Beware!

All Owners Are Not Alike

David M. Morrison, B.A., LL.B.

President, Morrison Financial Services Limited

One of the big attractions of the condominium lifestyle is often said to be “carefree” home ownership.  Move into a 15-storey high-rise and it is pretty well certain that you will not be the one shoveling snow or tending to the garden.  But what purchasers often overlook is that, when you buy into a condominium, you are joining a collective.  The future of your property, i.e., how it is maintained or improved over the years — or not — becomes subject to a process of democratic decision-making.  For people who take pride in where they live, or who seek to preserve the value of their investment over the long term, this is an issue about which they can hardly afford to be “carefree”.

As in the case of virtually all democratic constituencies, the unit-owners in a condominium property are rarely a homogeneous group, meaning that rarely are they all alike.  Within the overall group will be subsets of people who approach the exercise of condominium home  ownership from different, and often competing, perspectives, with potentially troubling results over the long term.

Perhaps the best way to illustrate the problem is through a hypothetical case.  Consider a condominium building that is five years old and the lobby area is beginning to show some signs of wear and tear.  It’s not that there is any sort of health or safety issue.  It’s simply that, in its worn state, the lobby no longer reflects the quality or  brand into which many of the unit-owners thought that they were purchasing.

Now, in this case, the condominium board of directors is comprised of five individuals.  They are trying to decide whether the corporation should incur the expense of refurbishing the lobby at this time, so as to restore it to its former glory.  The overall cost will be $5,000 per unit, and may have to be assessed against each of the unit-owners since there is not enough money in the corporation’s reserve fund.  Each director approaches the issue from a different perspective, with the different points  of view sometimes competing.  Also, the perspective of each director is reflective of at least some other unit-owners within the constituency who share the same view.

Let’s look at these directors and find out if the work gets done.

Mary

Mary and her husband are middle-aged urban professionals who have done well in their careers.  They bought into the condominium because it was touted as a “luxury” property, and they intend to live there for a long time.  They have the funds to pay their share to maintain it well, and approach where they live with a great deal of “pride of ownership”.  In other words, when family and friends come to visit, Mary wants them to see  a place that she is proud of and that accords with where she and her husband have arrived financially.  Mary’s view is that, as soon as any part of the building shows signs of wear, it should be maintained, so that the building continues to look at all times as good as it did when it was new.  She also believes that the expense of good ongoing maintenance will, at least in part, be returned through increased unit values upon resale. The $5,000 cost is no problem for Mary and her husband.  She wants the work done.

John

John and his wife are similar to Mary and her husband in terms of careers and financial well-being, but they are different in one significant way. Pride of ownership is not nearly as important to them. He hardly ever brings anyone over to the building, and his attitude is What’s a little wear and tear? No one really notices or cares anyway.  To John, spending $5,000 on aesthetics is simply a waste of money. He votes against doing the work. 

David

Like Mary and unlike John, David harbours a high degree of pride of ownership and would normally like to see the building maintained very well.  But he is anticipating a job relocation and does  not see himself keeping his unit beyond another two years.  In his eyes, although  the  lobby  is  not  as  good  as  he  would like it, he can live with it another two years, and sees the proposed expense as being something that will mostly benefit people coming after him. Furthermore, he doesn’t see the money coming back to him on the sale of his unit. He votes “no”.

William

William and his wife are retired seniors who moved into the property after their last child had left home. They could afford to purchase their unit from the equity in their previous home, but they are now living off William’s pension, which is fixed and does not allow for much discretionary spending over and above their monthly needs.  When they bought into the building, they loved the luxury feel, and in particular the freshness of a building that was brand-spanking new. William really wants to keep it that way, and would vote in favour of the work, but simply cannot afford the $5,000 cost. So he votes “no”.

Sandra

Sandra is a successful businesswoman who plays in real estate investment with her excess funds.  She actually does not live in the building, but rather rents out her unit to cover the costs.  Her plans to “flip” the unit within another year or two, hopefully at a good profit.  In the meantime, the less that she is out-ofpocket, the higher her return on investment, particularly because she does not believe that the current state of the lobby will impact negatively on what she will ultimately get when she sells.  She votes against doing the work. With four votes against and only one for, we really did not have to consider the fifth director.  The  tyranny of the majority dictated that the lobby refurbishment would not get done the moment the third vote against was cast.  Meanwhile, by whatever quality standard one may apply, the property has just gone down at least one notch, if not more.  More importantly, extrapolate this decision-making process into the future, when it is no longer simply the aesthetics of the lobby, but the integrity of the roof, a dated HVAC system, brickwork, or whatever, and this building may have just received the first cut in a death by a thousand cuts.

The fact is that, all across Canada, there are condominium properties that have lost their former lustre and are descending into a state of decay, albeit sometimes at an imperceptibly slow pace.  In many cases, the problem goes beyond merely appearance and impacts the vital components of the building.  Why does this occur?  Because, without an enlightened, highly-motivated and somewhat homogeneous constituency dedicated to good maintenance, and blessed with the means to pay for it, history demonstrates that the democratic decision-making process will always favour the lowest monthly payment and not a cent more.

In the writer’s view, there is no easy answer to this problem. The industry is beginning to hear talk about specific maintenance standards being mandated in the Declaration at the time that a condominium is formed.  This would, in effect, establish the building in a certain class,  upon which classification existing and prospective owners would be able to rely.  But it is unclear whether this concept will take root and how effective it will be if it does, and it will do nothing to assist existing buildings.  It is also unclear what role, if any, legislation will ultimately play in addressing the issue as problems with more and more buildings become apparent.

Albeit perhaps an overreaction, for some people the uncertainty surrounding the issue of ongoing maintenance may be sufficient reason to avoid condominium home ownership altogether.  Most, however, will regard that position as too extreme.  For a prospective purchaser seeking to “hedge their bets”, there are at least two things he or she can so.  First, all other things being equal, he or she might well be advised to buy into the wealthiest property he or she can reasonably afford.  For, if money is not  an issue, the number of reasons why  unit-owners might oppose a particular maintenance project is reduced measurably.

Second, he or she should seek out a condominium property where the constituency of unit-owners is as uniform or homogeneous as possible.  In these circumstances, the unit-owners are more likely — although not certain — to share a common view of how the property should be maintained.  Here, however, we may be talking about something that is becoming increasingly difficult to find.

One shudders to think how the resident owner of a 3,000 square foot penthouse will ever see eye-to-eye on matters of long-term maintenance with the owner of a 333 square foot hotel rental unit.  But, in fact, in downtown Toronto, there are already several buildings with differentials that extreme or almost so.  And many more are coming as both developers, for market reasons, and politicians, for social reasons, continue to favour projects specifically designed to accommodate a wide range of affordability and uses.