Posted on December 30, 2011 by Chris Jaglowitz

Top 10 condo law cases of 2011

As one of our annual traditions, it is time to unveil our picks for the top 10 cases of the year gone by.  2011 brought us a bumper crop of condo-related cases by Ontario courts and tribunals, with almost 50 reported decisions cited in the @ChrisJaglowitz Twitter feed and frequently summarized in our microblog entries.

Here are our selections:

#10 -- York Region Condominium Corporation No. 890 v. RPS Resource Property Services, 2010 ONSC 3371

News of several condo frauds broke in 2011 but there was only one reported court decision on the topic, for a fraud between 2003 and 2005.  The management firm here “borrowed” money from one condo to finance its own operations and those of its other condo clients and then repaid the money before year-end so as to avoid detection by the condo’s auditors.   The plot unravelled when the condo changed managers and the fraudster was short $370,000 at year-end.  The management firm and its principal were liable for breach of contract, breach of trust and conversion and were ordered to repay the $370,000.  The condo’s claim against its bank was dismissed.  We commented on this case and listed a number of takeaway points.

#9 -- York Condominium Corporation No. 26 v. Ramadani, 2011 ONSC 6726

The court granted a compliance order requiring the removal of a dog accused of peeing on a balcony.  Despite the owner’s arguments, the condo was found to have acted reasonably in demanding the dog's removal.    Condominium boards and managers must act reasonably in enforcing condo rules and what is “reasonable” will be decided on a case by case basis, but courts will not substitute their own opinion for that of the board or manager.   Justice Strathy gives a good overview of the current law related to condo rule enforcement and his decision stands for the proposition that unit owners who think that a condominium must prove an owner’s wrongdoing beyond a reasonable doubt before taking steps against them are just fooling themselves and needlessly risking their financial security.  The case also confirms that the court has a broad discretion in fashioning an appropriate remedy which minimally affects the unit owner but which effectively solves the problem.

#8 -- McFlow Capital v. Simcoe Condominium Corporation No. 27, 2011 ONSC 7389

The number of condominiums under court administration has grown over the past year, as has the number of reported decisions dealing with appointment of administrators and related issues.   In this case, a motion for directions in an ongoing case that was named #8 in our top 10 list last year, the court gives useful guidance as to the materials that must be prepared and filed when condo administrators seek approval of the reports of their activities and the accounts for their fees and their lawyers’ fees.   This is a good read for anyone trying to understand how a court-appointed administrator should report their activities and fees and the principles behind a court’s approval of those reports and accounts.

#7 – Three-way tie:  Walji v. York Condominium Corporation No. 455, 2011 HRTO 1365, Parkinson v. Carleton Condominium Corporation #43, 2011 HRTO 1209 and Dai v. Metropolitan Toronto Condominium Corporation No. 971, 2011 HRTO 876

Here’s proof that the Ontario Human Rights Tribunal has become an increasingly popular venue for frustrated condo unit owners to bring grievances against condo boards and property managers.   These are just three cases among a whole bunch of complaints that were summarily dismissed as not disclosing an actionable human rights violation or as having no prospect of success.  The first case relates to statements by a board member that the owner’s unit smelled of urine. The second case alleged harassment when the condo required unit owners to remove protective weather stripping from their unit doors.  The third case was brought by a married woman offended by the condo president addressing her as “Miss.”  While these three cases were dismissed, the unit owners who brought them felt sufficiently aggrieved by shoddy treatment by the board or management.  Condos can and should avoid these kinds of proceedings by treating their owners respectfully and managing disputes more proactively.

#6 -- Jakobek v. Toronto Standard Condominium Corporation No. 1626, 2011 HRTO 1901

Just because complaints to the Human Rights Tribunal are often unmeritorious doesn’t mean they can be ignored.  In this case, the condo corporation and its management firm failed to provide a meaningful response and did not participate at the hearing of a unit owner’s complaint related to the condo’s refusal to accommodate a disabled person.   After hearing the unit owner’s evidence (no one from the condo attended), the Tribunal smacked the condominium and its management firm with a $5,000 fine, ordered the condo to amend its bylaws to permit parking mobility-assisting scooters in the garage and ordered the condo and its manager to read up on the duty to accommodate.   Condo corporations that don’t actively respond to and manage HRTO proceedings are playing with fire.

#5 --  Pantoliano v. Metropolitan Condominium Corporation No. 570, 2011 HRTO 738

This was a human rights complaint by a unit owner over condo pool rules that set separate swim hours for kids, prohibited children under age 2 from using the pool and completely banned diapered individuals (baby or adult).  The Tribunal confirmed that age restrictions in recreational facilities at condominium complexes are discriminatory on the basis of family status and consequently struck down the offending rules and awarded the complaining unit owner $10,000 as damages injury to her dignity, feelings and self-respect in response to a hostile environment created by the board during the proceedings.  This case reminds us that the concept of adult-only buildings is utterly dead in Ontario.

