Deposits on New Homes: Know Your Rights and the Risks
Like in all agreements of purchase and sale ("APS") for real estate, buyers of new homes are required to provide a deposit or multiple deposits to secure the agreement and as an offer of confidence to the builder that the buyer is serious in completing the deal. The difference in providing deposits towards new homes versus resale homes is that deposits for new homes tend to be larger, especially when buying a pre-construction home. Because of this, and due to the increased risk of the buyer losing its deposit, the Ontario New Home Warranties Plan Act, administered by Tarion Warranty Corporation ("Tarion"), was created to protect these deposits, up to certain limits.
The Act insures deposits paid on new freehold homes up to $40,000 and up to $20,000 for deposits paid on new condo units. Should the builder become bankrupt, fundamentally breach the APS and cannot complete the transaction (or if you are otherwise legally entitled to treat your APS as terminated) you are eligible to make a claim to Tarion for the recovery of your deposit.
But what if your deposit amounts exceed these protection limits? Although this is (thankfully) rare, there are some notable cases where a builder has gone bankrupt and was not able to return the full deposit amounts to the buyers, leaving such buyers at a significant financial loss (e.g., Google "Urbancorp bankruptcy"). To protect against such instances, most agreements acknowledge that your deposits are being held in trust by the builder's solicitor (i.e., separate and apart from the builder's funds). Under the Condominium Act, all deposits are to be held in trust, usually by the builder's lawyer unless Tarion has received "prescribed security" for the first $20,000, or excess deposit insurance has been purchased by the builder. Buyers should insist on getting a copy of the builder's excess deposit insurance, if available, to ensure funds above Tarion's limits are also being protected.
Why doesn't Tarion just increase the caps on its deposit protection limits to alleviate the risk to new home buyers? A few real estate professionals have made such an argument. Tarion's response has been threefold: (1) Cases where deposit amounts exceed the protection limits are rare; (2) If deposit protection is increased, Tarion enrollment fees would have to follow suit and such additional cost would be passed onto buyers, slowing new home sales and, in turn, new construction; and (3) Tarion's warranty program was only intended to provide limited warranty coverage, not absolute coverage for any and all losses, as the cost of such absolute coverage would be prohibitive.
Buyers of new homes should also be aware that payments made to builders for upgrades or extras will typically not be refunded. Furthermore, Tarion does not protect any payments made toward reserving a new home or condo unit before you sign the APS. If you make payments under these particular circumstances, you should obtain a receipt from the builder and request that it hold the money in trust.
Your real estate lawyer should provide you with guidance on matters regarding your deposits. He or she should also look for provisions in the APS that (a) entitle you to the return of your deposit, with or without interest, and (b) entitle the builder to keep your deposit. Of course, builder agreements contain more provisions under (b) than under (a). Some of these provisions may seem surprising and unjustifiably harsh. For instance, it is not uncommon to see a clause that gives the builder the right to terminate the agreement because you did not attend at its office to select the features and finishes, and that such termination includes forfeiting your entire deposit.
Finally, even in cases where you are eligible to terminate the APS and recover your deposit, you should be aware that you would be giving up the potential equity that accrued since the time you signed the APS for the new, pre-construction home many months or even years ago. Depending on the market, that equity could mean many thousands of dollars. As such, you will have to weigh the pros and cons of terminating the APS. Despite complications that may lead to delays to the closing of your new home, you may still have a strong business case for not "abandoning ship", but rather seeing the transaction through to its completion.