Turnover or roll over? Property developer legal avoidance and influence on condominium governance in New York City and Toronto

Randy K. Lippert and Stefan Treffers

Introduction

Sophie¹ and her partner moved into then newly built unit in a Toronto high-rise condominium conveniently located on a major subway line. Following formal transition of control of the building² from the developer to the new owners, she was elected as a new board director to provide her professional experience to oversee financial affairs and broader well-being of this new condo community. This transition of power, from developer to owners, or what is commonly referred to in condo statutes as ‘turnover’, has been long perceived by legislators as a prerequisite of sustainable condo conununities (see Weiss and Watts 1989,100-101). hi fact, for some time in the majority of jurisdictions across North America, developers have been required by statute to turn over control of a new condo building to a board of new owners once most units are sold. The spirit of this stipulation is that while the developer has arranged for the construction or conversion of the building, new owners should control the destiny of then- property and conununity. It is expected by statute that, folio whig turnover, the new owners’ board will adopt major governance responsibilities including procurement of service providers, maintenance of common elements and infrastructure (roofs, boilers, pools, lobbies, and elevators), prudent board spending, and the creation and enforcement of rales to govern residents and daily living (see also McKenzie 1994,128). As such, condo boards are entrusted with ensuring the physical and financial integrity of condo buildings, while representing and governing the broader collective interests of thefr condo community. Sophie’s participation in condo governance is a foundational element of this property form. However, after the developer nominally turned over control of the condo building and its finances, it became clear that owners wielded far less power and influence than promised. For instance, new board members discovered the condo building was locked into exorbitant, multiyear contracts signed by the developer with service providers. Moreover, the developer also still owned several units and an attached commercial space, thus holding considerable voting power in meetings about the condo’s future. The new board members found themselves devoid of easy remedies for this troubling situation and, to their dismay, they noticed other new board members were inexplicably forgiving of serious and costly developer-caused defects for which owners

(and/or their renters as we explain below) were now left on the hook. To complicate matters further, these challenges rendered efforts to foster conununity in the new building more difficult since the developer had ‘stacked’ the new board with directors largely supportive of its interests. The combination of strategies used to avoid the intent of legal requirements for ‘turnover’ and to maintain influence in condo affairs amounts to what we refer to here as ‘legal avoidance’. This common scenario from our research reflects developer influence via legal avoidance as a common circumstance that condo boards and conununities face upon statutory formation.

The introduction of condo statutes in the 1960s in North America (Hanis 2011) created a new property fonn imiquely combining individual ownership of units w'ith common ownership and control of the infrastructure spaces of a building. Since then the number of condos, whether luxury, modest, or in between, has grown markedly in many cities globally. For example, condos now constitute about 7.5 percent of all housing in New' York and continue to grow steadily relative to other tenure types (US Census Bureau 2019). In Toronto, condos provide more than one-fifth of all housing (Statistics Canada 2017). Democratic control of the finances, rules, and communal aspects of condo living are vital to tens of millions of condo residents worldwide. However, this control and the very notions of ownership and property are commonly thr eatened by outside for-profit corporation influence via legal avoidance. Such influence likely decreases financial stability of a condo corporation, since owners face higher costs and hidden liabilities that reduce the long-term capacity to fund repairs and maintenance in the building and reduce affordability. This may also indirectly affect renters w’ho have increasingly taken occupancy in condos; higher maintenance costs likely lead to higher rents.

Developers have profited handsomely from condo growth in North America³ and actively influenced the creation of the fir st condo statutes (McKenzie 1994, 95). In their efforts to maximize profits, developers commonly draw’ the ire of new' condo unit owners w'ho encounter poor building standards, deceptive marketing tactics, and outright fraud (Lippert, Treffers, and Bud 2017). Some condo developers seek quick returns through short-term ventures, but others seek to maintain long-term influence in condo complexes after completion or conversion as a platform to launch the next development phase; to prevent construction defects from being exposed; or to achieve other profit-oriented amis. While a framework for the transition of control from developer to owners is set out in condo statutes, a key question remains: how do condo developers avoid effective ‘turnover’ and continue to influence the governance of condo buildings' affairs, including owner fees and financial spending, board elections, and by-law's and myriad rules affecting a condo community and its residents in order to pursue profit?

In this chapter we deploy the concept of ‘legal avoidance’ (McBamet 1988) to consider the strategies that condo developers employ to undermine the efficacy of the turnover provisions in condo legislation. Legal avoidance enables developers to circumvent the spirit and letter of regulations in ways that are not obviously illegal (McBamet 1988). In existing scholarship, legal avoidance is most often associated with tax laws, although it has been shown to have broader purchase regarding legal regulation of renting (McBamet 2004), employment law (Alexander 2016), and other practices of organizations. Legal avoidance is sometimes described as ‘creative compliance’ (see McBamet 2004) because it entails innovation. But this ‘creativity’ and innovation means circumventing rules and regulations within statutes intended to protect consumers, workers, renters, and the public more broadly. Rather than assume legal avoidance's inevitable presence, this chapter heeds a call by McBamet (1988,121) for a “much more detailed analysis of law and its avoidances across a range of areas and styles of jurisdiction.” We show how legal avoidance is relevant to condo law and other legal regulation of condo developer practices.

We explore how condo developers engage in legal avoidance to create or maintain influence on condo governance and spaces long after a condo building has been constructed and corporation control has been transferred to owners in a turnover process required by condo statutes. We define condo governance broadly as managing and ordering condo finances, residents, and spaces, which entails multiple strategies, forms of knowledge, agents, and rules. Developerinfluence through legal avoidance in condo governance has far-reaching implications. First, developer influence shows this concept has much purchase in the realm of the legal governance of property and ownership and housing more broadly. The efforts of developers and their lawyers to limit the effective transfer of control means that condo governance is not nearly as democratic as widely assumed in condo statutes and government studies (e.g., Ontario 1977; Canada’s Public Policy Forum 2013) and that boards have far less authority and power than is often believed (Lippert 2019). Left unchallenged, developer influence via legal avoidance can undermine the condo as a collective ownership form, and we suggest this diminishes the prospects for democracy, conununity, and affordability. Second, it also begins to question notions of ownership and property related to but beyond the issue of collective versus individual ownership in that it subverts owners’ right to do with their individual and collective property as they wish, free from interference of private actors from beyond the community. Thus, this chapter examines how developer control of condo buildings ‘rolls over’, in the sense of lingering after this legally mandated transfer point, and in the sense of surmounting the interests of residents. It shows how developers use, manipulate, and avoid law and regulation to exert influence over the governance of condo spaces and residents.

This chapter unfolds in four parts. We first review literature about legal avoidance, as well as literature about condo development and its relationship with condo governance. Second, we discuss the methods and procedures used to study the influence of condo developers on condo governance through legal avoidance. Thud, drawing on analysis of extensive qualitative data from New York State and Ontario, we describe the developer turnover requirement whereby owners ostensibly take control of condo corporation functions. We then explore accounts of developer influence to discern five types which stem from strategies of legal avoidance. Finally, we reflect on the implications of our analysis for understanding legal avoidance by developers and for future socio-legal research.