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Bridge Beat

Apr 12, 2019

Condominium Cancellations – Part 2

A recent article in the Toronto Star http://tinyurl.com/y3nvub69 highlighted continuing purchaser complaints as to the financial impact of condominium cancellations.  The most recent condominium cancellation which triggered the article was the cancellation of the On The Danforth Condominiums by DIAM Developments in March 2019.  The developer cancelled the 135 unit 10 storey project "due to unforeseen circumstances outside of DIAM's control."

A developer's rights to cancel pre-construction projects are extremely limited under the Tarion Rules and the Addendum that is attached to the Agreement of Purchase and Sale.  Essentially, they can only be cancelled for the following reasons:

  1. a lack of prescribed government approval (such as zoning);
  2. a failure to meet a minimum pre-sale threshold by a certain date;
  3. a failure to obtain satisfactory financing by a prescribed date; and
  4. a failure of the purchaser to provide satisfactory evidence of a mortgage commitment to finance the balance of the purchase price.

Developers do not make the decision to cancel projects lightly.  There are significant pre-development costs, including huge marketing expenses that are thrown away when a project is cancelled.  Moreover, the developer's reputation in the marketplace and its ability to get licensed by Tarion can be severely tarnished and affected.  We should also keep in mind that the actual risk of condominium cancellations is relatively low and consistent when you look at the number of sales vs. the number of cancellations on an annual basis over the last 10 years.  

The article refers to discussions with Tarion which revealed it is in the process of preparing new disclosure rules for all pre-construction purchase agreements so that purchasers are fully aware of the risks in buying a pre-construction condominium which is subject to early termination conditions noted earlier.  The new rules could potentially require developers who cancel a project to provide some type of evidence to support the decision.

The real problem with condominium cancellations is not that developers are being greedy or acting improperly in terminating projects.  This is a rare occurrence at most.  The real issue is that purchasers are not making informed decisions and assessing the risks of their investment.  Essentially, they are buying at the early stage of pre-construction to get in when prices are lower and hope to benefit from the appreciation that the market will give to these units over time.  That is the upside.  What some purchasers don't appreciate (or wilfully ignore) is the risks that they face given the early timing of the purchase.  Zoning may not be in place and costs may escalate by the time the developer is ready to start construction which may make the project uneconomic at the original sale prices and, therefore, unfinanceable. 

Purchasers have choices.  They do not have to buy at the pre-construction stage.  They can wait until construction has commenced and there are no early termination conditions and most other variables have been addressed.  At that point, the likelihood of a condominium cancellation is very slim.  However, at that stage, prices will have already in all likelihood, risen from the pre-construction sale prices.

Purchasers can also purchase a completed unit so that they know about the timing of when they can move in and the actual finishings of the unit and the building.  However, at that stage prices may have increased even more.

I have some sympathy for purchasers who have invested in a project and then after cancellation, face going back into the marketplace at a higher price.  As well, they would have received little or no interest on their deposits given the current regulatory structure of interest on deposits.  However, purchasers know or should know of these risks and it is incumbent on them and their financial and legal advisors to ensure that they sign these agreements with their eyes open.  They do have choices.

With the new Tarion disclosure requirements that Tarion and the government are considering, it is hoped that both the purchasers will be better informed and understand the investment risks they are taking. 

So buyers beware, be informed and be educated.

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