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The importance of having a lawyer review a new condominium Agreement of Purchase and Sale

When buying a new condominium unit from a builder, there are two primary documents that should be reviewed by a lawyer: the Agreement of Purchase and Sale (the “Agreement”) and the Disclosure Statement. Like any other real estate transaction, the Agreement sets out the contractual terms between the purchaser and the vendor (the builder), including a description of the property being purchased and the price. Unlike other real estate transactions, there is no standardized form of Agreement that builders use. Each builder has their own form of Agreement, which is typically much lengthier and more complicated than the standard resale form of Agreement. The Disclosure Statement, on the other hand, does not include anything specific to any particular purchaser. Rather, it’s a package of documents specific to the development as a whole, intended to provide a purchaser with information about the development and the condominium that will ultimately be created. When spending a significant sum of money on a new condominium unit (which at the time the Agreement is signed has usually not yet been constructed), it is crucial to retain a lawyer to review and explain the finer details of these documents.

Condominium law in Ontario provides a cooling-off period (called the “rescission period”), which provides purchasers of new condominium units (not resale units) an opportunity to have the Agreement and Disclosure Statement reviewed by their lawyer. Purchasers have ten calendar (not business) days from the time that the builder provides them with both the fully-signed Agreement and the Disclosure Statement to terminate the transaction and have their deposit returned. It’s important that a lawyer be retained immediately after purchasing a unit to review these documents as it will typically take lawyers a few days to do so. It should be noted that if a builder makes any material changes to the Disclosure Statement at any time prior to the purchaser taking ownership of the property, the 10-day rescission period will be re-triggered.

Some of the more significant aspects of the transaction that should be discussed during a lawyer’s review are outlined below.

Adjustments to the Purchase Price

Purchasers are often surprised that, unlike in a resale transaction, the purchase price that they agreed to is not the total amount that they will have to pay on closing. There are typically additional charges built into the body of the Agreement, which are referred to as “adjustments” (ie. increases) to the purchase price. Depending on the builder and the nature of the development, these can result in an extra few thousand dollars to tens of thousands of dollars — hence why it’s crucial to have a lawyer explain these potential costs during the rescission period while the purchaser still has an opportunity to back out of the transaction.

Purchasers, with the assistance of their lawyers, may attempt to have certain adjustments deleted but more importantly, however, are to have “caps” (ie. a maximum amount) placed on the adjustments in order for buyers to budget properly. For example, Agreements typically provide that the purchaser will pay any increases to development charges applicable to the unit that the municipality levies after the date that the Agreement is signed. If a cap of, let’s say, $5,000 is placed on this adjustment, a purchaser can be certain that they will not have to pay more than $5,000 in this regard. Without a cap, the buyer’s liability is theoretically unlimited.

Harmonized Sales Tax (HST)

Whereas there is no HST payable on the purchase of a resale home, there is HST payable on the purchase of a new home (including a condominium unit). Typically, HST is handled by including it in the purchase price specified in the Agreement other than the amount of any HST rebate that the purchaser will receive from the Canada Revenue Agency (CRA). Purchasers who move into the property are entitled to a return of a portion of the HST payable on the purchase – the HST rebate. Instead of having purchasers pay this amount and claim a rebate after closing from the CRA, builders simply do not charge this amount to purchasers and instead take an assignment of the HST rebate from purchasers (ie. the CRA pays this amount directly to the builder after closing and the builder applies it to the HST that was payable but not collected).

The result is that, for buyers moving into the property being purchased, they don’t have to pay on closing any HST in addition to the agreed-upon purchase price. However, purchasers buying a property as an investment (ie. not moving into the property on closing) will have to pay to the builder the amount of HST equal to the HST rebate in addition to the agreed upon purchase price — this catches many purchasers who did not have the Agreement reviewed by a lawyer off guard, especially when told they need to pay additional tens of thousands of dollars to complete the transaction days before the transaction is scheduled to be completed. Investors who rent out the property for at least twelve months after closing may claim the HST rebate and a return of the additional HST paid after closing (builders will not accept an assignment in this situation). Investors who do not rent out the property for at least twelve months after closing (like flippers), will not be entitled to an HST rebate.

The above is an oversimplification of the rules surrounding the HST rebate; there are nuances (eg. a purchaser can have certain relatives move into the property and still be entitled to the HST rebate on closing) and certain actions may affect a purchaser’s entitlement to the HST rebate (eg. allowing a third-party renter to occupy the property first), so a purchaser should discuss their intentions with their lawyer to ensure that they do not inadvertently disqualify themselves.

