early termination

Early termination clauses open to possible abuse

Addendum permits developers to insert conditions into purchase or sale agreement
Monday, April 8, 2019
By Patrick Greco

Lately there has been a lot in the news about the cancellation of condominium projects in the Greater Toronto Area. These cancellations were met by frustration and anger from unit purchasers who, though they received their deposits back, along with the nominal interest prescribed under the Condominium Act, felt that this did not go far enough toward making them whole.

How, exactly, is a developer permitted to simply cancel a project, sometimes a number of years after the first agreements of purchase and sale were signed? The answer lies in the mandatory Tarion Addendum to the agreement and purchase and sale of a pre-construction unit. The Addendum requires a developer to provide a unit purchaser with a list of critical dates in the context of the Tarion delayed occupancy warranty.

However, with regard to the issue of project cancellation, the Addendum also permits a developer to insert into an agreement of purchase and sale certain early termination conditions which, if not waived, can lead to the termination of the agreement of purchase and sale. These include:

  • Conditions that permit the developer to terminate the agreement based on the fault of the purchaser. One such common condition is the assignment of the agreement by the purchaser without the consent of the developer.
  • Conditions that solely benefit the purchaser, such as to obtain financing or the statutory 10 day “cooling off” period following the execution of an agreement.
  • Conditions that make the agreement conditional upon receipt of approval from a government authority for things like planning/zoning changes (including minor variances), site plans and similar agreements, and the obtaining of easements or similar rights serving the property.
  • Conditions that solely benefit the developer, notably confirmation that financing for the project on terms satisfactory to the developer has been obtained by a specified date.

It is the final two categories of conditions that can lead to the types of cancellations that have been in the news.

A major problem with these types of conditions is that they are open to possible abuse. For example, a project that was marketed as having a certain number of floors or a certain range of uses, may be conditional on municipal approval for a greater number of floors or additional uses, even though there may only be a limited possibility of ever receiving this approval. Similarly, a condition requiring the developer to confirm that it has been able to obtain financing on terms satisfactory to the developer is not pegged to whether reasonable financing exists that would permit the project to proceed, only to whether the terms are “satisfactory” to the developer. So, even though the Addendum clearly provides that the developer must take “all commercially reasonable steps within its power” to satisfy early termination conditions, this still leaves open a tremendous amount of room in which something like financing could be used as an excuse to cancel a project for other reasons.

These problems are compounded by the fact that a financing term such as that set out above does not have a tight timeline within which it must be waived by a developer. Instead a condition of that type can remain open up until 90 days before the First Tentative Occupancy Date for the unit, which can be many months into the future. It is this factor that leads to perhaps the most troubling impact of the cancellation of a project. Although a project may be cancelled years after an agreement of purchase and sale was signed, the developer is only required to return the purchaser’s deposit, along with nominal interest as prescribed in the Condominium Act. There is no accounting for the fact that the purchaser has been kept out of a rising housing market for months, if not years, and now may not be able to find a similar home in a similar area for anywhere near the same price and may, in fact, be priced out of the market altogether.

The final aggravating factor is that even though early termination conditions are governed by Tarion’s Addendum, Tarion itself has no power to award damages to jilted owners. The most Tarion can do is investigate whether a developer has acted properly and use that to potentially prohibit that developer from registering further projects. That does little to help a purchaser on an already terminated project. Instead, purchasers are left out on their own to consult with lawyers as to whether they should litigate against deep-pocketed developers. Indeed, the latest round of project cancellations has already led to at least one court application already having been commenced on behalf of a large group of unit purchasers in the cancelled Cosmos condo project in Vaughan.

There is no doubt that purchasing a unit in a pre-construction condo project comes with risks. In return for the potential to own a brand new unit, at a price that is almost certain to appreciate in the current housing climate, a purchaser must recognize that they are shouldering certain risks that the project will not get off the ground. However, two relatively straightforward conceptual fixes that would help protect purchasers are:

  • Limiting the deadline by which a developer must waive certain types of conditions. Some have suggested that this should be a maximum of 90 or 180 days after the first agreement of purchase and sale for the project is signed. This would force developers to be more certain of their municipal approvals and financing prior to signing agreements, lest they go to the trouble of selling units only to have to cancel the project a few months later. This would protect purchasers by ensuring that their deposit money is not tied up for years and that, if a project is cancelled, they can quickly look for another purchase.
  • Requiring a developer to return to purchasers not only their deposit amounts, but instead an amount that reflects the estimated fair market value of a unit of similar size and quality in the same geographic area. This would certainly require some legwork, but could be overseen by Tarion, especially with regard to any security that may have to be posted in this regard.

There is always risk in buying something sight unseen, and many developers take great pride in delivering their purchasers a quality completed product. However, that does not mean that purchasers, many of whom may view this purchase as a home or a long-saved-for rental unit, should be left to the whims of a developer who may take advantage of the leeway afforded by early termination conditions.

Patrick Greco is a partner at Shibley Righton LLP with a practice specializing in condo law. 

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