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The Ontario Government has recently commenced consultations with the public and stakeholders with regards to proposed changes to the rules governing purchases of pre-construction homes. The proposed changes seem to be in response to recent news highlights where buyers of pre-construction homes reportedly were charged hundreds of thousands of dollars over and above the price in their agreements. 

Today, we are going to talk about the proposed changes according to the Government’s consultation paper. The consultation paper and an overview of the proposed changes can be found here: Consumer Protections Related to New Home Purchase Agreements and Price Escalations (ontariocanada.com).

The Ministry of Public and Business Service Delivery is seeking input on three issues:

1. Price Escalations
2. Cooling-off Period for New Freehold Home Purchases
3. A Mandatory Legal Advice for Agreements of New Homes

1. Price Escalations: according to the consultation paper issued by the Ministry, price escalation is referenced to as, “After a buyer has signed a purchase agreement for a new home, some builders may try to increase the price of the home in ways that are unrelated to price adjustments ordinarily associated with completing the purchase of a new home.” Examples that get covered under the definition are clauses that allow builders to increase purchase price due to higher construction costs, offering to resell at a higher price following terminating the Agreement by relying on a default by the purchaser, etc. 

The issues mentioned above are surely of nature that needs attention, but in order to provide increased transparency and better protection for the buyers, the protection should be with regards to each dollar that a buyer has to pay over and above the purchase price. Adjustments charged by the builders on closings have always been a contentious point of discussion among real estate professionals. Every buyer of a pre-construction house has this question when they are advised about the long list of Tarion Schedule B – “I have gone through the list, but… what will be the total amount to be paid?”. An average amount may be provided depending upon the amounts we come across in other pre-construction transactions, but there is always a caveat attached to it – we cannot be sure until we have the final adjustments from the builder. 

Looking at it from a builder’s perspective, there are many adjustments in the Schedule B list that cannot be determined at the time of signing an Agreement, and therefore, they have to wait until they are able to determine. But now looking at it from a buyer’s perspective, they don’t know what to expect – $5,000 or $50,000? If they are handed over an adjustment where they are being charged thousands of dollars in excess of what they were expecting, not all buyers will be in a position to cover those extra thousands. Which will lead to default, lawsuits, and more money being lost. From two different perspectives, it is clear that a middle ground needs to be reached. 

One such middle ground is included in the consultation paper – Price Caps. Often, an Agreement for a pre-construction home will have a clause “capping” a certain adjustment at a certain amount. For example, development charges capped at $10,000, which means that the builder can only charge up to $10,000 for development charges. The Ministry proposes to provide mandatory price caps restricting the builders to increase prices of the homes only by a certain percentage of the purchase price. If the objective is to provide clarity to the buyers, price caps should include ALL the adjustments being charged by the builder. This will ensure that buyers are aware of what is the maximum they will have to come up with on the closing date and will avoid surprises. 

When deciding the percentage of price caps, it is imperative that builders’ perspective is kept in mind as well. Otherwise, we may see builders’ profit margins reducing and ultimately a possible soar in housing prices. 

2. Cooling-off Period for New Freehold Home Purchases: I have always struggled, and I am pretty sure most of you have as well, to understand why the legislation isn’t being amended to allow a cooling off period for pre-construction freehold homes as well. We have had it for condominiums for a while, but why not the same for freehold homes? Finally, looks like the Government is close to introducing it. 

Agreements for pre-construction freehold homes are of the same complex nature as agreements for pre-construction condominiums, and therefore, should have the same cooling off period. The buyers should be provided with an opportunity to take the agreement to their lawyer to understand what they might have signed on the site to secure the property. One argument from the advocates of “no cooling-off period for freehold homes” might have been that the condominium unit transactions are relatively larger in number, and some condominiums may be relatively lower in price than a freehold home, therefore, buyers are at a higher risk of signing in haste due to increased demand. However, considering the housing market in Ontario (especially GTA), I do not see much difference in the time that buyers have to secure a new property whether it is a condominium or a freehold. If the intention is to provide better disclosure and protection to the buyers, it should be the same regardless of the type of property.

The introduction of such a provision will surely lead to inconvenience and extra costs for builders, but in the interest of the public and buyers in particular, I believe this provision should surely go ahead. To address the inconvenience caused to the builders, the Government can look into introducing provisions to compensate the builders in case the buyers rescind an agreement within the cooling-off period. For example, I would answer one of the consultation paper’s discussion questions in the affirmative – “Should builders be entitled to charge buyers who cancel the purchase agreement during the cooling-off period? If yes, what would be a suitable fee?”. Maybe a nominal fee charged to the buyers who wish to rescind an agreement will act as a deterrent for buyers misusing the right of rescission.

3. Mandatory Legal Advice for Agreements of New Homes: the Government has proposed to introduce provisions to make legal advice a mandatory step for the buyers in case of new homes. Proposed provisions include buyers being required to provide evidence by way of a signed statement from a lawyer that legal advice has been provided. I can say without a doubt that this will be a great step to ensure protection for the buyers. And looking at it from a builder’s perspective, it will ensure that buyers do not claim that they were not aware of certain provisions they signed up for. However, as individuals should not be forced to obtain legal services or advice, a provision allowing buyers to waive their right by expressly signing a waiver may be of help. A detailed waiver which specifies the risks that come with not obtaining legal advice can be considered.

We will have to wait to see if this proposal eventually becomes a law, however, I strongly encourage all buyers of pre-construction property to have their agreements reviewed by experienced real estate lawyers. To ensure that buyers understand their obligations and rights under the agreement, every real estate professional should be encouraging their clients to have their agreements reviewed. Our firm is well-versed in reviewing pre-construction agreements and our turnaround times are impressive. If you or one of your clients ever require an agreement to be reviewed, please reach out to us and we will be more than happy to assist. 

The Government’s consultation process is a great way to provide your opinion about the proposals and other terms that you think must be introduced. 

Please feel free to reach out to us with your questions or thoughts. We would love to hear your opinion! Contact us at (905) 270-6660 or e-mail us at: Info@kormans.ca.

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