As we have reported in previous blog posts, there have been a number of pre-construction condominium developments in the Greater Toronto Area that have been canceled by the developers. The developers relied on early termination rights set out in the purchase agreements.

While the purchasers were refunded the deposits that had been paid, many were not happy with what had transpired. Because the selling price of condo units in the Greater Toronto Area has been steadily escalating, many purchasers now found themselves in the position where they could not buy another comparable unit for the same price as was originally negotiated. They were now priced out of the market, as they could not afford to buy a unit at the current market rates.

605 purchasers in the cancelled Cosmos Towers project commenced legal proceedings after the developer canceled the project two years after the purchase agreements were entered into.

Agreements of purchase and sale of pre-construction condominium units are required by law to incorporate the provisions of the Tarion Addendum. The Addendum only permits certain types of termination conditions, one of which is the “receipt by the vendor of confirmation that financing for the project on terms satisfactory to the vendor has been arranged by a specific date.” The Addendum also provides that the vendor must “take all commercially reasonable steps within its power to satisfy” the early termination conditions.

The Cosmos purchasers claimed that there was wording in the agreements of purchase and sale that allowed the vendor to terminate the agreements if the vendor was unable to obtain financing for the project on terms satisfactory to the vendor, “in its sole and absolute discretion”. They took the position that this wording was inconsistent with the Tarion requirement that the vendor was obliged to take all commercially reasonable steps within its power to satisfy the condition – and for that reason, the purchasers claimed that the early termination condition allowing the vendor to terminate because it was unable to obtain financing was null and void. If that termination provision was in fact null and void, then the developer had breached the agreements, and thus was liable to pay damages to the purchasers, which would include not only a return of the deposits, but compensation for the lost appreciation on their investment.

Unfortunately for the purchasers, the Ontario Superior Court of Justice did not agree with their interpretation. Acknowledging that the Ontario New Home Warranties Plan Act and the Tarion Addendum constituted consumer protection legislation, the Court determined  that the purchasers’ interpretation of the termination clause would require the Court to adopt an interpretation that was the most adverse interpretation for the purchasers instead of the more favourable interpretation to the purchasers which requires developers to take all commercially reasonable steps within their power to satisfy the financing condition. The Court also concluded that the purchasers’ interpretation would result in a “commercial absurdity” as it would commit the developer to proceed with a project for which it had no commercially viable financing and would place the purchasers in an even worse position than they were in as a result of the termination – obliging a developer to proceed with a potentially uneconomic project and  risk bankruptcy/receivership.

The Court determined that the termination provision in the Cosmos purchase agreements was in compliance with the Tarion Addendum and that the developer had taken all commercially reasonable steps to obtain satisfactory financing.

This decision recognizes that the financing condition in the Tarion Addendum was intended to achieve a balance between the rights of both builders and purchasers. It protects developers from having to proceed with projects that are not financially feasible and protects purchasers from being committed to a project that is insufficiently financed and at risk of failure.