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Prepare for the process or pay the price in pre-construction deals

Purchasers of newly constructed homes need to be wary before they sign on the dotted line, warns Mississauga real estate lawyer Jia Junaid.

The average person trusts the builder, after usually directly interacting with the sales representative, but often ends up signing off their rights,” Junaid, principal of Atlas Law tells AdvocateDaily.com

“The minute my clients retain me for pre-construction I say, 'You will not sign anything presented to you by the builder before you vet it through my office.’ Because even though we’re in touch with the builder’s law firm, their representative still has communication with the client and tries to get them to sign off on things that may adversely affect their rights at the time of final closing.”

Purchasers of new homes have 10 days to see a lawyer after signing an agreement of purchase and sale. Junaid says visiting a lawyer can make a big difference because it often minimizes complications. These 10 days are critical as assignment clauses, capping development charges, and other purchaser requests can be communicated to the builder’s law firm.

"It is vital that buyers take the agreement for lawyer review as possible," she says.

Builder homes are rarely completed on time and extensions are common. But unlike in the purchase of a re-sale home, the remedies available to purchasers of new homes are limited, Junaid explains.

The purchaser can terminate the contract if it goes past the outside date and the deposit, with some interest, usually around three per cent, will be returned.

If the builder chooses the firm option, the agreement must provide a specific calendar date for a firm closing, as well as an outside closing date, which is one year later, Junaid says.

“If the house is not complete by the outside date, the purchasers have 30 days to terminate the agreement. They will then receive a full refund of all money paid, plus delayed closing compensation of up to $150 a day after the firm closing date, to a total of $7,500 through Tarion, which administers new home warranties for the province of Ontario,” she says.

But those options are hard to swallow if the moving truck is waiting out front. It also means that the purchaser loses out on the appreciation of home’s value, after their money has been tied up in this particular transaction — often for a number of years — especially in the case of high-rise condominiums, she says.

“What’s heartbreaking for many people is they’ve been waiting for two or three years and they’re stuck in between a rock and a hard place,” Junaid says.

For many new home purchases, knowing their rights is an issue.

Some builders will allow assignments, which permits the new homebuyer to “assign” or sell their agreement of purchase and sale to another buyer, usually at a profit. But the builder may prohibit assignments or only allow them with conditions.

The conditions often stipulate that a fee is paid to the builder, usually in the $5,000 range, Junaid says.

“But what was going on last year in the market was insanity. The prices were through the roof. So the builder in this particular case knew the purchaser had already made $125,000 on this transaction,” she recalls. The builder demanded $22,600. The buyer had never negotiated a cap on assignment and because he also couldn’t close the transaction himself, ended up paying astronomical assignment fees."

Closing dates can also be a sticking point. 

Many new builds tend to close at the end of the year. Junaid warns interruptions over the holidays could well complicate the situation for the buyer. If the closing day is December 27, for instance, the mortgage should be in place by December 24 because banks are closed on Christmas and Boxing days.

If the buyer is not on the ball, they could be subject to large penalties for every day they delay closing, she says.

“Come hell or high water the builder wants to close that deal. So even a short extension could come with a $1,000 penalty a day,” Junaid says.

And buyers shouldn’t think that a deposit offers any security, she adds.

"Contracts are structured so that the deposit is liquidated damages,” Junaid says, “and the builder can still come after you for more damages if that property sells for less than what you would have paid, which is particularly risky when the market takes a dip in prices, as we are now seeing.”

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