BY Lorne Shuman / March 23, 2021
My real estate practice involves acting for many buyers of pre-construction condominiums and houses. Buying a pre-construction property offers many benefits. These include buying a property that is new, modern, and has never been lived in, a property with a warranty, and most likely a property that may appreciate in value by the time that it is ready for occupancy. However, buying a pre-construction property is completely different compared to buying a resale property and there are several risks and surprises that come with buying a pre-construction property from a builder. This column will address numerous risks that buyers may face when presented with a builder’s Agreement of Purchase and Sale (“APS”) for a pre-construction property.
- A typical builder’s APS is a contract prepared on the builder’s form. It is long, complicated, and prepared by the builder’s lawyer. The contract is, in many respects, onerous and contains many provisions which are one-sided in favor of the builder. When buying a pre-construction condominium, a buyer will have a ten (10) day rescission or cooling-off period to cancel the transaction if not satisfied with the terms of the contract. During this period, the buyer is well advised to retain an experienced real estate lawyer to review the contract and provide legal advice. Failing to do this can be a mistake as you will see below.
- The builder’s APS will contain a section on adjustments. These are the costs that the buyer will have to pay for items like development charges, lot levies, Tarion enrolment fees, utility connection fees, etc. The costs of these adjustments can increase the purchase price by thousands of dollars. The exact cost of some, but not all of these items will be set out in the Tarion addendum to the APS. During the rescission period (which only applies to condominiums and not freehold properties), your lawyer may try to either eliminate or cap some of these costs. In some cases, the builder will provide caps of the adjustments. If the builder will not agree to any caps, you have the option to cancel the contract. The benefit of this review is that you will be aware that you will need to come up with extra funds on closing to pay for these items. A buyer who is aware of this will be better prepared for closing and can budget accordingly.
- Many buyers are dazzled by glossy brochures and plans at the sales office. Unfortunately, what you see is not always what you get. This is because a typical builder’s APS gives the builder the right to alter the plans and dimensions and substitute materials without the requirement to provide any compensation to an aggrieved buyer.
- Many buyers fail to realize that the builder determines when the property is complete and fit for habitation. The builder sets the closing date and the buyer has no say in this matter. In some cases, very little notice is provided leaving the buyer to scramble to arrange its financing. A buyer will be forced to close, pay for and move into a property that may be unfinished. While the buyer will have an opportunity to do a pre-delivery inspection prior to closing, unfinished items are completed by the builder after closing subject to the builder’s schedule and availability of trades.
- The builder has very liberal rights to extend the closing date for a number of reasons. The occupancy date on the APS is tentative and should not be relied upon as the final date. The date can and will likely change and while delayed occupancy compensation may be available, there is a limit to the amount.
- Conversely, the buyer has no right to extend the closing date. If a buyer is unable to arrange its financing in time for closing, the buyer cannot insist on extending the closing date. The builder does not have to grant an extension of the closing date. If they do, they can charge extension fees which can amount to thousands of dollars in some cases, depending on the builder.
- In some cases, a buyer may decide that it does not want to move in and may want to assign or sell its APS to a third party. This is generally not permitted without the consent of the builder which may be arbitrarily withheld. If the builder allows an assignment, there are often conditions and fees that must be paid.
- Similarly, if a buyer needs to add a third party to the APS because it will not qualify for financing alone, a buyer cannot unilaterally add a third party to the APS. The consent of the builder must be obtained and again, the builder will charge a fee for this.
- Many buyers who buy a property for purely investment purposes do not understand how the HST applies to the purchase of a new property. If the buyer or its immediate family member will not be occupying the property as its primary place of residence, then the buyer will not qualify for the HST rebate. This means that the builder will charge the buyer the HST rebate on closing. This could add an additional $25,000 to the purchase price. In addition, builders are now getting very stringent on this point and have the ability to charge the HST rebate if they suspect that the buyer is being untruthful about moving into the property.
- Many buyers fail to realize that a builder’s APS may allow the builder to cancel the contract altogether for a number of reasons. For instance, the builder can cancel the contract if it fails to sell a certain number of units, if it fails to obtain bank financing or if it fails to obtain the necessary approvals from the municipality. Finally, although it is a rare occurrence, the builder may go bankrupt leaving a buyer’s deposit at risk as Tarion only provides a limit on the amount of deposit protection that is available.
As can be seen from the points made in this column buying a brand new property from a builder comes with an element of risk. Understanding these risks and obtaining legal advice from the outset is necessary to avoid surprises and disappointment.
Lorne S. Shuman, B.A. LL.B.
Barrister, Solicitor, Notary
Isenberg & Shuman Professional Corporation 5075 Yonge Street, Suite 804 Toronto, ON M2N 6C6