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What Happens When a Developer Cancels a Condo Project?
Mar 04, 2015
It was devastating news for purchasers of UrbanCorp’s Kingsclub condos, a pre-construction Toronto condo building just north of Liberty Village. The developer recently announced an about-face on their building plans. Toronto condo rentals will replace these condos for sale in Toronto in King West. A move that left 181 buyers in the lurch.
Many purchased these pre-construction King West condos back in 2011 and have been waiting patiently as the project stalled out; the site was just entering the early phases of foundation work. Buyers were anticipating an update from the builder about delays but few would’ve expected the news that the project had in fact been cancelled.
The reason? Apparently the builder couldn’t get the original project financed but there is no official statement as of yet on UrbanCorp’s website. In fact, the Kingsclub microsite is still live as I’m writing this article with no mention of the cancellation.
Much like the quiet cancellation of The Selby at Bloor and Sherbourne just before Christmas – it’s also becoming Toronto condos for rent – builders are attempting to bow out of projects quietly, with minimal media and legal fuss. But The Selby was only in its first month of sales and we don’t believe any units had actually been sold yet. And so the impact of that decision on consumers was minimal. The UrbanCorp situation is very different as they were effectively sitting on buyers’ down-payments for years and tying their hands from purchasing anything else. Not intentionally, of course, but the damage to buyers is real nonetheless.
Reimbursements Will Come, But They Won’t Be Enough To Appease Most Buyers
Buyers will receive their money back plus interest but that interest is likely to be minimal. Developers’ contracts usually refer to the Bank of Canada’s overnight rate as their maximum requirement. Thanks to the BoC’s recent announcement of a cut to prime, that rate is now just 0.75%. So for a $20,000 investment three years ago, that translates to a mere $20,453. We don’t know what was stated in UrbanCorp’s contracts–they may have offered a higher interest rate. But chances are that the interest doesn’t come close to buyers’ real losses in terms of potential earnings.
Think about how much these investments would’ve grown had the buyers purchased re-sale Toronto condos back in 2011. And beyond the lost value appreciation, buyers are now facing a much more aggressive Toronto condo market now than they were three years ago. So buyers are going to have to pay more now to purchase a similar unit in another building then had the project not been cancelled or had they opted at the time to buy re-sale instead.
Your Legal Ground is Shaky at Best
This unfortunate incident underscores the risk involved with buying on spec and why pre-construction is not always a wise investment. If you’re one of the unlucky buyers of the Kingsclub condos or if you’ve purchased a different pre-construction Toronto condo for sale and are concerned that this may happen to you too, what are the legal ramifications? Can you take legal action for loss of potential profit?
We spoke with Toronto lawyer Mark Youngman who specializes in real estate law to find out more.
“The fact of the matter is, the builder is under no obligation to reimburse buyers beyond the amount dictated in the purchase agreement, which almost certainly includes a clause about potential project cancellation if sales are low, providing it adheres to Ontario condominium law. I haven’t seen UrbanCorp’s Kingsclub contracts but recent media coverage refers to the Bank of Canada’s current overnight rate (which is now at 0.75%) for each year since the initial deposit, minus 2%, which sounds fairly typical.
If, however, the interest rate they’ve stated in their contracts is less than what’s stated in Ontario condo law, then buyers have recourse to fight for that extra amount. But the difference is probably a few hundred dollars and just not worth the headache.
It’s highly unfortunate and very disheartening for a buyer to be in this situation. But when you buy pre-construction, you’re rolling the dice. You need to read contracts carefully and consult a lawyer before buying a property on spec. So many things can go wrong as evidenced by this event.”
Mark goes on to say that your best bet may be in a combined, class-action lawsuit but be aware that these typically carry on for years with no guarantee of a positive outcome and may require money upfront from the plaintiffs.
The bottom line is that, in most cases, it’s best to take your deposit money back plus the measly interest and walk away. Chock it up to a hard lesson learned and make sure that you speak with a realtor who’s highly knowledgeable in the Toronto condo market before making your next purchase.
Mark Youngman is a Toronto lawyer specializing in real estate law who acts for purchasers, vendors and mortgagees for residential and commercial real estate transactions. He became senior counsel in 2008. Mark is a member of the Canadian Bar Association. He is also a member of NARCA (National Association of Retail Collection Attorneys), an international organization for collection lawyers and is a real estate law representative on the Tarion Consumer Advisory Council.
Aritcle by Carl Langschmidt