How do you stop developers from cancelling condos? Buyers, lawyers and builders weigh in

Cancelled projects are taking a toll on consumers and the building industry. But can developers be punished for killing projects?

Thespec.com
April 8, 2019
Tess Kalinowski

They put down tens of thousands of dollars on a pre-construction condo and they wait -- sometimes years. But what happens if the builder delivers a refund rather than a home because it decides to kill the project?

Toronto region condo buyers say cancellations leave them licking their wounds from a fall on the property ladder, while the developer simply moves on to the next tower.

Now some disappointed purchasers are fighting back, hiring lawyers to seek compensation in the absence of protection from the Ontario government and the province's builder regulator Tarion, which is also supposed to protect consumers but has been widely criticized for siding with developers.

"(Developers) have to be held accountable. As a consumer I can't be the one that's suffering. I'm the small guy on the totem pole. These guys are at the top of the totem pole," said Rob Paniccia, who is pushing for change after the condo he purchased in the Icona development in Vaughan was cancelled last year.

He is among a group of buyers who have hired a lawyer and tried to stop developer Gupta Group in pursuing other applications at the City of Vaughan where another application is pending for a nearly identical residential and hotel development on the Icona site at the Vaughan Metropolitan Centre.

Purchasers in the On the Danforth condos, cancelled by DIAM Developments last month, are also creating a Facebook group and talking to lawyers about pursuing compensation for the three years their deposit money was held in trust.

Dave and Laura Wright put down a $48,650 deposit for a $320,000 condo there. They will get a refund on their deposit but not on the $3,000 in interest on the loan they used to put that money down. Nor will they realize the approximately $50,000 profit Wright figures they would have been able to make if the condo had been completed and he had elected to sell it, he said.

"The way the process sits right now is a builder can, in an extremely hot real estate market, allow projects to fail for some very suspect reasons," Wright said.

Meantime, the builder's land continues to appreciate.

"This isn't about a real estate risk gone wrong for a purchaser, this is about consumer protection where the builder has nothing to lose by delaying and cancelling projects," he said.

Wright said builders who cancel projects should be required to liquidate that asset and remunerate the buyers for lost opportunity.

"I did what I was required to do to purchase a product and they failed to create that product," he said.

Later this month, the buyers in Liberty Development's cancelled Cosmos condos in Vaughan will be back in court seeking to move ahead on a claim for lost appreciation on that cancelled project.

The Ontario government says it is already moving to improve buyer protections, including the restructuring of Tarion to remove the conflict between consumer protections and builder regulations. The agency will also have to enhance disclosures about the risks of buying preconstruction condos on the Tarion Addendum. That is the standard form attached to the purchase and sales agreement on those units setting out payment schedules, occupancy dates and the grounds for termination.

"This would include matters that could cause a project to get cancelled, such as outstanding approvals, project financing or restrictive covenants on title," said David Woolley, a spokesperson for Minister of Government and Consumer Services Bill Walker.

A Tarion spokesperson said the agency has received inquiries about the cancellation of the DIAM project and has begun its normal review of the developer's actions as part of the process when a project is terminated. Builders who are found to behave dishonestly are subject to sanctions ranging from a limit on the number of homes they can build in a year to having their registration revoked.

"The unique circumstances of each cancellation are what dictates how much time is required for Tarion to do its due diligence," Melanie Kearns said.

Meantime, some developers admit the industry's reputation is suffering as a result of a relatively few cancellations.

"It's a bad stain for the entire industry. It is a really terrible news story and you do feel for all the consumers that made the decision to be in those projects and have been priced out and can no longer purchase," said Peter Cortellucci, vice-president of Cortel Group, the company behind Vaughan's Expo City and the CG Tower.

He said he has noticed a shift in the kinds of questions consumers are asking: "Are you guys going to build the building? Are you guys going to cancel the project? These are questions that we take very seriously because we recognize the consumer makes a huge investment, a huge commitment to a builder when they're purchasing a home, especially when they're on the condo side."

Cortellucci made the remarks at the launch of a public awareness campaign aimed at telling the industry's side of Toronto's development and housing supply challenges. Among the topics raised by the Building Industry and Land Development Association (BILD) question-and-answer campaign are why some projects get cancelled.

What, if anything, should happen to builders who kill condo plans depends on who you ask.

