May 30, 2018

The de facto Application of the Business Judgment Rule to Condominium Boards in Alberta

The celebrated Ontario Court of Appeal case 3716723 Canada v. Carleton Condominiums Corporation No. 375, 2016 ONCA 650 (“Carleton Condominiums”) explicitly states that the business judgment rule applies to condominium boards. The application of that rule safeguards the board members (most of whom are volunteers) to a large extent from legal challenges to their decision-making, so long as their decisions are made reasonably, honestly, in good faith, and without conflict of interest.

The business judgment rule has been applied to condominium boards by the courts in Alberta in substance, if not in name, since at least 2007, and Alberta condominium boards are thus similarly safeguarded.

The Business Judgment Rule

What is the business judgment rule? This rule has American origins and basically means that directors acting reasonably, in good faith, and without a conflict of interest should expect that courts will not second guess their business decisions. Condominiums are not corporations in the usual sense. Rather they are statutory corporations created by the Condominium Property Act[1] (the “Act”). Unlike business corporations, condominium corporations are not treated as “persons” in the law and can only undertake actions that the Act specifically authorizes.[2] Since 2007 the Alberta courts have nonetheless been according deference akin to the business judgment rule to condominium boards.

The Carleton Condominiums Decision

The Carleton Condominium case involved a legal challenge to a condominium board’s decision not to allow the unit owner to rent out his commercial parking spot in a mixed use condominium on an hourly, rather than a monthly, basis. The condominium board had concerns regarding potential security hazards and stated that it would only grant permission if the unit owner hired a full-time security guard to monitor the operation of the hourly parking. The unit owner was unwilling to hire the security guard, and applied to the court to have the condominium board’s decision set aside on the basis of the oppression remedy in Ontario’s Condominium Act. This application was successful before the chambers judge, but overturned unanimously by the appellate court. The chambers judge was found to have erred in assessing the condominium board’s decision on a subjective basis and substituting his decision for that of the board, which decision had been exercised following a fair process and having regard to reasonable safety concerns.

The Ontario Court of Appeal explicitly invoked the business judgment rule, stating:

The issue has been canvassed extensively in the corporate law context. In reviewing decisions rendered by the directors and officers of for-profit corporations, Canadian courts have been guided by the “business judgment rule”. This rule recognizes the autonomy and integrity of corporations, and the fact that directors and officers are in a far better position to make decisions affecting their corporations than a court reviewing a matter after the fact: … Therefore, where the rule applies, a court will not second-guess a decision rendered by a board as long as it acted fairly and reasonably: …[3]

The unanimous appellate court went on to conclude:

Therefore, to summarize, the first question for a court reviewing a condominium board’s decision is whether the directors acted honestly and in good faith and exercised the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. If they did, then the board’s balancing of the interests of a complainant under s. 135 of the Act against competing concerns should be accorded deference. The question in such circumstances is not whether a reviewing court would have reached the same decision as the board. Rather, it is whether the board reached a decision that was within a range of reasonable choices. If it did, then it cannot be said to have unfairly disregarded the interests of a complainant.[4]

De Facto Application of the Business Judgment Rule in Alberta

Although Alberta courts have not not explicitly invoked the business judgment rule, they have taken a similar position. The 2007 decision of Justice Chrumka in 934859 Alberta Inc. v. Condominium Corporation No. 0312180, 2007 ABQB 640 involved a complaint by a unit owner that the condominium board of a commercial condominium had inequitably assessed charges and inequitably distributed parking spaces. The owner was successful before the Master, but the decision was overturned on appeal. Justice Chrumka stated:

A review of the cases submitted indicates that a court should defer to elected Boards as a matter of general application. In a number of the cases, from the various provinces, the decisions related to situations where there is a provision similar to Section 67 of the Condominium Property Act.

In my view, as a matter of general application, Courts do defer to duly elected condominium boards. However if improper conduct is alleged and a Court is satisfied that improper conduct has taken place, the Court, pursuant to Section 67(2) of the Condominium Act, may then direct and/or grant any of the remedies set out therein.[5]

The Alberta Court of Appeal took a similar position in the 2008 case, Maverick Equities Inc. v. Condominium Plan No. 942 2336, 2008 ABCA 221. That case involved a dispute by a unit owner with the condominium board as to the terms upon which it would be permitted to make renovations to the common property in the course of its renovations to its unit. The matter was before the court on a number of occasions. The condominium board had adopted rules to be followed by unit owners who wished to alter the building structure and the unit owner challenged those rules as beyond the legal authority of the board. The owner was successful before the Chambers judge, but the decision was overturned by the Court of Appeal. The appellate court stated:

