You’ve combed the city for the perfect condo unit and are poised to make an offer. You receive the status certificate—a document that outlines the history of the building, maintenance your unit has undergone and the financial solvency of the condo corporation—and spot something troubling. It turns out your would-be home’s board is currently embroiled in a lawsuit. Should you move forward with the offer or is this a huge real estate red flag?
Condos and lawsuits
As a condo is run by a corporation, lawsuits aren’t unheard of. There may be several times throughout the building’s history when a condo is either the defendant or plaintiff in a suit. Common reasons include injuries and accidents that occur on condo property, unresolved payment issues with current and past tenants, or ongoing disputes with contractors or developers employed by the board.
Owners among those who pay
While the condo board will have a cache of money set aside known as the reserve fund, in Ontario it can only be used for emergencies and major repairs—meaning owners will likely foot the bill in a suit in the form of higher monthly fees.
In an interview with Zoocasa, Toronto real estate lawyer Bob Aaron says residents can expect to pay more, even if the condo corporation wins the suit.
“If they win, their entire legal fees will not be covered by the other side—only part of them,” he says. “So the condo will still have to pay some of its own legal fees. And if they lose they’re going to have to pay all their legal fees and some of the fees of the other side as well. It’s all going to have to come from somewhere.”
It could affect your mortgage
It could be tougher for buyers to obtain the financing they need in a building with a pending lawsuit. That’s because mortgage lenders may consider potential future suit costs as part of a borrower’s debt servicing total, and question whether they’ll still be able to pay off their mortgage if their fees rise.
Existing owners may also find themselves in a tight spot when trying to sell their unit. Prospective buyers may face the same financing hurdles or shy away from the trouble altogether.
As more families are now turning to condos as an affordable real estate option rather than a house, this could be an additional cost not usually factored into their affordability.
Aaron says there are two things to keep in mind: “Number one, will a lender finance it? Number two, will a seller be able to sell with that kind of fear hanging over the head of the buyer?”
Factor legal costs into your bottom line
Should you opt to take the leap and buy a condo facing a lawsuit, it’s a good idea to have an emergency fund of your own should you need to shell out for your share of legal fees.
He says it’s vital to determine the dollar value of the risk posed by the suit and add that to the purchase price of your unit.
You can also work with a lawyer of your own to “freeze” some cash for a later date to cover looming litigation costs.
The bottom line is you should ensure the condo is still a good real estate investment for your hard-saved down payment.
“The takeaway here is that if you’re getting a good enough deal to compensate for the risk then go for it,” says Aaron. “And if you are risk averse and it doesn’t look good, then find something else.”
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Flickr: Joe Gratz