Collecting Common Expenses During a Pandemic: Options to Consider
From Shibley Righton LLC, Condo Blog newsletter. condoblog@shibleyrighton.com
Collecting Common Expenses During a Pandemic: Options to Consider
Every day we are learning new information about the spread and impact of the novel coronavirus on our daily lives. While we once thought that "social distancing" might only be required for a short period, some experts are suggesting that we may be working from home or without our normal incomes for months.
Many boards are now being approached by unit owners requesting some sort of relief from the obligation to pay common expenses. Our general advice to boards? Wait. There is generally not a need for a decision to be made right now. The Condominium Act, 1998 (the “Act”) states that a lien to secure the payment of common expenses must be registered within 90 days of default on the arrears. So, assuming a unit owner already paid for March common expenses but then defaulted in April, a lien would not need to be registered until June 30, 2020
While making decisions now may provide unit owners some relief in the short-term, it may have significant financial consequences for the condominium in the long-term if the pandemic is not quickly contained. The fact is that nobody knows what the long-term consequences of the pandemic will be.
That said, there are options that a board could consider during the pandemic when it comes to collecting common expenses, depending on the financial circumstances of the condominium.
Below are our responses to questions we are being asked.
Are unit owners still required to pay monthly common expenses?
Subject to our comments below, yes unit owners are required to continue paying common expenses. This obligation remains even if the condominium has temporarily closed amenity areas, suspended certain services, or taken other steps to prevent the spread of COVID-19 that may affect the income of investors.
Condominiums rely on the timely contribution of common expenses. This is the reason the Act provides condominiums with the extraordinary remedy to register a lien against a unit for unpaid common expenses. The failure of a unit owner to contribute to the common expenses of a condominium can have significant financial impact on the other unit owners, who are then required to make up the shortfall.
Most people in condominiums pay their common expenses by pre-authorized payment. Those who can afford to pay their common expenses should do so and relief should be available for those who really need it.
Should a condominium proceed to lien a unit if there are unpaid common expenses?
Subject to our comments below, and while it may be viewed as insensitive, a condominium must register a lien against a unit to secure unpaid common expenses. If it fails to register a lien, the condominium may lose priority that a condominium lien provides, thereby prejudicing all other owners. We have suggested to the government that it enact legislation to temporarily extend the 3 month period for registering condominium liens. While a condominium could still register a lien at 3 months, this proposed extension would provide a board with an opportunity to exercise its discretion in light of the financial hardships that unit owners may be experiencing without unit owners incurring additional costs, which may place a financial burden on the condominium as a whole. We do not mean to suggest that a 6 month lien registration period would become a licence for owners not to pay. The obligation to pay remains. We believe that those owners who can pay will continue to do so.
Can a condominium pause collecting common expenses from unit owners?
If the financial circumstance of the condominium permit, a board could relieve unit owners from contributing to the common expenses of the condominium for a period of time. However, we do not recommend this option. As nobody knows how long this pandemic may affect the economy, an across the board pause in the paying of common expenses is a very short-term approach. If a condominium uses its surplus now to pause common expense payments it may be more difficult for the condominium to provide relief to affected unit owners in the future when the total impact of the pandemic is better known.
Can a board create a new budget to reduce the amount of common expenses of the condominium?
If a condominium can afford to create a new budget with reduced common expense payments, it should work with its property manager to do so, keeping in mind that new expenses may have to be incurred for infection control. Given that many condominiums are now facing increased cleaning and sanitization costs, it may be difficult to find efficiencies that provide a meaningful reduction in the common expenses of the condominium. Any revised budget must ensure that the condominium is able to fulfill its obligations under its contracts, its governing documents, and the Act. It must also remember that the Reserve Fund must be kept in good standing.
We think it is still too early to decide whether reducing common expenses is a good idea. We all need more time to see how all of this is going to play out.
Can a condominium borrow funds to ensure there are adequate funds to meet its obligations?
Yes, however, this option will likely take the most time to implement as a borrowing by-law is required. The passage of a borrowing by-law is further complicated because most in-person meetings of owners have been postponed or suspended to encourage "social distancing" and a condominium's documents may not allow a meeting of owners to be held by electronic means. Using an online meeting and electronic proxies may provide a quorum and the means to approve the by-law. We are of the view, however, that borrowing should be avoided if possible.
Can a condominium allow a unit owner to establish a payment plan?
Yes. If the financial circumstances of the condominium permit, a unit owner and the condominium can enter into a written agreement regarding the structured payment of a unit's common expenses. Our general concern with a payment plan is that, if put in place too early, a condominium could be obligated to take reduced payments from unit owners that will not allow the condominium to meet its operating obligations and then the condominium will be stopped from collecting monies which the corporation may badly need. A board considering permitting payment plans should contact the corporation’s legal counsel to ensure that the plan is properly worded.
Can a condominium defer contributions to the Reserve Fund to meet its operational needs?
Yes. The Act requires a condominium to collect contributions to the reserve fund as part of a unit owner's contributions to the common expenses of the condominium. While contributions are generally made in equal monthly installments, we are of the opinion that a condominium may defer all or a portion of any monthly contribution to the Reserve Fund of the condominium. However, it is important to note that this deferral:
- may require the condominium to disclose in a Status Certificate that there has been a change to the payment plan into the Reserve Fund; and
- may cause the Reserve Fund balance to drop below the amount anticipated by the reserve fund plan.
Can a condominium withdraw from its existing Reserve Fund to meet its operational obligations?
This is not permitted. Once funds are deposited into the Reserve Fund of a condominium, they cannot be withdrawn to pay operating costs and must be used for the purposes permitted by the Act. Currently the Act limits the use of monies in the Reserve Fund to the major repair and replacement of the common elements and assets of the condominium. However, in addition to potentially extending the deadline by which a condominium must register a lien, temporarily permitting condominiums to use reserve funds for basic operation needs could be considered by the government. If the government does permit this on a temporary basis, condominiums should consult with their legal and accounting advisers as to how this should be disclosed and structured.
Prior to implementing any of the options for dealing with common expense payments discussed above, a board must consider the financial circumstance and long-term viability of the condominium. Any board considering the options discussed above should consult with the appropriate experts to ensure the options selected are properly implemented.
