Missing Middle Condos pt. 4.1 - What you need in your Purchase Agreement

In part 3 of our series on developing Missing Middle Condominiums, we assembled a team of experts who have the skills to bring your condominium project to the market. Today, we're going to delve into the sales package - first up, the purchase agreement. Because it's a big topic, I'm going to break this part into a few articles (hence the .1 above). We'll tackle the condominium disclosure statement in the next installment.

If you've dealt in real estate before, you'll be familiar with purchase agreements - especially, in Ontario, the OREA standard forms. Because of the unique requirements of new construction, we strongly recommend avoiding using those - they're designed for resale product and don't interact well with other mandatory documents. But what's actually different? Let's dive in.

Mandatory Inclusions

Remember our regulators, HCRA and Tarion, from part 2? They're popping back up to tell us how to put together the Purchase Agreement. They collectively require three documents form part of the Purchase Agreement.

New Condominium Information Sheet

HCRA requires every purchase agreement have, as its front page, their "Information for Buyers of New/Pre-Construction Condominium Homes" sheet. It gets updated on occasion, and can be found on their directives page .

The Info Sheet is meant to warn purchasers about what they're getting into when buying a new condo. Its primarily geared towards pre-construction sales, with warnings about the possibility of the Condo not being built. This may make you think it's not mandatory for as-built Condos. That would not be correct - it's got to be included any time you're selling a new unit, even if it's built and registered.

The Info Sheet carries to the front some, but not all, of the dates and information from the Addendum (the next mandatory inclusion). Does this make the Info Sheet redundant? Should it be merged with the Addendum? Probably.

Addendum

The Addendum must also be included in every purchase agreement. It contains crucial information for purchasers and regulates some crucial aspects of the transaction. This is am important document, so I'll break the explanation into a few parts: Statement of Critical Dates, Contact Information Sheet, Unavoidable Delay provisions, Early Termination Conditions, Adjustments, Occupancy requirements, and the primacy of the Addendum.

Statement of Critical Dates

The Addendum's most important function is the Statement of Critical Dates. New builds don't have a single fixed closing date - they will have tentative or firm occupancy dates, with rules that allow a builder to extend those dates, either without cost or on payment of some kind of compensation. The Statement will set out the critical dates so a purchaser can understand the earliest and latest closings, and when they will be able to exit the deal if it's really not moving forward. Tarion has a helpful calculator on their website for generating statements . When choosing between the options, take note that selecting a Firm Addendum means that, outside of "Unavoidable Delays", you'll be paying compensation for any extension. Selecting the Tentative Addendum means that, as long as you abide by the rules, you have the chance to extend the occupancy dates without penalties.

If you haven't built condominium before, you need to take note of the special rules in the Addendum. You're allowed to set and reset your occupancy dates without strict limit, as long as you stay within the Outside Occupancy Date, which you select. But be warned, once the roof is on, you must, within 30 days, set a final tentative or firm occupancy date (meaning 1 or 0 resets left). If you're doing pre-construction sales where this would be relevant, your sales team needs to be in communication with the construction team to ensure that milestone isn't missed.

Contact Information Sheet

The Addendum has a contact information sheet that is sometimes overlooked, but is extremely important. The contact sheet is the definitive record of the parties can reach each other and serve notices. Incorrect information can have catastrophic consequences.

As noted above, with a tentative closing date, a seller is allowed to extend the transaction multiple times. You do this by sending notice to the purchaser. It has to go to the address (ideally email) in the Addendum - if it isn't sent there (say the purchaser has been emailing from a different account), the purchaser has an argument they weren't properly served, and your dates might not be valid. Same with taking instructions from a purchaser - you should never accept, for example, a request to assign the agreement, or upgrade instructions, from an email account other than the one listed on the Addendum. We never really know who is behind an email account, so designating one by email is the safest way to make sure all correspondence is valid.

Unavoidable Delay

If there's one rule of construction, it's to expect the unexpected. That's why, when you're selling a pre-construction condo unit, you want to use the tentative closing form - you know things will come up in the course of any reasonable construction program - supplier delays, drywall team shows up a week late - and it's fair to have some wiggle room.

But what about the unexpected unexpected? A strike, a flood or a pandemic (does anyone remember one of those) can disrupt your build in ways that can't be anticipated at the outset and aren't in yours or the purchaser's control.

