What Happens if a Pre-Construction Condo Is Cancelled?

All across Canada, condominiums are being constructed on every corner, particularly in major urban centres. In fact, it was recently reported that the Toronto real estate market had the greatest number of cranes in the air, topping that of New York City and Tokyo. Impressive. During this phase, many people purchase pre-construction condo units. By doing this, buyers may receive discounts and perks. Of course, along with the pros there come some cons. So, here is a question that could become more common in the coming months: What happens if a pre-construction condo in the Canadian real estate market is cancelled?

What Happens if a Pre-Construction Condo is Cancelled?

Indeed, cancellation of pre-construction condos is a risk for buyers who engage in this type of purchase.

This is why it’s important for purchasers who decide to invest in condos to mitigate their risk and consult with a lawyer before signing the sales agreement. There is always a chance that the builder has included clauses in the agreement that allow them to get out of the contract. As a result, a real estate lawyer should review these agreements to ensure the buyer understands what he or she is getting into, and can request an amendment to the contract to protect their interests, if needed.

It’s important to remember that most project cancellations have a valid reason. It could be either due to lack of government approval, lack of financing, cost escalation to the point where the project is no longer viable financially, or failure to sell sufficient units to recover the investment. However, in some exceptional cases, builders can cancel a condo project and re-sell the units at higher prices.

If a pre-construction condo is cancelled, the purchaser receives their entire deposit back. This includes any payments they may have made for extras or upgrades and any interest. The purchaser typically receives the payment within 10 days of cancellation.

While deposits are returned to purchasers per the parameters laid out in business or real estate law, purchasers have two options to choose from during this process. The first is that homebuyers can accept the return and resume their lives (and find another property of interest). The second is that they can file a claim against the condo developer for breach of contract. The purchaser may receive monetary compensation or an order for specific performance if they file a claim.

Specific performance refers to a decision by the court in which the party in breach of the contract is required to fulfill its contractual obligations. This type of decision is usually undertaken when monetary damages are not sufficient as a possible solution or if the property is truly unique. This is usually not the case with condos since most condo properties are mass-produced. Therefore, if purchasers lose out on one property, they can easily find another similar condo. However, there have been cases where courts have ordered specific performance from the vendors.

In most cases, individual consumers do not file claims against developers.

For developers, the risk of a class action lawsuit is much higher. Suppose a developer terminates their sales agreements and the reconstruction condo is cancelled. In that case, one purchaser can act as the plaintiff on behalf of all other purchasers and file a lawsuit against the developer. Again, this usually does not happen if the deposits are returned and no other damages or compensation are owed to the purchasers. However, since the real estate market is a high-growth sector, even if the deposit is returned to the purchaser, there is always a possibility that an investor loses out on the equity they could have built up during the time they wasted investing on the now “cancelled” property.

In a market as hot as real estate, this can be a severe concern for property investors who lose out when a pre-construction condo project is cancelled.

It is very important to engage in property transactions with reputable developers. Buyers should research past projects to understand the quality and legitimacy of the builders. Most buyers get a 10-day cooling-off period after signing the agreement to purchase a pre-construction unit. During this time, they can withdraw from the deal without any penalty. During this period, they should conduct their research and discuss the contract with a lawyer to ensure it has the necessary clause in place and is up to industry standards.

The government has imposed several regulatory conditions to discourage unnecessary cancellations. Developers have to pay back deposits as well as interest in case of such cancellation. Information about the cancellation is a matter of public record, and purchases can find this information by researching the Builder Director. The government also has the power to go after unethical builders and to make sure they are penalized in case of illegal cancellations. Developers who cancel projects are also prohibited from reselling the same project for two years.