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Who is responsible when buyers lose their deposits on pre-construction houses?

Jan 20, 2024 | 2024 Toronto Star Property Law Columns

By Bob Aaron
Toronto Star contributing columnist

Regulators, government, real estate agents involved, even buyers, themselves, could share responsibility for the whopping losses.

When 28 buyers lose a combined $5.4 million in deposits on pre-construction houses, it is tempting to wonder who is at fault.

Last month, Ideal (BC) Developments Inc. was fined $34,375 for illegally selling new homes without a licence and failing to comply with a search warrant. It was also ordered to pay $150,000 in restitution to the Home Construction Regulatory Authority (HCRA).

The restitution – if it is ever paid – will be distributed as partial compensation among the wronged purchasers. But it will hardly be enough to make everyone whole.

In 2020 and 2021, Ideal sold freehold 28 units in the Boss Luxury Towns project, collecting about $5.4 million in deposits – an average of $193,000 per home.

The HCRA charges were the first prosecutions by the HCRA since it was established in February 2021. They were laid amidst an ongoing Star investigation by the paper’s investigative reporter Sheila Wang.

In addition, Tarion Warranty Corporation, which administers the province’s new home warranty program, commenced legal proceedings against Ideal, related companies and its directors, seeking more than $8 million in damages. Tarion is asking the court to hold Ideal’s principals personally liable for any alleged wrongful acts.

In addition to the builder and its principals, who else may be responsible for the mess the 28 buyers find themselves in and what can be done to protect future purchasers from the samepredicament?

As I see it, the individual buyers, the regulators, the government, and any real estate agents involved could share responsibility for the whopping losses.

If the buyers in the Ideal project had their pre-construction agreements vetted by a real estate lawyer, they might not have lost their deposits.

By law, all such agreements are required to include a Tarion schedule which, among other things, must disclose the HCRA licence number of the builder. The schedule encourages buyers to check with the HCRA website to confirm a builder’s licence status prior to signing. In order to be qualified to sell homes, a builder must enrol with Tarion and receive approval in the form of a Qualification for Enrolment (QFE). It is a provincial offence to sell a home without a licence from HCRA and a QFE from Tarion.

Any real estate lawyer reviewing a purchase agreement would have noticed the lack of the Tarion schedule and a missing or incorrect licence number. Both should be verified before buyers hand over large deposits.

A lawyer would have warned would-be buyers that their deposits were not protected above $60,000 or $100,000 (depending on the contract price) and that deposits should be held by a law firm rather than being paid directly to the builder.

The deposit protection limits were set many years ago and have clearly not kept up with inflation. It’s time, in my opinion, to double the deposit protection.

A legislative change is needed here so that freehold deposits will be protected as they are in pre-construction condominium contracts.

Real estate agents who sell pre-construction projects should be required to provide potential purchasers with particulars of registration with Tarion and HCRA.

As I see it, when buyers lose their deposits, it’s not just the builders who are to blame.


Contact Bob Aaron

Bob Aaron is a Toronto real estate lawyer and frequent speaker to groups of home buyers and real estate agents.
He can be reached by email at bob@aaron.ca, phone 416-364-9366 or fax 416-364-3818.

Aaron & Aaron specialize in Real Estate Law, specifically Sale of Rental, Condominium, Residential, Rural Recreation, Offer to Lease, Commercial, and New Construction

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