Choosing a Condo Plan That is Right for You – Part 2: Standard Condominiums

Post by: Carly Haynes

Standard Condominium Plans

Our previous blog post offered an introduction to vacant land condominium plans.  In this post we will examine standard condominium plans.

What is a Standard Condominium Plan?

A standard condominium plan is the traditional form of condominium that people tend to be most familiar with. Under previous condominium legislation in Ontario, only standard condominium plans could be created, as such, all condominium plans registered prior to May 5 2001 are standard condominiums.  Under Ontario’s new legislation, the  Condominium Act 1998 (“the Act”), a standard condominium plan is any condominium that is neither a leasehold condominium, nor any of the other types of freehold condominiums provided for in the Act (for example: common elements condominiums or vacant land condominiums).

Defining something by what it is not may not be very helpful, so what exactly is a standard condominium?

This type of condominium plan is typically comprised of completed buildings which are made up of units and common elements.  Some common elements, for example patios attached to the units, may be deemed exclusive use portions of the common elements, meaning that use of those spaces is reserved for specific unit owners only.  Other common elements may include exercise rooms, recreational facilities, roadways, green space and walkways. Notably, some units in a standard condominium can be left empty at the time of condominium registration, such as parking units, or units intended for commercial or industrial (not residential) use.

Finally, prior to the registration of a standard condominium plan all proposed buildings within the plan must be constructed to the level required by the Act regulations, which is also what forms the basis of “Schedule G” of a standard condominium plan.  Schedule G includes an engineer’s or architect’s certificate (or combination), as to the status of the construction of the condominium’s buildings. A completed Schedule G must be included as part of the condominium declaration in order for the declaration to be registered along with the description plans.

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Why Develop a Standard Condominium Plan?

One benefit of standard condominiums is that proposed standard condominium units can be marketed to potential unit purchasers prior to obtaining draft plan approval from the approval authority (this is also the case with common elements condominiums and phased condominiums).

Also, pursuant to the regulations, the municipality is not required to provide notice of a public meeting for the approval of a standard condominium plan to the surrounding community nor is any circulation to any agencies required. This factor may increase the efficiency of the development.

The Downside of Standard Condominium Plans

The buildings in a standard condominium plan must all be built at one time, without phasing, therefore substantial construction capital may be necessary at the outset of a project, especially if marketing of the units is slow. Phasing the condominium plan offers a solution to this issue, and will be discussed in the following blog.

Finally, pursuant to the Tarion New Home Warranties Act a developer is required to post security to enroll the condominium in Tarion. Registration with Tarion must occur at least 30 (thirty) days before construction begins.

In our next blog post, we will discuss phasing of  standard condominium plans.

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Choosing a Condo Plan That is Right For You- Part 1 : Vacant Land Condominiums

Post by: Carly Haynes

Ontario’s Condominium Act, 1998( “the Act”) provides for different types of condominiums, which in turn allows developers to utilize a condominium plan which is best suited to their needs. These variations include vacant land, leasehold, common elements and standard condominiums.  Only standard condominiums can be phased although there is hope the 002ability to phase condominium plans will be extended to other types of condominium in the expected updates to the Act.  The type of condominium development undertaken by a developer will vary based on a range of factors including the type of interest held in the land, intended future use and development plans.  It is important to be aware of the various positive and limiting aspects of each form of condominium when undertaking a development project in order to insure an efficient and successful project.

Vacant Land Condominium Plan

A vacant land condominium plan (“VLCP”) refers to a condominium plan that contains at least one unit with no structures on it at the time of registration of the declaration and description (the documents that are registered to create the condominium).

A VLCP allows the condominium plan to be registered on the land before structures are constructed on all of the units. In other words, what usually presents as a vacant “lot” is the unit, and the common elements are made up of any other parts of the plan outside the units such as for example, roads, visitor parking, sewers, recreational facilities etc.

Pursuant to the Act, the following qualifications must be met in order to register as a VLCP:

1.         No unit in a VLCP can be part of a building;

2.         If at the time of registration of the condominium, a unit in the VLCP contains any structure, the structure must be within the boundaries of the unit and cannot “straddle” a unit boundary. For example, a foundation for a town home block cannot be in place at the time of the registration of the vacant land condominium plan as it would constitute a structure crossing a unit boundary; and

3.         Units in a VLCP cannot be stratified. This restriction does not preclude the construction of multi storey buildings on units in a VLCP.  Rather, it prevents having units above or below each other.

