fixed at $9500, inclusive of HST and disbursements.