For those who have already gone through the process of both purchasing a new construction home and purchasing a resale home, you know that the purchasing experience is surely not the same. The new construction area can be especially daunting as homebuyers are more likely to deal directly with a builder’s (seller’s) representative compared to resale transactions which more than not have a realtor representing and guiding the purchaser throughout the process. Please use this guide to educate yourself and make your new construction home purchase experience less daunting.
What is a New Construction Home?
You can either purchase a house directly from the builder that no one has ever lived in (new construction home) or a house that was previously built, sold, and lived in by one or multiple set of owners (resale home). In real estate, “new construction” is also sometimes referred to as “new build”, “new home” or “pre-construction”. Resale is also sometimes referred to as “pre-owned”. The above wording can be used interchangeably.
Research your Builder
Unlike a resale home, a new construction home is yet to be build and cannot be physically inspected, so you must rely on the builder’s ability to build a property that you can comfortably live in and will hold its value for many years to come.
To ensure a positive consumer experience, effective February 1, 2021, the Home Construction Regulatory Authority (HCRA) regulates new home builders and vendors in Ontario. Prior to February 1, 2021, the Tarion Warranty Corporation was responsible for licensing home builders and vendors in Ontario. All matters related to homeowner warranty protection remain the responsibility of Tarion, which will be discussed further down.
One of the resources that the HCRA encourages homebuyers to use is the Ontario Builder Directory. Prior to signing your New Construction Home Purchase Agreement, it is highly recommended that you visit the directory to search the history of the builder/vendor that you are purchasing from in order to examine key metrics such as the number of homes previously built and the number, type, and result of claims against the builder/vendor.
The New Construction Agreement
In contrast to a resale purchase where your realtor will typically use a standard OREA form and add clauses designed for your protection, new construction agreements are more detailed, custom and unique to the builder/vendor and the specific construction project. As it is drafted by the builder/vendor’s legal counsel, rather than your realtor, it is important that you request your own lawyer to review and provide you with legal advice before you sign.
Statement of Critical Dates
Every new construction agreement has a Statement of Critical Dates which forms part of the Tarion Addendum. Unlike a resale, the closing date for a new construction is very fluid as the builder has to rely on numerous others such as the city/town for approvals/permits and the construction industry for supplies and labour, any of which can cause delays that are difficult to estimate from the start.
Depending on whether there is a Firm Closing Date or Tentative Closing Date (also called “Firm Occupancy Date” or “Tentative Occupancy Date” in Condo Agreements), the Builder/Vendor will have opportunities to extend the closing multiple times. It is important not to take “Firm” to literally, as the Vendor still has the ability to close within 365 days of the Firm Closing or Occupancy Date. As per the Statement of Critical Dates and under the Tarion Warranty, on a date after the Firm Closing Date or Firm Occupancy Date, a delayed closing date entitles the purchaser with up to $150 per day of delay to a maximum of $7,500.00. If the purchase of the home is not completed by the Outside Closing Date, then the purchaser can terminate the transaction and is entitled to delayed closing compensation and to a full refund of deposit plus interest.
Adjustments on Closing
When purchasing a new construction, it is important to read Schedule “B” of the Tarion Addendum to the Agreement of Purchase and Sale and budget for the additional costs that you will be responsible to pay at the time of closing. A non-exhaustive list of adjustments that are usually seen:
- Tarion Enrollment Fees (based on purchase price)
- Water, Hydro and Gas Utility Meter Installation and Connection Fees
- Development Levies
- Education Levies
- Estimated Annual Property Taxes and deposit on account of future Property Taxes
- Builder’s Lawyer Mortgage Discharge Fees
- Builder’s Lawyer Real Estate Transaction Levy
All homebuyers who buy from registered builders and vendors enrolled in Tarion are covered under the Ontario New Home Warranties Plan Act also known as the “Tarion Warranty”. In the process of obtaining the warranty service after closing, the purchaser is asked to complete:
- a confirmation of receipt of homeowner information package;
- a pre-delivery inspection (“PDI”); and
- complete and sign a Certificate of Completion and Possession (“CCP”) together with the Vendor or Vendor’s representative.
The PDI is a formal record of the new build’s condition before the purchaser moved in and is used as a reference point for any future warranty claims. If any defect is noted in the PDI and not fixed within 30 days of the Purchaser’s possession, the purchaser should include the items in the 30-day form along with any new items that are discovered since taking possession. Here are the subsequent submission deadlines:
The next submission for the Tarion Warranty is the one-year anniversary of the possession day and is used to submit any outstanding warranty items and any newly discovered items covered within the following:
- Requires a home is constructed in a workman-like manner and free from defects in material;
- Protects against unauthorized substitutions;
- Requires the home to be fit for habitation;
- Protects against Ontario Building Code violations; and
- Applies for one year, beginning on the home’s date of possession even if the home is sold.