VLCPs are generally intended for the development of units containing single buildings, whether they happen to be residential, commercial or industrial.    However, town homes can be constructed on a vacant condominium plan.  The foundations cannot be put in place until after condominium registration because of wording in the regulations to the Act.

If there are incomplete common elements at the time of condominium registration the municipal approval authority may allow the condominium plan to be registered but the approval authority is obligated to take sufficient security from the developer to ensure the common elements will be completed at a later date.

Money Matters

As any experienced developer will tell you, Tarion New Home Warranty enrollment fees for condominium projects represent a significant cost for residential developments.  Tarion can require security of up to $20,000.00 for each proposed condominium in a standard condominium plan.  The good news in regards to VLCPs is that Tarion treats these condominium units as a freehold homes, therefore no Tarion security is necessary for the common elements in the condominium. That being said, while Tarion doesn’t provide any warranty on the common elements of a VLCP, it will in almost all cases continue to apply to the new homes which are constructed on the units.

Upon completion of construction of the buildings on the condominium units, maintenance and repair obligations regarding each unit fall to the owners of the unit, not the condominium corporation.  The Act prohibits the condominium from doing any maintenance or repairs with respect to a vacant land condominium unit unless the owner fails to do so.

The Act also makes all insurance obligations with respect to the unit the responsibility of the unit owner.  While the unit owners are responsible for the units themselves, the vacant land condominium corporation remains responsible for the common elements.

Take Home

Positive aspects of VLCPs include:

  • registering the whole condominium at one time, prior to building
  • sales agreements for new homes on a VLCP can be closed as soon as construction is completed because the unit is already registered within the condominium; and   The builder does not have to wait for condominium registration or a phase to register.
  • developers are not required to post security to Tarion to enroll the condominium in Tarion.

The downsides of a VLCP include:

  • certain municipalities may be wary about foundation walls being situated on lot lines (see requirement #2 above) after condominium registration .
  • all units must be registered at once, and once registered the lot and parcel sizes are fixed;
  • no sales agreements can be finalized until the draft plan of approval of the proposed condominium is complete and construction cannot begin for any structure (such as town home) that will straddle a unit boundary until the condominium plan is registered, meaning all conditions placed on the draft plan must be met prior to such construction.  Single family home construction that will not straddle a unit boundary is not affected by this restriction. ; and
  • the inability of the condominium to insure any part of the units may result in the buildings having inadequate insurance which can result in serious repercussion in the event of a fire or other damage particularly if the units are semi-detached homes or townhomes.

In Part Two of this blog series we will discuss the pros and cons of standard phased condominiums.

Don’t Wait Too Long – Tarion, Bulletin 19R and New Condominiums

Post by: Craig Robson

We received a call recently from a prospective client who was interested in developing a condominium project.  The conversation went something like this:

Caller: – “We are looking at doing a 6 storey apartment condominium.”

Lawyer – “What stage are you at?”

Caller – “4th floor is being worked on now.”

Lawyer –“Are you looking to sell the units or rent them?”

Caller  “Rent.”

Lawyer – “Good.”

Our response was based on the fact that if the caller was intending to sell new residential units out of the project, the project would be subject to the Ontario New Home Warranties Plan Act (“ONHWPA”) jurisdiction.  The entity responsible for administering the ONHWPA is the Tarion Warranty Corporation (“Tarion”).

If the caller was planning on selling new residential units, the project would then likely be subject to Bulletin19R “Condominium Projects: Design and Field Review Reporting” (“19R”).  19R came into effect on July 1, 2010 (replacing a similar long standing bulletin).

19R applies to vendors and builders of proposed condominiums that have both Part 9 and Part 3 Ontario Building Code (“OBC”) construction requirements and proposed condominiums that have only Part 3 OBC construction requirements.

For most of us who are not schooled in interpreting the OBC it is not always clear when 19R will apply.  Its applicability can sometimes be a surprise.  The basic assumption by some is that it only applies to “high rises”.  The true test of applicability is what part or parts of the OBC apply.

