Demystifying condominiums with better communication
The single biggest problem in communication is the illusion that it has taken place.
~ George Bernard Shaw
Many people start their home ownership journey by purchasing a condominium unit. Others downsize to a condominium later in life. As first-time condominium buyers, they may be unfamiliar with the operation and documentation of a condominium corporation.
Communicating these details is key to helping clients understand what they are getting into and will help minimize your risk of a malpractice claim. As a first step: send a detailed retainer letter and ensure you set out what you will or will not be doing (e.g. providing advice on the budget and financial statements) and what the client is responsible for (e.g. viewing the parking or shared areas for adequacy). As a final step: send a reporting letter that confirms specific discussions with your client. A reporting letter can be your best defence in the event of a claim.
It may be useful to explain that condominium units are individually owned while common elements are co-owned with other unit owners. Parking and storage spaces are either created as units or they form part of the common elements (for the use of a specific dwelling unit). The condominium corporation operates the condominium, and unit owners elect a board of directors to oversee the running of the condominium corporation.
Reviewing condominium documents with your client and explaining the nuances of condominium ownership in accordance with current standards of practice is your professional responsibility. Below are some issues to keep in mind for resale condominium purchases.
The status certificate (in some provinces, an estoppel or strata information certificate) is one of the most important documents in a condominium transaction. Most offers are conditional upon the review of a status certificate and it is critical to review it with your clients to their satisfaction. If the status certificate is unsatisfactory and the offer is conditional on its review – point out the option of terminating the deal. If it is not current (for example, it is more than 30 days old), it may be missing up-to-date information and it should be updated before closing. Insurance documents for the condominium, copies of the declaration, rules and by-laws, the budget for the current year and other documents respecting the condominium should be delivered with the status certificate, depending on specific requirements in individual provinces.
Some key status certificate issues for your clients to understand include:
- whether the dwelling unit, parking and/or locker(s) match the agreement of purchase and sale;
- arrears or contemplated increases in common expenses;
- existing or contemplated special assessments against the unit;
- litigation involving the condominium corporation;
- insurance maintained by the condominium corporation;
- amount in the reserve fund;
- the reserve fund study and its possible impact on the reserve fund; and
- auditors’ comments on the financial statements.
Condominium declaration, rules and by-laws
These documents make up the condominium constitution and often cause the most confusion.
It is good practice to review the condominium plans with your client – before closing – to confirm that the location and elevation of the unit meets the client’s expectations (sometimes the unit numbers and levels in the agreement of purchase and sale are incorrect). The location of the parking and locker spaces should also be reviewed to ensure that the numbers posted in the parking garage correspond with the condominium plan and/or agreement of purchase and sale. Determine whether the parking/lockers are units or exclusive use common elements. Discuss the boundaries between the unit and common elements and advise clients of their maintenance and repair obligations pertaining to each. Also draw their attention to the costs that are included in common expenses versus those that they must pay directly (for e.g. utilities, cable, etc.) and compare these to the corresponding clause in the agreement of purchase and sale for any disparity.
An opportunity to provide value added services
As their trusted advisor, your clients rely on you to give them information they may not even realize they need. Consider the following and confirm who will do what, as applicable:
- Highlight any lifestyle or use restrictions, such as restrictions on pets or the use of the unit for business, or on the ability to sell or lease parking or locker units separately from the residential unit;
- The condominium corporation maintains insurance coverage which only covers the standard unit as defined in the declaration. Recommend that your clients obtain their own insurance for personal effects and liability as well as for upgrades and improvements to the unit;
- Explain that, as owners, your clients have a say in decisions of the condominium corporation through voting. To be able to vote, they must be on record and the property manager for the condominium corporation needs to be notified of the change of ownership;
- Any changes to the common elements, including exclusive use common elements such as balconies or yards, require approval from the board of directors. If the unit being purchased has been upgraded, inquire whether the changes were approved;
- Elevator bookings (if applicable) and move-ins need to be arranged in advance with the property manager/administrator;
- Recommend a home inspection for the unit (if provided for in the agreement of purchase and sale); and
Recommend title insurance with a condominium endorsement, and ensure that the policy includes the correct legal description for each of the dwelling unit, parking and lockers (assuming the parking and lockers are separate units).
Attending to these details may seem obvious but it is easy to let one or two slip through the cracks. A checklist can be a valuable risk management tool to help keep track, while enabling effective communication with clients. In Ontario, the Working Group on Lawyers and Real Estate is developing a Master Chart to help document client discussions about resale condominium purchase transactions while doubling as a checklist. Also, under development are various precedent documents for condominium transactions. Visit lawyersworkinggroup.com to view the draft documents and make comments.