Despite bleak, yet oftentimes periodic, forecasts about Toronto’s real estate market, the fact remains that many people are still interested in owning a home in the GTA. While many share concerns over the affordability of a purchase, you’re more than likely to know a few people that have saddled up the burden for financing a home.

While resale condos are popular choices, their limited supply inevitably prices many potential buyers out from the market. In light of this, many buyers turn to pre-construction or “new-home” condominium developments since the cost of purchasing these units are marketed as considerably lower. Additionally, they present a sort of long-term investment where buyers hedge their property value increasing over time as construction take place.

Even though there are considerable benefits to purchasing a new-home condominium, prospective buyer should have an understanding of what they are getting into before pulling the trigger on a promising development. This post provides some basic insight into how a typical new-home purchase is unique and some of the considerations that buyers should bear in mind.

For clarity, this discussion will be focused solely on pre-construction condominiums regulated by TARION. It will not discuss properties that are exempt from this protection.

Legal Starting Point

The new-home development industry is primarily regulated by the Ontario New Home Warranties Plan Act (the “ONHWPA”). TARION, a not-for-profit company created by the Government of Ontario, is in charge of administering the ONHWPA.

Apart from typical oversight functions, TARION administers a limited set of buyer protections for issues like construction and closing delays, defects in work/building materials, and deposit insurance. When purchasing a pre-construction unit, one of the first considerations buyers should turn their mind to is whether the development is considered a new-home and whether it falls within TARION’s jurisdiction.

In general, the following are not considered to be new-homes and therefore ineligible for TARION protections:

  • Condominium conversions (buildings that are refurbished into condo units)
  • Resale condominium units
  • Homes built on existing foundations

In spite of assurances from real estate agents and sales representatives, buyers should consult a lawyer to verify whether a particular developer and property are covered by TARION. This verification gives buyers comfort that developers meet TARION’s screening for business integrity, technical construction proficiency, and financial solvency. Additionally, buyers will find some assurance that their homes will be constructed according to strict legal frameworks and benefit from warranties should issues occur that impact their investments.

 

New-Home Condominiums

There are 3 major qualities that new-home condo developments have from resale properties:

 

1. Disclosure Statements

New-home condo developments are obligated to prove a disclosure statement to prospective buyers. According to section 72(2) of the ONHWA, a purchase agreement is not binding until the most current disclosure statement is delivered to a buyer. If it is not provided, a buyer can treat the Agreement of Purchase and Sale as non-binding even until the closing and despite providing payments to the developer!

Unlike a status certificates for resale condo units, disclosure statements generally do not have a statutorily-mandated form of presentation. However, they have mandatory contents such as a forecasted budget, copies of all proposed declarations, by-laws, and rule and insurance agreements, and statements regarding the apportionment of units that would be sold in blocks to investors or leased out by the vendor. In most cases, the disclosure statements are voluminous and filled with legal provisions that leverage the costs of construction off to buyers. As a result, thorough due-diligence is required from a buyer’s perspective in order to understand their liabilities and the full cost of their investment.

 

2. Cooling Off Period

Since disclosure statements cover a wide range of cost apportionments and limitations on a buyer’s rights during the construction phases, the ONHWPA provides buyers with a right to cancel their purchase within 10 days of receipt of a disclosure statement. The logic behind this 10-day cooling-off period is that a buyer needs a reasonable amount of time to understand that there may be ‘hidden’ or unanticipated costs associated with the development of their desired unit.

Oftentimes prospective buyers are so fixated at locking down a purchase at an entry-level price, usually marketed as a more affordable investment than resale properties, that they are led into buying a unit without fully contemplating the long-term costs associated with developers encountering construction delays and offsetting their building costs onto buyers.

3. Dual-Stage Closing

Most new-home condos possess a two-stage closing. As strange as this concept may be, the general idea is that a developer will attempt to sell as many units as possible to finance the cost of its construction upfront. Once enough capital is generated, it can start building the structure and move in as many people into the units it has already built pending final approvals from regulatory bodies to bring the condominium into existence.  In practice, this means that several floors of a development are liveable while other stories or sections of the building are still under construction.

The first stage is known as “interim closing and occupancy”. Buyers take possession of their units after providing their down payments to the developer and signing an Interim Occupancy Agreement. Since these liveable portions are incurring utilities costs, buyers must pay the developer occupancy fees even while they do not have legal title to their unit. While the disclosure statements should forecast the anticipated costs during this period, it is not uncommon for these costs to increase dramatically from the time the Agreement of Purchase and Sale was first signed.

The final closing occurs after the condominium’s constating documents are registered with the government. At this stage, the balance of the purchase price, subject to adjustments for interim occupancy fees, is paid to the developer and legal title is exchanged to the buyer.

While developers and buyers share a mutual interest in keeping the timeline between these two closing stages short, caution must be taken to consider that economic decline, unforeseen circumstances, and government red-tape can complicate these intentions. In essence, buyers should be most concerned with the possibility that they could be subject to a prolonged timeframe where they do not own a property and are still subject to pay fees for living in a space where their investment is locked in limbo.

 

Lawyering Up

Given the unique situation of new-home developments, it’s not surprise why TARION offers protection to prospective buyers through warranties, mandatory disclosure, and cool-off periods. While the economic benefit of building impressive skylines is obvious, the need to protect consumers is of foremost concern.

Traditionally, lawyers are called in when transactions are nearing closings. However, with new-home purchases, hiring a lawyer should be one of the first steps you take as soon as you sign the Agreement of Purchase and Sale. Since the 10-day cooling period starts to run, you’ll want to ensure that your lawyer takes you through the details and intricacies of a new-home purchase to ensure it matches your financial sustainability and goals as a place to reside or as a long-term investment.

Disclaimer: Information made available on this website in any form is for information purposes only. It is not, nor is it intended to replace, legal advice. Contact Chris Chu Law to discuss a specific legal issue and please note that contacting Chris Chu Law, on its own, does not create a lawyer-client relationship.