Over the past couple years, there have been a few pre-construction condo project cancellations and they range from a few hundred units to over a thousand units.
After this pandemic, we might see more project cancellations.
So why would developers cancel their projects?
There are the legal reasons and the real reasons.
The 2 most popular legal reasons are:
#1 – The developer is unable to meet a certain sales target within a certain period of time during the pre-sale phase.
#2 – The developer is unable to obtain satisfactory financing.
The condo market had been crazy over the past few years, so it was actually hard not to meet sales targets.
On the other hand, the financing condition is a much easier escape. Essentially, you just have to say that you’re not satisfied with the financing you obtained.
But of course, it really makes you wonder, if the project is over 90% sold, how can you not be able to obtain financing, right?
So it naturally leads to some speculations on the true reasons for the cancellations.
It could be some inexperienced developers not knowing their costs down the road, so 2 years after they sold the project, they realized that they could be building at a loss at the price they sold.
It could be the ever increasing building material costs, labour costs, government charges and so on. These can all shrink the developer’s profit margin. For some, the profit margin becomes too small that they’d rather not build it.
Whatever the true reason is…
As a buyer of the project, you thought you locked into the price 3 years ago, let’s just say $800 per square foot.
Now you got all your deposits back because the project was cancelled. But now everything in the market is over $1,000 per square foot.
So, can you sue the developer for your loss?
Let me share a recent lawsuit with you.
Back in 2016, a boutique style condo with less than 200 units was launched for sale in the Junction area in Toronto.
One of the biggest selling points was the unique architecture of the building.
6 months after the launch, the developer noted in its blog that the project was nearly sold out.
But there was no sign for construction to begin.
18 months later, the developer said that lengthy delays in the approval process made it impossible to finance the building.
So the developer cancelled the project, terminated all the purchase agreements and returned all the deposits to the buyers with interest.
The question is…
Did the developer act in good faith?
Buyers were left angry, disappointed and priced out of the market.
Some commented on Facebook “It seems that the true reason may be that this project is suddenly in a hot neighbourhood”, suggesting that the developer “would rather cancel, blame someone else and re-launch for 30% more down the road.”
So a group of buyers filed a class action lawsuit to sue the developer for damages, the money they lost due to the increased market value in their units.
Their position was that the developer failed to meet its obligations to take all reasonable steps to satisfy the financing condition in the agreement and really terminated the agreement for other reasons.
How did the judge rule this case in court?
In the court’s view, buyers recovering their deposits with interest was a fair and reasonable remedy of the situation.
And the class action was dismissed.
This judgement is bad news because it sets an example for future cases when buyers try to sue developers for damages of lost opportunities.
So what can you do as a buyer to protect your time and money invested?
Pick a reputable developer with solid history.
It’s not just about the quality of the building finishes, there are a lot more than that.
An experienced developer will be much more accurate in working out the budget for a project than a new developer.
Reputable developers often have their own line up for trades and contractors so they would be able to lock in the price for construction materials and labour before the project starts.
This is extremely important because unforeseeable increase in construction costs is often a major cause of project failure.
Another crucial factor is that reputable developers care about their reputation because it’s very costly to build. So they would always commit to delivering a project that they promised.
Of course, they also need to be in very good financial positions.
Next week, I’m going to show you some pre-construction units that are great for investing in today’s market.
These buildings are close to completion, some are ready for move in, so it’ll be like buying brand new resales.
And of course, there will be very special incentives.
See you next week!