Court rejects cancelled Cosmos condo buyers’ application to void contracts

Thestar.com
May 1, 2019
Tess Kalinowski

Buyers of Liberty Developments’ cancelled Cosmos condos have lost a legal battle they had hoped would clear the way for them to seek compensation after the project was scrapped two years after they paid tens of thousands of dollars in deposits.

It’s a decision one real estate lawyer says sets a legal precedent that will discourage other buyers.

Two years after purchasing units in the Cosmos condos project near Vaughan Metroplitan Centre, buyers received refunds and letters telling them the project had been cancelled “solely due to the inability to secure satisfactory construction financing.”

Ontario Superior Court Justice Michael Penny rejected the application to have their purchase agreements on the pre-construction units declared unlawful. In his ruling, Penny sided with the developers but found that voiding the contract would not be in the purchasers’ or the developers’ best interest.

Even though they had their deposits refunded, many of the buyers say the cancellation caused them to be left behind on the property ladder because the cost of homes soared in the Toronto region during that period.

Lawyer Bob Aaron, who specializes in real estate law, called the outcome “unfortunate for the buyers, not just (of Cosmos) but for every project that has been cancelled.”

“It sets up an expectation that the builders are going to win,” he said.

The ruling will discourage other buyers from going to court in the future, Aaron said.

Some Cosmos buyers, who had missed work to attend court last week, said they needed time consult their lawyer and consider their options.

Ted Charney, the lawyer representing 605 buyers of 454 Cosmos condos near the Vaughan Metropolitan Centre, would not comment on the decision.

He argued in court that the purchase agreements were unlawful because they included language that exceeded the legal conditions under which a developer is allowed to terminate that contract.

Condo vendors -- in this case numbered companies that share the same address as Liberty Developments -- can legally terminate a project on the basis of “having taken all commercially reasonable steps” to obtain satisfactory financing under the termination conditions in the Tarion addendum attached to the purchase agreements on new homes.

Tarion is Ontario’s new home warranty provider as well as the home-building industry’s regulator.

The Cosmos contracts included an additional clause conferring “sole, absolute and unfettered discretion” on the vendor. Charney argued the condo vendors included that language to give them broader latitude to cancel beyond the legally allowed financing condition.

Monique Jilesen, the lawyer for Liberty and the three numbered companies, told court that the “unfettered discretion” provision in the contract was not attached to the financing condition and that it could not, in any case, be used to undermine the vendors’ obligation “to take all commercially reasonable steps ... to arrange satisfactory financing.”

In a written decision on Monday, Penny agreed the “unfettered discretion” proviso does not give the vendors the ability to terminate the agreement beyond the permitted financing condition.

Eliminating the satisfactory financing condition because of the “unfettered discretion” clause could put “the vendors in a position where they would be obliged to proceed with a potentially uneconomic project and risk bankruptcy,” Penny wrote.

“Becoming mired in a condominium project in bankruptcy or under receivership ... could not possibly be in purchasers’ interest, as it would put them in a far worse situation than they ended up in as a result of early termination,” he said.

Aaron, who writes a condo law column for the Star, is among those recommending the rules change so that developers have a limited time in which they can cancel projects for financing reasons -- a year, 18 months or two years. After that, he said, the developer should have to buy the units at fair market value.

Buyers need to look for builders with long, proven track records and protect themselves from industry hype, he said.

“The marketing of new homes and condos involves a lot of excitement and pizzazz,” Aaron said. “When people come to my office to review these contracts they’re not interested in the what-ifs. They just want to see if I’m going to have a nice view, am I going to have marble countertops. They hear what I’m saying but they don’t want to listen.”

The rising number of condo cancellations in the Toronto area has prompted calls for better buyer protections. The number of cancelled units more than doubled to just under 5,000 last year, according to market research company Urbanation. In 2016, there were only 379.

Dave Wright said the Cosmos decision was a disappointing blow to he and his wife, Laura, who had bought into DIAM’s cancelled On the Danforth development. He said they will, nevertheless, continue exploring their own legal avenues.

“Until Tarion and other laws are strengthened to protect us we definitely won’t be investing in pre-builds,” Wright said.

The Ontario government has announced it is restructuring Tarion to eliminate the conflict inherent in an agency that is charged with consumer protection and builder regulation. It has also ordered Tarion to provide more information on builders that cancel projects, something the agency has said it will do this summer. But it’s not clear how effective that will be in protecting buyers because Liberty Developments had not previously cancelled projects.

Liberty’s spokesperson said last year that the Cosmos cancellation was an isolated event that would not impact future developments.

Another group of disappointed homebuyers, purchasers of Icona condos in Vaughan, who had their deposits refunded by developer Gupta Group is continuing its own legal challenge, said Rob Paniccia, one of the Icona buyers. Those buyers have been lobbying the City of Vaughan to reject another development application from Gupta.