The question of what part(s) of the OBC apply to a proposed residential project should be put to the project engineer or architect at the outset of any such project if there is any thought of selling units.  This question should be posed well before any construction gets underway if there is any chance of the project being subject to ONHWPA.  Tarion asks the question in its application form but we have seen those applications prepared from time to time without careful consideration (called guessing) of what part of the OBC applies.

For the caller referred to above, she would have had a major issue if her intention was to sell residential units out of the project.

Her first issue would be that she should have enrolled the project in ONHWPA before construction started.  That in itself is an exercise of some length.

The bigger problem is with respect to 19R.  19R requires a lot of paperwork, submissions and professional reviews starting before and during all aspects of construction.  The caller in the above example may have simply been unable to comply with 19R because her project was too far along in the construction process to be able to comply with 19R’s preconstruction and submission requirements that are required before and in the early stages of construction.

19R adds a lot of red tape and cost to a project but cannot be ignored with respect to projects to which it applies.  Not being able to comply with 19R requirements may preclude a project from being brought into ONHWPA registration/enrolment.  If a project does not have this registration/enrolment, the builder is not allowed to sell the new previously unoccupied residential units in the project.

The Take Away

  1.  If there is any chance that there will be sales of new residential units in a new project, contact Tarion immediately and at the very least find out what the process is to comply with their requirements.
  2. If sales of new residential units are intended:
    • get the process underway with Tarion well in advance of construction commencement.  It can take a while; and
    • determine with certainty whether 19R applies well before any construction starts.  If 19R applies, make sure all relevant members of your project team know what is required of them – and then make sure they do it.  A qualified member of your project team should be charged with coordinating all of the 19R requirements.

Developers Beware: Don’t Forget Your Critical Dates – Or Your Deal May be Dead!

Part 3 – The POTL Factor*

Post by: Meghan MacDonald

This is the final post in the series on the potential issues surrounding the Critical Dates in the Tarion Delayed Occupancy/Closing Forms.

Part 2 discussed the importance of making sure that Critical Dates are filled in on the Statement of Critical Dates** in all circumstances.  This includes situations where there is no occupancy period because the unit being sold is located in a condominium that has already been registered.

Part 3 expands on the confusion around using Tarion’s Occupancy Forms for sales of units in registered condominiums and the obligation to use Tarion’s Limited Use Freehold Occupancy Forms for sale agreements with respect to Parcels of Tied Land to Common Elements Condominium plans.

A Parcel of Tied Land is not a condominium unit.  A Parcel of Tied Land is a freehold parcel of land that is “tied” to a Common Elements Condominium plan.  A Common Elements Condominium plan consists only of common elements (for example, a shared roadway, park, recreation center, etc.).  The purpose of the Common Elements Condominium structure is to provide a mechanism for orderly governance, maintenance and repair of shared common elements and for the orderly collection of the costs on account thereof from the owners of the Parcels of Tied Land.

In almost all cases the Common Elements Condominium plan is registered long before the sale of the freehold homes that are tied to the condominium are constructed or ready for occupancy.

The sales of the homes that are Parcels of Tied Land to the Common Elements Condominium plan are typically closed as regular home sales with no period of occupancy.  Occupancy is only provided at the time of the sale closing, not before.

It was therefore surprising when, earlier this year, Tarion introduced new Limited Use Freehold Occupancy Forms designed specifically for agreements of purchase and sale for Parcel of Tied Land.  The accompanying regulations require the use of these Forms for Parcels of Tied Land.  The use is mandatory.  The regulations do not contemplate using a Freehold Closing Form if there is no period of occupancy contemplated by the sale agreement.  This appears to be based on the misguided assumption that periods of pre-closing occupancy are routine in the sale of Parcels of Tied Land.

Prior to the recent amendments to the regulations, Freehold Closing Forms were being used for Parcels of Tied Land.  This made sense as the Parcels of Tied Land were almost always sold in the ordinary course without any period of occupancy before sale closing.

Even though occupancy is a non-issue with virtually all Parcels of Tied Land and the inclination may be to continue to use the Freehold Closing Forms because there is no occupancy period for these homes, the appropriate Limited Use Freehold Occupancy Form must be attached to every agreement of purchase and sale for a Parcel of Tied Land and the Critical Dates must be filled out (for the reasons outlined in Part 2).  This must be done even though the Limited Use Freehold Occupancy Forms don’t really apply to the reality of the sales of Parcels of Tied Land because the Limited Use Freehold Occupancy Forms deal with occupancy instead of closing.

