What Happens to Purchaser Deposits in the Face of a Cancelled Condo Project?
When a condo project is terminated during receivership, purchasers who have locked in deposits face uncertainty. This article explores how receivership and project termination affect purchaser deposits in Ontario and what you need to know if the agreements of purchase and sale are cancelled.
Understanding Receivership in Ontario
Receivership is governed by the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA). When a company is unable to pay its debts, a court may appoint a receiver to take control of the company's assets and operations. A receivership is a protective measure for a troubled company, managed by a receiver or trustee. During this period, the receiver handles all company operations and financial decisions, while the company's principals retain limited authority.
The receiver's role is to protect the company's assets for the benefit of creditors and to manage the company's financial affairs. The receiver has the authority to make key decisions regarding the company's assets and management during restructuring, including halting dividend and interest payments. They ensure compliance with regulations while aiming to maximize profits. Typically, the receiver works to prevent bankruptcy by potentially selling assets to pay creditors and aid recovery. If these efforts fail, the court may order asset liquidation, with a liquidator handling the sale and distribution of funds to creditors, leading to the company's dissolution.
Though not a legal process itself, receiverships are usually part of legal proceedings. Receivers may be appointed by a secured creditor or a court, with court-appointed receivers representing all creditors. Receivers must be independent and impartial, ensuring they act fairly without favoring any party.
Let's Consider Examples of Recently Cancelled Condo Projects
Ms. Hollard invested $100,000 in a deposit plus an additional $3,000 for upgrades towards a new home in Barrie from StateView Homes (Hampton Heights). Unfortunately, she will not be receiving her possession of the house she contracted for. StateView Homes has been under receivership since June 15, 2023, and the homes at 2, 4, 6, and 8 Teck Rd., and 39 Auburn Ct., remain only partially built. The Home Construction Regulatory Authority (HCRA) suspended the company's licenses on July 4, 2023, effectively halting their ability to build or sell new homes in Ontario. This suspension has left many purchasers like Ms. Hollard concerned about their deposits.
In another example, The Urban North Townhomes project in Barrie, originally owned by Mapleview Developments Ltd., was sold after being placed under receivership in early 2024 due to financial issues with its developer. The project, planned for 1,057 units across 50 acres, was in advanced stages of construction for the first two phases but halted on the remaining phases. Following a court-ordered sales process, Dunsire Homes Inc. acquired the property, with a purchase price estimated around $100 million, which includes debts owed to KingSett Capital and other costs. As a condition of the sale, all pre-existing purchase agreements for approximately 494 units were terminated, frustrating many buyers. Some deposits for stacked townhouses are fully insured, but freehold unit buyers will need to claim partial insurance through Tarion. Dunsire, which has experience in similar situations, is expected to relaunch the project at potentially higher prices, as no other qualified bids were received during the sales process.
Deposit Insurance
According to Tarion, which administers Ontario's new home warranty program, deposits are protected under the Ontario New Home Warranties Plan Act (ONHWPA). If StateView Homes fails to refund deposits through the receivership process, Tarion will cover these claims. Directly from Tarion's website it states "Deposit protection covers you if you've paid a deposit toward the purchase price of a new home but your purchase isn't completed because your builder goes bankrupt or fundamentally breaches your purchase agreement. While these cases are rare, it's good to know you have some protection if it happens."
Something important to note, however, is that there are maximums for this coverage. If you signed your purchase agreement for a freehold home before January 1, 2018, Tarion protects your deposit up to a maximum of $40,000. For agreements signed on or after January 1, 2018, the deposit protection depends on the home's purchase price: if it is $600,000 or less, the protection is up to $60,000, while for prices above $600,000, it is 10% of the purchase price, capped at $100,000. For condominiums, builders are required to place all deposits in designated deposit trust accounts that are managed by escrow agents (usually the builder's lawyer), ensuring full protection; if the builder terminates the agreement, the deposit must be returned within 10 days. Tarion insures over the first $20,000 released into the project and excess condo deposit insurance is required to facilitate any subsequent deposit releases. Furthermore, for condominiums, as outlined by Tarion if a deposit isn't placed in trust or isn't returned, Tarion provides deposit protection up to $20,000.
Project Termination and Its Implications
When a company involved in a project goes into receivership, the possible outcomes are:
- Continuation of Agreements: If the receiver determines that the contracts can be honoured somehow and the project reinstated, the agreements will continue in effect.
- Cancellation of Agreements: If the receiver determines that continuing with the project is not feasible or in the best interest of the creditors, they may cancel existing agreements. This often happens when the project is financially unviable or cannot be completed as planned. Purchasers who have made deposits for the project may be concerned about the return of their funds. Deposits are typically used to secure a purchaser's commitment to the project, but their fate can be uncertain in the event of project termination.
What Happens to Purchaser Deposits?
In Ontario, the treatment of purchaser deposits when a project is terminated during receivership involves several key considerations:
- Review of Contractual Terms: The first step is to review the terms of the purchase agreements or contracts. These documents often outline conditions under which deposits are refundable or non-refundable. Understanding these terms is crucial in determining the purchasers' rights.
- Receivers Responsibilities: The receiver will assess the company's financial situation and determine how to handle various claims, including those for purchaser deposits. If agreements are cancelled, the receiver will decide whether to return deposits based on the company's financial condition and the contractual terms.
- Refund Process: The receiver may initiate the process of refunding deposits and interest on the despite as applicable, especially if the cancellation of the project was not due to the fault of the purchasers. However, if the company's assets are insufficient, refunds may be delayed or reduced based on the available funds.
- Legal Recourse: If purchasers do not receive their deposits back, they may have legal recourse. This could involve filing a claim with the receiver or pursuing legal action against the company. It is important to seek legal advice to explore these options.
- Priority of Claims: In the event of receivership, secured creditors have priority over unsecured creditors. Purchasers may only receive refunds after secured creditors are paid. This can impact the amount and timing of any refunds.
Conclusion
Receivership and project termination can create significant challenges for purchasers, particularly concerning the return of deposits. In Ontario, the process is governed by specific legal frameworks, and the outcome for purchasers depends on the terms of their agreements and the financial status of the company. It is important for purchasers to review their contracts, understand their rights, and seek professional advice to navigate the complexities of receivership and protect their financial interests.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.