Contract Homes

For most contract homes, the builder (contractor) undertakes the performance of all the work and the supply of all materials necessary to build the completed home. It is vitally important to understand that if the landowner, rather than a builder (contractor), exercises significant control over the construction of the new home, or is responsible for contributing one or more essential element(s) to it, the home may be considered an ‘owner-built home’ that is not eligible for statutory warranties. 

The statutory warranties do not apply to owner-built homes because the statutory warranties are owed by the ‘builder’, who must by definition supply all of the labour and materials to build the completed home. When the owner supplies labour and materials to complete one or more essential elements of the home, the result is that the contractor does not meet the definition of a ‘builder’. 

Owner-built homes may still be entitled to contractual warranties from their contractor (as negotiated between the owner and contractor) which are not backstopped by Tarion. As noted, they are not eligible for the statutory warranties which are intended for situations where the contractor/builder is responsible for completing all of the essential elements of the home.

The essential elements of a home typically include the foundation, framing, electrical system, roughed in plumbing system, heating, ventilating and air conditioning systems (‘HVAC”), and the building envelope.

Landowners who are considering a contract home must be aware of the impact that their level of control and involvement can have on whether the project will be covered by the statutory warranties. If you wish to have statutory warranties, then both the contract and the actions of the parties on the construction site should be clear that the builder is responsible for supplying the work and materials to complete the home.

If you have questions about your situation, you can contact Tarion at ismyhomecovered@tarion.com.  

Once the contract home is, in very general terms “completed”, the home typically would be eligible for construction type warranties: one year, two-year and seven-year warranties for construction defects, up to maximum coverage of $400,000, that begins on the date you take possession. See the discussion below and you can learn more about construction warranties here: Coverage for Freehold, Contract, Condo Units and Condo Conversions.

If you have contracted with a builder for the construction of a new home on your land and the project in very simple terms is not completed due to the builder’s fault, you may be entitled to financial loss protection. More specifically, financial loss protection is compensation for losses suffered by the landowner when the builder fails to substantially perform the contract for the home. Your entitlement is the difference between what was paid to the builder versus the value of the work and materials that were supplied by the builder, as at the date the builder stops work and fails thereafter to perform the contract. The maximum backstop financial loss entitlement from Tarion is $40,000.

The date that the builder stops work is a very important point in time. First, it will be necessary for the landowner to show that it was the builder who defaulted and thereafter failed to substantially perform the contract. Secondly, at the time the work ceases it will be critical for the landowner to demonstrate first what monies have been paid to the builder and secondly, the value of work in place as at the work stoppage/ abandonment date. Tarion strongly recommends that when the builder ceases work/abandons the site, call Tarion immediately so that Tarion can send a representative who may be able to assist or give guidance on how to assess and document the value of work in place as at the work stoppage/abandonment date. If you go ahead and finish the work yourself or have someone else do so, then you jeopardize your financial loss claim as it may become impossible to determine the amount of work that was supplied by the builder. 

Homeowners faced with a dispute with their builder regarding an incomplete contract home, who seek amounts in excess of the $40,000 financial loss protection limit, or any other kind of damages, will need to pursue those excess amounts through other means including the court system.

To recap, if the contract is not substantially performed due to the builder’s default, then the homeowner may be entitled to financial loss protection up to $40,000, backstopped by Tarion. It is also important to note that any benefit or holdback monies that the landowner has received, is holding or has access to, that relates to the financial loss will reduce the recovery from the builder and/or Tarion to prevent double recovery.

If the home is completed or very close to completion and the relationship with your builder breaks down , it is possible that financial loss will not be the appropriate remedy but rather the home may qualify instead for the statutory construction warranties discussed below.

The test to determine if a home is eligible for the construction warranties is not whether the home is “ready for occupancy” or “substantially complete”. It is a higher threshold test related to the contract, namely “substantial performance of the contract”. The actual test is complex, is set out on the ONHWP Act by cross referencing a test from the Construction Act . For plain language purposes only, in very general terms the contract for the home must have been at least 97% performed at the time the builder stopped the construction. Put another way, as a general rule homes that have more than 3% of the contract requirements yet to be performed then the home will not meet the statutory test to qualify for the construction warranties. The construction warranties include: a one-year work and materials warranty; a two-year water penetration and Ontario Building Code compliance warranty; and a seven-year major structural defect warranty. For more details visit: Coverage for Freehold, Contract, Condo Units and Condo Conversions.

The contract for the home to be constructed is all important as your rights and obligations will be determined by the terms of the contract. Tarion strongly recommends that a landowner get independent professional advice (legal, accounting). 

You should work closely with your lawyer to make sure the contract reflects your needs, wants, and expectations. Most importantly what you expect of the builder. Every situation will be different but consider these items. Who will do what? What work and supply of materials do you expect of the builder? Be careful if you take on too many tasks you could jeopardize the availability of statutory warranties. (see earlier discussion about owner-built homes). Is it a fixed price contract or “cost plus” contract (e.g., work and materials plus a say 15% markup)? Is it just a Project Management Contract which is indicative of an owner-build scenario. Each has it pros and cons and frankly pitfalls. 

Make sure you are clear on your costs (contract price) fixed or floating. Attach plans and specifications so your needs and wants are not in dispute. Include a timetable for completion of certain stages of construction. What happens if there are delays? Also include a schedule for payments following such completion milestones. Be careful about making payments in advance of the work being done. Get advice on what holdbacks are needed or are desirable. Outline a process that requires discussion, agreement, and written approval of any change orders. 

This is not a complete list of issues - get professional advice as these contracts are extremely complex.