When purchasing a pre-construction condominium, there is always a risk that the project could be delayed or cancelled.
There may be many different reasons for a project cancellation. For example, the expected sales for the project may not materialize or the development approvals necessary for the project are not forthcoming.
For purchasers who are facing the cancellation of their project, the following information will help in understanding their rights and in making informed decisions.
Purchase agreements contain important information about the purchaser’s rights, the builder’s rights, the unit, and the project. To ensure that purchasers are protected and understand exactly what they are signing up for, they should strongly consider having their agreement carefully reviewed by a lawyer who is experienced in pre-construction condominium transactions. Also keep in mind that purchasers have an initial 10-day period to cancel their purchase under the Condominium Act, 1988. So, if on further review they decide that they no longer wish to go through with the purchase, the purchaser can terminate their agreement within that period and get their deposit back.
For projects or phases of project that go to market after January 1, 2020, condo buyers will benefit from more information that will help ensure they can make a more informed purchase. Specifically, this requirement applies to any project or phase of a project where the first agreement of purchase and sale is signed after January 1, 2020. All agreements of purchase and sale will include an information sheet at the front of the purchase agreement that outlines some of the key potential risks of buying a residential condominium unit in a pre-construction standard or phased condo project. These may include potential early termination conditions such as reaching a minimum sales threshold for the project to proceed, the developer securing necessary financing for construction and completion of the project, and obtaining the required approvals from the municipality.
Termination of Purchase Agreements
In a purchase agreement for a new home, the vendor and purchaser may include conditions that, if not satisfied, may result in termination of the purchase agreement.
Some examples of conditions include securing the necessary financing, or minimum unit sales for the project to proceed. Early termination conditions are contractual, and must be agreed to by both parties to the purchase agreement (the vendor and the purchaser). Moreover, they must be clearly set out in the Addendum to the purchase agreement, so that consumers are made aware of the risks relating to the conditions when they enter the agreement.
The Addendum to the purchase agreement requires the vendor to take all commercially reasonable steps within its power to satisfy the early termination conditions. If the conditions agreed to in the Addendum have not been satisfied despite such reasonable efforts, the vendor is permitted to terminate the purchase agreement and must return to the purchasers all of their deposits.
Tarion’s powers and discretion are set out in the Ontario New Home Warranties Plan Act and it does not give Tarion the authority to compel a vendor to waive conditions agreed to in an Addendum or to complete a project.
If a project is terminated, the vendor is obliged under Condominium Act to refund all monies paid by the purchaser, plus interest calculated in accordance with the Condominium Act (see section 82 and section 19 of O. Reg. 48/01). Under these provisions of the Act, the interest required to be paid is 2 percentage points less than the Bank of Canada rate which is recalculated every 6 months. Since 2008, that bank rate has been less than 2% and thus effective interest rate payable has been 0%.
There are several layers of protection for deposit monies paid in relation to a condominium unit purchase.
First, the Tarion Addendum, which is required to be attached to every agreement of purchase and sale for a condominium unit specifically addresses this situation. The Addendum requires that if the purchase agreement is terminated that the vendor will refund all the monies paid by the purchaser including any monies paid for upgrades and extras, within 10 days.1
In addition, under the Condominium Act, any monies received by the vendor of a condominium project must be held in trust. This includes deposit amounts and any other payments made under the purchase agreement, such as for upgrades and extras. The vendor does have a right to have some or all of the deposit monies released from trust but only if the vendor has arranged for acceptable security to protect the return of deposit obligation.
If for some reason the vendor is unable or unwilling to return the deposit, then the purchaser is entitled to turn to the trustee who was obligated to hold the deposit monies in trust. The purchaser can then make a claim to the trustee (usually a lawyer) for return of the deposit from trust accounts maintained by the trustee.2
If the deposit monies are no longer in trust, then the purchaser has an alternative protection being the third-party backstop of Tarion and/or an insurance company. The purchaser can turn to Tarion for payment of the deposit or portion that has not yet been returned, up to $20,000. It is also possible that anything over $20,000 is protected by a third party major insurance company which has issued a deposit protection policy for the money.
In circumstances where an agreement of purchase and sale is about to be terminated or has been terminated, it is highly recommended that the purchasers seek the advice of a residential real estate lawyer to help guide them through the return of deposit process.
Other than deposit protection, there is no warranty or protection under the Ontario New Home Warranties Plan that covers losses that may be incurred by a purchaser when a purchase agreement is terminated under the Addendum, such as loss of profit due to changes in market prices.
Questions about deposit protection can be directed to Tarion’s customer service team toll-free at 1-877-9-TARION (1-877-982-7466), or by email to firstname.lastname@example.org.
Reviewing Condominium Cancellations
Tarion may review the circumstances around a cancellation to ensure that the vendor is in compliance with the Addendum – for example, to ensure the conditions were set out clearly as required, and that the vendor took all commercially reasonable steps within its power to satisfy the early termination conditions.
The Condominium Act includes additional measures for home buyers that may apply in the case of a project cancellation. For example, purchasers may apply to court for an order requiring a vendor to comply with its obligation under the Condominium Act to take all reasonable steps to provide a purchaser with a deed to the unit without delay, and for an order requiring a vendor to pay monetary damages incurred by the purchaser as a result of the vendor’s non-compliance.
If purchasers wish to challenge the cancellation of a specific project, they should seek independent legal advice.
1 The right to receive return of all monies paid in the event of termination, assumes that the termination of the contract is not as a result of breach of contract by the purchaser. If the purchaser might be at fault, the issue becomes more complex and advice from a residential real estate lawyer is essential.
2 There is also one very small risk that monies held in trust are improperly released by the trustee. This is an extremely rare occurrence.