Know What to Expect When Purchasing A Pre-Construction Condo

If I were to create a word cloud from my conversations with clients about their pre-construction condominium purchases, I am confident the two most common phrases would be “hidden closing costs” and “unexpected delays”. The truth is that these costs are rarely hidden and despite the best intentions, delays…well they happen. Proper legal advice can help avoid disappointment. Agreements of purchase and sale for pre-construction condominiums are dense legal documents and contain information that a purchaser needs to manage expectations and make an informed decision about their purchase. The complexity of pre-construction condominium purchases is why purchasers are legally entitled to a 10 day “cooling off period” in which to review the purchase agreement and disclosure statement and decide whether they would like to proceed with the purchase.

Here are my five key takeaways when advising a client with respect to the purchase of a pre-construction condominium. 

1. Your closing date is subject to change
Each purchase agreement will refer to two closing dates: (1) an Interim Occupancy Date and; (2) a Unit Transfer Date (also known as the Final Closing Date). The Occupancy Date is the exciting day you have been waiting for—move-in day! The Unit Transfer Date is payday; the day you hand over your hard-earned savings and receive legal ownership to your unit. Your purchase agreement will set an Interim Occupancy Date, but not a Unit Transfer Date. The builder will not know the Unit Transfer Date until the condominium is created.  Predicting the date the condominium will be created is about as worthwhile as predicting the end of Covid-19. Delays in condominium registration are common and will impact even the most reputable builders.

The date your unit will be ready for occupancy is also a moving target. While builders will set an Occupancy Date based on best available data at the time you sign your agreement, construction delays and municipal approvals can shatter even the best intentions. Carefully review the Statement of Critical Dates appended to your purchase agreement to determine whether your closing date is tentative or firm. A tentative closing date may be extended by a developer upon 90 days notice. The firm closing date (referred to as the Firm Occupancy Date) is a firm promise by the builder to have your unit ready for occupancy on such date, although there are circumstances in which the builder may move the Firm Occupancy Date. Check out Tarion’s useful guide here regarding firm closing dates.  

Ultimately, the builder is legally required to take all reasonable steps to provide occupancy of your unit and register the condominium without delay. A builder will not purposely delay occupancy or registration of a condominium, as a builder has a clear financial incentive to provide you with legal title as soon as possible. To avoid disappointment, do not start packing until the builder has established a firm closing date.

2. Closings costs can be significant
The purchase price on the first page of your agreement rarely tells the whole story. A builder will typically pass certain costs of development and construction to the buyer on closing. Such costs may include meter installations, Tarion enrollment fees, legal and administrative fees for amendments and extras, property taxes, and development charges. Your purchase agreement will contain a list of adjustments for which the developer has established a dollar value and is not entitled to increase, and those items for which the costs have not yet been determined. Carefully review these lists to ensure there are no hidden surprises. Additionally, during the 10 day conditional period, you may want to ask your lawyer to write to the builder’s lawyer to cap certain closing costs such as development charges, and administrative fees.  

3. HST is payable on the purchase of new homes
Unlike the purchase of a re-sale home, you will pay HST on the purchase of a pre-construction condominium unit. The purchase price on the first page of your agreement includes HST, while deducting the HST New Housing Rebate, as the builder will prepare the sale agreement on the presumption that you will qualify for the HST New Housing Rebate by virtue of you or your “relation” living in the unit as a primary place of residence on the Unit Transfer Date. As you have received a reduction in the purchase price, the builder receives all benefit and entitlement to the HST New Housing Rebate on the Unit Transfer Date.

If you are purchasing the condominium unit to rent, you will be required to reimburse the builder with the Rebate on the Unit Transfer Date. The reimbursement will vary based on the price of the home, but can exceed $30,000 in some cases. If you are renting, ask your lawyer about the HST New Residential Rental Property Rebate which you may apply for and receive from the Canada Revenue Agency following closing. 

4. The condominium may be cancelled…but probably not.
It is becoming increasingly more common (especially in the Greater Toronto and Hamilton high-rise market) for builders to include conditions in the agreement of purchase and sale that allow a builder to cancel a condominium project for a number of specified reasons. The standard reasons include failing to meet a sales threshold, the builder not obtaining satisfactory financing and or not being granted the required approvals from the municipality. Tarion requires these conditions to be clearly specified in the agreement of purchase and sale and for deposits to be returned to the purchaser in the event the condominium project is cancelled. The prospect of condominium cancellations is scary for even the most seasoned investor. Despite the media attention condominium cancellations receive, these events are rare and you can be confident that the condominium will be built…eventually. For more information about condominium cancellations and what that means for buyers and sellers of pre-construction condominiums, check out my presentation on June 4th on YouTube.

5. Disclosure Statement; some light reading
Due to its length, the condominium disclosure statement is easily the most overlooked document, but arguably the most important. When you are buying a condominium unit, you are buying into a set of rules that govern what you can and cannot do in the condominium and the unit. Failure to comply with these rules can have serious legal consequences. The disclosure statement includes information about your maintenance and repair responsibilities, the extent of your condominium unit boundaries and the amount of common expenses you will owe monthly to the condominium corporation after the final closing date. A careful review of the disclosure statement will help you decide whether this purchase and this particular condominium project are right for you.

These tips and a careful review of your agreement of purchase and sale with your real estate and legal advisors will help ensure you walk into your brand new condominium unit with the same excitement you had when you signed the agreement.