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:
- Tarion’s cost of resolving the MSD claim(s);
- 5% of the sale price of the unit; and
For common elements, the co-share payment is calculated on a per project basis as being the lesser of:
- Tarion’s cost of resolving the MSD claim(s);
- 5% of the aggregate sale price of all the units in the condominium project; and
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:
- 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.
- 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 :
- the test is objective; and
- 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.