Real Estate

Disclosure must be 'readable, free of unnecessary complexity'

By Rob Lamberti, AdvocateDaily.com Contributor

The Ontario Court of Appeal (OCA) handed consumers a victory when it upheld a lower court’s ruling demanding that condo developers explain what they’re selling by using plain language in disclosures, says Toronto real estate lawyer Megan Mackey, who represented the plaintiff in the matter.

Condo developers can’t just technically meet disclosure requirements under the Ontario Condominium Act, says Mackey, partner with Shibley Righton LLP.

She tells AdvocateDaily.com that she hopes the ruling will set a new expectation for easier-to-read condo disclosure documents.

The OCA ruling supported the plaintiff’s position by upholding an earlier Superior Court of Ontario decision that found disclosure has to be clear, transparent and easy to understand, says Mackey.

“The section in the Condominium Act about disclosure is really long, and it has many requirements, but there are technical ways to meet those requirements,” she says. “And then there are practical ways.

“This decision sends a message to the developer community that technically meeting the requirements of the Act may not be enough. Practically speaking, what is being disclosed needs to be readable.”

The case demonstrated how a developer tried to take advantage of condo purchasers, which is why condo lawyers will appreciate the OCA’s decision, says Mackey.

“The overall message from the court is that developers don’t have carte blanche to start extracting money from buyers on top of the purchase price, or creating what I call ‘income streams’ for themselves,” she says "unless the financial repercussions of those aspects of the purchase are disclosed to consumers in readable language."

In this case, the developer apparently got into financial trouble but saved this particular project and created income streams, where a buyer not only purchased a unit, “but actually bought into an obligation to make ongoing payments to the developer for the next 25 years,” Mackey says.

That was difficult for the condominium buyers because they felt they were done making payments to the developer after settling on the purchase price and closing costs, she says.

“But in this case, there were ongoing payments which were significant” for heating, ventilation and air conditioning equipment (HVAC), Mackey says.

The HVAC appliances cost the developer $575,000, but the cost to consumers was based on a price about four times more than that, she says. Although the consumers were eventually told how much they would have to pay for the HVAC appliances, they were not told that the developer inflated the price after the purchase agreements had been signed.

The court found that was unacceptable, says Mackey.

"The developer also required consumers to make ongoing payments to compensate the developer for surplus parking and storage units that no one wanted. Purchasers were not told this would affect their monthly carrying costs for their condominium units," she says.

“When you buy a condo, the developer, by law, must disclose a number of things, including what the monthly expenses are going to be,” Mackey explains.

The developer estimates the expenses in the first year of operation and the disclosure allows a buyer to determine if they can afford the unit and the monthly fees, she says.

“Disclosure of your ongoing ownership costs is important because some consumers buy into condos knowing what they can afford. Unless they know what the monthly condo fees are going to be, they can’t accurately make that calculation.”

Mackey says some developers create income streams that won't kick in until the second year to keep them out of the first-year budget.

“So, these purchasers see their ongoing costs, and they don't realize that in the second year, the costs are going to jump by $100 a month, for example,” she says.

Documents in a condo purchase can be confusing — to the point where lawyers have difficulty understanding them, Mackey says.

“When you buy a condo, you get the disclosure package, and it's enormous,” she says. “It’s usually more than a hundred pages of documents. They’re in fine print. They're confusing. You're getting a draft declaration. You’re getting draft bylaws.”

Mackey says the Superior Court judge’s ruling "can be seen as quite critical” of the way things are done by some condominium developers.

She says the decision was clear — information should be conveyed to the consumer “in such a way that they can understand what they are buying. That was significant in our view because it was the first time the unreadability of these statements got a comment from the bench.”

The OCA was coy in its ruling, however, saying it wouldn’t directly discuss readability but nevertheless suggested disclosures should be readable, Mackey says.

“Given the motion judge’s finding that the disclosure was confusing, it is unnecessary to consider … criticism that she found the disclosure of the material changes was insufficient because it was not made in ‘simple, readable language,’” Justice Russell Juriansz ruled. “Suffice it to say that the documents a developer uses to make revised disclosure must be readable and free of unnecessary complexity.”

Mackey says, "While there are many consumer-friendly developers who stand behind their products and have great reputations, unfortunately not all condominium builders pay attention to the consumer’s experience."

She hopes that all developers will now feel obligated to make their documents “readable and free of unnecessary complexity. We would like that to be the new standard.”

To Read More Megan Mackey Posts Click Here