December 4, 2017

What Happens When a Pre-Construction Condo Project is Cancelled?

Imagine paying hundreds of thousands of dollars for a pre-construction condo, only to learn that your developer has cancelled the project or, worse still, simply gone belly up.

While the in-house sales staff may have treated you like a prince, it’s wise to remember that when you buy a pre-construction home you’re actually well down on the list of those looking to be reimbursed in a bankruptcy filing. For example, hundreds of people who bought proposed Toronto townhouses and condos from Urbancorp, one of Toronto’s fastest growing developers, are still fighting the bankrupt developer in court to recoup at least some of their losses.

ReidBuilt Homes, one of Alberta’s largest homebuilders, is just the latest developer to land in receivership over unpaid bills after its biggest lender, Royal Bank of Canada, plugged the plug seeking $64 million in debt. The company’s other secured creditors, which generally have priority in receiverships, include lenders and municipalities that are owed close to $125 million. Unsecured creditors like homeowners and contractors are seeking a further $27 million, but they’re unlikely to see much money once the dust settles.

Condo Failures Still Rare But On the Rise

While the vast majority of condo developments proceed as planned, some do fail. In the GTA, 23 condo projects have been cancelled since 2012 — five of them in the last year, according to real estate consultancy Urbanation. Most of the cancellations are a result of zoning issues or rising construction costs that cut into projects’ planned profitability.

Tanya Rumble was excited when she first heard about a new 10-storey condo building in the Junction Triangle called Museum FLTS, quickly signing an agreement early in 2016 to purchase a two bedroom unit with a promised occupancy of March 2019. Earlier this month, she and 100 other condo buyers received a letter from the developer, explaining it couldn’t get construction financing and wouldn’t be proceeding with the project. The company is at least returning their deposits.

Recently, another project adjacent to the Mimico GO station in Etobicoke was placed into receivership despite the fact that 200 of the units in the proposed 27-storey tower had already been sold. It’s now in the hands of a different developer and while buyers can expect to receive refunds of their deposits from the new ownership group, it’s under no obligation to honour the existing purchase agreements. As a result, disgruntled buyers worry about being shut out of Toronto’s hot market since prices continue to climb.

How to Research a Developer’s Track Record

When it comes to going the pre-construction route, you’re really buying something that doesn’t yet exist. That’s why it’s so important to check the overall track record of the developer, particularly when it comes to their record for finishing projects on schedule and on budget. Tarion Warranty Corporation, for instance, maintains a searchable database of developers, with detailed data about builders’ past projects.

But don’t stop there. Look for outstanding liens, particularly when dealing with smaller developers. A lien is placed when a creditor goes to court and registers an interest in a specific asset, hoping to recoup a debt due from the owner. You don’t want to be dealing with a company that regularly stiffs its suppliers or contractors. It only costs $8 to search online for outstanding liens against any Ontario-based company or individual.

You can also review the developer’s history through the Canadian Legal Information Institute (CanLII) at www.CanLII.org. CanLII is a non-profit organization that makes Canadian law records accessible and searchable online at no cost.

Tarion Protection Useful but Quite Limited

When you’re looking at pre-construction options, be sure to protect your investment from the outset. When you buy a new home or condo from a developer in Ontario, a portion of your deposit is protected by Tarion. Its New Home Warranty Program covers up to $20,000 for a new residential (but not commercial) condo deposit and $40,000 in deposits for a new house (soon to be increased to a minimum of $60,000 and a maximum of $100,000).

It’s important to note, however, that deposits over and above these amounts aren’t protected. In addition, Tarion doesn’t cover any payment you make to reserve or hold a condo unit before you sign a purchase agreement. If you do make such a payment, ensure the builder is holding the money in trust through its law firm and that you get a receipt confirming this arrangement.

Involve your own lawyer throughout the process and remember, even after you’ve signed an agreement to purchase a pre-construction condo, you still have a 10-day cooling-off period where you can back out without penalty.