#4 -- Waterloo North Condominium Corporation No. 168 v. Webb, 2011 ONSC 2365

In what is probably only the fifth case of its kind, the Ontario Superior Court granted the extraordinary remedy of forcing a unit owner to sell and vacate a condo unit.  In this case, featuring a very brief decision, the court cited years of aggression, violence, threats, vandalism by the unit owner as justification for the remedy.   What’s noteworthy is that this case, like the Korolekh decision of 2010, appears to have been decided on its first appearance, but for an even more modest cost.  This case is a good example of how an efficient, economical and effective compliance application can deal with anti-social behaviour by problem unit owners.    More like these will follow.

#3 -- Pate v. Sinclair, 2011 ONSC 3997

Condo resale agreements often include a condition allowing the purchasers to back out of the deal if their lawyer is not happy with the status certificate issued by the condo corporation.  At issue in this simple discovery motion in a lawsuit over an aborted condo purchase was whether purchasers must answer questions about their lawyer finding the status certificate to be unsatisfactory.  In a nutshell, while a lawyer’s opinion and advice to purchasers would normally be protected by lawyer-client privilege, the privilege related to the opinion itself was waived by the purchasers when they pleaded in their defence that they relied on the lawyer’s opinion in terminating the transaction.  Any advice given by the lawyer as to whether the agreement could legally be terminated would be protected by privilege, but issues surrounding the purchasers’ instructions to their lawyer to terminate the transaction and the issue of “whether” the lawyer gave any advice are not protected and questions about those aspects must be answered.  While it’s not very sexy, this case is a gem for real estate litigators who will get busier when the local real estate market corrects and purchasers seek to nix their deals.  The case also reminds purchasers relying on this clause that they cannot use it in a capricious manner or in bad faith. 

#2 – Schneeberg v. Talon International Development Inc., 2011 ONCA 687

In a case related to the new Trump Tower in Toronto, the Ontario Court of Appeal agreed that a purchaser was entitled to terminate his new condo purchase agreement because the developer failed to provide occupancy and close the transaction on the specific closing date set out in the agreement.   After a good overview of the law of contract interpretation, the court said that “[t]he proper functioning of the complex and rapidly growing condominium industry depends on agreements that set out all rights and obligations of the parties in a clear fashion.”   Purchasers at other projects shouldn’t get too excited, however, because the wording of the contract in this case had a gaping hole through which the lucky purchaser beat a hasty retreat when the project got delayed and the economy turned south.    “The Donald” likely isn’t very happy with the lawyers who drafted the agreement for this project.

#1 -- Orr v. Metropolitan Toronto Condominium Corporation No. 1056, 2011 CanLII 66010 (ONSC)

Weighing in at 422 paragraphs on 75 pages, it’s only fitting that this behemoth decision, the product of 12 years of litigation ending in 40 gruelling days of trial, makes the top of our list.    At issue in the case was an unauthorized third floor built into the common elements by a previous owner who sold the unit to a purchaser who believed that the third floor was part of her unit.  See Bob Aaron’s column for a short summary of the facts.  To briefly summarize the result, the court dismissed the purchaser’s claim for an order legitimizing the third floor, granted the condo’s request for an order requiring the purchaser to close up the third floor, and awarded damages against the purchaser’s lawyers for negligence in failing to check the floor plans and tell the purchaser that the third floor was not part of the unit.   This single case is worth an entire series of smaller posts on a large number of issues, chief among them being the higher standard by which lawyers will be held in handling condo purchase transactions.  The effects of the case are only beginning to manifest themselves in the real estate bar and will likely give rise to an increase in costs for consumers.  Rumour has it that this case has been appealed, making it possible that our Court of Appeal might comment on some of the more salient legal issues, so there will likely be more that we can write about in the future.

And that concludes our list for this year!  Which of these cases are your favourites?   Would you have chosen any different cases?   Do you have any observations about the trends in the cases we’ve chosen?  Submit a comment below to give us your two cents. 

For you impatient types who would rather not wait until next December to see the top cases of the coming year, follow @ChrisJaglowitz on Twitter and watch our microblog posts to receive frequent updates during the year.  

Thanks for following our blog this year and for all your comments, kudos and support.   Visit us again in January when we dust off our crystal ball and make some predictions about which issues will define condo law in 2012.
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Posted on January 27, 2011 by Chris Jaglowitz

Property management firm liable for unauthorized money transfers

While it is routine for money to flow from condominium corporations to their managers for payment of regular management fees, there are few valid reasons for other such transfers. It is, for instance, completely improper for a management firm to “borrow” its clients’ funds to finance its own operations or to “lend” funds to its other condo clients.

A recent Ontario Superior Court decision highlights precisely such a scenario and brings several important lessons for condominium directors.

In 2005, York Region Condominium Corporation No. 890 (better known as Pacific Mall in Markham) brought a lawsuit for damages against its property manager, RPS Resource Property Services Ltd. (“RPS”) and William Garland (“Garland”) who was RPS’s principal, for breach of fiduciary duty, breach of trust, conspiracy, fraud and breach of their obligations under the Condominium Act, 1998.

The condo also named Royal Bank of Canada (“RBC”) and sought damages for breach of contract, negligence and conversion.

