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Condos are hot, hot, hot

Real Estate
|Written By Kevin Marron
Condos are hot, hot, hot

Condominiums are hot again and so are condo laws. In spite of a recession that took most of the air out of real estate bubbles, the frantic pace of condo development is picking up again in major Canadian cities.

Real estate agents in Toronto and Vancouver are queuing to buy units in prestigious developments, and, once again, there are reports of street fights breaking out in the lineups. Meanwhile, legislators are trying to catch up with the new issues churned up as condo development raced through a cycle of boom, bust, and boom over the past few years. There is a new condo act in New Brunswick and new legislative amendments in British Columbia and Nova Scotia, while Alberta is beginning to re-examine its condo law and lawyers in Ontario are proposing changes.

In British Columbia, where an earlier construction boom left a legacy of litigation over leaky condos, new amendments that have yet to be turned into regulations will, when enacted, require condo corporations, known as strata corporations, to file depreciation reports forecasting future costs of repairs. Patrick Williams, a partner at Clark Wilson LLP in Vancouver, observes that these costs could amount to as much as several million dollars in the case of a development requiring a new roof. What has yet to be specified in the regulations is how often such reports must be compiled and whether certain kinds of strata, such as duplexes, should be exempt.

A further B.C. amendment will require strata corporations to do audits, but regulations have yet to be drawn up specifying how often they should be done and what kind of audit is required, says Williams, who maintains a full forensic audit would be prohibitively expensive. He notes strata corporations will be allowed to opt out of the requirements if three quarters of the unit owners vote for it. However, he predicts most will decide to comply with the rules to protect future purchasers.

Before the bubble burst, condos were all the rage in Alberta as builders in Edmonton and Calgary raced to keep up with the demand. But some of them cut corners and now many condo owners are in a rage over leaking roofs and rotting wood. There are also many prospective owners upset about delays in the completion of buildings where they have already paid their deposits and made plans to move in. There are others who paid their deposits and signed contracts during the economic boom, but now want to get out of a deal that seems too expensive in leaner times. Many of the latter are looking for a way out by arguing that the developer has made changes that depart from the original prospectus and plans. With all this controversy, there have been calls for government action and the province is now responding by striking a committee of stakeholders to review the Condominium Property Act, which was last revised in 2001.

Heather Bonnycastle, counsel at McLeod & Co. LLP in Calgary who has been asked to participate in this consultation, says there could be some improvements in the legislation, but maintains it already has strong consumer protection provisions. She says consideration could be given to issues such as the length of time owners can be expected to wait for a building to be finished. With respect to shoddy construction, however, she says, “I’m not sure that you can legislate quality.” What’s most important, she says, is for lawyers and their clients to review condominium documents carefully and do due diligence before entering into a purchase agreement.

In Ontario, Harry Herskowitz, senior real estate counsel at DelZotto Zorzi LLP, is seeking a legislative amendment to deal with what he sees as a looming problem facing many developers: the consequences of the province’s move to harmonized sales tax. The HST will mean that provincial sales tax will effectively increase the cost of condo units by eight per cent; add this to the normal inflationary increases in costs that occur over a two- or three-year construction period, and there may be price increases of 16 to 19 per cent. This could well be construed by a court as a “material change” in the development and, as such, it will allow unit holders to get out of their contracts and demand their deposits back.

Herskowitz is afraid that in a less vibrant economy many purchasers will want to take this way out, leaving developers and their creditors in the lurch. He says a short-term legislative amendment is all that’s needed because the problem only applies to developers who made up their budgets before anyone knew about the move to HST.

New Brunswick, which had not made significant changes to its condo legislation in 30 years, has now enacted a completely new Condominium Property Act designed to make condo development safer, fairer, and more transparent, while balancing the responsibilities of developers and the rights of consumers. “It’s a very positive step forward. The old act was completely outdated,” says Steven Christie, a partner in the Fredericton office of McInnes Cooper.

