Buying a pre-construction condominium is a complicated process. In some cases, the easiest part is actually finding a new condominium to purchase. Once you find the right condominium, the legal process begins when you sign on the dotted line. This column will examine the legal process involved when buying a brand new condominium and provide some insight into the risks involved.
Once you have signed the Agreement of Purchase and Sale, you should immediately take the Agreement to an experienced real estate lawyer. In Ontario, you have a ten (10) day cooling-off period or rescission period. This means that have the right to cancel the Agreement and have your deposit returned provided you give notice to the builder prior to the expiry of the ten (10) day cooling off period. During this period, your lawyer will review the Agreement, advise you of its contents and most importantly, of all the additional costs or builder adjustments that you will have to pay on the final closing date. During this period, your lawyer may seek to amend the Agreement by requesting that certain builder adjustments be capped or deleted altogether. From my experience, the response of the builder will vary from builder to builder. In some cases, the builder may agree to cap or delete some of the adjustments. This will depend on the demand for the property and market conditions. In the event that the builder will not agree to cap or delete the builder adjustments, you as the buyer, may wish to continue with the transaction, or may cancel the Agreement. The key point is that if you decide to proceed, you will not be surprised by the additional builder adjustments when you proceed to final closing.
As I have said many times, builder Agreements are complex and very one-sided in favour of the builder. As a buyer, you have very little leverage when attempting to negotiate and finalize the Agreement. Buyers of brand new condominiums who fail to have their Agreement reviewed by a lawyer during the cooling-off period are often shocked on final closing when the receive the builder’s statement of adjustments replete with thousands of dollars of additional costs. In some cases, they cannot come up with the necessary funds and have to find alternate financing or request an extension of the closing from the builder which the builder can refuse or impose additional extension fees for the extension.
The builder’s contract has many provisions which are not in your interest as a buyer. For instance, the contract typically allows or gives the builder the right to vary the layout of the property, substitute materials of equal value at any time, install bulkheads in the property, reverse the floor plan, change the colours or materials used. As well, the builder can extend the closing date for lengthy periods of time. In addition, the builder may have the right to cancel the construction of the entire project and void all Agreements if it cannot obtain adequate financing or determines, in its own opinion, that the entire project is not economically feasible.
Along with the Agreement of Purchase and Sale, you will receive the condominium disclosure documents. This is a lengthy set of documents which provides details of the condominium including the proposed declaration, by-laws, rules, proposed budget, condominium plans and monthly common expenses attributable to each unit. These documents should be carefully reviewed by the buyer as well during the cooling off period.
Often overlooked in the process of buying a brand new condominium is the closing process. With a brand new condominium, there are two (2) closings. The first closing, or the interim occupancy closing is the date that you will obtain possession of the condominium. Following the interim closing, you will not be the owner of the unit, but will be responsible for occupancy fees which are made up of monthly common expenses, estimated property taxes and the outstanding amount of interest on the balance owing to the builder. You will likely have to provide the builder with a series of post-dated cheques to cover the monthly occupancy fees. During the interim occupancy, you are not permitted to make changes to the unit and may not be able to rent out the unit. Following the interim occupancy closing and typically 3-5 months following that, you will have a final closing. This is when you become the legal owner of the property and pay the balance owing to the builder and arrange your mortgage financing. Your monthly occupancy fee payments end and you will start paying your mortgage payments, if applicable.
Buying a pre-construction condominium can be rewarding, but often comes with many unknowns and potential risks. To eliminate the risks and to understand the process better, a prudent buyer should obtain legal advice from the outset to avoid costs and surprises.