What is Different About Purchasing Pre-Construction Property Vs. Used Property?

What is Different About Purchasing Pre-Construction Property Vs. Used Property
What is Different About Purchasing Pre-Construction Property Vs. Used Property

Whether you are looking to purchase a pre-construction property from a sophisticated developer or an amateur, purchasers should be prepared to deal with complexity and uncertainty above and beyond what they would normally see in the purchase of used property. Simply put, if purchasing a used property is like taking a dip in a backyard pool, purchasing a pre-construction property is a deep dive in the ocean.

The following outlines three key features of purchasing a pre-construction property which differ from standard purchases of used property:

1. Possession vs Ownership

It is common for builders of pre-construction condominiums to set an earlier date when the property can be occupied (the Interim Closing or Occupancy Closing) and a later date when ownership is transferred (the Final Closing or Unit Transfer Date). For example, for a purchaser of a 2nd floor suite in a 33-storey building, the Unit Transfer Date could occur up to a year after the Occupancy Closing. For purchasers, this means that they must pay a monthly occupancy fee similar to rent, until the ownership is transferred to them. These payments are not credited toward the purchase price and can be a significant burden to many purchasers, who would not have access to secured financing until title is transferred.

2. A Flexible Interim/Final Closing Date

While purchases of used property generally include an inflexible closing date, purchases of pre-construction property generally involve “tentative” dates for Occupancy and/or Unit Transfer Date. The tentative nature means that builders have the right to extend closing as many times as they wish without compensating the buyer, provided they meet certain conditions and do not extend beyond an “outside” date. If you are buying early in the development process, these tentative dates are often years away. This can be a significant obstacle to a purchaser’s plans and has the potential to negatively impact financing as the value of the property fluctuates. As a result, it can be very difficult to plan for mortgages.

Pre-Construction Property Vs. Used Property

3. Adjustments and HST

Purchases for used residential property frequently only involve a handful of adjustments to the purchase price. Purchases of pre-construction properties on the other hand, usually include a long list of adjustments that are buried in the contract. More often than not, these adjustments reflect expenses that the builder has incurred in the course of the development project that the builder will offload onto purchasers. These adjustments are in the builder’s favour and can cost the purchaser an extra several thousand dollars.

One of these adjustments that is already included in the purchase price is the HST New Housing Rebate. In short, the purchase price reflected on the contract ordinarily accounts for HST and also:

  • assumes that the buyer will qualify for the HST New Housing Rebate (offered by the Canadian and Ontario Government to those who meet certain criteria), and
  • credits the buyer with the rebate amount based on the requirement that the buyer transfer the rebate to the builder.

If for any reason the purchaser does not qualify for the rebate, or if the builder doubts that they will qualify, the purchaser will have to compensate the builder with the amount that they would have received had they qualified. This adjustment alone can cost the buyer up to $24,000.00 in addition to the purchase price.

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The above list of features is by no means exhaustive. Agreements to purchase pre-construction property – sometimes over fifty pages in length – cover many additional terms dealing with, for example: vendor’s warranties, construction, early termination conditions, terms of occupancy, assignment rights, and purchaser’s default.

At Hummingbird Lawyers LLP, our experienced lawyers can help you understand the terms of your purchase agreement and plan around any risky terms so that you can have peace of mind regarding your investment. We can also help you negotiate the terms of the contract to minimize closing costs.

For more information, please contact our office. Our real estate lawyers are always available to help.

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Kevin

Kevin Lee joined the Real Estate group at Hummingbird Lawyers LLP in 2021 as an Associate Lawyer.

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