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What Happens When A Pre-Construction Developer Fails To Complete A Project?

Pre-construction projects have always attracted buyers easily, whether it is a first-time home buyer or a seasoned investor. They offer a tied deposit structure that allows the buyer to pay down payment in stages, usually spread across a couple years. At the end, you own a brand new unit that’s finished with stainless steel appliances, quartz countertops, and energy-saving features. You get all this at current market price, sometimes lower, and once the property is ready, you are able to sell it at a higher price. 

However, as the pre-construction popularity increases, new buyers are clouded with queries, one of them being – what happens when a pre-construction developer fails to complete a project?

Before any more information, let’s make it clear. ONLY 5% projects in GTA are cancelled or not being able to complete. So, what happens with those 5% projects and their buyers: 

warranty certificate on a blue background

Tarion Warranty kicks in…. 

When a builder declares they can’t finish the project, they are required to pay back all deposits you’ve paid until that point in 10 calendar days. If they aren’t able to or only return a part of your deposit, you can claim through Tarion Warranty, a non-profit safeguard initiated by the Ontario government. For freehold homes, the coverage is up to $60,000, while for condominiums, the protection is up to $20,000. 

If a builder delays the closing or occupancy date beyond the agreed-upon dates without providing proper notice, buyers are eligible to claim up to $7,500 in additional living costs, moving and storage fees, and legal fees. Let’s get into detail how the warranty works for freehold and condo pre-construction purchases. 

Freehold purchases 

Freehold ownership means that the buyer owns both the house and the land it stands on outright. There are no space limitations other than local zoning and bylaws. 

Pre-construction freehold purchases made before January 1, 2018 are eligible for a maximum coverage of $40,000. For purchases made on or after January 1, 2018, you are eligible for 10% refund of the total purchase price with a maximum of $100,000. If you purchased a property that costs $750,000, you’ll receive $75,000 but for a property costing $1,200,000, you’ll only receive $100,000. 

Condo purchases 

Condominium ownership is different in that while you own your individual unit, you share ownership of the land, building, and common areas with other unit owners. All condo units fall into this category and some townhouses that are clearly mentioned as condo townhouses. 

For condos, there are two approaches. All condo builders in Ontario are required to put buyer deposits in a trust fund that can be accessed only once the project is ready for move-in. If a builder uses this money, they are protected for up to $20,000 through Tarion Warranty

Can I sue the builder for the remaining deposit? 

Yes, you can sue the builder for the remaining deposit. You can also join or create a group for buyers who are facing the same and file a class-action lawsuit. You may cite cancellation and false hope as the main reasons. However, be warned that it could take years. The builder can also file for bankruptcy, making your lawsuit even more complex. Here’s what you can expect to happen: 

Automatic Stay of Proceedings

This means that all legal actions against the bankrupt company are put on hold. Creditors, including those part of your class action lawsuit will have to halt all legal actions unless the court gives you the green signal.

Claim Filing in Bankruptcy Proceedings

You will have to file claims with the bankruptcy court within their set deadline. Only then do you have a chance of recovering any damages.

Priority of Claims

Secured creditors are typically paid first, followed by unsecured creditors, which would include most class action claimants. Unfortunately, there is often not enough money to fully satisfy all unsecured claims, so you may only receive a fraction of your claim.

Impact on Class Action Lawsuit

Your class action lawsuit can get dismissed if the court feels there’s no feasible way for you to recover damages. In some cases, you may need to prove their claims in bankruptcy court alongside other creditors to demonstrate that you need the money. 

Potential Recovery from Insurance or Other Assets

In certain situations, claimants might be able to recover damages from the builder’s insurance policies or other assets that are not part of the bankruptcy estate.  

How to avoid pre-construction projects that might get cancelled? 

Use  Home Construction Regulatory Authority’s Ontario Builder Directory as a tool to research builders for the number of units they’ve completed, how long they’ve been in business, any claims made through Tarion Warranty, projects they are currently building, and any disciplinary activities or court cases that were made against them. 

Find a builder that has been in business for at least a decade. If they have too many projects ongoing they will likely be delayed, so avoid them if you want a quick possession. Other than that, visit a builder’s Google Maps listing and read reviews. You can also reach out to pre-construction buyers by posting questions on local Facebook groups to know how their experience was dealing with a particular builder. 

a person in a blue shirt and tie is holding an empty wallet

Why do pre-construction projects get cancelled? 

If you are looking into a project that’s delayed, we would recommend you to not book a unit with them. Sometimes it could mean it is just delayed but sometimes it is the first step towards cancellation. 

Here are 5 reasons projects have got cancelled in the past in GTA: 

1. Money Troubles for the Builders

Developers usually start with a budget, but then costs go up – maybe materials get more expensive, or they didn’t plan well. If they can’t find the money to keep going, they might have to cancel the whole project. In a TorontoRealty blog, David Fleming, mentions a story about Giraffe Condos in Toronto. The developer wanted to build a 27-storey building but only had permits for 10-storey. People purchased units but then got a refund.

The City of Toronto allocates a city planner to every project to offer recommendations and make sure the application is complete and approved. Giraffe Condos got cancelled in the pre-sales stage when the project didn’t have any approval or a design plan. 

2. Paperwork and Rules Headaches

Before building can start, developers need to get a bunch of approvals and make sure everything’s according to local laws. Sometimes, they find out they can’t build as planned because of these rules, or getting the needed permissions takes way longer than expected. If it gets too complicated, they might just decide it’s not worth the trouble.

Builders don’t have to explain why a project got cancelled. You can only speculate that it was either an increase in materials, labour, or interest rates. 

Market Changes

The housing market can be like a roller coaster – sometimes it’s up, and sometimes it’s down. If developers start building during a good time, but then the market takes a nosedive, they might find they won’t make as much money as they thought. Or worse, they could lose money. So, they might pull the plug if things look bleak.

Not Enough Buyers

Developers often sell condos before they’re built to help pay for construction. Based on the number of units sold, they get a construction loan. But if not enough people are interested in buying, they might not get the loans they need to finish the job.  

Bankruptcy 

Urbancorp declared bankruptcy in 2016 and some of their construction sites were listed for only $1. They also had to downsize the design and offered a $50,000 discount to buyers for the design and delays. Many backed out of the deal but never got the full deposit returned. Some, especially investors, chose to stick along and the project was completed eventually. 

Be diligent in your approach. When you work with a realtor, ask them questions about the builder, how their experience has been dealing with them, and also ask around about the realtor. 

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