If the appropriate Limited Use Freehold Occupancy Form is not attached with the Critical Dates filled out, the Purchaser can kill the deal.

It is also worth mentioning that Tarion included a new Schedule C to the Limited Use Freehold Occupancy Forms that sets out the terms that will govern the occupancy period.  The inclusion of Schedule C in the Parcel of Tied Land Forms seems odd for two reasons:

  1. as previously mentioned, most Parcels of Tied Land don’t have occupancy periods; and
  2. Schedule C wasn’t included in the updated Condominium Occupancy Forms.  It seems illogical that this Schedule was added to the Forms for Parcels of Tied Land where there is rarely any period of pre-closing occupancy, but not added to the Condominium Delayed Occupancy Forms where occupancy prior to closing is fairly routine.

Registered Condominium Units

Once a condominium is registered most agreements of purchase and sale do not require pre closing occupancy as buyers can move straight to closing.  However, as the agreement of purchase and sale is still with respect to a condominium unit the only choices for Tarion Schedules are the Condominium Delayed Occupancy Forms.  In our view, Tarion should have allowed the use of the Freehold Delayed Closing Form for registered condominium units and Parcels of Tied Land where the agreement of purchase and sale does not contemplate any period of occupancy.  However, they have failed to do so.  Hopefully this is remedied.

Recommendation

Since the Common Elements Condominium plan will in most cases likely already be registered at the time the sale agreement for a Parcel of Tied Land is signed, it is suggested the builder simply fill in the home’s closing date for all Critical Dates and put an outside occupancy date as far past that as possible because if you miss that date the deal will be terminated.  In the unlikely event a builder is contemplating a period of occupancy for a Parcel of Tied Land, the appropriate Limited Use Freehold Occupancy Form needs to be filled out on the same basis as the Condominium Occupancy Forms when choosing dates.  However, as noted, this does not happen very often.

With respect to sale agreements for registered condominium units where no period of pre-closing occupancy is contemplated we suggest the same practice in completing the Condominium Occupancy Form.

Bottom Line: never underestimate the importance of attaching the correct Tarion Occupancy/Closing Form to agreements of purchase and sale and filling in the Critical Dates on the Statement of Critical Dates even if the Form speaks to occupancy when no occupancy is contemplated.  If the regulations call for an occupancy form even though no occupancy is contemplated the builder must comply and use the occupancy form.  If done incorrectly your deals could be in jeopardy.

* Part 3 of a 3 part series on the potential issues surrounding Tarion’s Critical Dates.

** The Statement of Critical Dates is part of the Tarion Delayed Occupancy/Closing Warranty Form that must be attached to the agreement of purchase and sale.

 

Developers Beware: Don’t Forget Your Critical Dates – Or Your Deal May be Dead!

Part 2 – Leave No Blanks Behind*

Post by: Meghan MacDonald

This post continues the discussion of the potential issues surrounding the Critical Dates in the Tarion Delayed Occupancy/Closing Warranty Forms.

Part 1 discussed the importance of making sure that Vendor’s agreements of purchase and sale for new housing do not have any provisions that permit the Vendor to make changes to Critical Dates or automatically extend those dates contrary to the provisions in the Tarion Schedule.

It is equally important to make sure that the Critical Dates are filled out in the Statement of Critical Dates.**  The Tarion Forms state that if the Critical Dates are not filled out, the Purchaser can terminate the deal:

If: calendar dates for the applicable Critical Dates are not inserted in the Statement of Critical Dates; or if any date for Occupancy (or Closing for freehold) is expressed in the Purchase Agreement or in any other document to be subject to change depending on the happening of an event (other than as permitted in this Addendum), then the Purchaser may terminate the Purchase Agreement by written notice to the Vendor. (emphasis added)

It may seem obvious that Critical Dates always need to be filled out in the Tarion Forms, but consider the following situation that could occur with a home on a Parcel of Tied Land to a Common Elements Condominium:

  • Vendor creates a Common Elements Condominium with single homes as Parcels of Tied Land to the Common Elements Condominium;
  • The condominium is registered and there is no occupancy period for the homes, just a regular closing date;
  • The Vendor does not fill out the Critical Dates on the Tarion Form because there is no occupancy period;
  • A Purchaser of one of the homes decides she doesn’t want to close the deal and uses the Vendor’s failure to fill in the Critical Dates on the Tarion Form as justification for terminating the deal.