The trial took place over several days in June 2010 and the ruling was released this month. The full decision is now reported here. We will reproduce some of the highlights here, but time-starved readers can skip to the bottom to see the important lessons.

After hearing all the evidence, the court’s findings about the unauthorized transfers were as follows:

[36]    [RPS’s senior accountant] Sivaneswaran testified that when he first joined RPS in 2000, it was RPS’ practice whenever it or Daniels Associates, Garland’s other company, needed money, to take an advance from the client accounts and then return the monies at a later time when RPS or Daniels had money. Sivaneswaran said that the decisions as to which account would be accessed and how much money would be taken were always made by Garland.
 
[37]    RPS began taking trust money from the Account in 2003 and utilizing it for its own operational purposes or to pay back other clients. The money was withdrawn from the Account from time to time and placed in another RPS account at RBC by internet transfer carried out by Sivaneswaran. It was shown on the Account’s monthly bank statement provided by RBC by the notation “WWW”. Sivaneswaran posted the amount withdrawn to the Plaintiff‘s books as a pre-paid expense. The total amount withdrawn in 2003 was in excess of $400,000.00.
 
[38]    Throughout 2003, RPS also transferred money back into the Account from time to time by internet transfer. Prior to the end of 2003, RPS ensured that all of the monies it took from the Account during the year had been returned in order that when the Plaintiff’s auditors audited its 2003 financial statements, there would be no discrepancy between what RBC confirmed was the Account balance at the end of the year and what the Plaintiff’s banking records for the Account showed.
 
[39]   RPS’ use of the Account to fund its operations and re-pay clients continued in 2004. Between February and October, 2004, RPS transferred by internet transfer a total of $408,381.47 from the Account to its operating account and payroll account, one of its trust accounts and two client accounts at RBC. In November 2004, RPS transferred into the Account $38,000.00, leaving a shortfall of $370,381.47 as was subsequently determined by [Condo’s new manager] in early 2005, when he was finally able to obtain some financial information from RPS.
 
[40]    Sivaneswaran’s email to [the men who purchased RPS] on November 19, 2004, that $408,000.00 was required for the Plaintiff was an attempt by Garland and Sivaneswaran to obtain the money necessary to deposit into the Account before the Plaintiff’s yearend to avoid detection by the Plaintiff’s auditors. The failure to deposit that money together with the Plaintiff’s decision to terminate RPS’s services in early January 2005 very shortly led to [condo’s new manger’s] discovery of the misappropriated money.
 
Interestingly, were it not for these precise circumstances, the condo board likely would not have discovered the unauthorized transfers, and this practice would have continued year after year.
 
On these facts, the court drew the following conclusions against RPS:
 
[41]     By transferring monies from the Account to other accounts held by it at RBC, either for its own benefit or the benefit of other clients, RPS was in breach of its Management Agreement with the Plaintiff, as amended by the Board’s banking resolution of November 28, 2002. RPS had no authority to deal with any of the Plaintiff’s funds in the Account over $100 without the signature of the president, secretary, treasurer or a director of the Plaintiff.
 
[42]    I am also of the view that RPS’ actions in wrongfully transferring the Plaintiff’s funds from the Account for its own purposes constituted conversation of the Plaintiff’s property: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce.
 
[43]     More importantly, by transferring the monies from the Account for its own use, RPS committed a clear breach of trust. Section 115(1) of the Condominium Act, 1998, supra, provides, in part, that a person who receives money on behalf of or for the benefit of a condominium corporation shall hold the money in trust for the performance of the condominium corporation’s duties and obligations.
 
[44]     Apart from s. 115 of the Condominium Act, 1998, it is clear from the evidence of Sivaneswaran and Garland (read in from his discovery) that at all material times RPS knew that all monies received by it on the Plaintiff’s behalf and deposited to the Account were trust funds belonging to the Plaintiff.
 
[45]     As a result, it is my view that RPS knew by transferring monies from the Account from time to time for its own use or benefit, it was in breach of trust. Notwithstanding that RPS took the monies with the intention of returning them and did so during 2003, its actions throughout constituted a clear breach of trust.
 
[46]     Accordingly, RPS is liable to the Plaintiff for breach of contract, conversion and breach of trust in the amount of $370,381.47.
 
Turning to the liability of Garland, the principal of RPS, the court summarized the legal test for establishing liability of a third party and then applies those tests to the facts at hand:
 
[58]    Accordingly, in order for Garland to be liable to the Plaintiff for breach of trust, the evidence must establish that Garland knowingly participated in the breach. As noted, the Plaintiff must prove that RPS’ breach of trust was fraudulent and dishonest and that Garland had actual knowledge of the trust and the breach or was wilfully blind or reckless in respect of it.
 
[59]    Was RPS’ breach of trust fraudulent and dishonest? In Air Canada, supra, at para.59, Iacobucci J. adopted the following description of fraud and dishonesty in connection with a trustee’s breach of trust: “the taking of a risk to the prejudice of another’s rights, which risk is known to be one which there is no right to take.”
 
