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Condo Project Cancellations
Are Condo Project Cancellations Common?
If you were to compare a resale purchase and sale agreement to that of a pre-construction agreement, the first thing you will notice is that the resale contract is very thin by comparison. The resale contract is also very easy to read through and comprehend. Oftentimes, purchasers give the bible-sized, pre-construction contract to their lawyer to read who don't usually bring up the developers escape clause because cancelled projects are not very common. However, the fact of the matter is that cancelled projects do happen and it is important to be prepared. Even though the developer will return your deposit and even if cancellations are not an often occurrence, it is always important to know the risks associated with purchasing a pre-construction condo, why condominium projects get cancelled and what to do in the event this happens to you.
Recently, Tarion added a new policy to the list of standard and mandatory documentation found in the purchase and sale agreement. All projects or phases that go to market after January 1, 2020, must include an information sheet at the front of the purchase agreement that outlines some of the key potential risks of buying a residential condominium unit in the pre-construction phase. Some of these risks or reasons for cancellations may include the developer not reaching a minimum sales threshold for the project to proceed, the developer has not secured the necessary financing for construction and completion of the project, or the developer has not obtained the required approvals from the municipality. This information sheet is beneficial to condo buyers because it is an added transparency that the purchase and sale agreement previously did not have. Transparency will help ensure that you can make a more informed purchase and that is of most importance to us, at GTA-Homes.
Top 3 Reasons for Pre-Construction Condo Project Cancellations
The Developer Has Not Reached a Minimum Sales Threshold for the Project to Proceed
On February 20, 2019, the Ministry of Government and Consumer Services announced new initiatives to enhance consumer protection for purchasers of residential condominium units. The initiative includes enhanced disclosure for consumers about potential risks regarding early termination conditions, timelines and project status. For any developer, there are many conditions that need to be satisfied before a developer can proceed with a development project-- many of which are outside of the developer's control.
Take the concept of "A Minimum Sales Threshold", for example. A condo developer needs funds to employ consultants, advertise and of course to build, so the units are sold before construction begins. Ideally, a developer will try to sell at least 70% of the entire building before construction begins because the typical lender usually requires 70% of the revenue from the building's sales in order for financing to be approved. If the developer cannot meet this 70% requirement, then the project will have to cancel because there will not be enough money to back construction. In a tight market like Toronto, it is unlikely that a developer doesn't sell 70% of its units; however, this is one of the reasons why pre-construction projects are cancelled.
The Developer Has Not Secured the Necessary Financing for Construction and Completion of the Project
When it comes to pre-construction condos, prices are increasing because of the well-known housing shortage in the Greater Toronto Area but also because of ever-increasing development charges and levies. One of the best publicly available resources that you will find for construction costs is from the Altus Group's Annual Construction Guide. It is a trusted budgeting tool for developers, lenders, contractors, consultants and various industry professionals. Within their report, one can find the costs per buildable square of land.
With a guide like this in hand, developers must estimate costs like labour and materials and commit to delivering the product with the estimated budget. Within the 3 to 5 years that it generally takes to complete a condo, the cost of any given element of construction can increase for various reason like shortage of materials, workers or an "act of God", like a pandemic. A prime example of an unexpected change in costs occurred in 2018 when new steel and aluminium tariffs with the US increased the costs of materials like steel rebar, a key component in concrete construction. Since August 2018, steel rebar has risen by 58 per cent compared to the previous year. If we tally up the increased costs of the various elements required to complete a project, there are bound to be occasions where the estimated budget is far surpassed. The result of this is the building having many unavoidable delays to the point of no longer meeting completion within a timely manner.
While the risk is low, developers have also filed for bankruptcy in the past based on various financing factors. That is why the Ontario Government has regulated the Tarion Warranty Corporation to provide safeguards to all new home purchasers. When buying a pre-construction condo, your purchase fee includes a Tarion Warranty which provides deposit protection of up to a maximum of $20,000. This way, in the unlikely event that the project is not completed, your financial loss is less significant.
The Developer Has Not Obtained the Required Approvals From the Municipality
The process of obtaining building permits from the municipality is notoriously lengthy. Within the City of Toronto, for example, there are numerous policy and regulatory controls which have slowed down the supply of new units coming to market. These controls are also one of the reasons for the cancellation of projects post-sales. Although a developer can start selling the pre-construction project prior to receiving the proper building permits required to begin construction, the purchase and sale agreement's addendum includes a timeline that features a permit approval deadline. This deadline is a part of the early termination conditions outline in the addendum, which if surpassed, could result in your purchase being terminated. The purpose of the addendum is to not only restrict the conditions under which developers can terminate agreements early but require them to take responsible steps to satisfy those conditions.
While the addendum offers purchaser's transparency, it does not eliminate all the risks involved in purchasing a pre-construction condo or townhome. The limitations and level of disclosure that the addendum requires helps protect you and inform you of the potential risks, however unlikely they are. It is important also to remember that the addendum does not replace having your purchase and sale agreement reviewed by an experienced real estate lawyer. A new property is one of life's most significant investments. The more you know before you enter into the deal, the better equipped you are to know what to do if you are faced with a cancellation.
How to Mitigate Your Risk
Research. Research. Research.
Researching your developer before signing the purchase agreement is key to mitigating the risk of losing your unit. An experienced developer with a great brand and reputation has more to lose by cancelling their project than a new developer. Do your due diligence by checking consumer reviews and publications mentioning the developer. Although this isn't a foolproof approach, it's a great place to start.
Tarion Directory of Builders is another approach and useful resource for looking into the developer's profile. At this website, you can search for things like previous projects that were unduly delayed or cancelled. You'd be surprised to find out that some developers have racked up quite a few cancellations which in that case you should steer clear of working with that developer.
What to Do If Your Condo Project is Cancelled
While there seems to be no shortage in the demand for condominiums, there is a shortage of pre-construction condo units available for sale. Unfortunately, this is due in part to development projects taking longer than expected, or some being cancelled altogether. If you find yourself entangled in the latter scenario, you are protected, and you do have rights as a purchaser.
Under the Condominium Act, if a condo project is cancelled, purchasers are entitled to receive their entire deposit back, including any payments made for extras and upgrades, plus interest within 10 days. This is because the developer is required to put your money in trust or provide acceptable alternative security. If a project is terminated through no fault of your own, and the deposits and other amounts are not repaid by the developer, condo buyers are eligible for protection of up to $20,000. If your deposit is over $20,000, you can collect the rest of your deposit under a major insurance company who will issue you a deposit protection policy. Your lawyer may also have a strategy for you to collect your outstanding funds from the developer so do seek his or her advice before you make any decisions.
Luckily, there are consumer protections in place to ensure that all reasonable steps are taken to complete a condominium project, but it is essential to understand your rights as a purchaser if your project is cancelled.
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