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Condominium Corporations Benefit From Business Judgment Rule Just Like For-Profit Corporations

istock_72757013_largeIn the case of 3716724 Canada Inc. v. Carleton Condominium Corporation No. 375, the Ontario Court of Appeal held that decisions of boards of non-profit condominium corporations are owed the same deference as are those of for-profit corporations, relying on the “business judgment rule.”

In the corporate law context, Canadian courts have been guided by the “business judgment rule” when considering decisions of for-profit corporations. The business judgment rule recognizes the autonomy and integrity of corporations, and the fact that directors and officers are in a far better position to make decisions affecting their corporations than a court reviewing a matter after the fact. As long as a for-profit board acted fairly and reasonably, courts will not second guess their decisions.

At issue was whether boards of non-profit condominium corporations could rely on the business judgment rule when their decisions were being reviewed by courts.

The appellant in this case, 3716724 Canada Inc. (“371”), owns parking spots within the parking garage of the respondent, Carleton Condominium Corporation No. 375 (“Carleton”), which is located in the ByWard Market area in Ottawa, Ontario. 371 had been renting the spots on a monthly basis, but wanted to convert them to an hourly “pay and display” system. The declaration creating Carleton specifically authorized this type of business. To convert its business into an hourly parking operation, 371 required a number of changes to the Carleton’s common elements to permit cars to enter and exit and for their occupants to enter and exit the parking garage through an otherwise locked stairwell. From the very beginning, the Board made clear that it was concerned that some of the changes would make the condominium less safe. The condominium is located in a high-crime area with a significant transient population and there was no dispute that some of the changes requested by the respondent would increase the risk of trespassers gaining access to the garage, which had security implications for both unit owners and anyone using the parking spots.

Carleton would only approve the changes if 371 provided a full-time security guard to monitor the parking spots or a full-time attendant at the entrance to the parking lot. 371 balked at that expense and indicated that there were other security measures that could satisfy the board’s concerns. The board continued to refuse approval of the requested changes without a full-time security guard.

At first instance, 371 sought a declaration under the oppression remedy of Ontario’s Condominium Act, 1998 (Section 135), which provides: “On an application, if the court determines that the conduct of an owner, a corporation, a declarant or a mortgagee of a unit is or threatens to be oppressive or unfairly prejudicial to the applicant or unfairly disregards the interests of the applicant, it may make an order to rectify the matter.” 371 argued that its interests were being oppressively and unfairly disregarded by Carleton’s board.

To succeed on the application, 371 had to show that Carleton (i) breached 371’s reasonable expectations that it be able to operate an hourly lot; and (ii) that the impugned conduct amounted to “oppression”, “unfair prejudice”, or “unfair disregard”. The application judge found that Carleton had unfairly disregarded 371’s reasonable expectations in that the requirement for a full-time security guard was unreasonable and not the only option that could have satisfied Carleton’s security concerns.

Court of Appeal Extends Business Judgment Rule to Condominium Corporations

The Court of Appeal disagreed with the application judge on the basis that the business judgment rule should apply to decisions of boards of condominium corporations just as it does to decisions of boards of for-profit corporations. The Court held that boards were better placed to make judgments about their interests and to balance the competing interests engaged than were the courts: “The question in such circumstances is not whether a reviewing court would have reached the same decision as the board. Rather, it is whether the board reached a decision that was within a range of reasonable choices. If it did, then it cannot be said to have unfairly disregarded the interests of a complainant.” (para. 53)

This rationale accorded with a prior Supreme Court of Canada decision made in the context of an oppression remedy case under Canada’s Business Corporations Act. In BCE Inc. v. 1976 Debentureholders, the Supreme Court held that when weighing the conflicting interests of stakeholders, the decisions of for-profit boards were owed deference as long as the decision made was from a range of reasonable alternatives:

The “business judgment rule” accords deference to a business decision, so long as it lies within a range of reasonable alternatives. It reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation. This applies to decisions on stakeholders’ interests, as much as other directorial decisions.

[The oppression remedy] claim must be considered from the perspective of the duty on the directors to resolve conflicts between the interests of corporate stakeholders in a fair manner that reflected the best interests of the corporation.

Provided that, as here, the directors’ decision is found to have been within the range of reasonable choices that they could have made in weighing conflicting interests, the court will not go on to determine whether their decision was the perfect one. [Citations omitted.]

Test to be Applied

The Court of Appeal held that the “first question for a court reviewing a condominium board’s decision is whether the directors acted honestly and in good faith and exercised the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. If they did, then the board’s balancing of the interests of a complainant under s. 135 of the Act against competing concerns should be accorded deference. The question in such circumstances is not whether a reviewing court would have reached the same decision as the board. Rather, it is whether the board reached a decision that was within a range of reasonable choices. If it did, then it cannot be said to have unfairly disregarded the interests of a complainant.”

In this case, the issue over what security measures were appropriate given the location of the building was wholly within the purview of Carleton’s board: “the Board members’ knowledge of that area is clearly an advantage that they enjoy over any court subsequently reviewing their decision.” The real question was thus, whether the Board’s decision was within a range of reasonable choices. The Court of Appeal found that the application judge found in favour of 371 because he disagreed with the balance between competing interests struck by Carleton’s board, which was an error. The Court of Appeal found that Carleton had fairly considered competing interests and had selected an option – the full-time security guard – which was within a range of reasonable choices. That decision was owed deference and should not be interfered with. Moreover, Carleton’s decision did not deprive 371 of operating an hourly lot; rather, “the board’s decision had the effect of rendering the respondent’s proposal less profitable.” That was not the same thing as unfairly disregarding 371’s interests.

Takeaways for Business

If there is a fair and good faith process, it will be difficult to challenge a condominium corporation’s board’s decision that favours one side’s fair and legitimate competing interests, so long as the decision is made from within a reasonable range of options.

Michael Binetti
Affleck Greene McMurtry LLP

Michael Binetti

<p>Michael Binetti, a partner of the firm, brings a proven litigation background plus extensive experience in arguing both trials and appeals. He has demonstrated his strategic legal capability and expertise in wide-ranging areas of litigation, including business and construction disputes, fraud, employment law, competition investigations, private competition actions, elections law and dealing with municipal and government regulators.</p>

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