[60]    RPS knew that the monies in the Account were trust monies. By transferring monies from the Account to itself or other clients to cover shortfalls in its business, RPS took a risk to the prejudice of the Plaintiff. Further, given the terms of the Management Agreement, as amended by the November 28, 2002 banking resolution, RPS knew that it had no right to take such risk. Accordingly, I have no hesitation in concluding that RPS’ breach of trust in this case was fraudulent and dishonest.
 
[61]    Further, because Garland knew the monies in the Account were trust monies belonging to the Plaintiff and authorized and directed them to be used by RPS to cover shortfalls in other areas of its business in direct contravention of RPS’ agreement with the Plaintiff, I find that Garland not only had actual knowledge of RPS’ breach of trust but he also enabled the breach of trust to occur.
 
[62]    Accordingly, based on knowing assistance, Garland is personally liable to the Plaintiff as a constructive trustee for breach of trust in the amount of $370,381.47.
 
With this, the condo was awarded $370,381 against the management firm for breach of contract, conversion and breach of trust and also against the firm’s principal, Garland, for a similar amount for breach of trust.   
 
The court then turned to the condo’s claim against the bank.  The condo claimed that the bank was a constructive trustee or, alternatively, that the bank had converted the condo’s funds.
 
What is most useful in the following passages is the way in which the court dealt with the account operation agreement, signature cards and internet banking.  Further, the court sets out the importance of what information is given and when by the account holder.
 
[64]   There is no evidence that RBC ever assumed the office or functions of trustee in respect of the monies in the Account or administered the monies in the Account on behalf of the Plaintiff. At all times RBC acted as a banker and administered RPS’ bank accounts including the Account on behalf of RPS. Accordingly, RBC cannot be liable to the Plaintiff as a trustee de son trot.
 
[65]   Nor in my view can RBC be held liable to the Plaintiff as a constructive trustee based on knowing receipt. As noted, the relationship between RBC and RPS was one of administering RPS’ bank accounts, including the Account. There was never any lending or overdraft facility between RPS and RBC. Over the two and a half year period that the Account was operated by RPS, RBC never received or applied any monies from the Account for its own use or benefit.
 
[67]    The third and final way in which RBC can be liable to the Plaintiff for breach of trust is based on “knowing assistance”. As already noted, in order for RBC to be liable for breach of trust based on knowing assistance, the Plaintiff must prove that RPS’ breach of trust was fraudulent and dishonest, that RBC had actual knowledge of the trust and the breach (or was wilfully blind or reckless to it) and that it participated in it.
 
[68]    As previously discussed, it is my view that RPS’ breach of trust in this case was fraudulent and dishonest.
 
[69]    Apart from deemed knowledge of the trust pursuant to s. 115(1) of the Condominium Act, 1998, supra, RBC concedes that it had actual knowledge that the Account was a trust account.
 
[70]   It is clear from the evidence that RBC did not have any indication, let alone actual knowledge, of RPS’ breach of trust until June, 2005. Ms. Wendy Sprung, the relationship account manager for RPS at RBC, testified that the first time RBC became aware of any issues in respect of the operation of RPS’s account relating to the Plaintiff was in June 2005 when RBC was contacted by Mr. Pais on behalf of the Plaintiff.
 
[71]   RPS’ bank accounts were operated by RPS and were not monitored by the Bank. The monthly account statements were compiled at the Bank’s data centre and sent directly to RPS without Ms. Sprung ever seeing them. In accordance with the provisions of the Financial Services Agreement between the Bank and RPS, RBC relied on RPS to advise it if there were any mistakes or irregularities in the operation of the Account based on the account statements. At no time prior to June, 2005, did RBC receive any indication that there was any issue or irregularity in respect of the operation of the Account.
 
[72]   The Plaintiff submits that when RBC received the signature cards for the Account that indicated that RPS only had authority to sign cheques up to $100 they should have made reasonable inquiries of RPS and/or the Plaintiff to determine whether RPS had unlimited authority to access the Account through internet banking. By failing to make any such inquiries, RBC must be found to have constructive knowledge of RPS’ subsequent breaches of trust. In support of its position, the Plaintiff relies on A&A Jewellers Ltd. v. Royal Bank of Canada.
 
[73]   A&A Jewellers is a knowing receipt case. In that case, RBC had a lending relationship with the trustee companies who committed the breach of trust. Pursuant to that relationship, RBC utilized trust monies from the accounts to repay loans. In this case, as noted, there was no lending relationship between RPS and RBC and RBC never received any trust funds from the Account for its own use or benefit.
 
[74]    Accordingly, whether the signature card and the RPS banking resolution that RBC received at the time that RPS opened the Account were sufficient to give rise to a duty on RBC to inquire whether there were any restrictions on RPS’ internet banking need not be determined. Such an inquiry is only relevant to the issue of constructive knowledge which is not sufficient to establish liability for knowing assistance.
 