Rental Contracts

The Agreement and Disclosure Statement will provide details as to any rental contracts that a purchaser will need to enter into after closing. For instance, it’s common that furnaces, water heaters, and similar equipment are not included in the purchase price and are not to be owned by purchasers upon closing. Rather, they remain the property of a third-party provider (eg. Reliance Home Comfort) and are leased to the purchaser or unit owner. In such a case, the Agreement will obligate the purchaser to assume the rental contract(s), and as such, a purchaser should be aware of what they will not own and what their obligations in this regard will be (eg. monthly fees, cost to buyout the equipment, etc.).

Assignment

A lot can happen between the time that an Agreement is signed and the completion of construction and the transaction (which is usually a number of years). For financial, personal, or other reasons, a condo buyer may not be able to or even want to complete the purchase. In this case, the purchaser would be wise to attempt to assign the Agreement to another purchaser (instead of simply failing to complete the transaction, which would be a breach of contract and expose the purchaser to significant liability). Alternatively, an investor-purchaser may never intend on completing the purchase, but rather may intend on assigning the Agreement all along — locking in the purchase price, waiting for the unit’s value to increase while the building is being constructed and then assigning the Agreement at a higher price to another purchaser for a profit (ie. the higher purchase price less the purchase price stated in the Agreement). In any event, a purchaser should become familiar with how the Agreement deals with assignments. Assignments are typically only permitted at the builder’s discretion and upon payment to the builder of an assignment fee. These fees could be a fixed number (usually thousands of dollars) or a percentage of the assignor’s profit.

Interim Occupancy and Closing Dates

Buying a condominium unit is not the same as buying a parcel of land in the traditional sense (eg. a house in a subdivision). When an individual purchases and owns a condominium unit, they are in essence purchasing an interest in a legal construct — the condominium — as opposed to an interest purely in land. Very briefly, the legal construct that is a condominium cannot be “created” until all units in the building are ready for occupancy. In turn, a builder cannot sell a condominium unit to a purchaser until the condominium itself has been created. However, units in a future condominium building may become ready for occupancy at different times. Typically, lower floors are completed and ready for occupancy sooner than higher floors.

To avoid having completed units sit empty, condominium law provides for something called “interim occupancy”. Interim occupancy is like renting the unit from the builder until the entire condominium is created and legal title can be transferred to the purchaser. When a purchaser’s unit is ready for occupancy, the builder will notify the purchaser and an “interim occupancy closing” will occur, which is really just the builder handing over keys of the unit to the purchaser and perhaps the purchaser paying an additional deposit.

The purchaser will have to pay monthly occupancy fees to the builder until final closing, which are comprised of the estimated maintenance costs, property taxes, and interest on the unpaid portion of the purchase price — this is the builder’s costs of carrying the unit. In exchange, the purchaser will be able to occupy the unit prior to actually paying the full purchase price and owning the unit. If someone other than the purchaser occupies the unit during interim occupancy, this could affect the purchaser’s ability to claim the HST rebate and this would typically require the builder’s consent. When all units in the building are substantially complete, the builder can “create” the condominium as a legal entity and transfer legal title of the units to purchasers. This is referred to as “final closing” and is when the balance of the purchase price becomes due.

Understandably, a builder cannot with certainty state when a purchaser’s unit will be ready for occupancy and when the condominium as a whole will be completed. Many aspects of the development and construction process are beyond a builder’s control, including delays in municipal approvals and availability of trades. For this reason, a builder’s Agreement will not provide a fixed closing date, whether for interim occupancy or final closing. Instead, the Agreement will provide a “tentative” occupancy date — the date that the builder expects to be able to complete the interim occupancy closing.

Almost without exception there are delays. By law, the builder must provide notice of any such delays in accordance with certain timelines, failing which they’ll have to provide certain compensation to the purchaser (“delayed closing compensation”). More importantly, the Agreement provides for certain dates by which the builder must provide occupancy of the unit to the purchaser (the “outside occupancy date”) and transfer title to the purchaser. These dates are set out in a schedule to the Agreement of Purchase and Sale called the “Statement of Critical Dates”. By reviewing this Schedule, a lawyer is able to give a purchaser realistic expectations as to when they may ultimately come to occupy and own the unit.

Other Considerations

The matters discussed above represent some of the more significant aspects of purchasing a new condominium unit from a builder. However, there are a number of other intricacies to this type of real estate transaction (eg. early termination conditions, Tarion warranty obligations, restrictions and rules surrounding use and occupation, etc.) that make retaining a lawyer immediately upon signing the Agreement to review the relevant documents a prudent decision. Especially for a first-time purchaser, the complexity of this type of transaction has great potential to lead to surprises both on and after closing without a proper review.

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