multi-residential

Pre-construction sale cancellations: What are the options?

Thursday, May 9, 2019
By David Taub

What can a purchaser do when their agreement to purchase a pre-construction condominium unit is cancelled? This affects condo investors, or landlords, that buy multiple new units to lease out.

Over the last two years, multiple news headlines announced further cancelled pre-sale condominium projects. While there are many causes for the cancelled projects, two key reasons are the significant and rapid increase of both the construction costs and interest rates, which can cause projects to fail.

The increased costs put developers in situations where their projects, which appeared lucrative at the outset, are no longer viable or profitable.

Increasing real estate values can also lead to cancelled sale agreements if a developer believes it can increase its profits byre-selling the units at a higher price. These projects are not cancelled in their entirety, but instead, the pre-sale agreements are terminated by the developer and then those same units are remarketed at the higher current market prices. This step is not taken lightly by developers and only some developers will do this, as it damages their reputational capital.

However, the fact is that this has been the outcome for a number of large pre-sale condominium projects in the Greater Toronto Area in the last few years.

Developers usually will rely on specific conditions in their sale agreements which permit termination of the contract in specific enumerated circumstances. Whether the termination was properly made under the terms of the sale agreement depends on the facts of each individual case, and each individual agreement.

Regardless of why developers terminate their sale agreements, the end result is the same for purchasers, who are thrown back into the real estate market. There are often years between the date that the sale agreements were made and the date of cancellation. In the interim, real estate prices and the cost of

alternative condominiums have risen significantly, with the result that these alternatives are less attractive than the original sale agreement. For the luckless purchaser, the prospect of another pre-construction sale agreement appears risky and undesirable.

Some of these buyers will consider their legal options, including a claim against the developer. Both builders and buyers should to know what options are available to a jilted buyer.

The deposits are typically returned to the purchasers and the purchasers are left with two options: 1) accept the return of their deposits and move on, or 2) bring a claim against the developer for breach of contract. The remedy for breach of contract will be either an award of monetary damages or, in exceptional circumstances, an order for specific performance.

Specific performance

Specific performance is a remedy awarded by the courts in which a contracting party who is in breach of contract is compelled to perform its contractual obligations. This is an exceptional remedy which is only granted where monetary damages are not sufficient as a remedy. In respect of a contract for the sale of land, specific performance is available only if the property is “unique.”

Residential properties, particularly condominium properties, are mass produced. If a deal falls through for one property, another comparable property is frequently readily available.

That said, there have been recent cases in which courts have ordered specific performance of the vendor for the sale of condominium units. In these cases, the purchasers were able to show evidence that the properties were unique, given the size, features and location of the properties. Importantly, in these cases, the units were either already completed or nearly completed.

If the condominiums are still in the pre-construction or early construction stages when the sale agreement is terminated, it is highly unlikely that specific performance will be ordered.

Damages

In most cases, where the developer is found to have breached the contract, purchasers will be limited to a claim for monetary damages.

Damages in these circumstances would be quantified based on the difference between the purchase price under the agreement of purchase and sale and the market value of a replacement property on or about the date the agreement was terminated. Any deposit not returned by the developer would also be included in the quantification of damages.

As well, in Canada, parties to a contract are obligated to perform those contracts in good faith. If a Court determines that the developer acted in bad faith in terminating the contract, it may award punitive damages, which are usually in the range of 10 to 20 per cent of the assessed damages.

Class actions

Individual consumer claims are certainly problematic for developers, but it is unlikely that each purchaser would bring a claim and damages on an individual scale may not cause serious concern. The greater risk for a developer and benefit for a consumer is a class action lawsuit.

Class action lawsuits require only one plaintiff, who represents that entire class of plaintiffs. If a class action was commenced against a developer for terminating its sale agreements, only one purchaser would need to act as the representative plaintiff for all of the project’s purchasers, but damages for all of the purchasers would be at issue in the action. The developer is potentially liable for the total damages for all of the terminated sale agreements. As well, class actions often attract media attention, which can damage the developer’s reputational capital.

Unlike in conventional litigation, in which lawyers are typically paid at an hourly rate, and the successful party hopes to collect some of its legal costs at the conclusion of the litigation, class action lawyers typically work on “spec” – meaning they do not get paid unless and until the litigation is successful, whether by a judgment or a settlement. As such, members of the class will not incur the upfront legal costs of supporting the action.

David Taub is a litigator with Toronto business law firm Robins Appleby LLP. This article first appeared in CondoBusiness Spring 2019.

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