Borrowing money for repairs tricky for strata

Dear Condo Smarts: Our strata corporation is a 54-unit apartment building in  Surrey. It is 37 years old and due for some major upgrades and construction.

We have not had our depreciation report done yet, as we were planning on  doing our major construction first. Our roof repairs and piping will cost our  complex about $1.9 million, and the assessments will range from $27,000 to  $45,000.

After our first information meeting, it became obvious we were going to have  some serious problems passing the vote. Everyone agrees the work has to be done,  but we have a number of owners who have no credit left, or are seniors on fixed  incomes with no access to credit. They are unwilling to vote in favour of a  project that will essentially result in them defaulting on their special levies  when they are due.

We have looked at a few possibilities, one of which is the strata corporation  borrowing the money, but those people who can pay are unwilling to pay a high  rate of interest. A broker has approached us with a solution in which the strata  corporation borrows the funds only on behalf of those owners who need it. It  seems like a great solution, but we can’t figure out how to protect the strata  corporation if those owners fail to pay the loan.

Is it possible for the strata to borrow just on behalf of some owners?

Shirley Morris

Dear Shirley: The strata corporation can – through a resolution passed by a  three-quarters vote at an annual or special general meeting – borrow money that  it needs to exercise its powers and perform its duties. It can also secure the  repayment of money it borrows, as well as interest on that money.

There are a number of limitations on how the money is borrowed and repaid,  and how payments are collected. The strata corporation must not mortgage common  property. For security, it may have other assets – such as a caretaker’s strata  lot or investments – or it can contractually assign the collection of the  special levies as a priority to the lender, ensuring the lender is paid  first.

If the strata corporation borrows the money, then the cost of repayment,  broker’s fees and interest are all a common interest of the strata corporation.  Each strata lot is responsible for paying its share of the loan and fees based  on unit entitlement.

The strata corporation holds the debt, while the strata lot’s obligation is  to pay the approved special levies either for the construction or repayment of  the debt.

The strata corporation is not permitted to reallocate common expenses of the  strata corporation to only those units that choose to participate in the loan.  If a strata corporation borrows the money and lends to a strata lot owner the  funds necessary for the special levy, a number of complications arise.

The most serious complication the strata corporation will encounter is the  collection of unpaid terms of a remaining contract. If an owner contracts with  the strata corporation to borrow the funds to pay the special levy, and if that  owner fails to make payments, the only priority or security that the strata  corporation can rely on for the collection is the special levy as originally  approved by unit entitlement.

The cost of the loan, interest and brokerage fees will not be paid out ahead  of special levies or mortgages. The strata corporation would have no choice but  to proceed with an application to B.C. Supreme Court for an order for the sale  of the strata lot to collect the amounts owing.

Those charges that may be liened under the act, such as the amount of the  special levy, filing costs and legal and administrative costs, are likely to be  granted first, but other charges – such as a mortgage on the property – will  rank after the lien costs. The remaining charges, such as the contracted cost of  the loan, interest or brokerage fees, will rank below the registered mortgages  and loans.

If there are no longer funds left to accommodate the remaining costs, the  owners of the corporation could be left on the hook for the balance of the  costs, including the remaining years of interest.

The only way to ensure the strata corporation has secured a first priority on  the loan is when a special levy or operating expense is approved based on unit  entitlement of all strata lots to repay the entire cost of the loan.

Keep it simple. When the corporation borrows, everyone in the corporation  pays.

Source: The Victoria Times Colonist

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