Managing a Condominium-Hotel Project

Some considerations for managers from a legal perspective


Introduction

Condominium-hotel projects are a new and exciting aspect of land development in Ontario.  Although many of the usual issues and considerations that arise in the management of typical condominium corporations apply in the “Condotel” context, there are many unique considerations applicable to this emerging trend. This article will provide managers of Condotels with a summary of some legal issues to consider with respect to the management of a Condotel, including conflicts of interest, governing documents and agreements, and the impact of securities law on Condotel rental pool arrangements.

By way of background, Condotels are a relatively recent phenomenon in Ontario.  Over the last decade, several Condotels have been developed in Ontario, and in particular, the City of Toronto.  Examples include the Trump International Hotel and Tower, The Ritz-Carlton, Toronto/The Residences at the Ritz-Carlton, Shangri-La Hotel, and One King West Hotel & Residence, among others.  Cottage country is also seeing an influx of Condotel projects, such as those constructed or to be constructed in Wasaga Beach and Muskoka.

A Potential Conflict of Interest?

Managing both the Hotel Component and the Condominium Corporation

The Condotel projects of which the author is familiar have a single entity responsible for the management of  the hotel and the condominium corporation. This is a practical reality given the high-end nature of the Condotel projects that have been constructed in downtown Toronto.  Owners of units in these projects typically want the benefit of being associated with an upscale management company, one which is usually related to the owner of the hotel.  One of the challenges presented in this scenario is that managers taking on the dual role of representing the condominium corporation and the hotel component must be careful to avoid potential liability in situations where the interests of the hotel and condominium corporation conflict.  Managers must ultimately ensure they act in the best interests of both the hotel and the condominium corporation.

Understand Your Governing Documents and Agreements

Managers need to have a comprehensive understanding of their condominium corporation’s governing documents.  This requirement is even more critical for managers of Condotel projects given the fact that the rights and responsibilities of the hotel, the condominium corporation and the food and beverage component (if applicable) will be discussed in excruciating detail in the condominium corporation’s governing documents and the various agreements entered into by the respective parties.

In particular, a manager needs to review the management agreement in detail and pay attention to the respective rights and responsibilities of the condominium corporation, the hotel, as well as the manager and ensure that these rights and responsibilities are respected by all parties.  The management agreement will also likely detail the hotel services and amenities to which owners of condominium units will have access at no additional expense, and those services and amenities for which unit owners will have to pay.  Unfortunately, unit owners often do not read their governing documents or seek the advice of a condominium lawyer prior to purchasing their condominium unit.  The manager will play a critical role in educating owners about access to and the costs associated with using the hotel’s services and amenities.  Unit owners may not be happy to hear that they have to pay extra to use, for example, the hotel spa and sauna.  The key is to make unit owners aware as early as possible of the rules of the game with respect to the use and enjoyment of the hotel services and facilities and to promptly update them with any changes.

Given the fact that the hotel component and the condominium corporation in the Condotel context share the same building, cost-sharing agreements are a necessity.  An issue to be aware of is that positive obligations contained in cost-sharing agreements are not necessarily enforceable against successors in title.  For example, if ownership of the hotel component were to change and the new owner does not sign an assumption agreement agreeing to be bound by the terms and conditions contained in the cost-sharing agreement, the successor in title may be able to avoid the positive obligations contained in that agreement by relying on the case of Amberwood Investments Ltd. v. Durham Condominium Corp. No. 123, 2002 CarswellOnt 850, 211 D.L.R. (4th) 1, a decision of the Ontario Court of Appeal.  There is little a manager can do to cause successors in title to enter into an assumption agreement.  However, if a change of  control is being contemplated by the hotel, a manager can assist a condominium corporation’s board by bringing the case of Amberwood to the board’s attention.  Armed with knowledge of the implications of the Amberwood decision, management can advise the board to seek appropriate legal advice and impress upon the board the importance of the new owner entering into an assumption agreement with the condominium corporation prior to completion of the change of control transaction.  Unfortunately, a change of control often takes place without an assumption agreement being executed by a new owner, particularly in the context of mixed-use condominium and commercial projects, leading to potentially costly litigation to settle the respective rights and responsibilities of the parties vis-à-vis cost-sharing arrangements.

Rental Pools

A rental pool is an arrangement whereby participating owners of condominium units agree to have their units available for rental as determined by an agreement, usually called a “Rental Pool Agreement”, and then share in the profits and losses of all the rental units in the pool in accordance with the agreement. 

Management companies that will act as the rental pool agent under a Rental Pool Agreement need to ensure that the rental pool program complies with the provisions of the Securities Act, R.S.O. 1990 (the “Securities Act”).  According to section 25 of the Securities Act, a person or company shall not engage in or hold himself, herself or itself out as engaging in the business of trading securities unless the person or company is registered in accordance with Ontario securities law as a dealer.  Further, section 53 of the Securities Act requires every person or company trading in securities to file a preliminary prospectus and a prospectus with the Ontario Securities Commission (the “OSC”).  

The question management companies need to consider is whether the rental pool arrangement would constitute trading in securities.  According to certain OSC rulings, it would appear that rental pool arrangements do in fact constitute trading in securities, although a representative with the OSC advised the author that every rental pool arrangement must be analyzed on a case-by-case basis to determine whether the Securities Act applies.  If a rental pool program is found to constitute trading in securities, then an exemption from the requirements set out in sections 25 and 53 of the Securities Act must be obtained from the OSC under section 74 of the Securities Act.  Such an exemption order has been successfully obtained by developers of Condotel projects, including by 1 King West Inc. and by Ken Fowler Enterprises Limited. The responsibility for obtaining an exemption order generally lies with the developer of the Condotel project.  However, management companies should confirm whether the Condotel project to which they will be assigned has in fact obtained an exemption under section 74 of the Securities Act from the requirements to register as a dealer and to issue and file prospectuses as set out in sections 25 and 53 of the Securities Act.

Conclusion

Condotel projects are becoming more and more common in the condominium landscape in Ontario.  There will likely be many opportunities for management companies to enter into this emerging niche area of the market and many challenges for them to address.  In order to succeed in managing a Condotel, managers need to have a solid understanding of the condominium corporation’s governing documents and agreements, particularly management agreements and cost-sharing agreements.  Managers also need to be able to act impartially with a view to promoting the best interests of both the hotel component and the condominium corporation. Finally, management companies should ensure that rental pool arrangements comply with the Securities Act and seek appropriate legal advice before agreeing to act as rental pool agents in Condotel projects.

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About Managing a Condominium-Hotel Project

Condominium-hotel projects are a new and exciting aspect of land development in Ontario. Although many of the usual issues and considerations that arise in the management of typical condominium corporations apply in the “Condotel” context, there are many unique considerations applicable to this emerging trend. This article will provide managers of Condotels with a summary of some legal issues to consider with respect to the management of a Condotel, including conflicts of interest, governing documents and agreements, and the impact of securities law on Condotel rental pool arrangements.

Posted by: Founding Partner John Moher, B.A., LL.B,