Pre-sale regulations in spotlight as hot GTA condo market leaves buyers out in the cold

Share

When Mohammad Zaki agreed to buy a three-bedroom unit in a preconstruction townhouse development in 2016, he thought the home would be move-in ready this year.

Two weeks ago, he found out it's not being built at all. The cancellation of the project has left Mr. Zaki and the other buyers in the 68-unit Kennedy Gardens development on the east side of Toronto scrambling in a market where prices have climbed significantly since purchase agreements were signed years ago.

The condominium-style townhouse building was originally scheduled to be completed in mid-2018, but buyers were notified in December that the completion date had been changed to 2021. A month later, buyers were sent another letter saying the project was being cancelled entirely and their deposits would be refunded.

Mr. Zaki and his would-be neighbours are not alone. Kennedy Gardens is the eighth such project to be scuttled in the Greater Toronto Area in the past year.

The trend is raising questions about the rights of buyers, the motivations of developers and the responsibility of lawmakers to better regulate a red-hot segment of the real estate market: presale condos. The issue is positioning buyers against builders as both sides attempt to reap the benefits of soaring prices. Buyers are frustrated that even as they are locked into deals, there is no recourse if a builder backs out. Developers say they are simply following the terms of signed contracts.

Purchase contracts typically give builders wide scope to cancel a project, including if they have not sold enough units, do not have financing or have not received city building permits.

The developer of Kennedy Gardens, Time Development Group Inc., told buyers in a Jan. 31 letter that it had not sold enough units and did not have satisfactory construction financing in place to proceed with the project. The company did not reply to requests for comment.

Mr. Zaki, who agreed to pay $525,000 for his townhouse in 2016, feels guilty that he encouraged other prospective buyers to proceed after meeting them at the sales centre in 2016, where he lined up for four hours for information on buying a unit.

"I kind of reassured them, which I shouldn't have done – I should have kept my mouth shut," he said.

The cancellation comes after several other Toronto-area development projects have also been halted in recent months, including the high-profile Museum Flats condominium in downtown Toronto. It was cancelled in November after buyers had purchased 168 units in the 10-storey building in 2016. Developer Castlepoint Numa said it had not received necessary approvals, building permits and financing, but said it plans to redesign and relaunch the project later.

There have been seven condominium project cancellations in the Greater Toronto Area in the past year, according to data from condo-tracking firm Urbanation, not including the Kennedy Gardens project. Home construction tracking site BuzzBuzzHome said it recorded five projects that were cancelled in 2017 after sales had launched, and four others cancelled before sales had occurred, including single family, townhouse and condo projects.

The proportion of cancellations is not high considering there are more than 600 new residential projects either preselling or still in the planning stages in the GTA. But some of the failures have been attributed to delays in receiving city permit approvals, financing issues and poor sales, surprising buyers because the region's condo market has been so strong.

Condominiums have become the hottest housing sector in the GTA as detached house prices have climbed out of reach for many buyers in recent years. The result is that most new development projects have sold out quickly, some within days of launching. The strength of the demand is evident in the increase in the preconstruction price of apartment-style condominiums in the GTA, which rose 58 per cent between the end of 2015 and the end of 2017 to an average of $716,772 in December, according to the Building Industry and Land Development Association.

The recent project failures have also put new focus on the lack of recourse for buyers, who can do little when a project is scuttled as long as their deposits are returned as required.

Toronto lawyer Bob Aaron said if a developer cancels a project and relaunches it, there is nothing the original buyers can do if the reasons given for cancellation were permitted within the sales contract.

"I have seen builders say: 'Hey, I can make more money if I just terminate these agreements on some excuse and then put them back on the market at a lot more money,'" Mr. Aaron said.

"It all depends on what the contract says, and typically those contracts are wide open for the builder to back out. It's whatever is in the contract."

Toronto city councillor Josh Matlow tabled a motion that was approved by council in 2013, asking the province to require developers to spell out uncertainties far more clearly in promotional materials to buyers – particularly when the projects haven't secured city zoning approvals for a residential development.

While potential risks for cancellation are included with the purchase contract, he believes they also need to be prominently displayed in advertising-style marketing materials so that buyers clearly see the uncertain nature of their purchases.

"It may be in there somewhere, but a lot of people aren't fully cognizant – they think they're getting something and they're waiting for something to be built and ready for them. It needs to be far more clear."

Cancellations for any reason are hard on buyers because their lives are thrown into turmoil after years of waiting, Mr. Matlow added.

"The market may have passed you by," he said. "I've heard from others … who have been sitting for a number of years thinking they have their lives organized and now the market has become far too expensive for them. They're never going to be able to get a unit the same size unless they win the lottery."

Ontario's consumer protection rules currently require new home vendors to provide project information to buyers with each purchase agreement, but more disclosure requirements are coming.

Aleks Dhefto, spokesman for the Ministry of Government and Consumer Services, said the province is developing regulations to standardize disclosure statements so they are easier for buyers to understand and contain required information about the status of the project, planning approvals and other issues.

The regulations haven't been developed yet, but the province will work with stakeholders "to find ways to provide extra safeguards to protect condo buyers and help them make more informed decisions," he said.

Further disclosure regulations are also coming as part of the new Strengthening Protection for Ontario Consumers Act, which received royal assent in December. The regulations could specify disclosures that must be made to all new home buyers – not only condominium buyers – as well "mandatory or prohibited" terms and conditions in new home sales agreements, Mr. Dhefto said.

Mr. Matlow believes consumer protection rules should go further to also prevent a developer from cancelling a project and then relaunching it at a higher price shortly afterward. He suggests former buyers should be "grandfathered" and their prior purchase price honoured if a developer relaunches soon after cancellation.

Ontario legislation requires deposits to be repaid with interest when a project is cancelled, but does not go further. The Condominium Act also requires developers to "take all reasonable steps" to sell units in a property without delay, and complete and register buildings without delay.

Mr. Aaron, the real estate lawyer, said rules are tilted in favour of developers, who can cancel projects for a wide variety of reasons, while buyers cannot opt to cancel their purchase as time passes.

It is an imbalance that particularly irks Mr. Zaki, who is unsure of his next step. He recently saw a three-bedroom unit at a nearby project being developed on Victoria Park Avenue listed for $810,000, which is far more than the $525,000 he agreed to pay two years ago for his larger Kennedy Gardens unit.

"We can't just back out, but yet a developer has this trump card they can play, saying 'Oh, sorry,'" he said.