Recently, our office has had a number of condominium interim occupancy closings. In every case, the Buyers are shocked to learn of the amount of the monthly occupancy fees that they are required to pay during the interim occupancy period. This column will look at this issue along with many other important issues that are often misunderstood or overlooked by Buyers of brand-new condominiums.
When you buy a brand new condominium from a builder, there is often excitement at the prospect of one day owning a brand new condominium. That excitement may be overcome by disappointment when the property is ultimately delivered by the builder. Unfortunately, many buyers fail to understand the intricacies of closing on a brand new condominium property. This results in confusion and shock at the time of the interim occupancy closing.
The closing process for a brand new condominium is unique because there are two (2) closings. The first closing is the interim occupancy closing. This is when the Buyer obtains possession of the property. However, it is not when the Buyer becomes the legal registered owner of the property. This happens on the final closing which coincides with the actual condominium corporation being created. Between the time of the interim and final closing, the Buyer will be required to pay monthly occupancy fees. The occupancy fees are composed of the estimated property taxes, the estimated monthly common expenses as well as the interest on the deferred purchase price. The sticker shock for the Buyer is when they learn of the amount of the monthly occupancy fees. Consider for example a purchase price of $1million. On the occupancy closing date, the Buyer will likely have paid 20% of the purchase price. Therefore, the unpaid or deferred purchase price will be $800,000. In calculating the interest rate on the deferred purchase price, the Condominium Act states that the interest rate is linked to the Bank of Canada’s one year conventional mortgage rate in the month that the occupancy closing takes place. The current rate is 7.24%. Therefore, the interest component of the occupancy fees alone in this case would $4,826.00. In addition to this would be estimated monthly common expenses and property taxes. Therefore, in the scenario above, the Buyer would be required to pay the builder monthly occupancy fees of approximately $5500.
This situation will invariably lead to many questions, such as:
- Must occupancy fees be paid? The answer is yes.
- What happens if the Buyer refuses to or is unable to pay them? The answer is that this will result in the Buyer being in breach of contract allowing the builder to terminate the contract, forfeit the deposits and sue the Buyer for breach of contract.
- How long must occupancy fees be paid? They are payable until the final closing date. The final closing date is typically 3-6 months following the interim occupancy closing date, however, this could vary. I have seen them as short as 1 month and as long as 1 year.
- Can the occupancy fees be reduced? The answer to this is yes and no. A Buyer, with permission of the builder may have the ability to make a further payment/deposit on the interim occupancy closing date in order to reduce the interest component of the occupancy fees. However, we generally advise against this because there is an element of risk associated with this. The risk is that the builder will have a large sum of money and the Buyer will not have any security since it is not the legal owner of the property until final closing. In the event that the builder goes bankrupt or the condominium is not completed, the Buyer’s monies may be lost.
- Are the occupancy fees credited towards the purchase price on the final closing? The answer is no.
- Can a Buyer rent the condominium during the interim occupancy period to offset the cost of the occupancy fees? This will depend on whether or not the builder will allow the Buyer to do so. Without a specific amendment in the Agreement allowing the Buyer to rent the property during the interim occupancy period, a Buyer is not permitted to do so. The builder’s consent will need to be granted for this purpose.
- What happens on the final closing? On the final closing date, the Buyer becomes the owner of the property. This is when the Buyer will stop paying the monthly occupancy fees and will become the registered owner of the property and start making mortgage payments, if applicable.
Occupancy fees are like paying rent. They cannot be avoided and must be paid for several months. With the recent increases in interest rates, occupancy fees have become a major problem for Buyers of pre-construction condominiums. So, how can a Buyer avoid this problem? The best answer to this is for a Buyer to understand the process of buying a pre-construction condominium at the outset. It is advisable for the Buyer to retain an experienced real estate lawyer who can explain the process as well as the risks. In addition, if given the opportunity, the lawyer will review the builder’s Agreement and explain the numerous additional and unexpected costs that a Buyer will face with the purchase of a pre-construction condominium. To avoid many surprises and unknowns that come with buying a pre-construction condominium, a Buyer should obtain sound legal advice from the outset before they sign the Agreement of Purchase and Sale or during the rescission period.