It is estimated that 15% of new home sales are in fact resale transactions where the builder builds the property for their own use and then decide to sell the home instead. There are major issues for any buyer to be aware of in this situation and protections that must be provided to buyers of these homes. Here are 4 things to remember:
The home is likely not registered with TARION
When you buy a new home registered with the government TARION program, it comes with warranties for 1, 2 and 7 years. It does not matter if the builder goes bankrupt, the program will conduct any repairs covered by the warranty. When a buyer purchases a home not covered by the TARION warranty, then there is no assurance that any problems that arise after closing will be attended to by the builder. In addition, if the builder goes bankrupt, there is no program a buyer can turn to for protection. In the clause provided at the end of this presentation, you will find the warranties to include in your agreement to at least obligate the builder to both make repairs and transfer any warranties from the trades or subcontractors to the buyer.
What security are you providing for to make sure there is money to pay for repairs that may be needed
This is related to the prior issue. If you have not set aside money to pay for needed repairs if the builder does not do them, then you may find yourself with no recourse but to sue the builder after closing. In my opinion, 10% of the purchase price should be held back for 2 years as security for the performance of all repair obligations.
Be careful about HST
When a builder sells a new home in this manner, it is possible that CRA will assess this as a new home sale, and thus demand that the seller pay HST on the purchase price. For example, if a new home is sold for 2 million dollars, with HST included, and the CRA determines HST should have been charged, they may say the real price is $1,780,000 plus 13% HST and the builder will have to remit the entire HST. If you act for a builder, make sure that they obtain their own legal and tax advice before putting the home on the market.
If you act for buyers, besides making sure that HST is included in the purchase price, consider inserting a clause making it clear that the seller is certifying that the home is in fact a personal use property or a used residential complex or home occupied by the seller or the seller’s tenants, and does not constitute a new or substantially renovated residential complex as defined under the Excise tax Act of Canada.
Check the reputation of any builder in advance
The best way to avoid any future issue is to check the reputation of the builder in advance. Check other homes that he may have finished and ask the owners as to their satisfaction. In my opinion, there is no good reason for the home not to be registered with TARION. Be suspicious when it isn’t. However, you must also know how to protect your buyer if this is the property that they want. If you are not sure, make the deal conditional upon lawyer approval and then get some extra assistance.
At our firm, we close real estate deals all over Ontario including the Golden horseshoe area. With our mobile signing service we can come to you at the time and location of your choice to sign your closing documentation.
Mark Weisleder is a Partner, author and speaker at the law firm Real Estate Lawyers.ca LLP. Contact him at firstname.lastname@example.org or (416) 702-2499