Changes to the Limitation Act – Consequences on Strata Collections Procedures

First off, a disclaimer- we are not lawyers, nor do we offer legal advice.  We usually point this out, but it’s especially critical when we write about legal statutes.  An industry colleague of ours, Veronica Franco at Clark Wilson LLP provided our staff with an in-house seminar on the new Limitation Act recently and has prepared an excellent primer on what we discuss below. You can find it here.  Our purpose in discussing this is to elaborate on some of the practical consequences facing your strata corporation and our industry as a result of this new Act.

On June 1st, 2013, a new Limitation Act came into force in British Columbia.  One of the primary aims of the new Act was to bring it in line with similar statutes across the country.

Because we’re not lawyers, we’ll steer clear from a broad commentary on the Act and focus on one important subject: the new Act’s consequences for Strata Corporations collecting arrears.

The “old” Limitation Act imposed an upward limit of 6 years on collection of debts.  6 years is a very long time in the strata world, especially because a very common mortgage term is 5 years.  We’ll get back to that.

The most typical types of debts that strata corporations deal with can be broken down into these categories:

• Strata fees;
• Special Levies;
• Interest on either of those;
• Legal fees associated with collecting the above;
• Fines (whether related to arrears or not);
• “Chargebacks” relating to damage caused by one unit to common property or another unit – sometimes this is the insurance deductible, sometimes it is an amount less than the deductible;
• NSF charges;
• Various other charges for user fees and the like

Those are approximately in order of how common they would be for a typical strata corporation.  If you are a council member, you will likely recognize each of them as having been the subject of some discussion at a meeting in the past.

The new Act’s limit of 2 years on collecting debts means that, essentially, any debt accrued after June 1st, 2013 must be collected within 2 years.  If it is not, then the debt expires and the owner can rightfully demand it be removed from their account.

If this sounds a bit scary, we think so too.

Like any legislation, there are a number of caveats and nuances.  For instance, if the owner acknowledges the debt (this can be in writing, or by paying a portion of it) anytime within that 2 year period, then the debt clock resets and goes back to zero.  But, savvy owners could potentially be wise to the changes in legislation to the extent that they stay quiet and let a debt expire.

One of the aims of the new Act is to unclog the legal system- a fair bit of our system’s resources are allocated to the collection of debts.  It is thought that by lowering the expiration period of debts, there would be less litigation.  In the strata world, the opposite effect might be the case.  In the past, strata corporations would often let accounts receivable sit on an owners account indefinitely or at least until the amount of arrears warranted the legal expenses required to collect.  This meant very little litigation over small to medium amounts of arrears.  It was usually only very large arrears that actually got into the court system.

For example, if an owners monthly strata fee is $200 and they don’t pay for a period of 1 year, they’d owe $2,400.  A typical rule of thumb lawyers would give our clients is that the cost of litigating strata fee arrears and pursuing foreclosure against an owner could run anywhere from $5,000-10,000.  So, it really takes a few years of arrears for that to be worthwhile in that sort of scenario.

Now, with the debt expiring after 2 years, strata councils will be faced with a new  and unsavoury dilemma: let the arrears expire and write them off, or litigate/foreclose even though the cost of doing so will likely exceed the funds you receive at the end of the day.

Special levies are often larger amounts, which might prompt quicker action.  Likewise for insurance deductibles.  Of course, very rarely were any of these litigated on, and that’s because there were two primary means of collection which cost the strata nothing:

• Owners would pay voluntarily, or through their insurers or;
• Arrears would simply stay on an owners account indefinitely until they sell or remortgage.

Which brings us back to the earlier point- over a 6 year period, there is a strong likelihood that an owner would request a Form “F” (Certificate demonstrating full payment of their account) to either sell their suite or arrange a new mortgage.  Strata corporations would get their money when an owner requests this, because they’d have no choice but to pay up in order to receive the Form.  This is a passive collection method, but one which was very common and now mostly unavailable unless an owner happens to be selling/re-mortgaging in the 2 years subsequent to the debt being incurred.  Obviously, this is much less likely than over a 6 year period.

Further compounding these difficulties is that lenders are becoming increasingly savvy of this matter as a result of the change in legislation.  We are hearing anecdotal evidence that lenders are quite pleased with this new wrinkle, because they can foreclose against their mortgage holders in arrears without having to worry about paying more than 2 years of arrears to  the respective Strata Corporation.

In Part 2 of this article, we’ll elaborate on some of the points raised here and discuss some of the things your strata will need to consider moving forward.