Appellant’s conduct signalled agreement to pre-incorporation contract, SCC finds

Owners of strata, or condominium, units in British Columbia are bound to a parking-space agreement that existed before their corporation was formed, as their behaviour showed their intent to continue with the original agreement, the Supreme Court ruled today in an 8/1 decision.

In Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp., the Supreme Court took “the time to restate the principles applicable to contract formation, in general, as being objective rather than subjective,” says Kenneth McEwan of McEwan Partners in Vancouver, who represented the successful respondent in the case.

“It doesn’t matter what the parties have in their head; it’s how they behave.”

At issue was whether a group of condominium apartment, or “strata,” owners in B.C. were bound by parking facility agreements that developers had entered into before their strata (condominium) corporation was incorporated. The strata owners claimed that they were not.

Developers of Crystal Square -- a mixed-use retail complex, office tower, residential tower and hotel in Burnaby, B.C. -- entered into an Air Space Parcel (ASP) Agreement with the City of Burnaby in March 1999 that established access to parking for each “air space parcel” (e.g., floors in a tower), as well as how much each “parcel” would pay for such access.

A strata corporation (“Strata Co.”) comprising 64 strata lots in “Air Space Parcel 2” came into existence in May 1999, but the owners never signed an assumption agreement adopting the terms of the ASP Agreement, as required by section 16.3 of the agreement.

In June 2002, the group of Crystal Square developers sold the ASPs to Crystal Square Parking Corporation (or CSPC, one of the developers), effectively assigning the agreements to them, and between 2002 and 2012, the strata corporation’s members parked in the parking facility and paid parking fees to CSPC at the rate specified in the ASP agreement, before a dispute arose between CSPC and Strata Co. over capital reserve payments, which Strata refused to make, continuing to pay only base rent and operating costs.

Initially, “Strata Co. paid in accordance with what had been registered on title,” says McEwan. “What didn't happen is a separate set of assumption agreements.” But the British Columbia Court of Appeal – which overturned the trial judge’s ruling in favour of the appellant -- and the Supreme Court of Canada, which upheld the appellate court’s decision, “effectively say ‘yes, but by your conduct, you agreed to all of that.’”

Strata Co. held they couldn’t be bound by the initial contract, or ASP, as the corporation wasn’t in existence at the time it was created and so could not have a party to it.

“I appreciate that the members of a strata corporation may come and go, and that successive purchasers of strata lots will be bound by covenants arising from agreements to which they, as individual strata lot owners, were not parties,” Justice Suzanne Côté  wrote for the majority in finding for the respondent.

“Thus, enforcing a post-incorporation contract may appear, from the perspective of the members of the strata corporation, to operate very similarly to an exception to the general rule that positive covenants do not run with the land,” meaning that positive covenants do not bind subsequent purchasers of that land.

“Rather than being a flaw in the legal framework, however, this appears to be a feature of the SPA [B.C.’s Strata Property Act], which gives a strata corporation the power and capacity of a natural person and specifically provides that the strata corporation itself may enter into contracts.”

The Strata Property Act does not oust the common law principles relating to contract formation, the court held. Contract formation comprises four central elements: an offer, acceptance, consideration, and intention. The conduct, or behaviour, of the parties may indicate their acceptance and intentions.

The majority also held that the B.C. Court of Appeal was correct to find that Strata Co. manifested an intention, “by way of objective conduct,” to be bound by a post‑incorporation contract with CSPC after CSPC had purchased the parking facility from the developer, through making valid parking passes available to Strata Co.’s members in a quantity corresponding to their share of parking spaces under the ASP Agreement.

In today’s decision the high court clarified the law in relation to post-incorporation contracts, says McEwan. “In terms of the formation of contracts, generally, and in relation to pre-incorporation contracts, [the court] said, ‘it's an objective test’” based on the parties’ observed conduct. In this case, the strata owners had for years used and paid for their parking spaces under the original agreement.

“What made this case come to life” was the underlying property issue of positive covenants (such as an obligation to pay fees for shared facilities), not running with the land, meaning they cannot bind subsequent owners. This is known as the Austerberry rule. But the B.C. Court of Appeal found that a contract established before a party is incorporated can be the basis for a new contract binding that party post-incorporation, if the incorporated party shows an intention to be bound. Here, the appellants had accepted the benefits of the agreement for years.

“The question was whether the strata corporation, as a vehicle for the owners, by its conduct agreed [to the ASP], because there was never a formal agreement entered into,” says McEwan. “And the Supreme Court decided that they did, by their conduct.”

Justice Malcolm Rowe dissented in part, agreeing generally with the analysis and legal framework of the majority, but finding that the majority had inappropriately come to different conclusions and findings of fact than those that had been found by the courts below. Whether Strata Co. had manifested an objective intent to be bound by terms similar or equivalent to those of the first contract is a finding of fact that should be made by the trial judge, and not by the Supreme Court of Canada, he found.

The appeal before the Supreme Court in this case was the first that the court heard, on June 9,  remotely via Zoom, says McEwan, who appeared before the court from his boardroom in Vancouver.

“It’s a good judgement and a nice win, and really reinforces the objective theory of contract, which is central to commercial practice,” he says.