Missing Middle Condos Pt. 2 - Meet the Regulators

Last week, we talked about why you might want to develop your missing middle project as a condo. In that time, I'm assuming you've taken that all in, developed your pro forma, decided that condominium is the right strategy for you, and now you're back to learn how to get going. Today, we'll start with learning about your regulators and registration requirements. Exciting, I know!

Legislative Framework

In Ontario, the development and sale of new homes is a highly regulated activity. This has been the case since 1976, when the Ontario Government established the Ontario New Home Warranty Program - now known as Tarion . Tarion used to be the regulator of new home builder licensing, as well as warranting both deposits and the construction quality of new homes. In 2021, the licensing component was split off into a new organization, the Home Construction Regulatory Authority, or HCRA.

The primary legislation establishing Tarion's mandate is the Ontario New Home Warranties Plan Act, R.S.O. 1990, c. O.31 (the "Plan Act') and HCRA's is the New Home Construction Licensing Act, 2017, S.O. 2017, c. 33, Sched. 1 (the "Licensing Act") .

In short, Tarion is responsible for purchaser deposit protection , the 1, 3 and 7 year warranties afforded to all new homes in Ontario and resolving disputes between buyers and sellers about these issues. HCRA is responsible for licensing and standards for vendors and builders of new homes, which includes maintaining a public database of all licensed builders, their projects and complaints .

Ok, but what is a new home?

Funny enough (ok, funny for the lawyers, not so much for anyone else), "new home" is not a defined term in the Warranty Act! The Warranty Act instead defines a "home" as a single-family dwelling, a building with up to 2 single family units, a residential condo unit, and other prescribed dwellings. The Warranty Act applies itself to new homes by defining an "owner" as being the first acquirer for occupancy of a home from its vendor, and the "vendor" as someone who sells a home not previously occupied. If anyone has the historical reason for this, please let me know in the comments!

(For extra laughs, the Licensing Act defines "new home" as having the same meaning as "home" in the Warranty Act. As far as I can tell, there are no real implications here, just odd terminology choices by the legislature.)

The important takeaway is that the Warranty Act & the Licensing Act apply to any new residential condo. This includes a building converted from an existing use into residential - so if, for example, you're converting an old church into a residential condo (like some of these gorgeous projects ), your project falls under the Acts. You should also take note - conversions have some onerous requirements , including completing and pre-funding a pre-existing elements study, so be aware and prepare.

You can, of course, convert an existing residential building into condominium without being regulated. This is a delicate matter for two reasons: (1) the regulators do not look kindly on attempts to intentionally avoid their scrutiny, so you may want to shy away from entering into a 1 day tenancy and proceeding to register (this is tongue and cheek, if you're considering building for rental and converting, speak with your lawyer immediately); (2) the Residential Tenancies Act, 2006, S.O. 2006, c. 17, s. 51 grants rights to tenants in the event of a conversion. Familiarize yourself (or, as always, speak with your lawyer) as they could scuttle your exit strategy.

Registering with HCRA

To be a Vendor or a Builder of new homes in Ontario, you must register with HCRA. HCRA provides a helpful checklist, which you can find here . HCRA is generally looking for information on yourself, your business and your finances, and specifically looking to ensure you fulfill the core competencies . If you are only applying as a Vendor, you only need to meet the first five competencies, but if you're both selling and building, you must meet all 7. You can fulfill the competencies by taking courses, demonstrating work experience, or obtaining professional designations/education.

If you're planning on building multiple projects and keeping them in separate corporations, each corporation will need to be registered. HCRA does have an expedited process and lower fees for 'Umbrella' registrations after the first project.

Keep in mind that HCRA doesn't have to grant a license, or may attach conditions to your license (i.e. improving knowledge of one of the competencies). If you disagree with HCRA's decision, appeal lies with the License Appeal Tribunal ("LAT") . I would always recommend applying as early as possible in your development process - if HCRA won't license you, any other steps towards developing your missing middle condo might be moot, unless you can partner up with someone who is licensed.

HCRA doesn't work for free - you'll be paying for your registration application, renewal and on the closing of every home you build. The fees can be found here , and are subject to change, so check back in if you're budgeting.

Qualification for Enrollment with Tarion

Just because you've registered with HCRA doesn't mean you can go ahead and sell homes. Section 10.1 of the Warranty Act lists the statutory requirements for acting as a vendor of new homes, and subsection (e) requires that the Vendor obtain, for pre-builds, something Tarion calls Qualification for Enrollment ("QFE") . If you're going to start building before you sell, the process is a little different, but we'll assume you're going for QFE.

Tarion will be looking at your proposed condo to determine whether it has confidence with your ability to build and warrant what you're aiming to develop. This will require providing Tarion with a basic description of your proposed condominium, financial disclosure, information on your past projects, entering into agreements and guarantees in support of the project and your obligations. Tarion takes this process seriously - it may even involve interviews and site visits. You'll also need to provide Tarion with your draft APS, Disclosure Statement and Declaration - this will require engaging your team of condo consultants, which we'll talk about in an upcoming post.

When applying to Tarion for QFE, you should be realistic. Tarion has the discretion to accept or reject your proposal, and if you've never built before, they may outright refuse a proposal to deliver 60 units on a major street . Starting at a smaller scale, and starting with 2-5 unit multiplex condos (yes, a condo can be as small as two units!) to demonstrate you're capable of delivering product to market, may be a more viable strategy than starting with a larger proposal.

When Tarion is done their review, they'll issue a Notice of Proposal ("NOP") outlining everything you need to obtain QFE, eventually enroll the home and stay in ongoing compliance. One of the most common conditions will be required security for the deposits (and after registration and sales close, for the warranty). We'll talk about deposit insurance in a different upcoming post. Appeal of your NOP also lies with the LAT, and if you don't file an appeal within fifteen days, you'll be deemed to accept.

Timelines for reviews will vary, but expect to wait 10-12 weeks for a response from Tarion after submitting a complete application, so make sure to budget for that time in your project timeline. The earlier the application goes in, the sooner you will be in a position to sell.

Do not sell without registration

This can't be emphasized enough - do not try to sell a new condo unit without registration with HCRA and Tarion. The respective Acts set out penalties for their breach - for example , selling without QFE can get a corporation a fine of up to $250,000 per charge, and an individual a fine of up to $50,000.00 and up to 2 years in prison. It's probably not worth it.

It's not only the regulators you need to worry about. The Acts are consumer protection legislation and the required registrations are meant to protect the public. If you enter into an agreement in breach of one or both of the Acts, and that denies the Purchaser the benefit of the intended protections, your agreement may be rendered voidable at the Purchaser's option. The details are a bit long-winded to get into here, but for more on this topic, Beer v. Townsgate I Limited makes for excellent bedtime reading.

Final Thoughts

The choice to go condo means exposing your operation to a lot of scrutiny. This doesn't mean rental is scrutiny free - if you're depending on CMHC financing to make your rental project pencil, then CMHC & your lender will be asking for much of the same due diligence material, and, to the extent that the Landlord Tenant Board constitutes an ongoing regulator of your relationship with tenants, it is not a pleasant one to deal with.

To help you get through your QFE application and the delivery of the proposed sales documents, you're going to need the help of seasoned condominium professionals who can lend you some expertise - your condo super-team, if you will. Luckily, that's the subject of part 3 of this series, so stay tuned!

Legal disclaimer: This article and any replies in the comments are for general information purposes only and are not legal advice. If you are seeking legal advice for your project, please reach out at [email protected]