A key component of this new act is a requirement that developments with more than 10 units complete a reserve fund study to determine the budget for current and future maintenance and repairs. Christie says his developer clients are concerned about the short-term impact of this because those who took out a building permit before the end of last year are not required to do a study and provide for a reserve fund, while newer developments must comply with the act. The act does require existing condo corporations to do a reserve fund study within three years. “So at some point it will catch up and I think the purchasers will understand that buying into a condominium corporation that has a vibrant reserve fund is probably a good thing,” says Christie.

Generally, Christie says, the new act is more consumer protection-oriented than the old legislation. It involves more governmental oversight and places more filing obligations on condo corporations, while imposing substantial fees on developers. For lawyers, the act brings some benefits by standardizing documents. It will also make life somewhat easier for condo boards because it gives more guidance on governance.

Consumer protection is also a priority in Nova Scotia’s Condominium Act amendments, according to Patrick Cassidy of Cassidy Nearing Berryman in Halifax, a member of the legislative review committee that advised the province on the amendments. He says a key innovation is a requirement that developers put a sum of money in trust, the equivalent of 10 per cent of the building’s annual operating budget, which the condo corporation can claim against within 15 months if expenses exceed the budget by more than 10 per cent.

As anyone dealing with condominium law can attest, condo living is not without its conflicts, many of which end up in litigation often over issues such as pets, outdoor ornaments, satellite dishes; concerns that are important to individual owners but not necessarily matters that merit the scrutiny of the courts. Nova Scotia is currently developing a novel approach to this by expanding the jurisdiction of residential tenancy officers, who are normally responsible for hearing landlord-tenant disputes, so they will hear condo disputes and make legally binding decisions allowing condominium boards to avoid the expense of hiring lawyers to represent them in court.

As the condo boom continues, however, and with plenty of new legislation to deal with, there’s not likely to be any shortage of work for lawyers working in this expanding field.

Freelance journalist and business writer Kevin Marron can be reached at kevin@kevinmarron.com.

  • Condos are Hot, Hot, Hot

    Wesley McMillan
    Dear Editor:

    I write concerning Mr. Marron's article, "Condos are Hot, Hot, Hot". While he points out the movement towards legislative reform and consumer protection, his article does not mention some very serious concerns facing condo purchasers as a result of legislation and other government action.

    In British Columbia all condo pre-sales (purchase agreements entered into before construction has begun) are subject to the Real Estate Development Marketing Act (the "Act"). In 2004 it was introduced as providing consumer protection and "enhanced rescission rights". This is true, but only if the developer fails to follow the simple rules set out in the Act (something I see a lot of in my practice). So long as the Act is followed, the developer may change virtually anything about the development (including ownership of common property, location of the unit within the building, the fixtures, etcetera) and keep the purchaser tied into the contract. This hardly sounds like consumer protection.

    British Columbia's introduction of the HST on July 1, 2010, will result in unexpected costs to many pre-sale purchasers. The effect of the HST is an additional 7% tax on new condos. There is a provincial tax rebate of 5%, up to a maximum of $26,250. For condos up to $525,000 this amounts to an additional 2% tax. For any amount over $525,000, the full 12% HST must be paid without rebate. The government has justified the 5% rebate (as opposed to the full 7%) on the stated basis that new condos have 2% PST embedded in their price through taxes on materials and labour used to build the condo. This, of course, demonstrates a fundamental misunderstanding of real estate pricing. The market - not costs of construction alone - determines the price of real estate, including new condos.

    Making matters worse for purchasers, the minimum down payment for investment condos (i.e. not owner occupied) will quadruple from 5% to 20%. Many investors bought pre-sales months or years ago. They paid deposits of about 15% expecting that amount to cover the 5% down payment and the GST. The requirement for 20% down coupled with the drop in real estate values means that many who would otherwise have been able to complete will not be able to do so. They may lose significant deposits solely because of the new mortgage rules.

    I hear a lot of talk about consumer protection, I just haven't seen it yet.

    Yours truly,

    Wesley McMillan

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