The Addendum takes this into account, and (subject to compliance with the strict and sometimes byzantine rules) lets you suspend all dates while the unavoidable delay happens and resume, subject to a retooling period, when it's over.

Beware of abuse of this provision! It's only for true events out of your control, and if used improperly, your dates can 'snap back' - you might think you're closing in a few weeks, but Tarion finds you abused the provision and all of a sudden, your dates are back to the originals, and your purchaser now has the right to terminate. Be conservative.

Early Termination Conditions

Early termination conditions let a developer test the market while they determine if the project is truly viable. In short, the early termination conditions allow a developer to terminate a purchase agreement (or all agreements in the project) if certain targets aren't hit (i.e. not enough pre-sales, no good financing for the project) or development conditions aren't achieved (municipality doesn't approve the plan).

Early termination conditions aren't included by default and must be explicitly selected. They also aren't without cost. Some - like plan approval - are true conditions precedent . In short, if they're included and not fulfilled by the deadline set out for fulfillment, the agreement automatically terminates. There's some case law softening this principle - but only when it's in a purchaser's favour (you can't strategically let time run out, fulfill a condition the next day, then resell the condo units at a profit). Consider the potential for delays and also note that our unavoidable delay provisions, discussed above, won't apply. Talk to your lawyer, planner and realtor about balancing out the risk and rewards here.

Adjustments

New build purchase agreements often contain adjustments to the purchase price above and beyond the traditional adjustments for annual realty taxes, common expenses and prepaid utilities. These can include predictable costs, like charges for enrolling the property with Tarion, or unpredictable costs, like development charges (which can increase after sales if not fixed) or costs related to unexpected site conditions. Adjustments are an important part of the agreement - they allow for an allocation of some of the risk of the development process to the purchaser. Responsible purchasers understand this, and while they would obviously like to take on no risk, there's a reason we more often get requests for caps to adjustments than deletion of the adjustments - they're willing to accept some risk, but want to share it with the builder. Fair play.

Tarion doesn't ban adjustments, but it does regulate how they work. First, the builder cannot present an adjustment as a third-party cost (i.e. Development Charges) and pocket them instead. So if a builder's adjustment said "$30,000.00 for DCs" but the DCs were only $10,000.00, the builder would have to refund the difference to the purchaser.

Second, all adjustments have to be disclosed in Schedule B of the Addendum. This provides transparency to the purchaser - they only have to look in one place to see all the price-risks they're assuming. If an adjustment is hidden in the APS but not recorded in Schedule B, then tough-luck builder. Not collectable.

Occupancy

To conduct an occupancy closing, legal occupancy of the building must be granted by the municipality. Seems obvious enough. But with small condos - in particular, Part 9 buildings, which will be most multiplexes and some small apartments - come small complications.

Traditional condos are built under Part 3 of the Building Code and when the unit is complete and ready for occupancy, a partial occupancy permit is granted. This is usually called an occupancy permit, but I'm highlighting partial for a reason - the actual permit refers to the fact that the whole building isn't ready for occupancy, just the unit in question.

The City of Toronto (and most municipalities - but I haven't done a full canvass) doesn't issue partial occupancy permits for Part 9 buildings. All permits must be closed and the full building ready for occupancy before any occupancy is allowed. You're also left with the trouble of explaining to eager occupants why there is no occupancy permit to give them - but hey, that's what lawyers are for.

Addendum Prevails

You can't contract out of the Addendum. It's the law. There isn't much else to say about this, But keep in mind that I haven't described every element of the Addendum above, just the highlights, so it's worth reviewing with your lawyer in full before you go to market, to understand all the rules that apply to your agreement.

Warranty Information Sheet

The Warranty Information Sheet does just what it says it's going to do - it provides purchasers with information about the Tarion Warranty: the requirement to conduct a pre-delivery inspection, deposit protection, delayed closing compensation and information about the builder's warranty covering the first seven years of occupancy of the unit and the common elements.

The Warranty Information Sheet is updated from time to time, so be sure to download a fresh copy from the Tarion website .

To be continued...

With the mandatory inclusions covered, we'll get into drafting considerations for your general terms in part 4.2. Looking forward to it!

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]