Back on May 6, 2022, Real Estate Partner Leor Margulies had sent out a bulletin to all of his developer clients and confreres outlining the impact of the strikes that were ongoing at that time, as well as the release of a little known regulation from the Ministry of Government Services relating to interest payable on condominium deposits. At the time, he had not fully appreciated the enormous impact of the change in the rules on project budgets. He does now. https://tinyurl.com/3nwfv3xc
Many clients have been very concerned about the significant cost increases in interest payments payable to purchasers caused by both the change in the regulations and the significant increases in the Bank of Canada rates. Until now, because of the low interest rate environment and the current regulations, developers have not been required to pay any interest on deposits since the last financial crisis of 2009. Unfortunately, as the song goes, the times they are a changing.
As part of the government's efforts to address the issue of project cancellations, one of the items that the Ministry of Government and Consumer Services looked at this spring, was the fact that purchasers who had their agreements of purchase and sale cancelled were receiving essentially no interest based on the formula in the regulations. Pursuant to discussions between the Ministry, OHBA and BILD, it was agreed that purchasers should receive a reasonable interest rate on monies that were tied up for potentially several years and returned as a result of purchase agreement cancellations.
The new regulations that were issued on April 28, 2022 to amend the interest rates payable on deposits were the result of these meetings. Unfortunately, rather than focusing strictly on payment of a higher interest rate where purchase agreements were cancelled by developers without the fault of the purchaser, a blanket change to the calculation of interest on deposits was made in respect of all deposits, whether they were returned as a result of developer cancellations, or the agreements closed and interest was payable on closing. Below is a summary of both current regulations and proposed changes:
- For purchase agreements entered into prior to January 1, 2023,
the existing calculation would apply. That is, the Bank of Canada
minimum lending rate for
short-term advances ("Bank Rate")
(currently 2.75%) minus 2% would be applied to all deposits from
the date of payment to the date of either return or closing. That
means that under the current regulations, interest at 0.75% would
be payable. This applies to all existing new condominium purchase
agreements as well.
Calculations are made twice a year prospectively as of September 30th and March 31st. Since the rapid increase in interest rates occurred after March 31st, it is likely that interest will start actually accruing from and after October 1, 2022 on existing and grandfathered purchase agreements.
- For all purchase agreements entered into from and after January
1, 2023 (but excluding agreements in projects where at least one
purchase agreement was signed prior to that date, essentially
grandfathering all projects launched before January 1, 2023), the
rules would be as follows:
- The benchmark interest rate would be the Bank of Canada policy rate and not the Bank Rate. The policy rate is actually 0.25% below the Bank Rate and is currently 2.5%. There would be no 2% deduction, which means that the full policy rate would be applied to deposits under these agreements (an increase of 1.75%); and
- The same rules would apply for calculating the interest such that the rate is set twice a year prospectively on September 30th and March 31st.
OHBA and BILD, together with industry representatives including the writer, have been meeting with the Ministry to address the serious and probably unintended impact of the regulatory changes. The removal of the 2% deduction and the rapidly escalating interest rates will mean that mean projects launched after January 1, 2023 could have yet another significant cost added to the project budget which ultimately would either be passed on to the purchaser or perhaps result in a delay or cancellation of the project. Finnegan Marshall Inc. has been working with us and provided cost projections for sample projects to support the industry positions noted below.
The industry has been supportive of implementing the regulatory change increase as it impacts on purchase agreements cancelled by the developer, whether for early termination conditions or otherwise (but not because of the purchaser's default). We have requested removal of this change for payment of interest on closed purchase agreements as ultimately this additional cost would be absorbed by purchasers through higher sale prices.
It has also been pointed out to the Ministry as well, that leaving this January 1, 2023 date in place for all deposits, could result in an unnecessary acceleration of the launch of projects prior to January 1, 2023, which may not otherwise be ready to go, in order to avoid the significant cost impact of these changes.
As indicated by the attached letter, which OHBA and BILD received on September 2, 2022, we are hoping for changes in the legislation within the next few weeks to address concerns the associations have raised as it relates to costs for completed units.