Performance Audits and Tarion

We’re sure that our readers are well aware of the importance of claims to Tarion. Claims to Tarion (made in relation to deficiencies in new homes) are governed by the Ontario New Home Warranties Plan Act (ONHWPA).   

As is confirmed in Section 13(6) of the ONHWPA, such claims are in addition to all other rights (including typical claims to Court). But claims to Tarion have some important advantages, including the benefits of a guarantee fund (as security for recovery of repair costs), as well as warranty coverage that applies without requiring proof of negligence.

So in summary: Wherever possible, it is important for purchasers and condominium corporations to preserve (and then to decide whether or not to pursue) their claims to Tarion.

For the common elements of a residential condominium corporation, these Tarion warranty rights are in the hands of the condominium corporation.

Furthermore, condominium corporations are required to follow a mandatory process – set out in Section 44 of the Condominium Act – for preservation of first-year claims to Tarion. In particular, residential condominium corporations (including mixed-use condominiums with any residential units) are obligated to arrange for first-year performance audits (prepared by an architect or engineer) in support of the corporation’s first-year claims to Tarion. [Note: We also recommend that condominium corporations consider performance audit updates in support of 2^nd year and 7^th year claims to Tarion.]

This process raises some important questions:

1. How much detail is required (in the performance audit) in order to preserve a claim respecting a particular deficiency?
2. If a deficiency or problem is identified in one location, does this preserve a claim for all locations (ie. all locations of the property where the deficiency or problem exists)?

These questions have been points of argument between Tarion and Tarion claimants for years.

A recent decision of the Divisional Court in our view sheds some important light on these questions.

Muskoka Standard Condominium Corporation No. 5 v. Tarion Warranty Corporation

In the case of Muskoka Standard Condominium Corporation No. 5 v. Tarion Warranty Corporation, the Ontario Divisional Court dismissed an appeal by the condominium corporation seeking over $1.5 million in repair costs. The Licence Appeal Tribunal (LAT) had previously limited the condominium corporation’s award to just $84,830, which covered only a specific caulking deficiency identified in a 2007 performance audit. The condominium corporation argued that, because its performance audit mentioned water penetration, the resulting claim should cover the extensive building-wide remediation that was eventually performed to address the water penetration, in 2017.

However, the Court ruled that the legal standards for common element claims have shifted.

The Court explained that under Section 44 of the Condominium Act, corporations must now submit a performance audit prepared by a professional that identifies the specific deficiencies for which warranty coverage is being claimed. This creates a critical distinction between a “symptom” and a “deficiency”. While an individual homeowner might only need to report a symptom like a leak, a condominium corporation is required to identify the actual cause of the symptom (the deficiency) in order to preserve a warranty claim. In this instance, the performance audit specifically flagged small gaps in caulking at siding interfaces, not a systemic building envelope failure.

The judgment clarified that notice of a symptom (like water penetration) does not preserve a claim for every underlying defect that might cause that symptom. The Court said:

Water damage is a symptom which can have many different causes.  It is the cause that is the deficiency.

For example, a window leak caused by missing flashing is a different deficiency than a roof leak caused by a torn membrane, even though both result in water entry. Because the 2007 audit only identified caulking deficiencies as a specific cause of water entry, the court found no error in the LAT’s decision to exclude the costs for other repairs (also needed to stop water entry). Essentially, the corporation’s failure to professionally identify other specific causes of water penetration during the initial warranty period meant those other causes were not covered.

At the same time, the Court confirmed that an identified deficiency is covered at all locations.   The Court said:

If many windows leaked throughout a building because of the same deficiency or cause (for example, no flashing), then there would be a systemic issue. All windows lacking flashing would be warranted, notwithstanding that Tarion was only given notice of a few leaking windows. The windows would be warranted because they all had the same deficiency (no flashing).

In our view, the above Court decision leads to the following important conclusions for condominium corporations and performance auditors:

1. Performance auditors (preparing audits for condominium corporations under Section 44 of the Condominium Act) should carefully confirm the causes of observed symptoms.  Referring only to the symptoms (water penetration, efflorescence, cracking, noise, etc.) may not be sufficient to preserve a claim.
2. If the identified defect (the cause) would logically be expected to be present at other locations, in our view all such locations are covered. Even so, the audit should ideally identify all locations where the defect has been identified as well as locations where the defect would logically be expected. In addition, the auditor should ideally check other similar locations (either all such locations or a random number sufficient to confirm conclusions about the presence of the defect at such locations)….and those observations should of course be included in the audit.
3. In cases where owners identify damages (symptoms) in unit surveys that are completed as part of the performance audit process (pursuant to Section 44 (5)(d) of the Condominium Act), the auditor should similarly confirm the causes (of such damages) and should confirm all expected locations (in the manner described above).

This will no doubt mean that costs for preparation of performance audits will be higher (than they have been in the past). The cautionary steps described above can involve a lot of investigative work, particularly in cases where the building(s) have numerous defects.  However, in light of the above-described court decision, it is our view that these cautionary steps are required in order to properly protect a condominium corporation’s warranty rights.

Our further comments are as follows:

1. Developers should be adjusting their first-year budgets to account for these higher costs for first-year performance audits, and developers are of course responsible (per Section 75 of the Condominium Act) for any first-year deficits that result from higher than budgeted costs for first-year performance audits.
2. In our view, condominium corporations should be able to recover these extra investigation costs as part of their first-year Tarion claims. In our view, if the Ontario New Home Warranties Plan Act is now interpreted to require condominium corporations to prove each defect (each cause of a symptom), it follows that these extra costs should be covered under warranty. We expect, however, that Tarion will refuse to pay any such amounts (and that condominium corporations will be left to consider the practical pros and cons of a dispute with Tarion about such costs).   
3. As a further alternative, condominium corporations can of course also consider ordinary Court claims (against the developer and others involved in the original construction) for recovery of such amounts.

Stay tuned to Condo Law News to keep up to date on the latest developments !