The Tarion Forms do not account for situations where there is no occupancy period for registered condominium units.

There is rarely an occupancy period in agreements of purchase and sale with respect to registered and completed condominium units, yet this registered unit is still a condominium unit and the Vendor must use either the Tentative or Firm Condominium Occupancy Schedule.

It is not clear why there is no Tarion “Firm or Tentative Closing Date Schedule” similar to the form used for a freehold  home for registered condominium units which have no occupancy.

Neither is it clear why the Tarion legislation requires the use of an occupancy schedule for all Parcels of Tied Land to Common Elements Condominiums.  Most Parcels of Tied Land to a Common Elements Condominium are freehold and don’t have occupancy provisions because the Common Elements Condominium was registered long before home completion.

Regardless, if the Vendor of a  new condominium unit that is not going to have an occupancy period or a Parcel of Tied Land which is not going to have an occupancy period fails to have the Statement of Critical Dates filled out a Purchaser can kill the deal for failure to include those dates.  At least that’s what the required schedules say.

Therefore it is essential in these cases where there is to be no occupancy of a registered condominium unit or Parcel of Tied land to simply fill in the home’s closing date for all Critical Dates and put an outside occupancy date as far past that as possible because if you miss that date the deal is dead too.

Bottom Line: never forget to fill in all of the dates on the Statement of Critical Dates even if there is no occupancy period, otherwise you run the risk of the purchaser terminating the agreement.

* Part 2 of a 3 part series on the potential issues surrounding Tarion’s Critical Dates.

** The Statement of Critical Dates is part of the Tarion Delayed Occupancy/Closing Warranty Form which must be attached to all agreements of purchase and sale for newly built condominium units and freehold homes.

Developers Beware: Don’t Forget Your Critical Dates – Or Your Deal May be Dead!

Part 1 – Consistency is Key*

Meghan MacDonald

When completing agreements of purchase and sale for homes on newly built parcels of tied land, condominium units and freehold homes, do not overlook the importance of this section of Tarion’s Delayed Occupancy/Closing Warranty Forms:

If: calendar dates for the applicable Critical Dates are not inserted in the Statement of Critical Dates**; or if any date for Occupancy (or Closing for freehold) is expressed in the Purchase Agreement or in any other document to be subject to change depending on the happening of an event (other than as permitted in this Addendum), then the Purchaser may terminate the Purchase Agreement by written notice to the Vendor. (emphasis added)

Many agreements of purchase and sale contain clauses that allow the Vendor to extend the occupancy/closing date due to the actions or omissions of the Purchaser.

For example, many agreements state that the Vendor has the right to extend the closing/occupancy date if the Purchaser has not chosen extras (e.g. a walkout basement, custom cabinetry or a sunroom addition) or colours for his/her home by a certain date.

If these clauses in the agreement of purchase and sale do not conform to the Tarion process for extending Critical Dates then, according to the Tarion section above, the Purchaser can kill the deal.

Bottom line: all home vendors should go through their agreements of purchase and sale and all related documents to make sure there are no clauses that permit the Vendor to extend the occupancy or closing date except in strict accordance with the provisions in the Tarion Schedule, otherwise the Vendor runs the risk of having an unenforceable agreement.

* Part 1 of a 3 part series on the potential issues surrounding Tarion’s Critical Dates.

** The Statement of Critical Dates is part of the Tarion Delayed Occupancy/Closing Warranty Form that must be attached to the agreement of purchase and sale.

What About the Initial Registration?

Post by: Meghan MacDonald

Developers take note: Tarion has recently overhauled its Delayed Occupancy Warranty Forms and it could cause some headaches for phased condominium projects.  Tarion requires Vendors to append these Forms to agreements of purchase and sale of newly constructed homes.  Some of the major changes in the new Forms include:

  • new Forms for parcels of tied land attached to common element condominiums;
  • a new Schedule B in all of the Forms that lists all of the closing adjustments; and
  • inclusion of an arbitration provision for resolution of disputes between a Vendor and Purchaser.

