Can a developer’s board of directors — appointed to serve at a new condo until owners can vote in their own board — prohibit buyers from suing for deficiencies that are not covered by the Tarion warranty?

Yes, according to a decision of the Ontario Court of Appeal last month.

The case involved a 510-unit condominium project at 628 Fleet St., in Toronto. The developer, West Harbour (I) Residences Corp., a subsidiary of Plazacorp, constructed the building which became Toronto Standard Condominium Corporation 2095 (TSCC 2095).

When the units in the project were being marketed, the agreements of purchase and sale and the related disclosure documents stated that the builder’s liability for deficiency claims could not exceed the limits of the Tarion warranty program. Buyers were prohibited from suing the builder for claims outside the Tarion warranty.

After the project was registered as a condominium, the first board of directors, comprised of the developer’s representatives, signed an agreement with the builder restricting the right of purchasers to sue. The board also passed a bylaw endorsing the agreement, and the bylaw was registered on title as notice to subsequent purchasers.

When the new unit owners later elected their own board of directors, it brought a Court application seeking to overturn the agreement and the enabling bylaw. The condo board argued that the builder board did not have the legal right to restrict their right to sue.

In his decision last year, Justice David L. Corbett ruled that a developer is entitled to limit its risk, and it effectively did so by an agreement with the condominium corporation which it controlled at the time. The agreement was properly disclosed in advance to prospective purchasers and registered on title so that subsequent owners would have notice of it.

The condominium corporation appealed the ruling to the Ontario Court of Appeal, which released its decision late last month. Writing for a three-judge panel, Justice Paul S. Rouleau upheld the trial decision and dismissed the appeal of the unit owners.

The court found that the bylaw and agreement were within the powers of the builder’s board of directors, and were not contrary to the Condominium Act or the declaration of the building.

In his decision, Justice Rouleau wrote, “I find that By-Law No. 2 and the warranty agreement are lawful and valid. There is nothing inherently unreasonable in a declarant limiting its liability for construction deficiencies in the manner done here. None of the provisions cited by TSCC 2095, either individually or read in the context of the Condominium Act as a whole, prevents a declarant from entering into such an arrangement.”

Recognizing that the court decision might not be met with enthusiasm by condominium owners and buyers across the province, the judge added, “Whether developers should be prevented from limiting their liability to the statutory warranties provided in the . . . Act is a matter of policy for the legislature and not one for judicial determination.”

The owners in the condominium project were ordered to pay $12,000 in costs for the initial court hearing, and $15,000 for the appeal.

For buyers of pre-construction condominiums, the case has a number of lessons:

• Builder condominium purchase agreements and disclosure statements are lengthy and complex. Spending hundreds of thousands of dollars without having the documents reviewed by a lawyer during the 10-day conditional period is risky and could wind up being very costly.
• Buyers should ask their lawyers whether the purchase documents contain a limitation on builder responsibility for defects.
• Buyers should become familiar with the provisions of the Tarion warranty and discuss them with their lawyers during the purchase process. Tarion’s website makes it clear that the warranty coverage has “limitations and exclusions.”
• Before buying a condominium, it’s a good idea to find out what is included, and what is not included, in the Tarion warranty, and whether or not the builder can be taken to court after closing for issues and defects not covered by the warranty.