What happens when a pre-construction condo project gets cancelled?

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Buying a pre-construction condo is an exciting investment opportunity. Most often, buying pre-construction can potentially save you money compared to buying a resale unit.  It also allows you to have a lot more choice and control over location, finishes and amenities as opposed to the constraints with a resale property. However, sometimes things don't go as planned, and the developer cancels the project. The project can be cancelled for various reasons such as lack of interest or the developer not being able to secure financing.  In some cases, developers can go bankrupt prior to completing the project, leaving the project in a potentially messy situation.  Most pre-construction purchase agreements do allow for the developer to cancel the project without many ramifications to the developer. If you find yourself in this situation, you might be wondering what happens next. In this blog post, we will explore the implications of a pre-construction condo cancellation in Ontario and the options available to homebuyers.

Implications of a Pre-Construction Condo Cancellation

A pre-construction condo cancellation can have several implications for the homebuyer. Firstly, it can be a major disappointment, especially if you were looking forward to living in the building. Secondly, it can be a significant financial loss if you have already paid a deposit and home values have appreciated from the time you signed your purchase agreement to the time of the project's cancellation.  Finally, it can create a stressful situation if you have to find alternative housing options.

What Happens to the Deposit?

In Ontario, the Tarion Warranty Corporation protects homebuyers who purchase from builders who are registered with them. Tarion requires builders to provide a warranty to purchasers of new homes and condominiums. Part of this warranty includes protection against deposit loss due to builder default. If the builder cancels the project, they are required to refund your deposit in full, plus any payments made towards extras/upgrades and any interest. Recently Ontario has moved towards strengthening its consumer protection for buyers of pre-construction condos. The Ministry announced a change to the interest rate payable on pre-construction deposits effective January 1, 2023, increasing the interest payable on all new Agreements.  It also brought forth amendments to Ontario New Home Warranties Plan Act requiring Tarion to provide more information about condo cancellations and terminated agreements on the Home Construction Regulatory Authority’s Ontario Builder Directory. If the builder cancels the project and they do not refund your deposit in full, you can make a claim to Tarion for up to $20,000 in compensation. However, this compensation is subject to certain Tarion eligibility criteria and may not cover the full amount of your deposit.


Other Options for the Homebuyer

If you find yourself in a pre-construction condo cancellation situation, there are several options available to you. Firstly, you can accept the refund of your deposit and move on. This may be the best option, so that no more time is lost and you can look for alternative housing. Secondly, you can make a claim to Tarion for compensation. This option may be suitable if you are eligible for compensation and the amount offered by the builder is insufficient to cover your losses. Thirdly, you can choose to sue or join a class-action lawsuit against the builder. If several homebuyers are affected by the cancellation, they may choose to file a class-action lawsuit against the builder. Finally, once your deposit is returned, you can consider purchasing another pre-construction condo.

How to avoid the risk of a Pre-Construction Condo Cancellation

Before you sign your purchase agreement, it is essential to research the builder and the project carefully. The Home Construction Regulatory Authority’s Ontario Builder Directory and Tarion have compiled data and research about most Ontario builders.   It is important to avoid the excitement and emotions of buying a property and take your time to do proper research. If you find a builder has a track record for cancelling projects or has not been established for a number of years, with several projects under their belts, your risk will naturally be higher.  Aside from the above directories, you can check the builder's Google reviews, or even ask previous purchasers about their experience with the builder. Most importantly, take your new build Agreement to a lawyer during your 10-day cooling-off period after signing to be reviewed by a real estate lawyer.  During that time the lawyer can request further caps on adjustments, review the Assignment clause and review the early termination conditions in your contract, amongst other things.  The lawyer can help you make an informed decision about your purchase reducing the risks.

The bottom line

In conclusion, a pre-construction condo cancellation can be a challenging and frustrating situation for homebuyers in Ontario. However, there are several options available to them, including accepting a refund of the deposit, making a claim to Tarion, joining a class-action lawsuit, or purchasing another pre-construction condo.

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