Editor’s Note: Two days after this article was republished online, Tarion released a revised and approved version of Builder Bulletin 51 – Residential Condominium Conversion Projects. This article, which originally ran in print in the September 2017 issue of CondoBusiness, has been updated to reflect the fact that the initial period for pre-existing elements is seven years, not five years (as the article previously stated, based on the draft version of BB51).
Starting next year, builders and vendors of residential conversion projects will have to register with Tarion and obtain approval to proceed with their plans. These changes under the Ontario New Home Warranties Plan Act will help close current gaps in consumer protection.
A residential conversion condominium is where an existing building (office, factory, rental apartment building, as examples) is refitted or expanded to create a multi-unit condominium corporation registered like any newly built condominium. With conversions, there are often two major hurdles that the corporation’s board and owners may encounter during the first few years after registration: no Tarion warranty protection and insufficient funds for imminent expenses.
Current shortfalls in consumer protection
The common elements of conversion corporations have no Tarion warranty protection, as is currently afforded to newly constructed condominiums. Even if the conversion included newly constructed components (roofing, heating/cooling equipment, windows) or if there were new building structures constructed (new row townhouses as part of an existing loft conversion), there would still be no common element warranties. As such the board is left to deal with the vendor/builder on building deficiencies.
The common elements in newly constructed residential condominiums have a range of Tarion warranties, which kick in on the date of registration. In the first year, warranties ensure condominiums are fit to live in, up to Ontario Building Code, and the work and materials are free from defects. Through the second year, warranties continue to cover certain types of defects, violations of the Ontario Building Code’s health and safety provisions as well as water seepage through the basement or foundation walls. Major structural defects have warranty protection for seven years.
There can be a host of major common elements in a newly registered conversion that may meet code, but are nearing the end or have exceeded their expected service life. This can include building envelope components, parking garage structures, balconies, elevators, and heating and cooling equipment.
The reserve contribution in the vendor/builder’s first-year budget does not typically account for these significant costs. The standard calculation of 10 per cent of the operating budget as the first-year reserve transfer has no relation to what it should be to address these imminent expenditures.
As such, the corporation can be faced with insufficient funds to address major repair costs in the early years after registration. And the major repairs may only be identified through the Class I Comprehensive Reserve Fund Study, which is done in the first year after condominium registration.
Legislative changes bring new requirements
To address these shortfalls in consumer protection, effective January 1, 2018, the Ontario New Home Warranties Plan Act will require builders and vendors who sell units in an applicable residential conversion project to be registered with Tarion and undergo an approval process before the proposed project can commence. The full process is outlined in Tarion Builder Bulletin 51 and includes:
Property Assessment Report
Either a licensed engineer or architect provides a general description of the building, its condition and the planned conversion. This high-level report is provided solely to Tarion.
Capital Replacement Plan
An architect or engineer creates an expected work schedule, including budgets, for modifying, repairing and replacing pre-existing common elements for the 45 years following registration. This involves assessing the condition of the common elements and identifying related key risks. It also involves assessing structural adequacy and destructive testing. This report is provided solely to Tarion.
Pre-existing Elements Fund Study
Provided to all purchasers, this report generally describes the new building and planned conversion and includes a schedule for anticipated work in the seven years after registration. The report also shows expected work for all pre-existing elements for the following 38 years and includes a list of pre-existing elements that will be repaired, replaced or restored before the condominium is registered. The study will also calculate the amount of funds the vendor/builder will need to contribute to the pre-existing elements fund to cover the cost of expected work in the first seven years after registration.
The funds for the work expected in the first seven years will be placed in a separate escrow account for the condominium corporation. Further, the funds must be in place at the time the project is enrolled with Tarion. After the condominium has been registered, the fund will be transferred to the corporation in a segregated account to be used in accordance with the expected work schedule included in the pre-existing elements fund study.
Warranty claims under expanded coverage
How do the Tarion warranties come into play? In two ways.
A performance audit will still be required under the Condominium Act to identify common element deficiencies. Pre-existing elements cannot be expected to perform as new elements, so they will not have the normal first-year warranties that newly constructed common elements (of the conversion) have with respect to workmanship and materials. Ontario Building Code and fit-for-habitation warranties will, however, apply. The second and seven-year warranties will apply both to pre-existing and newly constructed common elements in conversion projects.
Tarion warranties will also apply if the condominium corporation feels that the funds allocated for repairs and replacements in the first seven years may not be sufficient. A warranty claim to Tarion and the vendor/builder can be initiated.
It will be interesting to see how warranty claims will be handled. Two of the key tenets of all Tarion warranties are that normal wear and tear (which is to be expected with pre-existing elements) and improper maintenance will void coverage. It’s anticipated there may be considerable debate over the scope of work and costs allocated in the pre-existing elements fund and what’s deemed necessary by the condominium corporation and its performance audit consultant.
Another caveat is that the above-described reporting and funding requirements and Tarion warranty provisions will not apply to conversions of rental apartment buildings. This appears to be a tactic to preserve Ontario’s rental stock. In the writer’s experience, apartment buildings converted to condominiums often retain many of their original building components. Hence, they would also benefit (perhaps more so as compared to other forms of conversion) from a comprehensive pre-existing elements fund.
The changes to the Ontario New Home Warranties Plan Act represent a major step forward in consumer protection for conversion condominium unit owners. They include:
• More disclosure on the status of pre-existing common elements;
• seven-year funding by the vendor/builder for pre-existing elements, setup prior to project approval/enrollment; and
• warranty protection for both pre-existing and newly constructed common elements.