[75]    The Plaintiff further submits that by throwing the signature cards in a file and not looking at them, RBC was wilfully blind to RPS’ breach of trust. It is not accurate to say that RBC simply threw the signature cards in a drawer and never looked at them. Ms. Sprung’s evidence is that they were utilized by RBC when someone sought to negotiate a cheque drawn on the Account at a branch of RBC. They were not, however, utilized in respect of internet banking.
. . . 
[79]    As noted, prior to June 3, 2005, when RBC received Mr. Pais’ letter, there is no evidence it had any knowledge of facts that would cause it to suspect that RPS’s operation of the Account was in breach of trust.
 
[80]    RBC knew that RPS’ business was administering property on behalf of clients, some of whom were condominiums. There is no evidence that prior to the Account being opened in November 2002, RBC had any information of any concerns or impropriety in the way RPS conducted its business or operated its bank accounts for itself or its clients. RPS had opened current accounts both for its own business and for its clients’ business in its name at RPC. Some of those account involved trust funds. There was therefore nothing unusual in the manner in which RPS opened the Account from RBC’s perspective or that, even though it was for the Plaintiff’s business, it was in RPS’ name and had access to internet banking.
 
[81]     Further, there is no evidence that at any time during the operation of the Account, RBC had notice of any issues or concerns in respect of its operation or the operation of any other RPS’ bank account that may have given rise to a suspicion by RBC of breach of trust by RPS.
 
[82]    There is no evidence that any of the cheques written on the Account were not signed in accordance with the signing authority provided to RBC. While there were clearly internet transfers from time to time, no signatures were required to carry them out. From RBC’s viewpoint, the transfers could have been carried out by the Plaintiff or by RPS with authority. In the absence of a duty to inquire, RBC has no obligation to monitor the Account: Bank Act, s. 437(3) and (4); Arthur Andersen Inc. v. Toronto-Dominion Bank.
 
[83]    Accordingly, on the evidence, I am unable to find that RBC was wilfully blind or “deliberately ignorant” to RPS’ breach of trust.
 
[84]    Similarly, there no evidence that establishes RBC was reckless to the extent that it would amount to actual knowledge of RPS’ breach of trust.
 
[85]    In the absence therefore of actual knowledge, wilful blindness or recklessness, RBC cannot be held liable to the Plaintiff for breach of trust on the basis on knowing assistance.
 
[86]    Nor, in my view, can the Plaintiff’s claim against RBC for conversion succeed. In 373409 Alberta Ltd. (Receiver of) v. Bank of Montreal, Major J., on behalf of the Court, noted at para. 10 that a lending institution’s liability in conversion is predicated upon a finding both that payment upon a cheque was made to someone other than the rightful holder and that such payment was not authorized by the rightful holder. Neither circumstance exists in this case.
 
[87]    Accordingly, for the above reasons, it is my view that the Plaintiff’s action against RBC fails and must be dismissed.
 
The condo’s entire claim against the bank was dismissed, and the condo will presumably be held responsible to pay some of the bank’s legal costs.  It is also noteworthy that this corporation’s claim against the bank prompted the bank to make a claim back against each of the condo directors alleging that the loss arose by the directors’ negligence.  This surely complicated the case and increased the costs.
 
Here are some of the lessons to be learned from this unusual case:
 

1.   If a condominium management firm or manager deals improperly a condo corporation’s money, it can and will be held to account in a court of law.    

2.   Succeeding in court is not necessarily a victory.  After spending five years and untold thousands in legal fees and hours of board’s time, this condo corporation made a large recovery from its manager, but will likely not recover 100 cents on the dollar.   

3.   Prevention is always a superior option.  Condominium corporations must exercise proper oversight of their finances and the acts of their managers.   The board should insist on receiving and scrutinizing the bank statements and cancelled cheques each month.   It is of no assistance to wait until the annual audit or quarterly reconciliation since almost all bank account operation agreements provide only a short 30 day window for account holders to notify the bank of errors or to seek reversal of fraudulent transactions.  With the passage of 30 days, that ability is lost.  Importantly, the 30 day period begins to run once the bank delivers the statement, usually to the manager and usually monthly.  Time is of the essence.
 
4.   Banks should not be expected to exercise any appreciable degree of oversight, initiative or even common sense as to what goes on in their clients’ accounts unless they are expressly told by the account holder.  While banks have deep pockets, courts have traditionally upheld the account operation agreements that shield the banks from most obligations or liabilities.
 
5.   Online banking is convenient but highly risky.  While signature cards offer some protection for cheque-signing, there are no comparable controls that regulate internet banking, making it very hard to recover unauthorized transfers made by internet banking.  See this January 2010 entry for more tips on minimizing risk in your bank accounts.
 
6.   Condo boards should ensure that their property management firm always carries sufficient fidelity insurance naming the condo as an insured party.  This will help ensure a recovery even where the manager or the firm is unable to pay and helps avoid the need to bring (and lose) an ill-advised action against the bank. 
 
It is not too late for condo boards to make a new year’s resolution to tighten up the financial controls over their corporations’ finances.   Talk to your auditors today.
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Posted on December 6, 2010 by Chris Jaglowitz

What is a "phantom buyer?"

