Strata Series, Part 2- Your strata lot for sale by public auction
In last week’s installment of the Strata Series, we discussed strata developments generally and what a potential purchaser may expect when buying into one. Last week’s article also touched briefly on the duties of the Strata Corporation all of which translate to items of expense for the strata corporation.
How does the strata corporation actually get money to pay for these things?
Option 1- Try, and try to collect the delinquent maintenance
Ideally, a strata corporation should employ a manager who will follow up with various proprietors for the payment of their maintenance fees. Like any corporation, a strata corporation cannot survive without cash flow, and given that a strata corporation does not generally engage in revenue generating activities, the maintenance fees are more often than not the only cash that the corporation can hope to collect. When the manager has instructed the security guard to refrain from opening the gate for a delinquent proprietor but that proprietor has no qualms about opening it himself, and when the proprietor remains un-phased by notice after notice being posted on the community bulletin board announcing his delinquency- what can the strata corporation do? Serve a notice.
Where a proprietor fails to pay the maintenance fees for more than a period of thirty days, the strata corporation must send a notice in writing to the strata lot owner and mortgagee (if the owner has an outstanding mortgage registered against his lot) setting out:-
- the outstanding amount of maintenance owing and the period for which it is owed;
- the amount of interest accruing on the contribution and the period for which interest is payable;
- that the proprietor is required to pay the outstanding maintenance and interest accrued thereon within thirty days of the service of the notice;
- that if the outstanding amounts are not paid or if suitable arrangements for the payment thereof are not made within the thirty days, the corporation may sell the strata lot by public auction or private treaty; and
- that the proprietor may lodge an appeal (with the Strata Appeals Tribunal) if he has paid at least 50% of the outstanding amount.
Yes, you read that last part correctly- the strata corporation can sell a proprietor’s unit if they fail to settle their outstanding maintenance fees.
Option 2- Power of Sale
Before the strata corporation can sell a proprietor’s unit, they must satisfy the Commission of Strata Corporations that they have taken all reasonable measures to recover the amounts owing. The strata corporation will then have to follow a carefully outlined procedure for the sale of the strata lot which includes sending various notices to the delinquent proprietor and their mortgagee (if any), publishing numerous notices and advertisements and having two separate valuations conducted on the strata lot. A strata corporation would also be prudent to engage the services of an attorney to advise them on the process, and once the process has been completed, the corporation would then engage the services of an auctioneer and/or a real estate dealer to assist with procuring a sale. In summary, the corporation may have to incur significant expense to bring itself to a position to dispose of the strata lot.
Option 3- Consider Downsizing
A strata corporation that is facing insolvency could consider creative options such as leasing or even selling a portion of the common property. The Registration (Strata Titles) Act contains provisions whereby a strata corporation may by unanimous resolution lease or sell portions of the common property. For example the corporation could lease a portion of its common area to a neighbour for parking so long as the remaining common area is sufficient to satisfy certain other regulatory requirements.
This option is easier said than done. From a practical perspective, it may prove very difficult to get the entire strata corporation to unanimously agree to the sale or lease of the common property. The sale or lease of any common property would also require mortgagee consent for any strata lots with an outstanding mortgage. The more units in the strata, the more difficult it will be for this option to be achieved. This option would also require a surveyor to prepare a subdivision plan carving out the portion of land to be leased or sold as well as to amend the existing strata plan.
Option 4- Destruction; the last resort
Under the Registration (Strata Titles) Act, a strata building is destroyed when the proprietors so resolve by unanimous resolution or when the court is satisfied, on the application of a proprietor or a mortgagee, that having regard to the rights and interests of the proprietors as a whole it is just and equitable for the building to be deemed as destroyed. The concept of destruction under the act is somewhat of a misnomer as the building itself need not be destroyed in the physical sense. Destruction of the strata is essentially the undoing of the strata sub-division.
Where a strata is destroyed the strata titles will have to be surrendered to the Registrar of Titles who will thereafter issue one title for the entire building. The proprietors will no longer own separate strata lots but instead would be tenants in common of the building in proportion to the unit entitlement which they previously held. The practical effect of this is that it would be much easier for a third party to buy the building as a whole. For example, a failing but centrally located strata of 20 one-bedroom units could be destroyed and repurposed into an extended stay hotel, which could prove to be a much more profitable use of the real estate. In such a scenario the proprietors of the strata would be paid in proportion to their percentage share of ownership of the building. Like option 3 and in the absence of an application to the court, this option would require a unanimous resolution of the proprietors.
This option could be a game changer for the myriad of rundown apartment complexes in the corporate area that are situated on prime real estate and that are effectively an underutilization of the space.
Although options and opportunities exist for a failing strata to raise money, prevention is always better than cure. Having your strata efficiently managed and well run is the best option for ensuring that its books do not go into the red. In addition to having a capable strata manager, it is also recommended to have an attorney who is familiar and experienced with the strata legislation to guide your strata to success.
Gabrielle Grant is an Associate at Myers, Fletcher & Gordon and is a member of the firm’s Property Department. Gabrielle may be contacted via firstname.lastname@example.org or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.