Who pays the interest and other charges on strata loans?
Paul G. Mendes, Partner
Phone: 604-685-4894
Email: pgm@lmlaw.ca
Christ v. The Owners, Strata Plan NW 3229, 2018 BCCRT 611
When a strata faces a big repair levy, some owners may find themselves unable to pay that levy. As a result, many strata’s explore third-party financing as a way to help those owners pay their share of a large special levy.
In the typical scenario, the strata obtains a loan from a third party lender for the full amount of the proposed special levy. The strata then approves the special levy with an option allowing owners who wish to “opt in” to the loan to pay the special levy in installments over a fixed period, usually 5 to 10 years. Although the loan is in the name of the strata, the loan is entirely for the benefit of those owners who cannot pay the special levy in full by the due date.
This type of loan is sometimes referred to by stratas as an “opt-in” loan. The loan is “opt-in” because the resolution approving the special levy gives the owner’s the option of paying the special levy in full by a certain date, or paying the special levy in installments over time by “opting in” to the loan. The idea under this scenario is that only the owners who “opt-in” end up paying the bank charges and interest associated with the loan.
But what happens if an owner who “opted in” changes their mind and decides that he now wants to “opt out” of the loan and pay the balance of the special levy in full? Who pays the interest on that owner’s proportionate share of the loan?
The CRT recently answered this question in Christ v. The Owners, Strata Plan NW 3229. In that case, the strata obtained a $1.2 million loan in connection with a $1.75 million special levy. The average cost of the levy was $39,000-$100,000 per owner.
The special levy contained language stating that owners who failed to pay the special levy in full were “deemed” to participate in the loan, and that the strata would not file a lien against the strata lot of anyone participating in the loan, so long as they kept up their monthly installments, which included principal and interest on the loan.
The owners in question opted into the loan, but after 38 months they sought to pay off the balance of the special levy with interest accrued up to the date of their payment. The strata refused to accept the payment, arguing that the owner had to pay off the whole amount of their proportionate share of the loan to satisfy their debt to the strata. So the owner applied to the CRT for an order that the strata be required to accept his payment.
The CRT agreed with Strata and dismissed the owners’ request. The CRT found that there was no right of pre-payment in the resolution. The special levy, when read as a whole, obligated the owners who elected to participate in the loan to pay all interest under the loan on their proportionate share of the amount borrowed, with the final payment to be on account of the remaining balance of the principal of that proportionate share, with interest paid in advance. Allowing an owner who opted into the loan to pay off the balance of the loan without paying their proportionate share of the amount financed would have shifted the burden of the loan from the participating owner to those owners who had paid off their special levy in full. This could not have been what the other strata owners intended when they approved the loan.
Although financing remains an important way of funding needed repairs, this case underscores the importance of making sure that all owners understand how strata financing works. Strata loans are complex commercial transactions and strata councils should obtain independent legal advice before signing loan documents and approving loan resolutions.
WHAT WE DO: Lesperance Mendes has been representing strata corporations on matters related to building envelope repairs and strata financing since 1997. If your strata is considering a loan to finance repairs, consider contacting one of our strata lawyers. For more information contact Paul G Mendes, Partner at 604-685-4894 or email Paul at pgm@lmlaw.ca.
THIS ARTICLE IS NOT LEGAL ADVICE: This article provides general information and should not be relied on without independent legal advice.