How Tarion has decided to implement these new Forms is where the headache for phased condominium developers lies.  Regulation 165-08 of the Ontario New Home Warranties Plan Act governs the implementation of the Delayed Occupancy Warranty Forms.  Section 8(1) of the Regulation states that, subject to exceptions, any agreements of purchase and sale that are entered into on or after October 1, 2012 must use the new Forms.  Sections 8(3) to 8(5) set out the exceptions.  Section 8(5) is the exception that applies to phased condominiums.  Section 8(5) states:

If, before October 1, 2012, parties have entered into one or more arm’s length purchase agreements in good faith for condominium homes in a phase as defined in subsection 145 (3) of the Condominium Act, 1998, other than in a vacant land condominium corporation, then section 6 applies to all purchase agreements for all condominium homes in the phase and this section does not apply to those purchase agreements.

What section 8(5) says is that if a developer has entered into at least one agreement of purchase and sale for a home in a phase of a phased condominium before October 1, 2012, then all agreements of purchase and sale for homes in that phase sold after October 1, 2012 can use the old Forms.  On a cursory reading, section 8(5) makes perfect sense.  It appears to create consistency in the agreement of purchase and sale for all homes in the same phased development by allowing the same Form to be used for all of them.

The issue with section 8(5), however, becomes apparent once you try to apply it after reading Section 145 (3) of the Condominium Act, 1998.

Section 8(5) of the Regulation refers to “condominium homes in a phase as defined in subsection 145(3) of the Condominium Act, 1998.”  Section 145(3) of the Condominium Act, 1998 states:

In this Part,

“phase” means the additional units and common elements in a phased condominium corporation that are created in accordance with this Part upon the registration of an amendment to both the declaration and description.

Section 145(3) of the Condominium Act, 1998 does not mention the initial registration in a phased condominium project.  The initial registration in a phased condominium (i.e. the first units built and offered for sale and identified in the registered condominium declaration prior to the first amendment) is not a phase of the condominium.  A phase in a phased condominium is any group of units brought into the condominium by amendment to the declaration after the registration of the condominium declaration which included the first units to be registered in the condominium.

This means that, due to the way section 8(5) was drafted, the exception that permits the use of the old Forms if there is a pre October 2012 sale doesn’t apply to the initial registration of a phased condominium project.

Neither is any future phase of the condominium exempt from using the new Forms if there are no pre October 2012 sales in such phase even if there are pre October 2012 sales in a prior phase or the initial registration of the condominium.

This could lead to situations where the new Forms must be used for sales in the initial registration and one or more of the phases that don’t have pre October 2012 sales while the old Forms can be used in other phases that had such sales.

The foregoing may have been intentional or it may be a drafting oversight in the Regulation, but it has the potential to cause issues.  Take the following situation as an example:

- A developer has a phased condominium townhouse project consisting of an initial registration and two phases.  The agreements of purchase and sale for some (but not all) of the homes in the initial registration were entered into before October 1, 2012.  The agreements of purchase and sale for some (but not all) of the homes in the first phase were also entered into before October 1, 2012.  None of the homes in the second phase were sold before October 1, 2012.

- On November 1, 2012, the developer enters into three agreements of purchase and sale, one for a home in each of the two phases and one for a home in the initial registration.

- The agreement of purchase and sale for the home in the first phase will be able to use the old Form pursuant to section 8(5) of the Regulation because at least one agreement of purchase and sale for that phase was entered into before October 1, 2012.

- However, the agreement of purchase and sale for the home in the second phase will use the new Form because none of the homes in that phase had been sold prior to October 1, 2012.

- The agreement of purchase and sale for the home in the initial registration will have to use the new Form even though some of the homes in the initial registration were sold before October 1, 2012 because section 8(5) of the Regulation doesn’t include the initial registration.

The above example illustrates that the inconsistency of section 8(5).  This will likely cause confusion for phased condominium developers and their sales teams.  The net result may be that builders should switch to the new Forms for all post October 2012 sales in a phased condominium even if there are existing sales in place at such time.

