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| Laura Gurr |
A status certificate is a document that provides essential information regarding the financial status of the unit and the condo corporation. Too often prospective purchasers do not want to pay their real estate lawyer to provide a detailed analysis of the status certificate. This is unfortunate. Status certificates can provide important information that purchasers need to know before making the decision to purchase a condo unit.
Below you will find 11 of the “red flags” that we see as condominium lawyers in status certificates:
Red flag #1: Vacancies on board
Paragraph 4 includes the names of the officers and directors of the corporation. It is important to keep in mind that a condominium corporation is managed by a volunteer board of directors. Vacancies on the board can be a sign of a dysfunctional board or poor succession planning.
Red flag #2: Arrears in common expenses
Arrears are required to be disclosed in Paragraph 5. These should be investigated, and a plan should be made to address these before closing. Keep in mind that the arrears can continue to grow between the date of the status certificate and closing.
Red flag #3: Condo fees are substantially higher or lower than anticipated
The current monthly condo fees are set out at Paragraph 6. While no one wants to pay high condo fees, some may wonder why low condo fees are a red flag. Low condo fees can be a sign that the corporation is not saving enough for the future, services are not provided at the industry standard, or that needed maintenance items are being deferred. Very low condo fees can be a sign that past and current condo owners are keeping the fees low at the expense of future owners.
Red flag #4: Anticipated increases in common expenses
No one can predict the future, but condominium corporations have to disclose any circumstances that may result in an increase in the common expenses for the unit. These circumstances should be disclosed at Paragraph 12, and you can ask for more details if there are any circumstances disclosed.
Red flag #5: Reserve fund balance does not match up with reserve fund study
Paragraph 13 of the status certificate states the balance of the reserve fund. The reserve fund is the money that current and prior owners have set aside and that can only be used for major repairs and replacements of the common elements that will be required in the future. It is important to remember that the amount of money that is “adequate” for a condominium corporation will vary widely. For example, a new townhouse complex can be expected to require much less in the reserve fund than an older high-rise apartment building with a lot of amenities.
Since there is such a variety in what is “adequate,” each condo must have a reserve fund study completed every three years by independent professionals to determine how much money is required to be put away each year. The study is a planning tool for the board. If the amount of money in the reserve fund is substantially less than the reserve fund study says is required, you may want to ask some questions to find out why. There may be a good reason for the variance (a project was completed earlier than planned).
Red flag #6: Ongoing legal proceedings
Paragraphs 18 to 22 set out any lawsuits involving the corporation. Litigation is inherently risky and expensive. The corporation’s own legal costs may exceed the budgeted amount and result in special assessments or increases in monthly fees. If the corporation is unsuccessful, all current unit owners will be responsible for any damages or costs owing by the condominium corporation, up to their proportionate share of the common elements.
Red flag #7: Unauthorized alterations
Additions, alterations or improvements to the common elements made by the owner will become the responsibility of the prospective purchaser. These alterations are described in Paragraph 23 and any applicable agreement should be provided. It is important to review the terms of any agreement and to ensure that you have adequate insurance in place to cover these alterations.
Where there are alterations that were not authorized (e.g. there is no approved alteration agreement registered on title), the future purchaser may be required to remove the alteration or work with the corporation to negotiate and register an alteration agreement to retroactively approve the alteration, which will all be done at the cost of the purchaser.
Red flag #8: Insurance deductibles, standard unit
Paragraph 26 requires the corporation to certify that they have secured all policies of insurance that are required, but this does not disclose the amount of the deductible or the limits of the coverage. In addition to confirming that this statement is made, a certificate or memorandum of insurance for each of the current insurance policies must be provided with the status certificate package. Insurance deductibles are increasing rapidly across the condominium industry. It is not uncommon to see deductibles of $50,000 or more for certain types of claims. A high deductible means that the corporation is self-insuring more repairs, this may lead to unbudgeted expenses and increased costs for owners.
Depending on the circumstances, unit owners may be responsible for the condominium’s insurance deductible. It is common for condominium corporations to pass a bylaw to extend the circumstances that unit owners are responsible to reimburse the corporation for this insurance deductible. Owners can get their own insurance coverage to cover this cost.
Owners are also responsible for insuring all “betterments and improvements” within the unit. Given the increased insurance and repair costs, more condominium corporations are limiting the number of components within the unit that the corporation will repair. The standard unit bylaw will set out what items within the unit the corporation’s insurance will cover and what the owners are required to insure themselves. It is important to understand what the condominium corporation is insuring so that owners can ensure that their own insurance coverage is appropriate.
Red flag #9: Cautions in audited financial statements
The status certificate package includes a lot of documents, referenced at Paragraph 33. One of the key documents is the audited financial statements. The auditor is required to disclose any reservation of opinion, which is the auditor’s warning signal to the reader. This could be a warning signals of poor recordkeeping or something worse.
Red flag #10: Restricted uses
The condominium’s declaration and rules can contain many restrictions on how you can use the condominium unit or the common elements. Restrictions on leasing, pets, operation of home businesses and noises can all found in the declaration and rules. If there is a specific purposes or activity that you wish to do within the unit (e.g. have a dog, operate a home daycare, play a musical instrument), you should ensure that this is permitted within the community.
Red flag # 11: Status certificate is old or is not addressed to purchaser
Finally, it is important to remember that the status certificate can only be relied on by the person that requests the status certificate and is only accurate as of the date that it is issued. Vendors may get a sample status certificate for prospective purchasers to review, but prospective purchasers will not be able to rely on any of the statements in the status certificate unless they get their own. Also, circumstances can change, and older status certificates may not include the most current information
Laura Gurr is a partner with Cohen Highley LLP in London, Ont. Cohen Highley has offices in London, Kitchener, Chatham, Sarnia, Stratford and Strathroy. Laura provides risk management and regulatory compliance advice to condominium corporations, property management companies and non-profit housing providers.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author's firm, its clients, The Lawyer’s Daily, LexisNexis Canada, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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