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No Free Ride for Non-Contributing Members

In D.S. Park Waldheim Inc. v. Nagy (decided 2008), Deputy Justice Freeman of the Ontario Superior Court of Justice held that minority members of a non-profit housing association were liable to contribute to the cost of subdividing the land so that members would be able to register the title of their lands.

1. Facts

D.S Park Waldheim Inc. was a corporation without share capital incorporated under the Ontario Corporations Act in 1966. It was the registered owner of approximately 52.5 hectares in the Town of Scugog, which was used to operate a resort property, divided into 125 lots for the exclusive use of its members.

The corporation paid for various expenses associated with maintaining the lands. The members of the corporation paid their proportionate share of the expenses. The corporation had no other source of revenue.

In the early 1990s, members discovered that they did not have legal title to their lots. Litigation ensued.

The corporation obtained legal advice, which recommended a registered plan of subdivision so that ownership of lots could be registered.

A special meeting of members was held in 2000 to authorize the board to pursue the plan of subdivision. 88% of the members attended or were represented by proxy at the meeting, and the special resolution received the support of 79% of the votes cast.

The corporation retained professionals to facilitate the subdivision process, which encountered various obstacles and difficulties.

From time to time, the corporation made requests of its members to pay their proportionate share of the fees. Approximately 90% of the members paid, but at least eight did not. The corporation sued these eight defendants for their unpaid portion of the fees, together with interest thereon.

2. Rulings

Deputy Justice Freeman rejected various defences raised and granted judgment in favour of the corporation for the amount owed plus statutory interest at 5% per annum.

In particular, the judge held that the payments were to be made as the expenses were incurred by the corporation and before the deeds of transfer became available. The corporation could not go forward with the subdivision process unless the members paid their share of the expenses as they were incurred. No credit could be given for volunteer work because several other members contributed volunteer work and still paid their proportionate share.

The corporation had the authority to amend its by-laws. Upon the amendment, the defendant members had a legal obligation to comply with the resolution, which they breached by failing to pay their proportionate share. Justice Freeman correctly observed that:

● The defendants would benefit substantially by having the land subdivided and having the plan of subdivision registered.

● By not paying their proportionate share of the expenses, the defendants would be unjustly enriched to the detriment of the other members, who would be forced to contribute a higher amount to cover all the expenses.

3. Key Observation

The law is clear that a majority of members can amend the corporation's by-laws and that, unless they withdraw as members, the by-law amendments legally bind all members including those who are opposed to the action of the majority. As demonstrated in this case, the logic of this extends to a financial obligation imposed by the majority that binds all members. Otherwise, the corporation would succumb to the collective action problem. A minority of dissenters will try to free-ride on the work and money of the majority. The solution for a minority member unwilling to contribute his share of the corporation's expenses is to convince a majority not to proceed with the proposed action or else to withdraw as a member. In this case, withdrawal likely meant that the member would forfeit his right to occupy and enjoy the corporation's lands (including his allocated lot).

The use of non-profit corporations to hold recreation property for multiple members has been the source of much litigation. Ultimately, the members of Park Waldheim had to proceed with a plan of subdivision. The abundant litigation that ensued would doubtless have been avoided had the land been properly subdivided at the outset. A non-profit corporation makes a poor substitute.

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