Are Pre-Incorporation Cost-Sharing Agreements Enforceable?
Naomi R. Rozenberg, Associate
Phone: 604-685-3911
Email: nrr@lmlaw.ca
Lessons learned from Strata Plan LMS 3905 v. Crystal Square Parking Corp., 2020 SCC 29
The Supreme Court of Canada has ruled that a strata corporation is bound by the terms of a parking facility agreement that existed before the corporation was formed, because the strata’s behaviour was consistent with an intention to enter into a new, post-incorporation contract on the same terms.
The Facts
Crystal Square is a large, mixed-use retail complex located in Burnaby. The development is comprised of seven “air space parcels” including a retail complex, an office tower, a residential tower, a hotel, and a parking facility.
In March 1999, the developer of Crystal Square entered into an Air Space Parcel (“ASP”) Agreement with the City of Burnaby, which provided for mutual easements for support, service connections, vehicular access and other uses to and on the various air space parcels.
Section 7.5 of the ASP Agreement provided as follows:
- The owner of the parking facility would provide the owners of the other air space parcels with parking and vehicular access rights in exchange for an annual fee, payable monthly. In particular, it allocated 76 parking spaces to the owners of the second air space parcel, where the office tower was located.
- Upon the subdivision of the air space parcels by a strata plan, the future strata corporation would be entitled to give all permissions and consents permitted to be given by the owners of the subdivided parcel.
- The strata would be responsible for paying the fee and administering the parking rights of the strata lot owners.
- Once the owner of the parking facility had recouped the capital costs of construction of the facility, the annual fee would be significantly reduced.
Section 16.3 of the ASP Agreement provided that the future strata corporation would enter into an “assumption agreement” with the owners of the other air space parcels so as to assume obligations under the ASP Agreement.
On March 17, 1999, the ASP Agreement was registered as an easement on title.
On May 26, 1999, Strata Plan LMS 3905, which comprises the office tower on the second air space parcel, was deposited in the land title office, establishing the strata corporation. However, the corporation never entered into an assumption agreement with the other air space parcel owners.
On June 28, 2002, the developer sold the parking facility to Crystal Square Parking Corporation (“CSPC”) and assigned the ASP Agreement to CSPC.
For several years, the strata corporation’s owners parked in the parking facility and paid fees to CSPC at the rate specified in the ASP Agreement.
The Dispute
Between 2010 and 2012, the strata corporation disputed some of the fees charged by CSPC pursuant to the ASP Agreement.
In 2012, a dispute arose between the strata and CSPC over capital reserve payments, and the strata stopped paying the parking fees. CSPC responded by revoking the strata owners’ parking privileges.
The strata corporation argued that it was not bound by the terms of the ASP Agreement, including the payment obligations, since the strata did not exist when the contract was created.
The Ruling
The Supreme Court of Canada held that the strata corporation had entered into a valid “post-incorporation” contract with CSPC on the relevant terms the ASP Agreement.
As the Court explained, “although a corporation is not bound by a pre-incorporation contract, it may, after coming into existence, enter into a new contract on the same terms as those of the pre-incorporation contract”.
The test for finding that a contract exists is an objective one; “the offer, acceptance, consideration and terms may be inferred from the parties’ conduct and from the surrounding circumstances”.
In other words, the objective conduct of a party may indicate its acceptance of – and intention to enter into – a binding contract.
In this case, the strata demonstrated its intention to be bound by a post‑incorporation contract with CSPC. For many years, the strata corporation:
- paid the fees contemplated in the ASP Agreement,
- made 76 parking passes available to strata lot owners, which corresponded to the strata’s share of parking spaces in the Agreement,
- used and paid for parking spaces in accordance with the Agreement, and
- accepted the benefits and performed the obligations of the Agreement.
In short, the strata corporation and CSPC acted in a manner that implied an offer and an acceptance of a new contract, on terms that replicated the terms of the ASP Agreement.
Lessons for Strata Corporations with Pre-Incorporation Cost-Sharing Agreements
If a contract is signed by a developer before the strata plan is deposited, it may not be enforceable. However, the future strata corporation, through its conduct, can demonstrate its intention to enter into a new post-incorporation contract.
When it comes to determining whether the contract is valid and enforceable, a court will infer a party’s intentions based on how that party has conducted itself.
If your strata corporation is performing obligations (i.e. making payments) pursuant to a contract that was entered into before the strata corporation came into existence, the safest course of action is to refuse to make any further payments under the agreement or take any other steps consistent with an intention to be bound by the agreement, and apply to court for a declaration that the agreement is unenforceable.
Alternatively, the strata should deliver a “notice of performance under protest” pursuant to section 62 of the Law and Equity Act. This section allows one party to a contract to comply with the other party’s interpretation of the contract, and later seek compensation in court. Issuing this notice may preserve the strata corporation’s right to challenge the enforceability of the agreement, even if the strata makes future payments under the contract.
WHAT WE DO: Lesperance Mendes regularly advises strata corporations and owners on governance issues, contractual matters, bylaw enforcement, and construction defect claims. If your strata corporation has a legal issue or dispute, let us help you resolve it. Contact Naomi R. Rozenberg at 604-685-3911 or nrr@lmlaw.ca.
THIS ARTICLE IS NOT LEGAL ADVICE: This article provides general information and should not be relied on upon without independent legal advice.