In a blog post last week entitled “Let’s put an end to phantom buyers,” Toronto Realtor Andrew la Fleur wrote an open letter calling for an end to a “significant problem” he describes as follows:

Phantom Buyers is a term that I have coined for buyers of pre-construction condos who are not really buyers. Usually what happens is this: when a new condo launches of any significance in the city, a large number of Realtors will camp out for several days to be first in line when the VIP broker event takes place. Many of the Realtors who are in the first several spots in the lineup do not have any actual clients who want to buy! These agents will buy units in their own name (usually the cheapest units available), and then they will use the 10-day rescission period to try to find an actual buyer to take the unit(s) they have ‘reserved’ in their name.

He then goes on to explain how those agents try to unload these units and then gives some reasons why the practice should be halted.

There are two problems with the passage above.

First problem: Mr. la Fleur did not coin the term “Phantom Buyers.” He’s at least 15 years too late for that. It is because he uses the term incorrectly, however, that I make this response to his post.

Second problem: Using the term “Phantom Buyers” in the scenario described above is plainly wrong. A Realtor waiting in line and buying up multiple condo units is not a phantom buyer. It’s simply a Realtor behaving like a scalper. Instead of baseball game tickets, condo units are being gathered up quickly for the sole purpose of assigning or reselling them, presumably for a profit or for the right to charge a commission. The buyer in this case is real and is legally obliged to purchase the units unless the deals are rescinded within the 10 day cooling off period. What Mr. la Fleur describes is not a phantom buyer.

In actual fact, a “phantom buyer” is typically a major part of a financial fraud that has real victims (usually banks) that suffer real losses.

In earlier days, phantom buyers were non-existent buyers who entered into agreements to purchase pre-construction condo units as part of a scheme by developers to prompt their construction lenders to advance the next portion of the loan where the timing of the loan advances was tied to the percentage of units sold. In most of these cases, the developer would use the funds to finish construction and then sell the units (to a real buyer) in order to pay off the construction loan.

More recently, the term is associated with a common mortgage fraud where a fictitious buyer, usually with the help of a dishonest lawyer and/or loan officer, gives a mortgage on newly-purchased property, takes the mortgage money and disappears. A prime example of this from New York State is reported here. This type of fraud is extraordinarily prevalent and has given rise to a massive strengthening of regulations requiring lawyers, real estate professionals and others to verify the identities of homebuyers. Those regulations are described in the Canadian Bar Association’s National magazine here (pdf).

In the scenario described above by Mr. la Fleur, no one suffers any real monetary loss. Neither banks nor developers stand to lose a dime and, in fact, the developers probably benefit from the buzz and the artificially increased values.

If real estate professionals want to clamp down on this practice of scalping which, on its face, appears to be a permissible form of capitalism that some condo developers probably sanction, they need only petition their own industry associations (TREB, OREA, CREA) and their regulator (RECO) to prohibit such conduct.  They should do so!

If that method is not effective or if the involvement of the development industry in this practice needs to be reviewed, another option is to call the Competition Bureau. Those good people appear to have had considerable success in dealing with real estate issues in recent months.

In the end, most folks would likely agree with the concept of prohibiting artificial and disruptive forces in the marketplace and it seems that Mr. la Fleur’s motive is to level the playing field for consumers. He should be commended for that.

Let’s just be careful to not confuse the public about what a phantom buyer really is.
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Posted on June 8, 2010 by Chris Jaglowitz

Best of the blogosphere for May 2010

This month’s best of the blogosphere collection contains a blend of the latest news, time-tested advice and some recurring issues.

The Gulf Oil Spill: Prepare for the Worst - Hope for the Best – John Cottle of the Florida Condo and HOA Law Blog offers tips to community associations in the areas affected by the massive oil spill in the Gulf of Mexico.

Embezzlement Prevention Strategies from Accountant Andrew Cohen – Seattle condo lawyer Kevin Britt posts some tips to help boards prevent fraud. This topic never gets tiresome, given the rising number of frauds being reported.

Fake Security Cameras - A Good Idea? – California condo law guru Beth Grimm takes a shot at this question.  

2010 Hurricane Preparedness Guide for Community Associations is Now Available!! – Just in time for hurricane season, the Community Advocacy Network of Florida has posted a sensible guide to preparing for disasters and how to respond to them. Some good ideas here to help batten down the hatches.

An Ombudsman For Everyone? Apparently Not – Colorado HOA lawyer Mark Payne reports on that state’s trials and tribulations in passing law to appoint an HOA information officer.

Overhauled Ombudsman Bill Passed by the Senate – Molly Healy-Jones of Colorado’s HOA Legi-Slate blog gives more details about their new ombud law.

Skype and ROC Board Meetings – Florida resident-owned community lawyer Scott Gordon extols the virtues of using Skype as an inexpensive and efficient way for board members to hold meetings. Good stuff.

Thoughts Regarding the 2010 CAI Conference – In the recently-launched Condominium Insurance Law Blog by Merlin Law Group in Florida, Corey Harris reflects on the successes and continuing importance of the Community Associations Institute.  

