Mortgage Broker

46 | fall 2016 mbabc.ca MORTGAGEBROKER stratabylaws Recent guidance from the Court e recent B.C. Court of Appeal decision in Mathews v. e Owners, Strata Plan VR90, 2016 BCCA 345, acts as a reminder to lenders that they should review strata bylaws before committing to accept a strata unit as security for a mortgage. e case also serves as a caution that a lender should not rely on the borrower being able to rent out the unit in the face of a strata corporation bylaw that prohibits such a rental. Further, a lender, in the face of such a bylaw, should not rely on being able to rent out the unit in the event of a foreclosure. While the case involves the interpretation of a specific section of B.C.'s Strata Property Act (SPA), other provinces have similar legislation applying to strata properties. e implicit concerns the case provides for lenders are relevant nationwide. What happened in the Mathews case? In the Mathews case, the strata property consisted of 158 residential units. e strata corporation had a bylaw in place that allowed only one of the strata units to be rented or leased at any given time. e owners of one of the units asked the strata council, on grounds of hardship, for permission to rent out their unit. SPA, s.144 allows for an exemption, on the grounds that the bylaw causes hardship to the owner, from a bylaw that prohibits or limits rentals. e strata corporation is not allowed to unreasonably refuse to grant an exemption. e owners of the unit claimed that owners of other units in the building were unfairly blaming them for damage caused by a fire; the fire had caused them and other owners to vacate the building for an extended time. e owners of the unit said that returning to the building in the face of such ongoing animosity would not be in their best interests. ey needed to rent their unit to be able to afford rental accommodation elsewhere. e strata corporation denied the hardship-based application. No application was ever made by the owners to be the one permitted rental unit. ere was no evidence in court as to whether there was already, at the relevant time, a rented unit, but the lack of application and the fact that the issue was not raised would suggest there already was one. e owners of the unit responded to the denial of the hardship exemption by applying to the court for an order that the rental restriction bylaw was itself invalid. e claim was that the bylaw did not comply with the requirements of SPA and so was invalid. Court decision: rental restriction is valid e SPA allows a strata corporation to adopt a bylaw limiting the number of residential strata lots that may be rented at any time. Section 141(3) of the SPA provides that such a bylaw "must set out the procedure to be followed by the strata corporation in administering the limit." e Court had to decide whether this meant a strata corporation bylaw limiting rentals was required to include both: n the process to be followed when a strata lot owner requests permission to rent, and n how the strata corporation will decide whether a strata lot owner will be given permission to rent when the rent restriction limit is not reached. e strata corporation had adopted a bylaw that limited the total number of strata units that could be leased or rented at any time to one. e bylaw set out the process governing applications by owners for permission to rent strata lots; it did not specify the criteria the strata council would apply in determining whether to grant an owner permission to rent. e Court said that a proper interpretation of SPA, s.141(3) leads to the requirement that a rent-restriction bylaw must set out the procedure to be followed in determining an owner's application for permission to rent. It also said, however, there is no requirement that the bylaw must also set out the criteria by which it will make its decision on whether to allow the rental. e Court found the subject bylaw to be valid and, in effect, upheld the restriction for the owners to not be permitted to rent out their unit. Takeaways Before accepting a strata unit as security for a loan, a lender should be satisfied with the bylaws. is can mean the lender holding off making any loan commitment until a review of the bylaws is completed or making any loan commitment subject to the satisfactory outcome of a review. If the borrower's ability to generate rental income from the unit is a factor in the lending decision, the lender should ensure that the borrower will be permitted to rent the unit out. If the lender needs to ensure that the unit can be rented out by the lender in the event of foreclosure proceeds, the lender should ensure the unit can be rented out. Beyond these concerns, the more restricted is the use of property, the less marketable (that is, the less valuable) is the property overall. e lender should ensure any limitations as to rentals are taken into consideration in any valuation of the property. Before accepting a strata unit as security for a loan, a lender should be satisfied with the bylaws

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