1 in 5 homebuilders are nixing projects amid high rates. Here are your rights

  8/18/2023 |   SHARE
Posted in New Developments by Terra Realty| Back to Main Blog Page

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Many Canadian homebuyers waiting patiently for construction to finish on their pre-sale unit are being met with cancellation notices from developers. The building environment is souring — leaving some unhappy customers scrounging to get their deposit, or more, in compensation.

Real estate lawyers in some of Canada’s busiest housing markets who spoke to Global News say you might not get much more than you put into a pre-build, depending on what your contract says.

The Canadian Home Builders’ Association (CHBA) said in a report released last week that high construction costs and rising interest rates are hurting developer confidence in the market. Two out of three builders tell CHBA that they’re building fewer units, while 22 per cent of developers have fully cancelled projects in recent months.

Aman Bindra of KSW Lawyers in B.C., tells Global News that buyers eyeing the pre-construction market are taking a big chance about what state the industry will be when construction completes.

“When you’re buying a pre-sale, you’re really speculating on what the market’s going to be like three, four or five years down the road, maybe more,” he says. “You might make a lot of money, but you take a lot of risk. And sometimes things don’t go your way, as we’re seeing right now with developers canceling projects.”

Here’s what to know if a developer has told you your dream condo or detached home won’t be ready on time — if at all.

What are your rights as a buyer?

The rights of buyers are similar in many jurisdictions, but because the real estate market is regulated provincially, a buyer in Vancouver might have a different legal standing from someone buying in Toronto.

Bob Aaron, a Toronto-based real estate lawyer, says the obligations a developer has to a buyer are outlined in the Tarion addendum, a compulsory attachment for a purchase agreement in Ontario.

“There are certain rights in there that give the builder the option to terminate the agreement,” Aaron tells Global News.

The Tarion addendum will typically include caveats for the developer to escape the contract, Aaron says, such as not being able to secure zoning approval or building permits, or failing to achieve a certain sales target for the project.

Developers can also say they failed to get financing for the project, he adds, a possible consequence of rising interest rates and a changing borrowing environment.

But Aaron says it’s easy for developers to use the financing excuse as an easy out from a project that is no longer as profitable, as it might’ve been when they sold the unit. There’s no simple way to find out if the builder is being genuine, he says.

He’s seen examples of builders cancelling units because the business case has changed, only to relaunch the project at a later date for prices 20-30 per cent more than they originally listed.

Aaron notes that’s a common case when home values have risen significantly, but in today’s market, many condo projects are coming to completion in a market where values are depressed — not elevated.

“A purchaser might be lucky if the builder cancelled, because the value may have dropped below the original purchase price,” he says.

In B.C., Bindra says pre-sale builders are governed by the Real Estate Development Marketing Act, or REDMA. But case law in B.C. hasn’t shown the reason for cancellation to matter much when it comes to determining whether a builder is in the right or wrong in nixing a project, he notes.

For buyers looking to understand what remedies are available to them in B.C., Bindra says to look at the builder’s disclosure statement as well as the purchase and sale agreement.

This is especially important for anyone taking on an assignment of an original buyer’s pre-sale — in many cases, buyers will just look at the assignment agreement, but should also review the original purchase agreements with a lawyer to understand what the builder is on the hook for, he says.

What are you entitled to?

When a buyer agrees to purchase a pre-sale home, they’ll typically put down a deposit on the project and pay the full amount at completion.

In Ontario, this amount is typically put into a third-party trust. Aaron says that buyers can expect to get that down payment back in the event of a cancellation, and potentially interest accumulated on the amount as well, depending on the specifics of the agreement.

In most cases in B.C., Bindra says buyers are entitled to get their deposit back on the project but not much else.

It’s possible to sue a developer for damages, he says, if a buyer is looking to recoup the “opportunity cost” on the money that sat without interest for the length of the agreement.

But in practice, unless the disclosure statement or purchase agreement contains language including deposit interest in the buyer’s remedies, Bindra says a legal case can be difficult for an individual facing down a deep-pocketed developer.

Some buyers could even sue the developer to attempt to get them to live up to their end of the bargain and finish building the unit, but Bindra says these outcomes are especially rare.

“Their contracts are fairly bulletproof and developer-friendly, and often the most common remedy is the buyer just gets the return of the deposit,” he says.

Some buyers could get compensation for delays

Developers might not cancel a build outright, instead delaying the completion date if they think the project is salvageable.

In B.C., Aman says builders could extend the closing multiple times, and typically there’s no compensation associated with such moves. Buyers can walk away, cancelling the contract within seven days after the amendment is filed, receiving their deposit back in full.

Ontario buyers have 30 days to do so in the same circumstance, Aaron notes. In Ontario, if a buyer opts to remain in the contract, they’ll be entitled to delayed occupation compensation, which works out to $150 per day to a maximum of $7,500.

If the reason for the holdup is out of the builder’s control — a strike among construction workers, for example — then Aaron says a developer can “stop the clock” on the compensation counter due to “unavoidable delays.”

However, getting the $7,500 can be cold comfort for buyers who are stuck waiting years for a builder to finish the unit, Aaron says.

“I had one close recently where it was seven years — there was a seven-year delay between the time the contract was signed and the time the buyer got a key.”

Both Bindra and Aaron say the best thing a prospective buyer can do is to get a purchase agreement reviewed by a lawyer before signing on the dotted line to avoid surprises if a project doesn’t cross the finish line.

Aaron says that the reward of timing the market well and getting to choose the finishes on your unit might outweigh the risks of possibly being put out in a difficult building environment as interest rates and other construction costs rise.

“It’s a matter of balancing the risks,” he says.

Source: Global News

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