An Ontario Superior Court ruling has found a developer acted in bad faith in refusing to accept evidence that would satisfy financing conditions in a presale condominium contract, setting a new precedent that could help tilt the balance of power toward new-home buyers and away from developers.
Justice Katherine Swinton found that Sandra Ania and her husband, Timothy Sullivan, were not in default of an agreement to purchase a condo for $444,900 and that developer Hi-Rise Group failed to act in good faith when it claimed it could keep their $55,624 deposit. Their money, plus interest, has been ordered to be returned, and the parties were ordered to discuss whether a settlement on further damages could be reached. The ruling was handed down on Feb. 15, 2019, almost a year after the couple’s legal saga began.
Starting in January, 2018, Hi-Rise demanded proof of a “binding and unconditional mortgage commitment” in order to satisfy itself the couple could afford the two-bedroom townhouse they signed up to buy in 2016, part of the Spice Danforth condo project at 35 Danforth Rd. in Scarborough, which began selling units as far back as 2014.
In the course of a few months the couple provided mortgage commitments, income statements and other financial information at least six times, all of which were rejected by Hi-Rise. “They didn’t accept what were perfectly reasonable responses to their request for proof of ability to fund eventual closing,” the couple’s lawyer, Mark Ross, said.
“Every time we came back they had a different reason, they kept changing their story,” Ms. Ania said. “We even passed the stress test! They denied that, they wanted us to sell our house and have the cash on hand to pay in order to get approved.”
At the same time, she was concerned the project might never get built: “They told us they would be starting construction in early 2018, then it was 2019, then 2020. I didn’t have a good feeling. … They hadn’t started digging,” she said.
Justice Swinton found Hi-Rise was behaving “unreasonably” in denying mortgage commitments from CIBC, in refusing to consider other sources of funds.
Litigation began in October, 2018, and at one point Hi-Rise chief executive Warren Green was asked why he wouldn’t co-operate with the purchasers attempts to prove their ability to pay. “I don’t have to,” said Mr. Green, according to the court transcript. Mr. Green is a retired lawyer who has partnered with other developers to build condo projects in Hamilton and Toronto’s Yorkville neighbourhood.
“If a builder is looking to get out of deals for any reason they will look to these sorts of [financing] clauses, which are highly onerous,” Mr. Ross said. “The vast majority of people would not be able to qualify. When individuals are faced with the prospect of losing a deposit – and having to pay legal fees to fight a builder. Most purchasers will do the pragmatic thing: Take the money and move on.”
During the trial Mr. Green claimed that 96 of 116 buyers in Spice Danforth had failed to qualify for financing, and also that he no longer intended to build a condo project and was planning a rental project instead. He also claimed the remaining buyers did not wish to stay in the project. He refused to give Mr. Ross any of the names of buyers.
“It all of the sudden made sense why the builder was being so difficult in trying to terminate our deal. … It appeared they were out to terminate the project,” Mr. Ross said.
“They had no right to terminate [under Tarion Home Warranty program] for a decision to change the use,” said Audrey Loeb, partner at Shilby Righten, LLP, who has long argued for the provincial government to enshrine “good faith” language into pre-construction contracts. To her it seems the developer wanted to be able to find the purchaser in default rather than cancel the building: “They had no right to cancel except for being unable to secure financing,” she said.
“I’m not aware of it, I have not heard any of that … those kind of tactics would find their way into a conversation with Tarion,” said Joe Vaccaro, Ontario Homebuilder’s Association, when asked about the ruling and the potential use of financing clauses to void more than 100 buyer contracts.
“We have received a complaint about the Hi-Rise Group, but as this is an active investigation, we can’t comment further,” said Melanie Kearns, director of strategic communications at new home regulator Tarion Warranty Corporation. Tarion does not post any information about ongoing investigations or complaints about developers on its website.
Hi-Rise said Mr. Green was out of the country and did not provide any other comment on the case at press time.
The Ontario government has called Tarion “broken” and has begun a process to split the agency into two parts – one for home warranty insurance and another pure regulator for the building industry – and reform some of its consumer protections.
For Mr. Ross, the case marks an important legal precedent and a win for his clients.
“Hopefully this decision formally brings the common law good faith requirement into focus. It’s very surprisingly there was nothing like this out there for the consumer protection aspect of this,” he said.
“We will support better disclosure to consumers about the conditional nature of the opportunity,” to buy a new home, Vaccaro said. “Let’s make sure the consumer understand what they are getting into.”
“I was aware there was risks, I know they can cancel it if they had just cause,” said Ms. Ania, who has purchased a presale condo in the past. “What [Hi-Rise] was doing was wrong. To me it seemed they were trying to bully or scare you. I’m a little person who doesn’t like to be bullied.”
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Shane Dingman