The recent arrest of Meerai Cho, a real estate lawyer practising in North Toronto, is proving to be a dramatic tale of woe over absconded condominium deposits. As everyone knows, Ontario (the Greater Toronto Area in particular) has become the heartland of the new condominium construction boom — a boom that, to date, may show some signs of slowing, but no real sign of bubble bursting. Developers and consumers alike also know that Ontario has a statutory consumer protection scheme designed to protect the deposit moneys of prospective purchasers buying pre-construction condominiums. Of course, to most, this deposit protection is the $20,000 coverage automatically available for all new construction condominiums from the Tarion Warranty Corporation under the Ontario New Home Warranties Plan Act. What most people don’t know or remember is that this $20,000 coverage from Tarion is but one source of statutory deposit protection in Ontario.
This Meerai Cho case reminds readers that Section 81 of Ontario’s Condominium Act, 1998 also provides a form of deposit protection in addition to the statutory Tarion warranty coverage by requiring that all deposit moneys are to be paid directly to the developer’s lawyer, who, in turn, must keep the deposits in his or her trust account until closing. Regulations under the Condominium Act also permit a very limited number of non-lawyer professional escrow agents to hold such deposits, but in our experience, the deposit holder under Section 81 is almost invariably a law firm, who holds the deposit until deposit insurance is put in place (as expressly permitted under the Act).
Section 81 of the Condominium Act does not operate as a supplemental insurance for the deposits, but, rather, seeks to insulate these deposits from the developer’s financial woes by forcing the deposits into a lawyer’s trust account right from the start of the deal. In theory, the deposits will then be safe from the developer and/or the developer’s other creditors until the deal closes, and if the deal doesn’t close, the deposits will be returned by the lawyer to the relevant purchasers. Alas, the best laid plans of mice and men…The Meerai Cho case reminds readers that even well-conceived legislation does not always work out exactly as intended.
Centrust Development, a development company run by Yo Sup (Joseph) Lee, a Korean entrepreneur, had plans for building the Centrium. As artists’ renditions are wont to be, the Centrium was going to be a gorgeous mixed-use condominium project (typical residential/hotel high-rise tower on a commercial/retail podium at grade) on Yonge Street at the north end of Toronto. Mindful of the deposit trust requirements under Section 81 of the Condominium Act, Centrust retained a local lawyer, Meerai Cho, to act as the deposit trustee. She collected upwards of $15 million in such deposits and dutifully deposited them into her bank account. As these stories all too often go, Centrust ran into financial difficulties and the Centrium was eventually sold under power of sale, cratering all of the existing pre-sales.
Well, long story short, when the prospective purchasers turned to Cho for the return of their respective deposits as contemplated under Section 81, they were shocked to find out that: firstly, the $15 million putatively in her trust account was gone, having been prematurely released by Cho to Joseph Lee (Centrust’s principal); and, secondly, that Joseph Lee had, by then, already “skipped town” and was presumably living the life of Riley back in Korea!
In this case, the deposit protection scheme envisioned by the Condominium Act left the prospective purchasers of the Centrium holding the bag with absolutely nothing to show for it. Cho has since declared bankruptcy. Sure, she may also eventually be disciplined by the Law Society of Upper Canada (already, her ability to operate bank accounts has been suspended and there is a motion before the courts to temporarily halt her ability to practice law completely), but anything that happens to her professionally will be relatively cold comfort to the many purchasers whose life savings were reflected in those deposits. “Many of the victims are from the local Chinese-Canadian and Korean-Canadian communities, and most of them can ill-afford the loss of these deposits,” says Brian Kwan, a local solicitor with a busy practice near the ill-fated Centrium, Sadly, the story has already been picked-up with fervor by CityTV, CTV, the Toronto Star and Law Times as a scandal in the making. At this rate, the Centrium collapse and the fragility of the protection actually offered by Cho’s trust account, may very well become one of the bigger headline stories for the Ontario development industry in 2014.
While the case against Cho and the Centrium is still in litigation nascency, there are already lessons that the development industry can take away from the mess. Sure, to the cynics reading this column, the “developer absconded, purchasers S-O-L” story is a perennial one (stay in this game long enough and this story is bound to repeat), but this time, there is a bit of a twist: the thought that a lawyer’s trust account might no longer be a safe harbour for purchasers may mean a re-think of the role of the project lawyer. While technical competence, capability and timeliness will always be a prerequisite for any lawyer on any file, as crazy as this may seem, going forward, the developer’s project lawyer may suddenly become an integral part of the overall marketing of future projects. While the spin masters will make it sound far more eloquent, we can already see the pitch being “come buy our project — this isn’t the Centrium — we have a famous and trustworthy lawyer who will hold the deposits in trust for you — and they will stay in trust!” This is especially true of commercial condominiums, where the deposit protection under Section 81 of the Condominium Act is the only deposit protection available to prospective purchasers (remember, Tarion is only available for residential condominiums whereas the Section 81 deposit trust requirements apply to both commercial and residential condominiums).
Of course, this may be a bit of an exaggeration, but sophisticated buyers will, after the Cho/Centrium debacle gets a full ride in the popular press, look more seriously at the reputation of the developer’s choice of law firms. Imagine: the lawyer as part of the marketing budget — stranger things have happened!
Jeffrey Lem is an editor-in-chief of the Real Property Reports and a Certified Specialist in Real Estate Law. Odysseas Papadimitriou is an Associate at Miller Thomson LLP, specialising in all aspects of condominum law.