In a recent decision, the Superior Court confirmed an important point for new condo corporations: where a corporation terminates a pre-turnover management agreement under section 111 of the Condo Act, the Condo will not be on the hook for early termination fees outlined in the agreement.
Put simply, section 111 is supposed to give condo corporations a real way out of declarant-entered management agreements. It is not an exit with the meter still running.
The Dispute
The management agreement was entered into just before turnover. After turnover, the new board terminated it under section 111. The management company did not dispute the corporation’s right to terminate, but claimed it was still entitled to more than $151,000 in liquidated damages.
An arbitrator agreed and held that, while the agreement could be terminated, the damages clause survived.
The Court Disagreed
On appeal, the court held that the arbitrator erred in law. Section 111 gives a condo corporation a broad statutory right to terminate a pre-turnover management agreement on proper notice. That right cannot be neutralized by a clause that effectively requires the condo to keep paying after the agreement is over.
The court’s point was a practical one. If liquidated damages remained payable after termination, there would be little value in the statutory right to terminate at all. In many cases, it would simply be too expensive for condo corporations to do so.
Why This Matters?
This decision gives real substance to section 111 and may also have important implications for section 112 of the Condo Act.
Although the case dealt with a management agreement under section 111, the language in section 112 is similar. Where the Condo Act gives a condo corporation the right to terminate an agreement, that right cannot be defeated by a payment provision that preserves the economic burden of the contract. This is incredibly significant for condo corporations dealing with sweetheart agreements the developer entered into with service providers on their behalf.
Obligations in the Declaration
There is, however, an important limit.
The Court of Appeal’s decision in Lexington on the Green Inc. v. TSCC No. 1930 remains important. In Lexington, the court held that section 112 did not permit a post-turnover board to terminate an obligation arising from the corporation’s declaration. That remains an important limit on sections 111 and 112.
Not every pre-turnover obligation affecting a condo corporation is simply an “agreement” that can be terminated under the Act.
Takeaway
The takeaway is straightforward: if a condo corporation validly terminates a pre-turnover agreement under section 111, the other party cannot rely on a termination payment or liquidated damages clause to make that statutory right meaningless.
For condos in their first year after turnover, this is a good reminder to review pre-turnover agreements carefully and consider whether termination rights may be available.
