MC900300842As the buying frenzy for new condos continues, a growing trend threatens to leave purchasers poorly protected against construction deficiencies.   Purchasers and their lawyers should pay attention.

In recent years, some developers’ agreements of purchase and sale for new units began including limits on the developers’ warranties for those units.   But that wording would usually not prevent the condo corporation from making claims for construction defects in the common elements.  That has changed.

More recently, some developers will make agreements between themselves and the condo corporations under their control in the early days after registration, where the corporation releases the developer from all warranties and claims for construction deficiencies except for the minimal coverage under the Tarion new home warranty.   Those agreements might be authorized and registered on title to all the units using a condo by-law.

The result is that the condo corporation turned over to its purchasers has no legal recourse against its developer for construction deficiencies, other than to make claim under the Tarion warranty, known for its many shortcomings and limitations.   This leaves the condo corporation having to pay the cost to repair most construction deficiencies from its own funds, leading to rapid increases in common expenses and surprise special assessments.

What makes this slick practice legally acceptable is that the release agreements and authorizing by-laws are disclosed to purchasers as part of the disclosure materials and the by-laws are registered on title following the condominium’s registration, thereby giving the world fair notice.   But is fair notice enough?

As it now stands, the key consumer protection component of the Condominium Act, 1998 is the concept of disclosure.   So long as a condition or state of affairs is disclosed, no matter how insane, improvident or unfair, it is fair game.  The problem with disclosure being the consumer protection linchpin for condo buyers is that most purchasers typically don’t read the disclosure materials, don’t understand what it means, or don’t care.

They should start, because a recent court decision confirms that a condo corporation has no ability to overturn those agreements or by-laws if they are clearly disclosed.

In a decision released October 22, 2014, the Ontario Court of Appeal affirmed a lower court ruling upholding an agreement and its authorizing by-law whereby TSCC 2095 (through its developer-controlled board of directors) released its developer from construction deficiency claims other than the Tarion warranty coverage.   The court concluded that:

Nothing in the Condominium Act, the Ontario New Home Warranty Plan Act, or any other provincial legislation, precludes a developer from limiting its liability in respect to common elements.

The court also rejected arguments that the by-law or the release agreement were beyond the powers of the declarant-controlled board or were unreasonable as per section 56(6) of the Condominium Act, 1998.    Last, the court decided that even if the by-law authorizing the execution of the agreement were subsequently repealed by the unit owners, the underlying agreement remains valid, making it impossible for the condo corporation to sue over construction deficiencies.

Buyer beware.

Aside from purchasers being saddled with the cost of their condominium corporations repairing construction deficiencies, an even worse potential outcome of this case is that the more reputable developers may begin adopting these questionable practices.   Given that our condo market is as hot and as competitive as ever, a good developer may be tempted to follow suit after watching its competitors reap the financial benefits without negative consequences.    The developer’s counsel in the TSCC 2095 case told The Lawyers Weekly that this concept may become commonplace.

In a race to the bottom, developers will push the envelope until the Condo Act is amended to prohibit certain questionable practices or until consumers wise up and steer clear of one-sided, risky deals.  Neither is likely to happen soon.