Following the one-year submission, the new homeowner must submit by end of 2nd year any outstanding warranty items and any newly discovered items that covered within the following:
- Protects against water penetration through the basement or foundation walls;
- Protects against defects in materials that affect windows, doors and caulking and defects in work that results in water penetration into the building envelope;
- Covers defects in work or materials in the electrical, plumbing and heating delivery and distribution systems;
- Covers defects in work or materials that result in the detachment, displacement or deterioration of exterior cladding (such as brickwork, aluminum or vinyl siding);
- Protects against violations of the Ontario Building Code that affect health and safety; and
- Applies for two years, beginning on the home’s date of possession.
From the start of third year up to seven years from the date of possession, the purchaser can submit a Major Structural Defect Form to Tarion for any major structural defects. For more details on the warranty coverage, please click here.
An Assignment or an Assignment Sale is the act of “assigning” the agreement to purchase the new build to another party. You are only assigning the agreement as the assignment is done prior to the actual closing and transfer of title. As a result, the assignee (purchaser that the agreement is being assigned to) takes the position of the assignor (original purchaser that is assigning his or her interest).
The assignor assigns its interest and rights in the Original Agreement with the builder (seller), assigns its interest in the original deposit and assignee assumes and agrees to perform all of the assignor’s obligations under the Original Agreement.
When you purchase a new construction property, you will find an assignment clause within the agreement that discusses items such as if the purchaser is allowed to assign and if there will be an assignment fee at the time the builder approves the assignment. If assignments are allowed, it will also likely state that an assignee is not entitled to receive the HST rebate on closing and must apply for it after the closing. You may also see assignment clauses stating that certain builder incentives (e.g. free 9 feet ceiling upgrade) are now longer valid after an assignment as they only apply to the original purchaser and not to an assignee.
HST on New Homes
When you buy a new build in Ontario, you have to pay 13% tax called HST, unlike resale homes which are tax exempt. You may be eligible to claim a HST new housing rebate if you or a related individual use the purchase home as primary place of residence. The list/advertised/agreement purchase price for a new build already accounts for the HST and the HST new housing rebate (assumes that the purchaser is eligible). As your closing date approaches, your lawyer will ask whether you intend to reside in the property as a primary residence or it will be an investment property. If you choose primary residence, no HST adjustment will be required. If you choose investment property, the builder’s lawyer will add the HST rebate amount to the purchase price and you must pay the additional amount at the time of the final closing. If you rent the property in a long-term lease (at least 1 year), you may apply and obtain the HST new housing rebate by submitting the appropriate paperwork after the closing.
Special Considerations for Condos
Cooling Off Period for Condominiums
Under Section 73 of the Condominium Act, purchasers have up to 10 calendar days to cancel the Agreement of Purchase and Sale for New Construction Condominiums. The 10 days start from the date the purchaser and vendor sign the agreement and the disclosure documents are delivered to the purchaser. This allows the purchaser to terminate the agreement after having an opprtunity to obtain independent legal advice. It is important to note that this “cooling off” period only applies when purchasing a condominium. Freehold new construction does not have any similar provision.
The vendor may require you to move into a new condo before the condo project is completed and registered, which is called “Interim Occupancy” or “Occupancy Closing”. Although you take possession of the property, the legal transfer to your name does not take place as of yet and so, you cannot obtain a mortgage at this time. As per the Condominium Agreement of Purchase and Sale that you sign, you will be required to pay monthly interim occupancy fees which are based on the interest on the unpaid balance of the purchase price at the prescribed interest rate, estimated monthly municipal taxes and projected common expense fees for the condominium unit. Although it is difficult to provide an accurate estimation of how long the interim period will last before the final closing date, feel free to ask the builder/vendor’s representative if they can provide a rough estimate so you can plan ahead. Interim Occupancy can be seen as a short-term rental of a condominium unit that you will soon own but still legally belongs to the builder/vendor and as a result, you will be asked to obtain and provide proof of home insurance to the builder/vendor.
If you are buying a new construction home, or have questions or concerns about residential or commercial real estate law in general, contact us at Sukh Law.
Sukh Law publishes articles for information purposes only and is not intended to constitute legal advice.