Jul 01, 1997

Commission Trust and the Personal Property Security Act ; Condominium Act - Assessments, Defaulting Owner, Strata Corporation Priority Over a Mortgagee #272


By Gerry Neely

Column No. 266 described a B.C. Court of Appeal decision that a valid trust can be created by a properly worded independent contractor contract, despite the illegality of that form of contract under the current Real Estate Act. The significance of this decision is that the trust protects the licensee's commission upon the bankruptcy of the agent employing the licensee. Column No. 267 referred to a further issue that had to be dealt with, namely whether the trust was one that should have been registered under the Personal Property Security Act.

That question was referred back to the Supreme Court, the issue was argued on July 4th, and in Reasons for Judgment, handed down on July 22nd, it was held that the trust created by an independent contractor contract was not one that was required to be registered under the Personal Property Security Act. The judge's decision was based upon the exemption referred to in Column No. 266, that commissions are not fees for professional services.

While this decision is good news, it is too early to break out the champagne. It may be appealed because of the large sum of money that will now go to salespersons, as opposed to other creditors of the bankrupt agency. An appeal must be filed within 30 days of the Order made in the Supreme Court, so we should know around August 22nd whether there is still one more hurdle to overcome.1

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The question of what expenditures by a strata corporation can be said to be included in common expenses, was examined in a case in which a foreclosing first mortgagee disputed the strata corporation's claim to have priority for amounts paid by the strata corporation on behalf of defaulting owners. The condominium in question was an old building converted to strata lots. According to the owners, who are suing the developer, the conversion was badly done.

A strata corporation can register a Certificate of Default against a defaulting owner, which gives the strata corporation priority over any other lien or charge, except a lien filed under the Builders Lien Act in favour of the Crown, or a mortgage in favour of the Crown. In the case in question, the defaulting owner owned four strata lots, and the amounts levied were in the range of $11,000 for each unit.

The amounts claimed by the strata corporation were divided into four categories:

Maintenance Levies:the monthly assessments based upon the annual budget and filing lien fees.
Fine Levies:late payment penalties.
Legal Levies:legal fees.
Repair Levies:plumbing, structural, repairs, roof, sump pump, deficit.

The foreclosing mortgagee acknowledged that the maintenance levies had priority over its mortgage. On the basis of an earlier B.C. decision, the judge held that fines and legal fees did not have priority over the mortgage. The main argument concerned the repair levies, which were about $7,000 for each strata lot.

The mortgagee's argument was that the combinations of Section 128 and 37 of the Condominium Act, meant that only those repairs provided for in the annual budget, could have priority over the mortgage. None of the amounts paid for repairs were included in the annual budget. The court rejected that argument, on the basis that the cost of the repairs had been authorized by a special resolution of the members; the repairs protected and increased the security held by the mortgagee, and therefore the strata corporation should have priority over the mortgage.

The judge mentioned in passing that the mortgagee could have chosen to exercise its voting rights in an attempt to defeat the special resolution had it wanted to. The court ordered the sale of the properties and directed the proceeds of the sale to be paid firstly to the strata corporation to cover the repair and maintenance levies; the balance to the mortgagee and if any surplus remained, fines and legal fees were to be paid from that surplus.2

Where as in this case, a strata corporation wants to collect monies owed by a defaulting owner, its remedy is to apply to the court for an order setting a redemption amount and period of time within which the owner may redeem its property. The redemption period may be as short as thirty days. Failing payment, the owner's property is to be sold and the strata corporation is to have conduct of sale.

 1.Drennan v. Turnbull, S.C.B.C., Reasons for Judgment, July 22, 1997.
 2.Royal Bank of Canada v. Holden, B.C.S.C., Reasons for Judgment, November 27, 1996.

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