Condominium Buying: Inspections and Status Certificates
A condo purchase is now a frequent city or first time purchase for those looking to move out of rental properties. Despite how common they are, it is often not well understood exactly what condos are, and what makes them different from freehold properties. In this article we will examine what is special about a condominium property, and some things you need to consider if you want to make an offer for one.
What are Condos?: The Condominium Act
A condominium is, legally speaking, a specific type of property created by the Condominium Act. They have no ancient, common law principle, like leases, but are an entirely modern, statutory creation. In basic terms what happens is a developer buys a piece of land and constructs a building upon it, and once it has passed a certain threshold of completion, a condominium corporation may be created. Leaving aside the technical requirements for the registration of the condominium corporation, what this does is create an entity, the condominium corporation, which will own the land, and allow for the creation of individual units which can be bought and sold. There are actually several different types of condominium corporations, but we will restrict ourselves to considering only the common, multi-unit kind. Such a condominium corporation will have the individual units, but also common elements, which remain the property of the condominium corporation, and cannot be bought and sold. Condominium corporations are by law non-profits, and the shareholders are the unit holders. As a corporation, it must have all the ordinary trappings of a corporation, meaning it must have Articles of Incorporation, rules on general meetings, board meetings, elections, financial statements, filing of returns, and dissolution. Condominium corporations also have special rules regarding funding, and the keeping of a reserve fund.
What this all means is that when you buy a condo, you aren’t buying a piece of land like you are if you get a freehold house. You get a unit which is part of a larger entity, but even if you have a condo townhouse you don’t actually own the land under the building, but rather the unit as defined in the documents of the condominium corporation. This means you are subject to the rules of the condominium corporation, and the things you own will be different from if you bought the same sort of place as a freehold. Let’s consider two townhouses as examples, on opposite sides of the same street, one freehold, one condo. When you buy the freehold property you simply own everything within the property lines, and barring any registered easements, charges, liens, or other rights, that is without caveat. When you buy the condo property, on the other hand, you would typically own only the interior of the unit, while everything outside, such as the exterior walls, roof, eaves and driveway, are all property of the condominium corporation. On the one hand, this should make the condo unit cheaper, because you own less, but you are also not personally financially responsible for the maintenance of the things owned by the condominium corporation, it is. This means it will need to get money from you and all the other unit owns to do things like fix rooves, replace driveways, repair cracked foundations, keep insurance policies, and so on. These are the common expenses which condominium corporations charge their unit holders. It also means you do not have as much control over things like maintenance schedules and choices, because you do not own those exterior features.
Condominium corporations can have very different configurations. Some are rows of townhouses with very few common elements, and relatively low common expenses. Others are groups of towers with substantial amenities available only to the unit holders, such as concierge, security guards, pools, gyms, parking garages, party rooms, BBQs, private lawns and gardens, and so on. What services a condominium corporation provides is entirely a matter of choice, and the willingness of the unit holders to pay the common expenses necessary to support those services and amenities. Choosing a condo then is not merely a matter of choosing a unit, but choosing the sort of corporation which sits around it, as a sort of immediate neighbourhood.
Buying Condos: Inspection and Status Certificate Review Clauses
When buying a freehold property one clause you will always want to have in your offer is an inspection clause, allowing you to physically inspect the property with a professional inspector, and if you find defects, allowing you to demand a reduction in price based on the estimate for repair, or to walk away from the transaction without penalty. What about condos? When you’re buying one of those, do you need an inspection clause?
As a general rule, no, you don’t need inspection clauses for condos, because most of the things which would be expensive to fix are the responsibility of the condominium corporation. When you look at a condo unit you are only buying everything inside the paint on the walls, which means that you should be able to see yourself if there are problems with flooring, walls, fixtures or fittings.
What you definitely will need when making an offer to buy a condo is a condition allowing you to review the status certificate, or to have reviewed the status certificate before making the offer. You will probably want a lawyer to help you with this, as these document packages can be both large and confusing. The status certificate is shorthand for a package of documents which you get which includes a specific certificate related to the unit you are looking to purchase, and which states whether the unit is itself behind on common expenses, how much the expenses are, and makes statements regarding the most recent financial statements and budget of the condominium corporation and the status of the reserve fund.
As a corporation, all condominium corporations must produce annual financial statements, which must then be presented to the unit holders in advance of an annual general meeting, at which the unit holders can question the managers of the condominium corporation about the spending during the previous year. Think of this as being like an extra, super-local level of government, with the common expenses as the taxes and the condo board as the town council. They will also need to make a budget for the next year, and explain how they intend to pay for everything in it, including whether they think they will need to raise the common expenses to do it. Budgets will include schedules showing by how much they expect to increase the common expenses over the next several years.
The reserve fund is a sort of savings account condominium corporations are required to keep by the Condominium Act. Basically, the Act says that they need to do studies of all the things which will need to be repaired and replaced on a regular basis, these are carried out by engineering firms, and then make a plan to have enough money to afford the repairs based on the engineers’ cost estimates by the time the repair needs to be done.
It is with regards to the budget and the reserve fund that the most common problems with condominium corporations can be found. Sometimes things happen which cause condominium corporations to have to spend a lot of money unexpectedly, such as heavy rainfall causing flooding, which required a lot of repairs. Insurance can cover many costs, but not always. Other times, condominium corporations will have made poor choices in the past to keep costs down for the unit holders at the time, and now a much more serious problem requires a more serious fix. Older buildings will also be much more likely to have more expensive maintenance requirements than newer ones, so expect them to have higher common expenses because of that.
Finally, there are things called special assessments. These occur when the condominium corporation needs money for something and doesn’t have a way to pay for it, even with borrowing, with the common expenses as they are. A special assessment is usually levied to deal with a substantial, one-off payment, such as for an uninsured risk or an unexpected maintenance issue before a scheduled repair. Status certificates will reveal declared special assessments, but you should be wary of condominium corporations which have issued any recently. They may be the result of bad luck, but it could also be bad planning, and you should do your best to determine which before making an offer or waiving a condition.
One of the biggest reasons you should consider hiring professional help with the review of a status certificate is that the people who produce them know what effect changing common expenses and condo fees have on property prices. As you would expect, a condo with higher condo fees is cheaper to buy than an otherwise identical one with lower fees, because the first condo is more expensive once you own it. This means that raising common expense fees, because inflation has made all the required maintenance more expensive, for example, will reduce the value of all the units. Condo boards know this, and so seek to find a way to raise fees as little as possible, sometimes through the use of special assessments, while not violating their obligation under the Condominium Act to stick to the plan laid out in the reserve fund study. Remember: the danger is not just that you may end up buying something you realise you do not want, but that you later realise you paid more than it is worth.
Conclusion: Know what you’re buying
Buying a condo isn’t inherently better or worse than buying a freehold property, it’s just different. They come with different concerns, obligations and responsibilities, and with both it is important that you choose the one that best suits your needs and wants, and do it in full knowledge of what you’re buying. For a freehold property you need to make sure of the physical state of the property, and for a condo you need to be sure about the financial state of the condominium corporation. In both cases you should consider hiring the appropriate professional to assist you in making your determination: a building inspector for the freehold and a lawyer for the condo status certificate.
