It Happened Again!
Condo cancellations continue to make big news in Ontario, and, this time, it is on the new government's radar!
It happened again! Another major condominium project in the province of Ontario has been abruptly cancelled, leaving thousands of prospective homebuyers, many of them first-timers, out in the lurch. This time it was the Icona Condos project being promoted by the Gupta Group at the Vaughan Metropolitan Centre, a massive project consisting of two 55-story residential towers with 1,264 condos, a 17-story hotel/residence complex, a convention centre, and 20,000 square feet of retail at grade. What had been billed as “Vaughan’s tallest tower” and the “Jewel of Vaughan” is now anything but.
This follows essentially hot on the heels of the almost identical cancellation of the 1,153 unit twin-tower Cosmos Condos project, also at the Vaughan Metropolitan Centre, that had been promoted by Liberty Development Corporation back in April of this year.
Between Gupta Group’s Icona project and Liberty Development’s Cosmos project, that’s almost 2,500 units abruptly taken off the market by two developers at the same location, leaving an almost corresponding number of buyers suddenly back in the market – a market which, almost by definition, has been scorching hot (if the market hadn’t been so hot, then the developers might not have been so inclined to terminate the projects in the first place!). According to the Globe & Mail, including Cosmos and Icona, that is almost a dozen condo projects cancelled by developers in the GTA since the beginning of 2017, totalling in excess of 5,500 condominium units.
Therein lies the public relations problem for developers and the public policy problem for government. It is not that the purchasers have been robbed of their deposits. By all accounts, all of the affected purchasers got their deposits back in full (thanks in part to Tarion Warranty protection rules for residential deposits), but none of the purchasers got any compensation for the lost opportunity cost of being out of a rising market for upwards of years. Every cancelled purchaser is now back in the market looking for a replacement condo where the market is as much as hundreds of dollars per square foot richer than it was when such purchasers first bought into their since-cancelled condo projects.
The perception in the popular press is that some developers have, essentially in bad faith, invoked financing or other such subjective conditions to terminate their projects, not really because they couldn’t get financing, but rather to capitalize on hot markets (by eventually repackaging and re-selling their cancelled condos at a much higher market price to new buyers without having to compensate the existing buyers that they just cancelled). Bob Aaron, a leading Ontario real estate lawyer and regular columnist on real estate law in the Toronto Star, said, in response to the Cosmos cancellation, “[r]ight now there’s a loophole in the legislation which allows builders on the flimsiest of excuses to terminate deals when the values of properties have gone up. That does not protect consumers in a rising market.”
Furthermore, there is no indication in the Tarion database alerting homebuyers to whether a developer (or its umbrella group) ever cancelled a condo project. For instance, in the case of Kennedy Gardens, the townhouse condominium project in Scarborough that got abruptly cancelled at the beginning of the year, the Tarion database gives no warning to the public that Forme Development Group Inc. is the current name of the umbrella group for the developer that sold then cancelled the Kennedy Gardens project.
For buyers, the art, it would seem, is to get a “good” pre-construction price for their condo, but not “too good” a price, lest the developer decide that it is better-off cancelling the project altogether and start afresh in a hotter market with new buyers. Odysseas Papadimitriou, a condominium development expert with Harris Sheaffer in Toronto, notes that the condo development industry should not be universally tarred with the same brush. According to Papadimitriou, “in some cases, sky-rocketing construction costs simply crush previously viable projects, and in many other cases — indeed most other cases — developers will complete projects that they have contracted to do, even if such projects are not as profitable as originally projected and/or if such projects leave potential profits on the table.”
There is currently a class-action lawsuit against the developer in the Cosmos condo cancellation and that is likely to spill-over to the Icona cancellation, but, from an industry perspective, it is quite possible that these condo cancellations will prompt a strong regulatory response as well. Todd Smith, the Minister of Government and Consumer Services was quoted in the Toronto Star immediately after the Icona cancellation as being “…concerned about this – this is a recent development where a couple of these condo companies have gone this route, which is of course disappointing for the people that were expecting to move-in to a brand new condo. It’s a serious issue that my ministry is looking into right now.” As we have seen in other areas of recent provincial politics, the current Ontario government is not afraid to act swiftly and authoritatively where it perceives the need to do so.
In addition to Cosmos, Icona and Kennedy Gardens, the Globe & Mail reports a host of other GTA condo cancellation in the last year or so: “more than 600 pre-sold contracts in a troubled Scarborough project called The Kennedy; close to 400 contracts were sold at a cancelled Ajax development called Central Park; more than 200 contracts disappeared in another Scarborough project in receivership called Harmony Village and there were about 168 units in the cancelled Toronto Junction-area Museum FLTS project from Castlepoint Numa.”
What’s troubling is that this may not be the end of it. While the market for freehold single-family dwellings has cooled since the introduction of the Non-Resident Speculation Tax earlier in the year, condo markets have stayed hot. Furthermore, anecdotal evidence suggests that construction costs really have shot up these past couple of years, with potential tariffs on steel yet to come. Indeed, this author would be shocked if there aren’t more high-profile GTA condo projects cancelled in the near future. Stay tuned.
Megan J. Lem is a corporate lawyer at Oslers LLP. The views expressed herein are the opinions of the author alone and are not necessarily the views of Oslers LLP.