Condominium Borrowing

Condominium corporations can borrow funds.

Section 56 (3) of the Condominium Act, 1998 states as follows:

“A corporation shall not borrow money for expenditures not listed in the budget for the current fiscal year unless it has passed a by-law under clause (1) (e) specifically to authorize the borrowing.”

So, borrowing by a condominium corporation must be authorized by by-law, unless the corporation is borrowing for expenditures listed in the current budget.

When a condominium corporation borrows, the corporation is then obligated to repay the debt in accordance with the terms of the loan. The payments are typically added to the common expenses (payable by all owners in accordance with the condominium’s Declaration). In some cases (where the purpose of the loan falls within the purposes of the reserve fund), the loan payments can be paid from the reserve fund – and the payments could then be built into the reserve fund study and plan. In some cases, a special assessment (often corresponding with the loan payments) may be necessary.

If the lender is agreeable, a condominium loan can be structured to allow owners to “opt in” or “opt out” of the loan. If this is permitted, an owner “opts out” by paying his or her share of the loan “up-front” – essentially as an up-front special assessment. However, this “opting out” possibility can add considerable administration to the loan (for the condominium corporation), and some lenders also won’t allow for opting out.

The primary security for the loan is an assignment (to the lender) of the condominium corporation’s rights to lien the units (ie. to levy and collect common expenses, including loan payments, from the owners). So, if a condominium corporation were to default on a loan, the lender would have the right to “step into the shoes” of the condominium corporation in order to collect common expenses as required to pay the loan. [As a practical matter, this rarely happens. In virtually every case, the condominium corporation makes the necessary loan payments, and attends to collection of common expenses, as necessary, on its own.]

A number of documents are required as part of a condominium loan transaction, including the by-law (in most cases) as well as a loan agreement, general security agreement and perhaps also an assignment of lien rights.

The loan normally must also be mentioned in the corporation’s status certificates.