What disappointed condo buyers say:

Developers need to be held accountable and that starts with money, say buyers like Paniccia. He said it's time to modernize the Condominium Act that states interest on consumer deposits is paid at 2 per cent below the Bank of Canada rate. Interest rates have been so low for so long, buyers effectively get no interest.

"I could have left $100,000 on the bank and although I'm not going to get rich, I would still get 1.5 per cent," he said. "That's what I did, I gave my money to them so they could push the job forward so I should get some rate of return on it."

On the Danforth buyer Angie Colgoni believes developers should have to pay buyers a fee based on the square footage of the unit and the appreciation in property value during the period in which deposits are held in trust.

"I can only imagine what the appreciation is on the unit," she said of the three years she waited for DIAM to build her a $430,000 penthouse unit with parking and a locker.

"That unit was probably worth over $700,000 when it got built," she said, adding that, "These guys should not be able to build for a certain amount of time, whether it's five years ... There's got to be some penalty."

As for consumer education, it's not clear how much information was available on DIAM, a Brampton-based custom homebuilder that is also behind an Innisfil townhouse project. Tarion said last year it would flag builders that cancel on its Builder Registry but that won't be done until this summer, it said recently.

In the case of Liberty's Cosmos, the developer had a good reputation and is continuing its business, including another development next door to the Cosmos site and a redevelopment of the Promenade Mall near Bathurst St. and Clarke Ave.

Buyers are prone to believing the real estate rule of location, location, location.

"That was what got me. I liked the location," said Paniccia, who has a background in construction.

"The subway was right there," he said.

What the lawyers say:

The Star's condo law columnist, lawyer Bob Aaron, says it's the government's job to introduce new legislation that would penalize condo-cancelling builders.

"There has to be something to discourage greedy builders from terminating and it's going to be money," he said.

Aaron also thinks builders should have a limited amount of time to cancel a project without penalty, whether it's six months or a year after accepting consumers' deposits.

"In a rising market, if people are on the hook for longer than six months they are going to lose their ability to buy an equivalent property," he said.

"We should say to builders if you cancel at any time or beyond your time limit then you have to buy the units from the buyers back at fair market value -- the price per square foot that similar units are selling for," Aaron said.

That, he said, would give buyers a registrable interest on the title to the land for their units.

Ted Charney, the lawyer representing hundreds of Cosmos and Icona condo purchasers, agrees that builders should be subject to monetary and other penalties.

The appreciated value of the condo should be owed to consumers who have paid the deposit that builders typically count on to obtain construction financing,he said.

"If a developer cancels without justification, the damages are the increased value of the condominium on the market since it was purchased," Charney said.

"The sanction for an improper cancellation should be a suspension preventing the developer from receiving a licence to build new projects or invest in new projects. A regulator can suspend and fine. Purchasers must commence proceedings to recover compensation," he said.

What builders say:

BILD CEO David Wilkes echoes the industry's awareness campaign when he says there are only three reasons for condos to be cancelled -- too few units are sold; the municipality doesn't approve the project; or, the builder can't get financing because costs of building the project have risen beyond the budget forecast.
The awareness campaign points out that the cost of fees and taxes from all three levels of government accounts for 24 per cent of the cost of building condos in the GTA. Generally, banks financing highrise residential construction are looking for developer profit projections of 8 to 13 per cent, compared to 30 per cent for telecommunications businesses or, conversely, 2 to 4 per cent for some retail and food service businesses. The industry argues that the rate of return for development and housing are moderate given the risk and the long timelines involved.

"The vast majority -- probably 97 to 98 per cent of projects -- do reach completion," Wilkes said. "Unfortunately, cancellations have been part of what has happened in the business for the past several years. It's not a new phenomenon. It's certainly not something that is pervasive."

He said the industry is now focused on explaining why it happens.

Jared Menkes, vice-president of highrise residential projects for Menkes Developments, also acknowledged the strain cancellations are causing the industry but he sees a benefit for more experienced, reputable builders.

"I think you're going to see a huge flight to quality. We've seen actually an uptick in our inventory sales because people are saying, 'It's Menkes, they're going to deliver and they're going to deliver a great product,'" he said.

He suggested the government or industry could look at a ranked or tiered system to distinguish experienced builders from those that have never put a shovel in the ground, and he said consumers absolutely deserve a refund on their deposits and maybe some interest but that is up to the government.