Changes to Tarion’s Major Structural Defects Framework Impact Condominium Builders and Owners

Post by: Meghan MacDonald

Tarion, the company responsible for administering the Ontario New Home Warranties Protection Act, has recently made changes to its major structural defects (“MSD”) warranty framework.  These changes are designed to provide new home and condominium buyers with additional protection for MSD.  The effects of these changes may include increased costs for builders due to the alteration of builder liability for MSD and a greater number of MSD claims as a result of the expanded definition of MSD.

This new framework will apply to new condominium projects where the first arm’s length purchase and sale agreement is entered into on or after July 1, 2012.

Builder Accountability for MSD

Tarion has expanded builder accountability for MSD claims in years 3 to 7 of the warranty period.  During this period, if a valid MSD claim is made, the builder will have to elect to either: i) take full responsibility for the MSD or ii) reimburse Tarion with a co-share payment.  This election will require builders to asses each option in order to minimize their financial exposure.  Under the new framework, builders will continue to have full responsibility for MSD claims made in years 1 and 2 of the warranty period.

For condominiums, the co-share payment for units and common elements are calculated differently.

The co-share payment for condominium dwelling units is calculated on a per unit basis as the lesser of:

  1. Tarion’s cost of resolving the MSD claim(s);
  2. 5% of the sale price of the unit; and
  3. $300,000.

For common elements, the co-share payment is calculated on a per project basis as being the lesser of:

  1. Tarion’s cost of resolving the MSD claim(s);
  2. 5% of the aggregate sale price of all the units in the condominium project; and
  3. $750,000.

The co-share payment options (i) and (ii) above will likely have a similar effect on all builders, but the monetary caps could end up having a disproportionate effect on smaller builders.  Compare the financial impact of a 1 million dollar MSD claim against the following two builders:

  1. A large builder of a high rise condominium with an aggregate sale price of 50 million dollars.  This builder elects to reimburse Tarion for a co-share payment rather than take full responsibility because the co-share payment option is cheaper.  For that builder, the lesser of the three co-share payment options is $750,000.
  2. A smaller builder of a townhouse complex with an aggregate sale price of 10 million dollars.  This  builder also elects the co-share payment option, but for this builder, the lesser co-share payment option is 5% (10 million x 5% = $500,000) of the aggregate price of all the units.

Although the small builder ends up paying $250,000 less than the large builder for the same 1 million dollar claim, the smaller builder’s MSD exposure is greater because the small builder’s co-share payment represents 5% of the aggregate sale price of the units, whereas the large builder’s exposure is only 2%.  The $750,000 co-share payment cap will benefit builders whose projects are worth over 15 million dollars because the $750,000 cap will always be less than 5% of the aggregate purchase price of the units.

Builders also need to be aware that, going forward, Tarion will report any MSD warranty claims that are not fully resolved by builders on its website.  However, a builder may not be subject to co-payment or disclosure requirements if the defect complained of is beyond builder control and is an industry wide issue.  Tarion’s Board of Directors will deal with those situations on a case by case basis.

Expanded Definition of MSD

Tarion has also expanded the definition of MSD.  The definition now comprises three separate tests for determining whether an MSD claim is valid:

i) Failure Test – defects in work or materials that result in the “failure of a structural load-bearing element of the building.” The test is a stringent one because it contemplates only actual structural failure.

ii) Function Test –a defect in work or materials that “materially and adversely affects the ability of a structural load-bearing element of the building to carry, bear and resist applicable structural loads for the usual and ordinary service life of the element”. This test is focused on the function of a building element.

iii) Use Test – a defect in work or materials that “materially and adversely affects the use of a significant portion of the building for usual and ordinary purposes of a residential dwelling and having regard to any specific use provisions set out in the purchase agreement for the home.” This test was part of the old MSD definition.  Tarion has modified it in order to clarify that :

  1. the test is objective; and
  2. the warranty will only be triggered if a significant portion of the unit/common elements is materially and adversely affected.

It is important to note that even if a claim meets one of the above three tests, there are warranty exclusions that may apply to exclude the claim from warranty protection.

Changes to the MSD Claims Process

The MSD claims process has also been overhauled by Tarion, which will have an impact on owners who are making a claim. Tarion Bulletin 24R provides a detailed breakdown of the new process.

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