CAI Soars At 30,000 – Over at CAI’s own blog, president Tom Skiba sums up his organization’s past year of growth and successes, capped by a very successful annual conference. Congratulations to CAI.

What Generation are Your State’s Common Interest Laws? – American condo/HOA law buffs will value Lincoln Hobbs’ observations about how to date or classify the community association laws of each state.

What were they thinking? Going without insurance is not an option – Donna Berger leads the head-shaking about the story of the Florida condo that cancelled its insurance policies to save money and was subsequently destroyed by fire.

5 Things Every Buyer Should Know about Model Suites -- Toronto realtor Andrew la Fleur shares some suggestions to help prospective new condo buyers avoid being flabbergasted by developers’ model suites.

Board Members: Making the Difficult Decisions – Oregon lawyer Michael Montag correctly points out that “as an HOA board member, you’re constantly between a rock and a hard place.”   He then offers some strategies for getting out from under the rock.

10 questions to demand of your board candidates – New York realtor Malcolm Carter suggests 10 questions to help unit owners decide whether to re-elect board members. Hopeful incumbents would be wise to answer these questions in their campaign speech.

Honesty & Transparency in Association Governance – Michigan condo and HOA lawyer Robert Meisner shares a tale of a condo board passing budgets and making decisions with a clearly apparent lack of process and procedure.   This kind of situation occurs all too often and creates mistrust and suspicion among owners, leading to serious divisions in the community.
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Posted on February 11, 2010 by Chris Jaglowitz

Best of the blogosphere for January 2010

In case you spent January at the gym or fulfilling other resolutions for the new decade, here is our mini-digest of noteworthy condo-related posts from the blogosphere last month.

Enjoy the Family Day long weekend!   

Records Retention: Going Paperless through E-Archives -- Paper is so passé! Marilyn Perez-Martinez of the Florida Condo & HOA Legal Blog describes some of the critical considerations in devising an electronic archive process for storing a condo’s records.  The key is in preparing a sound plan.

A Building Component does not become Common Area just because it was placed or built on the Common Area -- California HOA attorney David Swedelson blogs on a recent appellate case that sounds strikingly similar to our Court of Appeal’s ruling in Wentworth Condo Corp. 198 v. McMahon.   

Recognizing the Fraud Triangle -- Increase your vigilance. Florida condo lawyer Donna Berger highlights some telltale signs of fraud and how to spot them. 

CCAL Seminar -- The Case Law Update – Utah condo lawyer Lincoln Hobbs blogged about the presentation of the past years' top condo/HOA cases at the US College of Community Association Lawyers' annual law conference. Other seminars were reported, including CCAL Law Conference -- The Unauthorized Practice of Law.

The 2009 Home Renovation Tax Credit and Condominiums – It’s tax season again, and property manager Tracey McLellan offers some suggestions for reporting and claiming the HRTC.  

Dealing With "the Crazies" Within a Homeowner Association -- Daniel Zimberoff at the Northwest Condo & HOA Law Blog offers some advice for what is probably a remarkably rare situation that is seldom faced by condo boards and mangers. 

The Sword, the Shield, and the Guide - Working with the Association's Attorney -- Kevin Britt of the Seattle Condominium and Homeowners Association Attorney Blog identifies and describes three distinct roles that a lawyer can fill when acting for a condo or community association.

Make indoor air quality test a standard part of real estate purchases -- Bob Aaron notes that people are becoming increasingly aware of the dangers of radon gas but that indoor air quality is not yet dealt with as part of real estate transactions. He also describes a number of ways to test for radon.
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Posted on January 16, 2010 by Chris Jaglowitz

Protect your condominium community against fraud

The following guest post is by Athena Mailloux, a fraud examiner at ZAP Consulting Limited. Athena shares some practical solutions to help condo directors keep their new years’ resolution to be vigilant against fraud.

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Whether you are a large business corporation or a sole proprietorship you can never be too cautious when it comes to protecting against fraud. Condominium corporations have no less of a responsibility in protecting against fraud than a publicly traded company. In fact, condo corporations are often relatively small, close-knit communities that may lack stringent internal controls and thus be more susceptible to fraud.

Organizations such as condo corporations need to be even more vigilant for deception and fraud in the wake of the recent economic downturn. A Google search for “condo fraud” returns an almost endless list of fraud instances in condo communities, many of which could have been prevented by simple due diligence and good corporate governance. The fraud instances listed range from fabricating invoices for maintenance and repair work to illegally selling parking spaces and misappropriating trust funds. Frauds were committed by employees, members of the board of directors as well as vendors taking advantage of an opportunity to defraud the condo corporation.

It is important to remember that the cost of protecting against fraud seldom often outweighs the potential damage resulting from it. For example, it typically costs less than $100 to obtain a background check (with consent) on a potential employee, member of the board of directors or vendor, whereas the damage done by a fraudulent employee, director or vendor may far exceed that amount.

The following simple, cost-effective internal controls can go a long way in protecting your condo community from fraud.

