Condominium Due Diligence and top 10 issues to look for in a Status Certificates
When purchasing a condo, most of the agreements are subject to certain conditions to allow the buyer to conduct their due diligence before committing to the purchase. Once of such conditions is status certificate review.
A status certificate is a bundle of documents that disclose important information about condominium corporation such as its financial, legal and operational aspects. Status Certificate helps buyers understand the over all state of the condominium corporation and all allowing the buyers to make informed decisions prior to purchasing a condominium unit.
In this article we will discuss the top 10 issue to pay attention to when reviewing a status certificate. While status certificates are usually reviewed by a lawyer, the client should also know what to took for and ask informed question during the review.
01. Missing Parking or Locker
Your agreement of purchase and sale states that you are purchasing a condominium unit together with a parking and/or a locker. Upon review of the status certificate, you discover that both the locker and the parking are “exclusive use” meaning that you can use the spots while you own your condominium unit but parking and a locker belong to the condominium corporation. How does that effect your ownership? It doesn’t necessarily but if in the future you no longer have a car and would like to sell your parking spot, you are unable to do so. Alternatively, if you require an additional parking spot, you can rent it but are unable to buy an additional spot and as such increase the value of your unit.
02. Wrong legal description
Your agreement of purchase and sale may have a wrong legal description of the unit, parking or locker. Depending if you are purchasing from a builder or from a reseller, this could be a big issue. When reviewing the status certificate, the unit belonging to the vendors may be in a completely wrong location. When purchasing a unit, it is vital that the information in the status be compared to the Condominium Plan that show the exact physical location of the unit, parking and locker. When going to view the unit for purchase, the buyer should also visit the parking spot as well as the locker. It is possible that the seller is advertising the parking spot as having direct access to the elevator, when in reality the parking spot that actually belong to that particular unit is under a bulkhead next to a wall.
03. Lifestyle Issues
When looking for a condo, the buyer has certain criteria that they are looking for in a condo such as size, number of bedrooms, parking and location. The other lifestyle issues to consider when buying a condominium is whether or not the condo allows pets, the type of pets that are allowed, does the condo allow smoking. Therefore, restriction on use of condominium could be a deal breaker. The buyer has to be clear about their life style choices with the lawyer and ask the lawyer specifically to enquire in the status certificate. If the unit is perfect but does not allow pets, this could be a deal breaker for the buyer client. If this was not confirmed at the time of status certificate review, the buyer is left with a very difficult choice because they are unable to bring their pet into the unit.
04. Financial Matters
Lawyers are not trained to review financial statements and very few can read a balance sheet and make a sound financial determination. Lawyer can review the financials of the corporation and confirm the current amount held by the corporation in the reserve fund. Whether or not it is sufficient depends on the age of the building, the anticipated expenditures, and how the condominium corporation is being managed. We always suggest calling and discussing the financial with the condominium manager as they know what expenditures are planned for the next year and what if any, major repairs will be done. Based on that information, we can deduce whether or not the reserve fund will be sufficient to cover the expenses. When in doubt the buyer can always take condominium financial documents to a financial adviser who will be able to assist in greater capacity.
05. Unusual matters
Other matters that should be reviewed when looking at the status certificate is whether or not there is a special assessment. If a special assessment is in place, what is the payment schedule and who will be responsible for it once the transaction closes.
Another area to review is whether or not the condominium corporation is involved in litigation and the type of litigation that they are involved in. For example, is the matter a slip and fall on the premises? Or is it a litigation against the builder of the building for use of improper materials?
Status certificate would also indicate anticipated major repairs that are currently being done. As stated previously, a talk with a building manager will be able to clarify the work that is being done and any future major repairs. Subsequently, the buyers lawyer can determine whether or not the current reserve fund would be sufficient to address these repairs or will the required repairs result in a special assessment.
Drastic maintenance fee increase is another issue that the buyer should be aware of, this shows that the building is either going through an unanticipated repair or the building was under-collecting maintenance fees, meaning that maintenance fees were kept low for prolonged period of time and were not increased year to year even marginality to compete with the rate of inflation. Issue like this may be a result of poor property management, or change in property management. But this should nevertheless be brought to the buyers attention.
This category is not exhaustive, the above are just a few examples of issues that may be disclosed in some Status Certificates. Real estate lawyer should discuss all unusual issues noted in the status certificate with their buyer client and have the client acknowledge the said discussion in writing.
