What to Do if Your Pre-Construction Project Gets Cancelled: Although it’s a fairly rare occurrence, there are times when a builder will cancel a pre-construction project. There are many reasons for this happening in the Toronto real estate market – some legitimate and some, not so much.
When a project gets cancelled, there is likely plenty of confusion around what rights you, the buyer has, and what needs to be done. Here is our best advice.
Are Cancellations Common in the Toronto Market?
Oftentimes, purchasers give the pre-construction contract to their lawyer to read who doesn’t usually bring up the developer 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.
Top 3 Reasons a Project Gets Cancelled
The Developer Has Not Reached a Minimum Sales Threshold
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.
A condo developer needs funds to employ consultants, advertise, and of course 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
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 within 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 reasons 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 aluminum 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% 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.
Not Having the Right Approvals
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 outlined 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.
What to Do If Your Condo Project is Cancelled
Our best advice is to do your research. Also, it’s incredibly important to work with a Broker that is experienced in pre-construction and knows who the most reliable developers in the city are.
Researching your developer before signing the purchase agreement is key to ensuring you’re putting yourself in the right project. 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 talking with your broker and looking at 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. On this website, you can search for things like previous projects that were unduly delayed or cancelled.
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.
Trust the Experts at TRB
If you have questions about purchasing pre-construction and want to connect with us, simply complete our form on this page. We have over thirteen years of experience in dealing with pre-construction buying and know the ins and outs like no other.