… The operation of a condominium corporation on a day-by-day basis is too complex and varied to enable setting down in the bylaws detailed rules covering every possible contingency. …

… We should not be taken, however, as ruling that following policies that are not set out in the bylaws makes the exercise of the Board’s discretion per se unreasonable. The Board is entitled to some considerable scope as to how it will exercise his discretion in granting or withholding consent, and there is nothing objectionable to the Board setting down rules and regulations as to how its discretion will be exercised in the normal course. …[6]

In the 2010 case of Maverick Equities Inc. v. Condominium Plan No. 942 2336, 2010 ABQB 179, Justice Veit considered whether the condominium board was justified in imposing a $5000 damage deposit with respect to renovations completed by a unit owner. She concluded that the board’s decision was valid, and stated:

The weight of Canadian jurisprudence requires courts to give considerable deference to condominium boards. Our own Court of Appeal, in these very proceedings, stated:

The Board is entitled to some considerable scope as to how it will exercise his discretion in granting or withholding consent, and there is nothing objectionable to the Board setting down rules and regulations as to how its discretion will be exercised in the normal course.

And the Ontario Court of Appeal held in Dvorchik:

. . . A court should not substitute its own opinion about the propriety of a rule enacted by a condominium board unless the rule is clearly unreasonable or contrary to the legislative scheme. In the absence of such unreasonableness, deference should be paid to rules deemed appropriate by a board charged with responsibility for balancing the private and communal interests of the unit owners.

More specifically in relation to condominiums, in 934859 Alberta Inc., Chrumka J. of this court held:

… a Court should not lightly interfere in the decision of the democratically elected board of directors, acting within its jurisdiction and substitute its opinion about the propriety of the board of directors decision unless the board’s decision is clearly oppressive, unreasonable and contrary to legislation.[7]

Such a view was similarly expressed in Condominium Corp. No. 0723447 v. Anders, 2016 ABQB 656.

The Need to “Balance”

One of the key elements of the business judgment rule is that there must be a “balancing” of the competing interests before the board.[8] This is illustrated by the 2011 case of Master L.A. Smart, Condominium Plan No. 772 1806 v. Gobeil, 2011 ABQB 318. In this case one unit owner complained that the adjoining unit owner, the Gobeils, had erected a toolshed on their property without the board’s permission, which had the effect of blocking sun to the complainant’s property. The board applied for a court order requiring the unit owner to remove the shed. However, the application was dismissed because there was nothing in the evidence to indicate that there was any attempt by the board to weigh the consequences to the two parties directly affected and the board had simply accepted the complainant’s point of view. The Master then stated:

Resisting the temptation to substitute my decision, I direct that the board reconsider the Gobeils’ application and provide their decision after giving the matter proper consideration including the opportunity for the Gobeils to respond to the other interested parties’ submissions.[9]

Best Practices

In summary, it is clear that Alberta courts have been applying the equivalent of the business judgment rule to condominium boards since at least 2007, in substance if not in name, and that the deference given to condominium boards can provide a considerable shield from legal challenges. However, as suggested by the case law there are certain “best practices” that condominium boards should follow in order to be safeguarded by the business judgment rule, which include:

• The condominium board must take care to hear both sides of the dispute and balance the competing interests;
• The condominium board must come to its decision in a timely manner, be transparent, and give reasons for its decision/denial of consent; and
• In balancing interests, the condominium board must act reasonably, honestly, in good faith, and without conflict of interest.

If the above best practices are implemented, a condominium board is more likely to be safeguarded from legal challenges, as Alberta courts, de facto applying the business judgment rule, will give deference to the condominium board and not second-guess its decisions.

Carbert Waite has proven legal experience as trusted advisors in contentious condominium matters. If you have questions or issues relating to a condominium, please contact one of our experienced lawyers for a consultation.

[1] Condominium Property Act, RSA 2000, c C-22

[2] Sager v Condominium Plan No 953979, 2015 ABQB 549; Condominium Corporation No 0312235 v Scott, 2015 ABQB 171

[3] 3716724 Canada Inc v Carleton Condominium Corporation No 375, 2016 ONCA 650 at para 48

[4] supra at para 53

[5] 934859 Alberta Inc v Condominium Corporation No 0312180, 2007 ABQB 640 at paras 54 – 55

[6] Maverick Equities Inc v Owners: Condominium Plan 942 2336, 2008 ABCA 221 at paras 11, 13

[7] Maverick Equities Inc v Condominium Plan No 942 2336, 2010 ABQB 179 at paras 44 – 46

[8] Condominium Plan No 762 1302 v Stebbing, 2015 ABQB 219 at para 37

[9] Condominium Plan No 772 1806 v Gobeil, 2011 ABQB 318 at para 15