02/06/2020 – Jurisdiction British Columbia
Part 71 published on 01/09/2020
Court cancels restrictive covenant requiring owner to rent hotel unit through the strata hotel’s central system
This case deals with a “condo hotel” (a hotel strata corporation) in BC. It is part of a resort community. The owners’ rights to rent their hotel units were limited by a restrictive covenant registered on title.
The key facts (recited in the decision) are as follows:
Under the condominium hotel model, strata titled residential units are individually owned, and the entire strata complex is run as a hotel, with centralized services including housekeeping, laundry facilities, and other building amenities. A key part of the condominium hotel model as originally conceived was a centralized, uniform rental management system. Individual owners wanting to rent their units to the public must do so through the rental pool system established and operated by the owner-developer. To this end, a restrictive covenant was registered against title to each residential unit, preventing rentals except through the rental pool system.
…
In addressing the importance of the condominium model, the All Season Resort Guidelines chapter on “Mountain Resorts” explains that determining the appropriate balance of conventional private ownership units (“cold beds”) and units available for the public (“warm beds”) can significantly impact on a resort’s position in the marketplace and the critical mass of accommodations needed for the resort to succeed. In this regard, a resort developer “can ensure ‘warm beds’ through title restrictions and ownership mechanisms”. Restrictive covenants “may be registered on title of the property with either voluntary or mandatory obligations that require that the units be placed in the rental pool”. Such rental pool covenants can be “fundamental” to a successful destination resort.
One of the owners, Kent, wasn’t happy with the management provided by the manager hired to manage the hotel and wanted to rent outside the pooling arrangement. That owner petitioned for an order canceling the restrictive covenant.
The Court agreed and declared the restrictive covenant void on the grounds that the covenant is “impermissibly vague”.
The Court recognized the resulting threat to the entire scheme of the hotel. The Court said:
With regard to the broader implications, again I find some merit in the respondent’s concern about the consequences of a decision cancelling the restrictive covenant registered against the title to unit 33. A ruling to that effect would call into question the enforceability of similar covenants on the other 301 condominium hotel units at Panorama Mountain Resort. This in turn could pose a threat to the continued viability of the rental pool arrangement. If PMVI is unable to retain a critical mass in its rental pool, this could undermine the ability to deliver the kind of standardized, high quality, properly funded services expected from a conventional condominium hotel.
However, the law requires that restrictive covenants be sufficiently precise for present and future owners to be able to ascertain the restrictions on the use of their property, and I have found based on binding authority that the covenant in issue here is deficient in that regard. And of course, the outcome in this case may not be dispositive insofar as the question of remedy is concerned, since another party in another case may argue for modification of the covenant rather than removal. The respondent did not plead or pursue that form of remedy before me. To the extent that there are in fact broader implications, PMVI may have to find ways to adapt its business model to operate without reliance on a restrictive covenant determined by the courts to be impermissibly uncertain and thus unenforceable.
The Court went on to say that the manager (PMVI) may have a right to seek compensation under the terms of Section 35 (3) of BC’s Property Law Act (which, among other things, allows a party to seek compensation from an applicant who obtains an order canceling a restrictive covenant, if the party “suffers damage” as a result).