A recent court decision raises the thorny issue of whether it should be legal for builders to restrict the ability of new home and condo purchasers from suing them for deficiency claims exceeding the limits of the Tarion new home warranty.
The case arose at West Harbour City, a 510-unit residential condominium project on downtown Fleet St. It was developed by West Harbour City (I) Residences Corp., a subsidiary of Plazacorp Investments.
The developer has more than 5,000 condominium units already built or under construction in Toronto. Its projects can be found in Yorkville, North Toronto, King West, Queen West, Lawrence Park, Liberty Village, the St. Lawrence Neighbourhood, Harbourfront, and Mt. Pleasant Village.
When the first phase of the West Harbour City project was completed, it was registered as Toronto Standard Condominium Corporation No. 2095.
During the project’s marketing period, the small print in the agreements of purchase and sale stated that the builder’s liability for deficiency claims in the units could not exceed the limits of the Tarion warranty set out in the Ontario New Home Warranties Plan Act.
As a result, owners in the project would be prevented from suing the builder for deficiency claims beyond the amounts of the Tarion warranty.
After the condominium corporation was created, and while the developer’s nominees controlled the board of directors, the builder board entered into an agreement with the developer which restricted the right of purchasers to sue the developer. The board also passed a bylaw which mirrored the terms of the agreement, and the bylaw was registered on title to provide notice to subsequent purchasers.
After the units had been sold and control of the condo board turned over to the unit owners, the condominium board asked the Ontario Superior Court to set aside the bylaw and the agreement so that unit owners would be able to sue the developer for deficiency claims exceeding the Tarion warranty.
The condo board’s position was that the bylaw and agreement were beyond the powers of the condominium corporation, and that no reasonable board of directors would have agreed to it.
The developer argued that it was entitled to limit its liability to the Tarion provisions, and it did so in the only way it could, by way of agreements with the purchasers and the condominium corporation.
In his decision, Superior Court Justice David L. Corbett ruled that a developer is indeed entitled to limit its risk, and it effectively did so by an agreement to this effect with the condominium corporation which it controlled at the time. The agreement was properly disclosed in advance to prospective purchasers, and registered on title so that subsequent owners would have notice of it.
“There is nothing illegitimate,” the judge wrote, “about a developer seeking to limit its risk in this way, provided, of course, it does not seek to contract out of the statutory requirements (of the Tarion legislation).”
Denise Lash is a partner in the condominium law group at the Heenan Blaikie law firm in Toronto. She told me that she thinks this is a “terrible decision.”
“I agree,” she wrote me in an email, “that as long as disclosure is made upfront to purchasers and that purchasers understand the nature of such disclosure, then they are making an informed purchase.
“The problem is that in this case, the average purchaser would not understand what ‘limiting liability to Tarion warranty’ in the form of an agreement would somehow have a significant financial impact on them in the first few years of ownership. Upfront, clear and understandable disclosure - I am all for it. But this was not the case here.”
I understand the decision may be appealed, but in the meantime, the Ontario government might want to consider whether this type of limitation is in the public interest, or whether it should be outlawed.
Buyers in Plazacorp projects should check their purchase agreements to see whether the liability limitation clause is included.
Bob Aaron is a Toronto real estate lawyer and frequent speaker to groups of home buyers and real estate agents.
He can be reached by email at email@example.com, phone 416-364-9366 or fax 416-364-3818.
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