The Importance of Being Earnest
The vagaries of new home construction mean that the potential for closing delays is almost inevitable in this business. In Ontario, uniform delayed closing rules are built into every new home agreement of purchase and sale entered into in the province, courtesy of the mandatory contract supplements required by the Tarion Warranty Corporation, the province’s new home warranty administrator. These mandatory contract supplements, commonly referred to in the industry as the “Addenda”, provide a strict protocol on how long closings can be delayed, the mechanics for such delay, and when compensation needs to be paid for such delays.
While the Addenda has always required that a builder “construct without delay,” the Addenda has never explicitly required a builder to be realistic in setting closing dates in the first place, nor has the Addenda specified exactly how forthcoming a builder really needs to be with its customers about the builder’s actual timeline. Well, these questions have now been answered by the Ontario Superior Court of Justice in Jongazma v. Primont Homes (Heritage Hollow) Inc.
In the Jongazma case, a homebuyer entered into a purchase agreement in August of 2001 for a new single-family home in Phase 1 of the builder’s new subdivision, with a closing date of May 31, 2002. Unbeknownst to the homebuyer, just before entering into the purchase agreement with the homebuyer, the builder had acquired some additional adjoining lands, and had just submitted a revised draft plan of the subdivision to the municipality for the development of those adjoining lands concurrent with and as part of its Phase 1 subdivision.
Every reader of Building understands the business rationale of sweeping these adjoining lands into the current Phase 1, but every reader of Building also realizes that the municipality would not likely permit development on any part of the combined site until the whole combined site was approved. Unfortunately, the builder did not advise the homebuyer that it had resubmitted the plan of subdivision, nor did the builder warn the homebuyer of the inevitable delays.
Greatly paraphrased, under the Addenda (as it then was), the builder was permitted to extend the closing date for a maximum of 240 days, after which the builder could terminate the purchase agreement if the home was still not constructed, so long as the builder took all reasonable steps to construct the home without delay.
In the Jongazma case, the builder waited until two months prior to the scheduled closing date before advising the homebuyer that the home would not be completed on schedule, but the builder did not disclose the reason for the delay. The builder set a new closing date for September 2002, even though the builder knew that the new home could still not possibly be ready, even by the extended closing date. On receiving the letter, the homebuyer contacted the builder’s representative and advised that the homebuyer intended to sell his current residence. The builder’s representative did not warn the homebuyer of the risks of selling his existing home under the circumstances, probably because the builder’s representative did not want to disclose the impossibility of closing even under by revised closing date.
In July 2002, the builder again advised the homebuyer that the home would not be ready on time, even for the September 2002 closing date, and set a new closing date of January 2003. By this point, the homebuyer had already sold his existing home.
The builder did not get approval for the re-submitted plan of subdivision until December of 2002, which coincided with the end of the statutory maximum 240 day extension period. The builder terminated the agreement with the homebuyer, and then resold the same home to another purchaser for an extra $90,000 (some of which was additional upgrades, but most of which was just an appreciation in value over the course of the delays).
The homebuyer sued the builder, and the Court sided completely with the homebuyer, concluding that the builder knew or certainly ought to have known when it signed the purchase agreement that it could not possibly have delivered the home on time in light of the re-submitted plan of subdivision. According to the Court, the builder should have set a reasonable timeline for completion of the home and should have given fair warning to the homebuyer of the likely delays. At the very least, the builder could have been truthful about what was happening and offered to deliver the house to the homebuyer at the original purchase price. The court found that the builder failed to act in good faith and: (i) stripped the builder of the additional profit; (ii) reimbursed the homebuyer for his additional costs; and (iii) in an extraordinary move, awarded the homebuyer an additional $50,000 in “punitive damages” against the builder as a punishment.
On July 1st, 2012 the Tarion Warranty Corporation introduced amendments to the Addenda that will become mandatory on October 1st, 2012. A key difference from the Addenda as it was at the time that the agreement was entered into in the Jongazma case is that the current Addenda has reversed the option to terminate at the end of the maximum extension period so that it is the homebuyer, not the builder, who gets a 30-day window in which to decide whether the purchase agreement gets terminated or not.
Builders should take little comfort in the fact that the new Addenda still does not explicitly require a developer to provide bona fide closing date estimates, since the revised disclosure sections of the new Addenda imply the obligation to set realistic timelines for completion of a new home. More importantly, the Jongazma case tells the industry that, in addition to being honest in setting the closing dates in the first place, if the builder has knowledge of a potential delay in completion, it should inform its customers promptly and honestly of the nature of the delay. The threat of punitive damages, ushered in by the Jongazma case, for builders who ignore such obligations should be more than enough of a deterrent for such business tactics (remember that, in the Jongazma case, the homebuyer appeared to be a “one-off” situation – imagine, however, $50,000 in punitive damages per home in a fully sold-out subdivision project!). Nor is the Jongazma case applicable only in Ontario — builders across the country should take heed since the case did not turn on the Ontario-specific Tarion rules. Rather, the case was decided on general rules of contractual good faith which are generally applicable across the country — a reminder of the importance of being earnest, anywhere in Canada!