October 12, 2010

Condominium Special Assessments

Condominium special assessments have recently become so commonplace they tend to be a factor in the majority of residential condominium resale transactions. I suspect this is the case for a number of reasons including:

• Aging condominiums built in the 1970s and 1980s may now require
major maintenance that was either not anticipated or not fully
• Apartment buildings converted to condominiums during the hot
market of 2005 and 2006 may never have been fully refurbished
and problems are now surfacing (i.e. elevators, roofs, mechanical
• The rush to complete some condominium buildings during the hot market led to shoddy workmanship and expensive repairs are now required to fix the problems.
• Due to their prevalence, special assessments no longer have the stigma once associated with them and it is easier for condominium boards to pass and implement them.

Whatever the reason, the passing of a special assessment by a condominium board while a contract is “executory” can become a very unpleasant surprise for whoever is burdened with it – the buyer or the seller (Note: Executory refers to the time period after conditions are removed but prior to the closing date). The existing Residential Real Estate Purchase Contract does not specifically address special assessments except that the seller’s lawyer is required to obtain and provide the buyer with an Estoppel Certificate, which confirms that all condominium contributions that are the seller’s responsibility to the closing date are paid. Based in part on the foregoing, the practice that has evolved among conveyancing lawyers is to require the seller to pay any special assessments "due and payable" by the closing date. The buyer assumes responsibility for any special assessments payable post closing, no matter when assessed.
This practice has been expressly incorporated in clause 4.7 of the new Residential Purchase Contract for Resale Condominium Property, which should be available for use by industry members in the very near future. However potential problems may still arise.

While this practice is balanced, it can still result in circumstances of hardship for either party.
Here is a recent example of a seller with low equity caught up in the following situation. Two days before the closing date, the condominium board passed a resolution implementing a substantial special assessment payable in two instalments over the next several months. However, the resolution contained an “acceleration” clause, making the entire amount due and payable immediately in the event of the sale of any unit. The management company refused to issue a clear Estoppel Certificate without the payment of the special assessment, which substantially depleted the remainder of the seller’s equity.

On the other hand, a buyer who has done all due diligence and reviewed all available documentation could be hit with a significant special assessment shortly after closing if, for example, the elevator unexpectedly breaks down and has to be replaced. If the buyer doesn’t have the financial resources to pay the special assessment it can result in substantial penalties, late interest, and ultimately foreclosure of the unit.

As a result, where the relative bargaining position of the parties permits, the new clause contemplates the possibility that the parties could “otherwise agree in writing” to further shift the burden of any known or unexpected special assessments to one or the other of them.
The following are suggested clauses that can be used to help improve the position of either the buyer or the seller of a condominium. The appropriate clause would be inserted in 7.6 of the Purchase Contract (Additional terms of sale).

Clause for the benefit of the Buyer

7.6 "The Seller is responsible to pay all special assessments levied by the condominium board up to and including the Completion Day, no matter when actually due and payable."
This wording would obligate the seller to pay all special assessments approved by the condominium board even if not due and payable by closing. Any special assessments levied after closing would, of course, still remain the obligation of the buyer.

Clause for the benefit of the Seller

7.6 “The Buyer is responsible to pay all special assessments levied by the condominium board after final acceptance, no matter when actually due and payable.”

This wording would protect the seller from having to pay for any special assessments levied after the purchase price is negotiated and a contract entered into. The seller would remain responsible to pay for any pre-existing special assessments due and payable by the closing date.

Notwithstanding the fine print of the contract, it is always possible for the parties to negotiate and re-designate responsibility for any known special assessments as follows:

7.6 “The (Buyer or Seller) is solely responsible to pay the special assessment in the sum of $.......................due on ……………………

If not disclosed by the seller, information concerning an existing (or imminent) special assessment will typically surface during the condominium document review conducted on behalf of a buyer. Invariably the buyer will then try to negotiate either a price abatement or an amendment to the contract obligating the seller to pay for the special assessment. As a result, if the seller and the listing agent know about an existing or pending special assessment, the best policy is likely to disclose it to a potential buyer from the start and attempt to incorporate it into the initial contract negotiation.

Regardless of whether you are buying or selling a resale condominium, awarness of the potential of special assessments being passed and the proper handling of known special assessments in the contract will avoid hurt feelings and complications on closing. Needless to say, from a buyer’s perspective a thorough and professional condominium document review is the best line of defense against unpleasant and unexpected special assessment surprises post closing.

courtesy of Lubos K. Pesta, Q.C.

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