06. Section 98 Agreement
When you are buying a unit, the unit’s boundary may not be clear. For example: you own a unit but you have a balcony, the balcony may be a common elements “exclusive use” to your unit. Section 98 refers to an agreement between the unit owner and the condominium corporation to allow modification of a part of the condo common elements or exclusive use common elements. This is important because the condo unit owner may have completed renovations without consent of the condominium corporation and when the new buyer is found in default, the new unit owner is responsible for rectifying the issue. Therefore, the new owner may be responsible for returning the unit to the original condition resulting is huge financial loss. Furthermore, if the unit was purchase because of the recent renovation and a premium was paid as a result, the new buyer is faced with further financial loss. Therefore, it is important to review if there is a agreement in place and what the buyers rights and what are the buyers obligations under s.98 agreement are complied with.
07. Vendor Authentication
With real estate fraud so widespread, it is important to conduct due diligence when it comes to the vendor of the property. Real estate lawyer is able to conduct property search to ensure that the names on the agreement, status certificate and title match. While this is by no means prevent fraud, but it is an extra step in due diligence process that should not be overlooked.
08. Landlord and Tenants Issues
The agreement of purchase and sale clearly states if the buyer is getting vacant possession of the property or assuming existing tenants on closing. Where tenants are concerned the transaction can get very complicated very quickly if the wrong forms were filed with Landlord and Tenant board or if the tenant refuses to vacate the premises. A knowledgeable and experienced lawyer would know how to prepare and deal with such situations and guide the buyer client to a resolution in the least stressful way. If the agreement of purchase and sale states that the buyer is to assume the tenants, it is important to discuss who is responsible to give notices to the tenants once the property closes, verify rental income and deposits and ensure that statement of adjustments is completed correctly. It is also important to note that if there are any infractions by the tenants where condominium property was damaged, the issue will be noted in the status certificate until such time as the issue is resolved.
If the property is tenanted, statement of adjustments must be prepared correctly to ensure that adjustments for monthly rent, last month deposit as well as interest on deposit are noted correctly.
09. Taxation Issues
Taxation issues are not specific to status certificate review, but very important when purchasing any property. If the seller is a non-resident, there is a mandatory holdback requirement until such time that the seller can get a clearance certificate under section 116 of Income Tax Act. The amount of the holdback depends if the property was owner occupied, in such instances the hold back is 25% of the purchase price. If the property was rented and/or listed on Airbnb, the hold back is equivalent to 50% of the purchase price. This becomes a big issue if the property has a mortgage on it and there are insufficient funds for a holdback. The holdback must be paid to CRA within the specified timeline. If the buyer does not holdback the necessary funds, the buyer will face serious consequences such as penalty and possible lien registered against their new property.
10. Timing and Drafting Issues
When purchasing a condominium, it is very important to have your agreement conditional of status certificate review. This allows you as well as your lawyer to look at the status certificate and determine whether or not the property that you are purchase has any issues. Usually, the lawyer has two or three business days to review the status. It is important to waive the condition within the allocated timeline otherwise the agreement could become null and void. It is also important to communicate with your lawyer as well as your agent as to who is responsible for preparing the waiver documents and to confirm that all conditions are satisfied. Once the agreement is firm, the two important dates that should be diarised are title search date and the closing date. Therefore, keeping track of important dates and making sure that the necessary steps are completed within the timeline will ensure that you have a valid agreement of purchase and sale.
The other thing to consider when it comes to timing is that the status certificate is a snippet of information at the date when it was prepared. If your closing date is within 30 days of the receipt of the status certificate, the lawyer has an obligation to attempt to contact property management to confirm that the information on the status certificate is the same particularly when it comes to maintenance fees payment. The buyer may have some coverage with Title insurance if certificate is somewhere between 30-90 days old, subject to lawyer requirements to conduct due diligence. However, a new status certificate must be ordered if closing falls outside the 90 day window. Therefore, if the closing date is beyond the 90 day from the date of issue of status certificate, the buyer should be prepared for an additional expense.
Status certificate review is a vital step when purchasing a condominium. Status certificate can alert the buyer to potential issues and as a result, the buyer would look at a different condominium, saving the buyer from making a mistake and incurring financial losses. When reviewing a status certificate, the buyer has to be clear with the lawyer as to the use of the property and any specific issues that the buyer wants to address. A knowledgeable lawyer will be able to review the status, discuss their findings with buyer client and guide their client in making an educated decision.
Whether you are a first-time buyer or an experienced investor, a thorough review of the status certificate can protect you from costly mistakes and future disputes. Contact Us to speak with a real estate lawyer who will guide you through this essential step and ensure you make a confident, well-informed decision.
