New condo construction in Montreal on May 15.Christinne Muschi/The Canadian Press
As the insolvency and bankruptcy process of Ontario builder StateView Homes stretches into its sixth month a class-action lawsuit is calling into question a loophole in Ontario law that leaves some new home purchase deposits unprotected.
Currently, if you sign a preconstruction contract to buy a freehold home in Ontario any cash deposits made as part of that deal are not required to be protected by a legal trust and can be spent at will by the developer. But if you buy a preconstruction condominium, those same kinds of deposits are held in trust and cannot be spent.
“It’s a gap that should have been closed a long time ago,” said activist Barbara Captijn, who advocates for stronger consumer protections in the real estate industry. “There’s no reason the government should discriminate against people based on the type of property they buy.”
As more developers face a challenge finishing projects amid high costs of labour and credit, the freehold-condo distinction could make a serious difference for new home buyers. In the case of 765 buyers who gave $77-million in deposits to the insolvent StateView Homes, it’s already a big problem.
According to court-appointed receiver KSV Advisory Inc., those millions have already been “dissipated” or spent, along with $349-million lent to StateView by a collection of construction finance and mortgage lenders and another $37-million that TD Bank Group says was diverted from the bank via an alleged cheque-kiting scheme. In total, there’s just $467,000 left in StateView’s relevant corporate bank accounts.
The receiver plans to take what land assets are left inside the StateView sites and sell them off for cash to settle the builder’s debts. However, KSV has already warned that there will not be enough money to repay all the creditors. Under insolvency and bankruptcy law, the freehold status of the townhomes means the depositors are considered unsecured creditors who will only get paid after secured lenders.
That has spurred legal action by two parties representing the interests of the buyers. Sotos LLP has filed a class-action lawsuit challenging StateView’s contracts and Tarion Home Warranty has filed a separate motion to retroactively establish depositor trust for insolvency proceedings.
Tarion’s interest is straightforward: it is an Ontario-delegated authority that collects fees from builders to provide an insurance backstop for things such as deposits. For homes purchased since 2018, Tarion insures up to $100,000 of a deposit (if the purchase price was more than $600,000), which means Tarion could be on the hook to pay almost $76-million to StateView depositors.
Sotos, says there are depositors who paid more than the Tarion-insured amount whose interest it hopes to represent. It is also seeking damages related to supposed lost appreciation on the homes due to StateView’s failure to build them.
“We’re making a public interest argument,” said Denna Pourmonazah Jalili, an associate with Sotos. “This issue is coming up more and more. The real estate boom has incentivized a lot of greediness and overzealousness.”
The Sotos claim centres on the inclusion of Condominium Act language in the StateView agreements of purchase and sale related to the complexity of the ownership structure. Most freehold townhomes in Ontario today come with part-ownership of a Common Element Condominium Corporation (CEC) where buyers end up co-owning such shared infrastructure as private roads, parking lots or other amenities. Most freehold townhouse contracts direct a nominal sum of $1 or $2 toward the expenses for the common elements. Mr. Jalili claims this clause is a legal fiction that allows a company to bypass the Condo Act’s requirements to put deposits in trust. Sotos is asking for the court to rule that a remedial trust be established so that proceeds of the receivership sales can flow to buyers.
Other lawyers who regularly deal with these contracts say the CEC clause is industry standard and the real issue is the Ontario New Home Warranties Plan Act makes the distinction between freehold and condo.
“These contracts are tried tested and true,” said David Feld of Feld Kalia Professional Corp., though the company always advises buyers to review with a lawyer any preconstruction contract. “If you buy a freehold versus anything governed by the Condominium Act that’s a risk. That’s a big risk. We demand for our clients the cheques go to the builder’s lawyer in trust.”
KSV is opposing the Tarion and Sotos claims to establish an after-the-fact trust, not least because it means there will be less money to go around because trust monies cannot be divided among other claimants in an insolvency. In its report to Ontario Superior Court Justice Peter J. Cavanagh – who will rule on the motions – KSV also argues that “Tarion is not at law and/or in principle entitled to the remedies sought.”
“Just because something is industry practice, doesn’t mean it’s proper,” said Mr. Jalili. “Even if it is something that everyone does, we think that’s contrary to the essence of the Condominium Act.”
According to Audrey Loeb, partner with Shibley Righton, the divergence in the treatment of freehold and condo deposits began in 1980 after a financial collapse of a condominium project resulted in the government of the day being compelled to bail out depositors. After that, the Condominium Act was amended so that deposits for condos were held in trust while freehold deposits were left alone. Ms. Loeb expects any attempt to change the current status quo would be met with fierce opposition from Ontario builders.
“The developers would never let the government hold all that freehold money in trust,” she said, citing the higher costs associated with borrowing against trust-bound deposits. “All this consumer protection stuff costs us more money. … Obligating the developers to do things is not a high priority of this government.”