Law Times

lAw Times • April 23, 2012 T $40,000 parrot a red herring for condo law The Dirt Bazilinsky decision COMMENT ium Corp. No. 744 v. Bazilinsky did involve a unit owner' here has been much ado about the recent condo matter involving an expensive parrot. While the case of Metropolitan Toronto Condomin- pet parrot in violation of the condominium's s surreptitious maintenance of a do with parrots, at least in the sense that the principles dealt with in the case could have applied equally to any condominium board' no-pet rules, the bird itself was no more than a red herring. Th e Bazilinsky case really has nothing to eff orts to enforce compliance with any of the provisions of its declaration, bylaws, rules or other similar agreements. In this particular case, the condominium' s and the unit owner violated them by keeping a parrot, but the case could easily have been about balcony barbecues, outdoor storage, il- legal parking or any of the plethora of things that can fall under by a condominium' haps profoundly, is the specifi c cost-recov- ery powers given to condominium corpora- tions under s. 134(5) of the Condominium Act. It provides an extraordinary remedy to condominium corporations: "If a corpora- tion obtains an award of damages or costs in an order made against an owner or occupier of a unit, the damages or costs, together with any additional actual costs to the corpora- tion in obtaining the order, shall be added to the common expenses for the unit and the corporation may specify a time for payment by the owner of the unit." It follows naturally that if the condomin- laration, rules, bylaws, and agreements. What the Bazilinsky case does aff ect, per- s dec- ium corporation adds the damages as well as the additional actual costs to the common expenses and these amounts go unpaid, it then has a lien against the unit under s. 85 of the Condominium Act. s rules prohibited pets protect condominium corpora- tions from the high costs of liti- gating against the few wayward unit owners who chronically or blatantly refuse to abide by the act and the terms of their dec- laration, bylaws, rules, and agree- ments. Introduced in 2001 as part of sweeping reforms to the Condominium Act at the time, s. 134(5) was intended to ensure that condominium corporations would be able to add their additional actual costs to the bill payable and then secure a lien if the unit owner doesn't pay. Typically in litigation, even if a party is Th e purpose of s. 134(5) is to to eviscerate the operative provisions of s. 134(5). In Bazilinsky, the condominium corporation incurred total actual costs of just over $40,000 to obtain a court order against the unit owner forcing the removal of the parrot. However, a judge in Ontario' courts have grappled with and pared back the potentially extraordinary scope of s. 134(5). In the 2005 decision in Metropol- itan Toronto Condominium Corp. No. 1385 Superior Court reassessed the reasonable costs in the litigation to be about $6,500. Th e Bazilinsky case isn't the fi rst time the s victorious, it only gets to recover a relative- ly modest portion of the actual legal costs incurred. Rather than suff ering the indig- nity and costs of actually winning a lawsuit against a non-compliant unit owner and then fi nding itself still fi nancially preju- diced by having to pay for the legal fees and other litigation costs, s. 134(5) allows condominium corporations to recoup all of their actual costs incurred in dutifully enforcing their declaration, bylaws, rules, and agreements. Th e Bazilinsky case seems, at fi rst blush, Jeffrey Lem minium Corp. No. 1633 v. Baghai Develop- ments Ltd. and Rabba Fine Foods Inc., the court found a unit owner liable for having breached the corporation' In a 2011 case, Toronto Standard Condo- laws, and rules by taking up sidewalk space intended to be open common elements. Th e Ontario Superior Court considered s. 134(5) and concluded the condominium corpora- tion was entitled to all of its additional actual costs required to obtain the court order but then went on to say the provision wouldn't then allow it to go on a legal rampage and incur wildly outrageous legal bills. As a result, the court exercised its discre- s declaration, by- tion to drastically reduce the legal fees the condominium corporation could charge back to the unit as a common expense in a refl ection of what it deemed to be the dis- proportionate and unreasonable legal fees incurred as part of a scorched-earth litiga- tion strategy. Th e Superior Court reached a similar conclusion in the 2010 case of Peel Condominium Corp. No. 452 v. Jaworowski. It' Bazilinsky case came to her conclusion. On the one hand, she cited the rule in Skyline implying that the lion' s not really clear how the judge in the al actual costs did in fact relate to enforce- ment eff orts following the court order. But s share of the addition- v. Skyline Executive Properties Inc., the Ontario Court of Ap- peal considered s. 134(5) and concluded that the additional costs a corporation could add to common expenses for the unit were limited to those up to and including the actual court order. At the same time, it expressly excluded additional costs incurred by the condo- minium corporation in then trying to enforce the order. it's hard to reconcile this with the facts in the case. On the other hand, while she also con- cluded that the value of the work performed on a solicitor and client basis "is no more than $6,500," this, too, is hard to reconcile with the facts. Th ere' Bazilinsky of a deliberate scorched-earth liti- gation strategy or any of the other signs of overly aggressive actions that the judges in Rabba and Jaworowski carefully laid out as the grounds for their decisions. In the end, neither Bazilinsky nor Rabba is likely to be as disastrous as some condo- minium managers and boards might think. Th ese cases don't wholly eviscerate s. 134(5) and replace it with a judge' what might be fair under the circumstances. In fact, both of these cases actually affi rm, at least in principle, that in addition to what- ever the court may otherwise award by way of damages or costs, the condominium cor- poration can still charge and lien for legit- imate additional actual costs as long as it in- curred them in order to obtain a compliance order against the off ending unit owner and not in enforcing it. Furthermore, there are many other s discretion as to cases where condominium corporations are indeed