When buyers launched a class-action suit against a developer that cancelled a preconstruction condo project, they argued that they should be awarded damages reflecting the lost increase in value of their units.

But the court recently dismissed their class action case in Ritchie v Castlepoint Greybrook Sterling Inc, and the details of that ruling are a good reminder that buying preconstruction is always a “buyer beware” situation.

Lost Money

Most, if not all, purchase agreements include an escape clause for the builder, which allows them to stop construction for reasons such as being unable to secure financing.

They also include provisions for preconstruction buyers to get their deposit back, often with interest.

But years go by between the buyer putting down a deposit and the building being built. In that time, most buyers expect the value of their units to go up in value. If the project is cancelled, they lose the expected increase in value, and may also have to pay more for a unit in another building if prices increased in the market while they were waiting for their own condo to be built.

Up until recently, the Toronto market was so hot that it was rare for a project to be cancelled. But in the past few years, more projects have been cancelled, especially as construction costs rise.

The Case

In the case of Ritchie v Castlepoint, the developer cancelled the project, saying it wasn’t able to get financing in time, which was a condition in the contract, says David Taub, a partner with Robins Appleby Barristers and Solicitors. Specifically, the developer said it wasn’t able to obtain the necessary municipal approvals and permits, and with rising construction costs, the project became untenable and so not financeable.

As per the contract, the developer refunded the preconstruction buyers’ deposits with interest.

READ: Ask An Agent: What Happens If My Pre-Construction Condo Is Cancelled?

The contract also had an exclusion clause, making the developer not liable for any damages resulting from the termination of the agreement.

But purchasers of 179 units in the project sued for damages of more than $10 million, representing the increased market value in their units. They argued the exclusion clause was not enforceable, because the developer had not done everything it reasonably could to make the project happen, Taub explains.

The court, however, found that the exclusion clause worked to limit the developer’s liability, regardless of the specifics of how the developer had acted.

This is a win for developers, who don’t have to worry about whether the court will analyze their stated reason for terminating the contract, Taub says. They only have limited liability if cancelling projects.

The case is going up for appeal, which may overturn this ruling.

So does this mean preconstruction buyers have no recourse if a project is cancelled and they feel the developer has not acted in good faith?

Class-action Not the Only Option

Peter Spiro, counsel to Goldstein Law, recalls a couple of other, similar cases, where the class action was dismissed because of the Tarion warranty addendum to the contract. This specifies disputes can only go to arbitration, which does not allow for class-action suits, but only by individuals.

This means preconstruction buyers have another route to go after damages, through arbitration, if they believe the developer has not acted in good faith. The developer is required to pay for arbitration, unless the arbitrator finds the buyer has launched a false complaint.

Still, purchasers take on greater risk when buying preconstruction.

Tips for Buyers

Azin Ghorbankhani, a lawyer with Seif real-estate law firm, says she always recommends buyers research the builder, looking for any cancelled projects in the builder’s past.

She also suggests they look at where the proposed building site is. If there are other condos in the area, they know the city will likely give the builder the permits they need.

Buyers have a 10-day recession period after signing a contract, so she recommends they get a lawyer to look at it. Beyond the exclusion clause, which is standard, a lawyer may be able to flag some issues and try to request some adjustments to the agreement.

For instance, many buyers are shocked to find a mortgage commitment in the agreement, or levy fees that are higher than they expect, she says.

Sometimes contracts, which run 30-40 pages, may allow a builder to change unit numbers or total square footage.

Bottom line, buying preconstruction has risk built into it that buying an existing unit does not -- but for the past couple of decades that risk has paid off for many investors. Only time will tell if many more are willing to bet on the future again.

Real Estate News