October 26, 2016

Should you Buy a Condo that’s Facing a Lawsuit?

After weeks of searching the Toronto real estate market you finally find the perfect condo. It’s in that trendy west-end hood you’ve been dying to move into, the building has all the amenities that your heart desires and – most importantly – it’s within your price range. But there’s just one problem.

While reviewing the status certificate you notice that there’s a pending lawsuit against the condo corporation.

Should you take the risk? Or is it back to the drawing board?

Lawsuits are not uncommon in the condo world. They can range from someone suing the condo corporation because they slipped and fell while on the property to the condo corporation itself suing the developer for work that wasn’t completed properly.

There are a number of things to keep in mind if you’re considering buying a piece of real estate that’s facing litigation.

It’s Going to Cost You

For one thing, experts say it’s likely that the condo fees will climb higher as a result of the suit – and that’s regardless of whether the condo corporation wins or loses the case.

“If they win, their entire legal fees will not be covered by the other side – only part of them,” says Toronto real estate lawyer Bob Aaron. 

“So the condo will still have to pay some of its own legal fees. And if they lose they’re going to have to pay all their legal fees and some of the fees of the other side as well. It’s all going to have to come from somewhere.”

While most condos have a pot of money set aside for emergency, called a reserve fund, in Ontario that money can only be used for replacing equipment and major repairs, says Aaron.

You Might Have a Tough Time Selling

Should you decide to sell your unit before the litigation has been resolved, it might be tricky to find a buyer.

For one thing, some mortgage lenders may shy away from financing a unit in a building that’s got a lawsuit hanging over its head, says Aaron.

But even if the lender isn’t concerned, the buyer might be.

 “I was just involved with one of these and they ran it by the lender and the lender said okay. They weren’t worried,” says Aaron.

“So there’s two things. Number one, will a lender finance it? Number two, will a seller be able to sell with that kind of fear hanging over the head of the buyer?” 

Factor Legal Costs Into the Price Tag

 Aaron recommends keeping the size of the potential lawsuit in mind when determining whether the condo you’re buying is really a good deal or not.

“Figure out what the dollar value of the risk is and take that into account in the purchase price of the unit,” says Aaron. 

One option is to freeze that amount of money for some time – for example by having one of the lawyers hold back a certain amount of money back for a period of time to cover the potential exposure to litigation costs.

“The takeaway here is that if you’re getting a good enough deal to compensate for the risk then go for it,” says Aaron. 

“And if you are risk averse and it doesn’t look good, then find something else.”