successful in remaining fi nan- cially whole because of s. 134(5) but, of course, these successful applications rarely make the news. Th ese two new cases do, however, warn condominium managers and their boards that they can't undertake such litigation so recklessly and aggres- sively as to prompt the courts to deem their tactics as part of a scorched-earth strategy giving rise to unreasonable and dispropor- tionate legal bills. LT Jeff rey W. Lem is a partner in the real estate group at Miller Th omson LLP. His e-mail ad- dress is jlem@millerthomson.com. Tim Hortons' Always Fresh victory sets standard for franchise systems u SPEAKER'S CORNER BY STEVEN GOLDMAN For Law Times n a recent ruling dismissing a $2-billion franchise and competition class action against Tim Hortons, Superior Court Justice George Strathy provided a careful legal analysis on the pricing of products within franchise systems, the franchisor's duty of good faith, fair dealing under Ontario's Arthur Wishart Act, and the com- I petitiveness of vertical pricing and distribution arrange- ments. The decision should help raise the standards of how good franchise systems operate. The court viewed Tim Hortons as a profitable, fair, and professionally run franchise organization that goes to great lengths to remain competitive while introducing new menu items "only after careful consideration of the justification for a particular item, the cost of the ingredi- ents, and the price at which it is to be sold. two significant changes to the franchise system: first, Tim Hortons' conversion to the so-called par method, known as Always Fresh, for baking doughnuts and other goods, and secondly, the introduction of soups, sandwiches, and other lunch menu items. The plaintiffs alleged Always Fresh increased their costs to produce baked goods and cut into their profit margins. They also claimed Tim Hortons required franchisees to sell lunch menu items at a loss or at break-even prices while profiting through rent, royalties, and advertising payments based on their sales. It is a challenge for franchise systems to have such sig- The plaintiffs' claims against Tim Hortons related to " nificant margins and brand recognition that allow both the franchisor and franchisee to earn reasonably healthy profits. Tim Hortons is probably one of the few systems in Canada to meet this high level of success. It' waiting list of more than 3,000 candidates hoping to get in. Many franchise systems maintain an us versus them s no wonder there is a mentality with little communication between franchisor and franchisees. Franchisors often ignore their franchisees and sometimes treat them poorly. There are 1,200 to 1,500 franchise systems in Canada. The vast majority of them aren't household names and have less than than 10 units. Abuse suffered by unsophisticated franchisees led to The majority vote rules. In addition to those factors, the plaintiffs' Tim $100,000 to $325,000 per year. Ultimately, Strathy found the Always Fresh conver- Hortons stores were profitable. In fact, Strathy said these franchisees "earned very significant income from their stores" with net income ranging from the creation of the Arthur Wishart Act in Ontario. Most franchisees I have represented have either lost or are in the process of losing money or are making very little of it in light of the size of their investment and the long hours of work. Strathy' effected system change was refreshing. I wondered why these plaintiffs were proceeding with a $2-billion class action at all. Clearly, a large number of Tim Hortons fran- chisees opposed the plaintiffs' lawsuit and many actively supported Tim Hortons in defending this class action. Tim Hortons actively consulted with its franchisees s written description of how Tim Hortons sion and the lunch menu were reasonable commercial decisions Tim Hortons was entitled to make. There was no evidence that these decisions were "motivated by improper or extraneous considerations," as the plain- tiffs had claimed. In fact, the evidence established that, in general, "the plaintiffs and Tim Hortons franchisees make a reasonable return on their investments." In short, the court dismissed all of the plaintiffs' through an advisory board composed of 17 franchisees elected their colleagues across Canada and the United States. This board meets regularly with senior manage- ment of Tim Hortons attending. They keep minutes and make them available to all. At the meetings, Tim Hortons provides information to advisory board members about the state of the business and new products. At the same time, franchisee members raise issues of concern to them. In addition, Tim Hortons meets with all franchisees at spring and fall regional meetings and occasionally at a larger national convention. These meetings allow for discussions on topics of particular importance, including new products, methods, and techniques, and questions and complaints from franchisees. Franchisees also have a say in product pricing. claims, including the allegation that Tim Hortons had breached an implied term of the franchise agreements that it would supply ingredients to franchisees at com- mercially reasonable prices by not selling them at the cost Tim Hortons had paid. It also said Tim Hortons had the right to require its franchisees to sell all menu items, not just the most profitable ones, and that if they lost money on the sale of certain products, they made up for the loss through complementary offerings like coffee. Strathy' mechanisms for consulting with franchisees on products, methods, and other issues and explains how it seeks their input on menu and pricing changes. This decision should help raise the standard of conduct among franchisors and show franchisees how an effective franchise system operates so they may encourage their own franchisor to implement similar mechanisms. s decision provides insight into Tim Hortons' LT Advisory board members discuss the proposed price of new product offerings and the franchisees in each region vote on whether to approve the proposed increase. www.lawtimesnews.com Steven Goldman of Goldman Hine LLP acts as a media- tor and arbitrator in franchise and other commercial disputes and has planned and implemented commercial reorganiza- tions and restructurings. He' of Speedy Auto Service and Minute Muffler in Canada. s also former president and CEO s no real discussion in PAGE 7

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