Borrowing By-laws
Short Answer
Pursuant to the requirements of the Condominium Act, 1998, a by-law that authorizes the condominium corporation to borrow funds for specific special or budgeted expenses.
Definition
The case, York Condominium Corporation No. 42 v. Hashmi (2007 CanLII 19420 (ON SC)), confirms three principles of theCondominium Act, 1998, (the "Act") relating to the borrowing of funds by a condominium corporation:
These findings are based on subsections 56(1) and 56(3) of the Act.
Typically, therefore, a condominium corporation will enact a general borrowing by-law that authorizes the borrowing of funds for expenditures that are listed in the budget of the corporation for the same fiscal year in which the borrowing occurs. This is often set out as "By-law No. 2" of a new condominium corporation, but there is no magic to this. For many condominiums, the general borrowing provisions are included in By-law No. 1 or may be enacted in any other by-law of the corporation.
Whether or not it has done so, the corporation is required to enact a specific borrowing by-law for any loan relating to an expenditure not listed in the condominium's budget.
The Act does not expressly state whether borrowing pursuant to a general borrowing by-law should be limited to the amount that is specified in the budget for the listed item or the actual cost of the item in question. It is arguable that borrowing for an expenditure that is listed in the current fiscal year's budget but in an amount greater than what is listed triggers a requirement for a specific borrowing by-law.
Like all condominium by-laws, borrowing by-laws must be reasonable and consistent with the declaration as well as theCondominium Act, 1998, (the "Act"). See the Condopædia article, By-laws, for the basic requirements for enacting condominium by-laws.
- Any borrowing requires authorization in the form of a borrowing by-law;
- the corporation may borrow the amount necessary to fund expenditures included in its current year's budget pursuant to a general borrowing by-law; and
- it requires a by-law specific to a proposed loan (we can call it a specific borrowing by-law) if the purpose of the loan is to fund expenditures not included in the current year’s budget.
These findings are based on subsections 56(1) and 56(3) of the Act.
- Subsection 56(1) sets out the general authority of the corporation to enact by-laws that authorize "the borrowing of money to carry out the objects and duties of the corporation."
- Subsection 56(3) indicates that if it is for an expenditure not set out in the condominium's current year's budget, the proposed borrowing is not permitted without a by-law specifically authorizing it.
Typically, therefore, a condominium corporation will enact a general borrowing by-law that authorizes the borrowing of funds for expenditures that are listed in the budget of the corporation for the same fiscal year in which the borrowing occurs. This is often set out as "By-law No. 2" of a new condominium corporation, but there is no magic to this. For many condominiums, the general borrowing provisions are included in By-law No. 1 or may be enacted in any other by-law of the corporation.
Whether or not it has done so, the corporation is required to enact a specific borrowing by-law for any loan relating to an expenditure not listed in the condominium's budget.
The Act does not expressly state whether borrowing pursuant to a general borrowing by-law should be limited to the amount that is specified in the budget for the listed item or the actual cost of the item in question. It is arguable that borrowing for an expenditure that is listed in the current fiscal year's budget but in an amount greater than what is listed triggers a requirement for a specific borrowing by-law.
Like all condominium by-laws, borrowing by-laws must be reasonable and consistent with the declaration as well as theCondominium Act, 1998, (the "Act"). See the Condopædia article, By-laws, for the basic requirements for enacting condominium by-laws.
What you need to know…
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…as a Unit Owner
A unit owner has no power, other than the power to vote 'yea' or 'nay', to determine whether or not the corporation will borrow funds to pay expenses. However, each unit owner is liable to pay his/her/its proportionate share of the loan principal, interest and related expenses. Some unit owners have tried withholding payment of all or part of their common expense contributions because they have disagreed with the decision of the corporation to borrow funds. This is unwise. First, it might only serve to contribute to financial difficulties for the corporation, potentially leading to default under the loan and additional risk and expenses for all unit owners. Second, it will likely result in a certificate of lien being registered against the owner's unit, increasing the owner's costs. If the corporation enters into a loan agreement that is authorized by by-law in accordance with subsections 56(1) and 56(3) of the Act, there is no basis for opposition to the loan or its repayment. |
…as a Board Member or Manager
Typically, the assistance of legal counsel should be obtained for the purposes of drafting a borrowing by-law. In the case of a specific borrowing by-law, the lawyer might want to review the proposed loan agreement and perhaps attach it as a schedule to the by-law or at least incorporate some of its terms into the by-law. However, it is possible to draft and enact a specific borrowing by-law before any loan agreement has been obtained. In this case, the board will want to ensure that the proposed terms of the loan that are set out in the by-law are sufficiently general to accommodate whatever terms potential lenders are reasonably expected to require. Before borrowing -- whether under a general or specific borrowing by-law -- there are several factors boards and managers should consider including (but not limited to) the costs of borrowing, the security that will need to be given for the loan, a realistic assessment of the amount that needs to be borrowed, provisions in the condominium's governing documents that might impact the right to borrow, and whether there are other factors (such as pending litigation) that could impact the corporation's (or, more particularly, its owners') ability to pay. In short, condominius should not be made to enter into any loan agreement lightly. Professional financial advice is likely required. Also, legal counsel should be engaged as early in the process as possible, and certainly before anyone loan agreement is actually entered into. (Even reputable and well-established lenders may have provisions in their documents that are unacceptable or are effectively contrary to the Act.) |
…as a Declarant
When creating a condominium corporation, the declarant is responsible for the creation of the basic governing documents of the condominium. It is advisable that these include a general borrowing by-law. The declarant's budget should not, however, be established with the expectation that the condominium will have to borrow funds to cover its anticipated expenditures. |