Protecting condo buyers

While the condo investor waits for their condo to be built, the market can continue to climb beyond the price the purchasers had secured. Even with the deposit returned, they’ve lost any appreciation or interest the money used for the deposit might have gleaned had it been invested elsewhere when the project doesn’t materialize. It’s been enough of a concern for Ontario’s Condo Owners Association to argue for the establishment of an insurance program for appreciation lost when a condo project fails or is cancelled.

The purchase and sale agreement of a condo unit in Ontario typically includes a condition that the development achieves a certain threshold of sales within a certain period. Failure to reach those goals gives the developer the right to pull out of the project, says Barrie, Ont. real estate lawyer Andrew Ain of Ain Whitehead LLP, who represents both developers and purchasers.

But developers are required to register under Tarion, Ontario’s new home warranty corporation, which has a protection plan for deposits. And the deposits the builder receives must go to an escrow agent or the builder’s lawyer to be put into trusts, which the builder can only access when they satisfy the Tarion requirements.

While there are levels of protection in place for the purchaser of a pre-construction condo in Ontario, only a deposit of up to $20,000 is protected — although Ain anticipates that will increase.

Tarion went under the microscope last year, resulting in 37 recommendations presented by Douglas Cunningham, former associate chief justice of the Ontario Superior Court of Justice. Among the recommendations is increased regulation for developers and builders and sufficient protection for the consumer. That could include developing a record of builders who have had problems and perhaps preventing them from building in the future.

There are similar insurance programs across the country, including the Alberta New Home Warranty Program and the Atlantic Home Warranty Program. But no such program exists in Quebec, leaving purchasers to search for private insurance for their deposits.

Given that consumer protection legislation doesn’t apply to real estate purchase and sale transactions, there are limited protections for Quebec condo investors who don’t get insurance for their investment, says Jonathan Franklin, a real estate and commercial litigation lawyer with Franklin & Franklin Attorneys in Montreal.

The deposit can go to a notary in trust, but purchasers sometimes write their cheques directly to the developer to go toward construction costs. “It’s not regulated and it should be, like residential leases are regulated,” he says. “The real estate brokers have an excellent contract, which everybody uses on offers to purchase a building.”

Unless the contract specifically states that the deposit will be returned if the development isn’t completed within a window of time, investors and their money could be held in limbo or lost if a development is repeatedly delayed or when there is no activity on the project, he says.

Franklin sees benefit in the implementation of a common purchase and sale contract like those used by real estate brokers for pre-existing buildings. Vancouver real estate lawyer Kenneth Pazder agrees such an approach would help to level the playing field for purchasers in British Columbia as well.

While British Columbia does have protections in place for deposits, there are concerns in that often-hyper-inflated housing market that there are no further protections. A purchaser waiting for a condo after several years has lost the interest they might have achieved elsewhere and perhaps the opportunity to purchase again has vanished because of the ever-increasing housing values.

Contracts for purchase and sale of pre-construction condos, Pazder says, are heavily weighted in favour of the developer and shifts the risks to the purchaser. One of those risks is when the builder extends the closing dates when life goes on for the purchaser who may, in that period, have lost their job, become sick, divorced or subject to higher interest rates, impacting the viability of the condo purchase.

The test for further remedies beyond the return of a deposit has yet to be heard by a court, he says. “The buyers are not united … it’s very unlikely one person is going to take the developer to court and challenge this.” Developers also generally create a new company for each individual project, and if that project fails, the likelihood is that it has no money with which to pay damages.

Pazder thinks standard-form contracts would help to divide the risk more equally between the builder and the purchaser and he’s made that suggestion to the last two provincial governments. But it’s an idea he feels is unlikely to gain traction given the construction industry’s large contribution to the country’s GDP and the relatively low incidence of condo failures and bankruptcies in B.C.

A big problem with pre-construction projects is delays. Time schedules are rarely met, although provinces generally legislate limitations on extensions that developers are allowed. Extended delays can be cause for concern for the buyer for fear that the project will never be completed or that the final timelines extend beyond their moving plans, which may have involved the sale of their previous home.

In Nova Scotia, builders can extend closing by 360 days. “We did have people who were looking to get out of their agreements to purchase their units. The Nova Scotia legislation gives developers basically a full year of extensions without having to get the permission of the purchasers,” says Lauren Randall, an associate lawyer in the BoyneClarke LLP real estate practice in Dartmouth. “They’re selling units long before there is a product. I’ve never been involved in one that has actually closed when it was originally expected to close.”

She tells clients that they can ask for their money back when a project is delayed but the developer has no obligation to provide any remedies. If the project is delayed beyond the 360 days allowed, purchasers have the right to demand their deposits be returned, but they are unlikely to get any interest or other compensation.

Roberto Noce, a partner at Miller Thomson LLP in Edmonton and a specialist in condo law, says condo law is relatively new in Canada. “In fact, Alberta was the first province in Canada to adopt condo legislation in 1966,” he says, adding that Canada’s first condominium plan was registered in Edmonton.

But it wasn’t until Jan. 1 this year that Alberta’s condo laws were amended to provide greater clarity to developers in terms of their expectations and provide protections for buyers, ensuring their deposits are held in trust by a lawyer and returned in the event of a default by the builder.

“Today, I would say to a potential buyer that your money and position are much safer today than they were last year,” Noce says. But even with the deposit returned, the buyer loses out on any appreciation or interest their investment may have earned during the time they were waiting for the condominium to be built.

Noce says buyers are often swayed by the emotional attachment to the purchase and don’t always look at it objectively. The result is that they could end up signing contracts that provide them with few protections. Important factors often overlooked at the time of purchase are a certain move-in date and any remedies the builder might offer if that’s delayed.

And although the developer retains the right to cancel development if a certain threshold of sales isn’t achieved by a certain date, the contract could possibly include damages that can flow to a purchaser in the event of a cancellation.

“People have the freedom to contract,” but the market demand could dictate the buyer’s bargaining power, Noce says. “The chances of you having any clout to suggest any changes are on the low end.”