The sheer volume of new condos currently under construction in the Greater Toronto Area means that we at the Ontario Condo Law Blog will be keeping busy for a long time to come. It also means that a new generation of condominiums, boards and unit owners will soon begin the inevitable dance with developers over construction deficiencies.
One of the easiest and most costly mistakes the board of a new condominium can make is to lose the right to sue the developer for construction deficiencies by waiting too long. Although the limitations law in Ontario was changed 10 years ago, too many people still don’t know that claims arising after January 1, 2004 must be pursued with a lawsuit within 2 years of discovering the claim. Condominium boards fall into that trap routinely, as illustrated by a recent Ontario Superior Court case against a condo developer over construction deficiencies in the common elements.
The essential facts in TSCC 1789 v. Tip Top Lofts are as follows:
August 16, 2006: Condo declaration registered, creating the condominium.
It’s unclear when s.43 turnover took place – Likely not important in this case, but often a factor where limitation periods are at issue for a new condo.
March 26, 2007: Condo engages engineers to conduct the s.44 performance audit.
August 15, 2007: Performance audit completed, delivered to condo board 1 day before s.44(9) deadline. Copy given to the developer on same day.
August 2007 to October 2008: Developer commences remedial work that continues until about July 2008, with some additional work being done as late as October 2008.
Late 2007: Talks take place between the parties. Developer proposes a “process agreement” where an arbitrator would decide any remaining issues. Board does not sign the agreement.
Early 2008: Relations between the parties deteriorate. Board not happy with speed or sufficiency of the work, developer complains that it is not given sufficient access to complete the work, which might void some of the warranties.
July 2008: Developer writes to unit owners advising that it had offered to settle the matter with the board and remains willing to finish the work, and that litigation is unnecessary and owners should petition the board to reach a settlement.
June 30, 2010: Condo commences its lawsuit for construction deficiencies. Developer enters a defence arguing that the applicable limitation period had already passed.
October 28, 2011: Court hears developer’s motion to dismiss the lawsuit over expiry of limitation period. Court releases its reasons and dismisses the lawsuit five weeks later.
Most important in finding when the limitation period begins ticking is precisely determining when the plaintiff “discovered” the claim. In this case, the court easily found that the corporation had discovered all of the construction deficiencies included in its lawsuit by reading the performance audit that was issued in August 2007. The limitation period for those deficiencies therefore began at that time and expired 2 years later, in August 2009.
The condo raised an elaborate argument that the limitation period was suspended because the parties had agreed to have an independent third party resolve the claim or assist them in resolving it, which is contemplated by section 11 of the Limitations Act, 2002. In support of this theory, the condo pointed to the terms of the agreement of purchase and sale, the conciliation process under the Tarion warranty and the draft “process agreement” proposed by the developer (but never signed by the condo board). The court rejected this argument, finding that the parties had never agreed to appoint a third party to resolve or assist in the resolution of the claim and that the agreement of purchase and sale made reference to the Tarion warranty but not specifically to the conciliation process.
The condominium also argued that the limitation period actually began ticking much later, and namely once the developer had abandoned the remedial work, thereby breaching its obligations to the purchasers. The court found, however, that the agreement of purchase and sale contained no clause obliging the developer to remedy or correct certain defects in its work upon being given notice of the defect. Since the developer had no obligation under the agreement of purchase and sale to rectify deficiencies, the condo could not argue that the developer breached a contract when it stopped performing remedial work.
After rejecting these arguments and finding that the limitations period expired almost a year before the lawsuit was commenced, the court dismissed TSCC 1789’s lawsuit against the developer and ordered the condo to pay the developer’s legal costs of $21,000.
A few useful points emerge from cases like this.
First: As a general rule, the limitation period for construction deficiencies revealed in a performance audit begins when the audit is issued to the condominium’s board. The right to recover damages for such deficiencies is forever lost unless a claim is made within that 2 year period.
Second: It may be possible to extend or suspend the 2 year period, but this will require an explicit agreement that must be prepared by legal counsel. While few details were revealed about the “process agreement” that Tip Top Lofts proposed in late 2007, such an agreement could have potentially suspended or extended the limitation period for a time. Such agreements are a useful tool in helping parties continue trying to resolve their problems while postponing the need for litigation. To be effective, however, these agreements must be carefully prepared and will require the assistance of the corporation’s lawyers. Boards that rely on verbal or wishy-washy written assurances or, worse, the Tarion conciliation process do so at their peril.
Third: The dismissal of a corporation’s lawsuit does not necessarily mean that the owners have to suck up the loss. In cases where the board or its professional advisers are negligent in identifying and preserving the applicable limitation period within which to make a claim, the individual directors or the advisors are potentially liable to the corporation and its unit owners. Having adequate errors and omissions insurance available for condo directors is therefore essential, as is ensuring that the corporation’s professionals (such as property managers, lawyers and engineers) are properly licensed (if applicable) and adequately insured.
Fourth: It is critically important for new condominiums to engage legal counsel at an early stage to get advice on construction deficiency issues. Boards or property managers that fail to secure appropriate legal assistance in time to preserve their corporation’s legal rights do themselves, their condominiums and unit owners a huge disservice and are accountable for that failure. For more on the importance to getting legal advice in a timely way, see our July 2010 piece on “10 reasons why condos should get legal advice about warranty claims.”
Keep your eye on the clock.