Accounting and Finance

1.  Use a secure, password-protected accounting system to track transactions. This type of software can be purchased off the shelf at any retail office supply store. The corporate auditor should be the only one with the “accountant” password.

2.  Set up all corporate financial accounts to require two signatures for all transactions including cheques. Often it is wise to have one of the signing authorities be a board member and the other the property manager.

3.  Cheques used by the corporation should be of the pre-numbered variety. Cheques should be locked away when not in use.

4.  Wherever possible expenses should be paid for by cheque.

5.  Avoid issuing corporate credit cards. If corporate credit cards are in use, carefully scrutinize each transaction on credit card statements.

6.  Depending on how active your condo corporation is, set up a policy that all cash transactions (no matter how small) must be recorded daily and deposited either daily or weekly.

7.  Keep a petty cash amount on hand for emergencies. Often less than $50 is sufficient. Track all usage of these funds through “petty cash slips”.

8.  Any investments of corporate funds should be made through a reputable and licensed broker. All investments should be purchased in the name and address of the condo corporation only and no other names should appear on the instrument.

9.  Financial statements should be presented to the board of directors on a monthly basis. It is the responsibility of the board to satisfy themselves that the statements accurately reflect the condo corporation’s financial status.

Hiring and Contracting Process

Ensure that you have a competitive hiring process in place. Interview or invite bids from at least three separate people or corporations. Once you have narrowed down the selection process to the three top candidates, get their consent (in writing) to perform a due diligence check, which may include any or all of the following:

  • Criminal background check
  • Credit check
  • Previous work experience
  • Reference(s)
  • Driver’s License Verification
  • Any other type of due diligence that may be required.

Insurance

The condo corporation and its manager should have adequate fidelity insurance policies in place that cover all employees, management and the board of directors. What counts as adequate insurance may be debatable, but a good rule of thumb is to insure at least up to the value of all funds and assets that could be at risk. Obtain legal and financial advice to make sure the condo corporation has proper coverage.

Be Proactive

Adequate measures to prevent and protect against fraud are essential for every organization, including condo corporations. Failure to have such measures in place can lead to disastrous consequences and potentially huge losses for your condo community. The benefits of adequate protection against fraud far outweigh the costs.
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Posted on March 7, 2009 by Chris Jaglowitz

Ask questions to help prevent fraud

It has been a while since we’ve heard a story of a big fraud in the local condo scene. We like to think that better education and more vigilant accounting and auditing may have reduced instances of fraud in recent years, and that might be true. It might be more true, however, that the current economic climate may increase the likelihood of a fraud taking place or improve the odds of detecting an ongoing fraud.

Attorney Mark Payne of the Colorado Homeowners Association Law Blog cites the recent case of the chief financial officer of a family-run property management firm in Virginia who stole $3 million from 350 homeowner associations. The Washington Post reports that the culprit confessed to the crime and was sentenced to 5 ½ years in prison and ordered to pay restitution. He also faces IRS action over undeclared income and criminal prosecution for a bizarre police chase and gunfight.

Mr. Payne then provides some simple but essential suggestions to help minimize fraud and recommends that all associations vigilantly protect against director conflicts of interest and carry fidelity insurance to ensure recovery in cases of theft. These are all good suggestions and are worth revisiting during these difficult times. Read the entire blog entry here.

Directors of any condo corporation should also ask their auditor from time to time whether reasonable systems of checks and balances are in place at their corporation to help prevent fraud and whether existing systems have remained effective over time. Unit owners have the opportunity to ask the auditor those same questions at the annual general meeting each year but no one does, maybe because it seems impolite or appears to question the integrity of the board or manager.

Questions about fraud prevention are both legitimate and important, and owners should be asking them. If weaknesses or problems in the financial management of the condo are detected, they can be addressed. Failing to ask the simple questions may result in a problem going undetected, leaving your corporation vulnerable to misfeasance and preventable financial loss. Being vigilant is more important now than ever.

Remember to check out the recently-revised Auditing and Accounting Guidelines for Ontario Condominiums, which we discussed earlier this year and posted here.
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Posted on January 13, 2009 by Chris Jaglowitz

New guidelines for condo financial accounting and auditing

The Institute of Chartered Accounts of Ontario has announced the release of an important document entitled Accounting and Auditing Guidelines for Ontario Condominium Corporations.

This publication is the first major revision of the Institute’s audit guidelines for condominium corporations since 2001 and incorporates recent changes in accounting practice and the requirements of the Condominium Act, 1998. According to the Institute:

The result is a comprehensive guide that promotes best practices for the industry. It details considerations for both accounting and audits that range from budgeting and financial statements to tax issues and reserve funds.

Members of the committee that drafted these guidelines include the most prominent auditors on the local condo scene. Most have audited the books of hundreds of condo corporations and face the unit owners at dozens and dozens of annual general meetings each year. These folks know their stuff. 

This guide will be a valuable resource for any condominium manager, director, unit owner or professional who wants to better understand accounting principles and best practices for audit procedures for Ontario condominium corporations.  In addition to being written in no-nonsense plain English, it also includes a preferred specimen presentation for financial statements.

The full document is available for free download here.

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