Cancellation always a risk for pre-construction buyers, says Howden
By AdvocateDaily.com Staff
Purchasers who wish to invest in condos prior to construction can mitigate their risk by seeking legal advice before signing on the dotted line, according to Toronto condominium lawyers Deborah Howden and Warren Kleiner.
Howden and Kleiner, partners with Shibley Righton LLP’s Toronto office, tell AdvocateDaily.com that a string of recently cancelled projects in the Greater Toronto Area (GTA) has left prospective purchasers high and dry, sometimes years after they paid their deposits.
Even if that money is returned to them, investors still lose out on the equity that would have built up in their property in the meantime, which can amount to a hefty sum in a market as hot as the GTA.
“Essentially, there is always a risk when buying a new condo because the builders will always include various clauses allowing them the ability to get out of the contract,” Kleiner says. “I can’t stress enough the importance of getting a lawyer to review these agreements, who can advise buyers of what they’re getting themselves into, and if possible, secure amendments to the contract to protect their interests.”
But not just any lawyer will do, adds Howden.
“It should be someone who knows condos,” she says. “If you get advice from a lawyer who deals with cottage properties, they may not have much experience with the documents, and may not know what to look out for.”
Howden says one recent Superior Court decision in favour of a developer who cancelled a project two years after buyers paid their deposits could put off future prospective pre-construction buyers.
He acted for some of the 600 investors in a sold-out Vaughan development who went to court seeking a declaration that their purchase agreements were invalid because of their extreme language, which allowed the seller the “sole, absolute and unfettered discretion” to cancel the contracts.
A judge found that, properly interpreted, the provision did not, in fact, give the developer a “sole, absolute and unfettered discretion” right to early termination. Nevertheless, he found that its right was properly exercised in this case, and rejected the buyers’ application to void the contract.
In an article on the case, the Toronto Star reported that there were 5,000 units affected by project cancellations in 2018, up from just 379 in 2016.
“It’s very bad news for the buyers,” Kleiner says. “No matter what you try to do to protect yourself, there are certain risks associated with brand new condos. You can put down your deposit, only for the vendor to come back years later, hand you back your money, and tell you it’s no longer proceeding.
“The only way to avoid that kind of risk altogether is to buy something that’s already built,” he adds.
Still, for those determined to proceed with a pre-construction purchase, Howden says there are other steps they can take to mitigate against the risk of cancellation.
“Make sure you are dealing with a reputable builder, and take a look at any past projects they’ve been involved with,” she says.
Under the Condominium Act, developers must give investors a 10-day cooling off period after signing their agreement to purchase a pre-construction unit, during which withdrawal can occur without penalty. Kleiner says this provides the perfect opportunity for buyers to seek counsel from a lawyer who can warn them about any terms that may fall short of industry standards.
“That cooling-off period is crucial,” he says. “These agreements can be very complex, so you want to have enough time for your lawyer to go through them. Even if you come late in the day, you may be able to get an extension of the time.”
For those who do proceed, Kleiner says they may be caught off guard by the extra costs often associated with new-build condos. For example, the law allows vendors to charge “interim occupancy fees” to cover maintenance costs during the stage of limbo between when the units are built and the time when the new condo corporation is officially registered.
Unit owners in the completed lower floors of buildings may also face these same charges before the construction on higher floors is complete, Howden warns.
“Not everyone realizes the consequences of the two-step closing,” Kleiner says. “You may have to move in before you actually own the unit, so it’s essentially akin to paying rent to a developer.”
Howden adds that while the risks of buying a pre-construction condo cannot be eliminated altogether, they can be mitigated.