Cancellation of Preconstruction Condominiums

What to do when a project is cancelled?

The experience of purchasing a condominium can be one that is both exciting, particularly for first time home buyers, and emotionally and financially draining. Purchasers would have gone through the process of assessing their finances with their banks, expending considerable effort in looking at different condominiums, plans and locations, speaking to lawyers about the contracts, and completing the other strenuous tasks that goes into deciding to buy a condominium. While many people are purchasing these condominiums as investments, the majority are looking to make a home in the building. As such, this is made all the more frustrating when a developer/ builder seemingly cancels the agreement on a whim, leaving the purchaser without much recourse.

Seeing the same project subsequently being sold for a higher price by a new developer only adds insult to injury and leaves people frustrated, angry and disheartened. One of the biggest financial losses suffered by people who have had their contracts terminated is the loss of appreciation of the value of the property in the market. They would have paid a certain price for the property and, while they waited, the price of condominiums, particularly in Toronto, would have increased – in some cases, quite drastically. Further, these purchasers would have received no compensation for the cancellation of their previous agreement and are instead, left looking at another project being sold in the exact same location at a higher price. The upshot is that they may have been priced out of the market while waiting. With the increase in prices and the level of activity in Toronto’s market, this can mean the difference between being able to buy a condo or not and ultimately, the difference between being a homeowner or not. What can add to this vexatious process is the sense that the cancellation of their deal was largely due to the developer’s decision to resell the property or project at a later date for greater profits instead of for legitimate reasons.

How often does this happen?

Although the frequency of this happening has been lower this year in comparison to years past, it remains a pertinent issue. For example, over the last several years, reports have revealed that there were over 2000 stalled or cancelled projects in 2019, 5000 units cancelled in 2018, and 6000 units cancelled in 2017 – up from just 379 in 2016. This in turn has prompted the government to tighten, albeit minimally, some of the regulations to protect consumers. Unfortunately, the result is that consumers still remain largely unprotected. As a result of these cancellations, many of which were high-profile and resulted in great losses for consumers, as of January 1, 2020, new condominium purchase agreements were required to include a schedule, clearly informing buyers of the potential risks of preconstruction units. The schedules highlighted several factors which could lead to early termination of their agreements such as minimum sales thresholds, developer financing or approvals from the municipality. These were introduced after the spate of cancellations in recent years left thousands of consumers without much recourse.

Why is this happening more often?

Although there are several factors that influence a developer’s decision to cancel a project and consequently, the purchase agreement, it often boils down to three legitimate reasons – and perhaps some less legitimate ones – all of which are not necessarily satisfying to the consumer. The reasons are as follows:

The developer has not met the minimum sales threshold. It is often a standard condition that before construction can begin, developers will need to sell at least 70% of all units within a building. If the developer does not meet this threshold, the project gets cancelled. It is worth noting, however, that in the hot Toronto market, this scenario is rather unlikely.

The developer does not get the financing required to complete the project – which is perhaps one of the more common reasons that lead to cancellation. Prices are increasing on almost everything including all the costs that go into a project. Factors such as the cost of labour, materials, shortages, and delays resulting from the pandemic, etc., can increase exponentially to the point that the project is no longer feasible. Municipalities can also increase their development charges and levies for projects. This results in increased total costs for the project and leads to developers deciding that it is no longer practical to continue building or to even secure financing from their lenders. Construction costs in Toronto are rapidly increasing, leading to an increased risk for projects being sold at this time.

The developer does not obtain the required approvals for the project from the city. Developers are allowed to begin selling pre-construction units before they receive the proper building permits. They sell the units on the expectation that they will get these permits and develop the project the way they anticipate. However, the city may put limitations, such as the number of stories for example, that make the project less profitable and therefore less feasible. Until the project is fully approved by the city, the developer cannot know the full extent of what is going to be required and thus, if things do not go according to their preliminary plans, the cost and feasibility of the project can diminish to the point where it makes more sense to simply cancel it.

There can also be nefarious reasons to cancel the project such as a developer coming to the realization that the price per square foot has increased exponentially and thus, they stand to gain more by relaunching the project under a different company for a higher price per square foot or perhaps simply selling the land at the said higher price and letting another developer develop the project.

Best way to avoid this type of situation?

The best way to avoid this is to start with the right understanding and working with an experienced real estate home closing lawyer. It is important for buyers to understand that first and foremost, the current laws and regulations offer inadequate legal protection against a developer’s decision to cancel the deal. Whether their reasons are legitimate or not, the agreements are drafted in such a manner that recourse for the purchaser is limited, if available at all. Historically, consumer attempts of pursuing legal action against developers/ builders has yielded largely fruitless results. This avenue is also very expensive, time-consuming and uncertain. Even in the number of cases where there have been class action suits against builders or other such suits for compensation after cancellation, the rewards have been of limited benefit to the buyer.

There are, however, certain safeguards that a buyer can utilize to reduce the possibility of project cancellations and agreement terminations. One of the main things a buyer can do is to deal with reputable builders. Builders with an extensive history and long track records of construction are going to be better at budgeting their projects and thus, less likely to be impacted by issues such as rising costs and government approvals. Additionally, because of concern for their reputation, they are less likely to try to cancel the project for reasons of profit. We emphasize the importance of due diligence by always telling buyers to research a builder’s track record and other developments. It is also strongly recommended to speak to other purchasers of units from the same builder to gauge their experiences, both in terms of the process of the purchase and construction, and the quality of the unit. Stay away from builders that have a dubious past and look for builders who have had a longstanding history of dependability and quality in the business.

It is also crucial to have the contract reviewed by a lawyer. Every pre-construction condominium contract is subject to a ten (10) day cooling off period where within this time frame, the buyer can get their deposits back and have the deal cancelled without question. This is the buyer’s opportunity to have the contract reviewed by a lawyer, who can in turn, point out all the aforementioned areas of concern and provide the necessary advice to minimize risk of surprise and disappointment later. Although a builder’s contract in this current market is virtually non-negotiable, having the contract reviewed by a lawyer allows a buyer to at least understand the risks and make informed decisions as to what they are comfortable with accepting. It is important to note that this applies only to condominium contracts. Contracts for resale homes do not have a 10 day cooling off period and should have a condition on lawyer’s review. We include a complimentary written review of the agreement as part of our closing process, partly because we do not want any buyer to feel compelled to sign a contract before we have had a chance to let them know what is in it.

A buyer should also assess whether buying preconstruction units makes sense for them. In the past, preconstruction costs were lower than resale costs and there was an advantage in buying preconstruction over resale. In the current market, very often, the cost of buying a preconstruction unit is the same as, if not more, than existing resale units. While there is an advantage in buying preconstruction in that a buyer can put down less money upfront to secure a unit and only have to come up with the final balance years later when the unit is ready, purchasing a resale unit will allow a buyer certainty as to the cost, the closing date and the quality of the unit being purchased, all without the risk of cancellation.