Photo by Ennio Dybeli on Unsplash
Whenever cancelled condo projects make the news, utter panic spreads out amongst those who've already invested. Steve Jelenic of Chestnut Park Real Estate Ltd. and Christie's International attempts to assuage those worries.
What do you do if the pre-construction condo project you invested in gets cancelled?
This literally comes down to legalities. It comes down to the agreement of purchase and sale, which you signed with the builder and which 95 per cent of people don't read.
Instead, they give it to their lawyer who usually reads the first few pages and says, “Okay, it's good.” But, the builder has an escape clause built-in, which allows them to escape from the contract due to any unforeseen circumstances, but the builder will also return any investor's deposit. The escape clause is not something a property lawyer usually brings up to their clients.
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The only way a builder can escape from these projects is to have an escape clause inside the agreement of purchase and sale, which is the size of a bible. By comparison, a resale contract is very thin – it's very easy to read through and comprehend – but a pre-construction properties agreement of purchase and sale is usually hundreds of pages and no one wants to read through the whole thing.
They give it to their lawyer to read, but lawyers don't really bring up the issue of escape clauses because cancelled projects didn't happen very much. But now we're seeing it happen more and more, you're starting to see the issue of escape clauses being raised.
Is it possible to invest in a development that doesn't have an escape clause?
No builder would be that stupid, especially in a hot market where condos are likely to sell out in a heartbeat. If the market turns, builders will have to get more creative to offload inventory. With the frenzy of the current Toronto market, there's no need for builders to put themselves in harm's way when they don't have to.
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If you are buying pre-construction, you want to make sure you know the reputation of the developer and it helps if there are no assignment clauses in the purchase agreement. When there are assignment clauses, people tend to buy just to scalp the property after. It's like a scalper at a leaf game: they bought the tickets for a lower price and then are trying to assign them after for a higher price. This means a lot of investors will buy in and when an investor buys they're going to rent it out. It's important to be in a building which has a high percentage of owners vs renter.
There are so many things to keep in mind with pre-construction condos: location, builder, what type of building it is, is it boutique, how many residences are there and what's the quality of the building? All these things come into play when you're trying to vet a pre-construction project.
Since you can’t see the finished product, you almost have to close your eyes, cross your fingers and hope for the best.
There's a low bar of entry for realtors, so not a lot of agents understand legal precedents in pre-construction or the legal ramifications of such things like easements and status certificates. If you find your pre-construction condo cancelled, your deposit returned and can expect a long battle with the builder to recover damages you should go to the real estate lawyer who assisted you with the purchase.
READ: Condo Cancellations Risk Crisis Of Confidence In Toronto Real Estate
Your real estate lawyer should then break down your contract in more detail. Some builders may return your money with interest. Alternatively, you may end up with an option to join a class-action lawsuit with other buyers.
I don't want to make it seem like builders are evil because they're not. Things happen — they may not have the proper zoning permits, or financing or the land could be contaminated. In the end, they are providing a service to the community and without them, our market would be a disaster.
The good news is, your deposit was likely higher than what you need to afford a condo in today's current market because again, you were paying tomorrow's prices today. So, when your deposit of $1,200 to $1,400 per square foot is returned, you'll likely be able to find something at $1,000 per square foot on the resale market. However, with resale, you'll likely have to compete with other buyers. But at least you'll be able to see exactly what you're buying before you put in an offer.
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