Condo Contract Question - Defaulting?

[Winsor_Pilates]

Originally Posted by killer_carlson

There are provisions within the Condominium Property Act to get out of your purchase contract with a developer if you walk within 10 days of signing it (section 13 or so). I haven't dealt with it in a while but there is this relief provided on new condo developments that isn't offered for regular real estate purchases. Check them out.

yup, it's 10 days in AB, and 7 in BC. Obviously too short of a period to help with changing market conditions though.

[onetwo_threefour]

Since troutman hasn't made an appearance, I will give my 2 cents. I am also a real estate lawyer, and the general consensus here is right. Economic tides do not qualify as force majeure. The builders a couple of years ago were using 'out clauses' and not force majeure arguments to try and jack up prices. In some cases they even had clauses written right into contracts allowing for price adjustments based on increased materials/labour costs.

As a small consolation, chances are that even if you had consulted with a lawyer, you wouldn't have been given any advice that would have changed your mind or got better terms in your contract. In general, in the good economic times, the builders will not modify the terms of their carefully created contracts even a little bit. Your lawyer may have advised you that you wouldn't have any outs in the event of a drastic market shift, but unless you were more risk-averse than most, you probably wouldn't have anticipated the recent shift and would have gone ahead anyway. (That's what every single one of my clients has done that I have advised of this risk in the last eight years.) Even if you had asked the builder, they wouldn't have agreed to modify the terms to shift the risk of a market collapse to themselves. (And really, why would they)

However, it is also true that some builders are renegotiating with purchasers right now in order to avoid having to take units back that may not be saleable and having to pursue purchasers for lost profits in bad economic times. However, you do need to be careful, as asking the builder whether they are willing to let you out of your contract could be considered an anticipatory breach of contract if handled improperly, and it would be a good idea to get a legal opinion specific to your situation and the particular contract you signed. However unlikely, it is possible that there may be a loophole in the contract that would let you out of the deal, and that is definitely the first thing to investigate if you are serious about getting out of the deal.

As always, when I post in here I remind people that you get what you pay for with free legal advice. Without seeing the specific contract and reviewing the situation, the above is just generalizations about my experiences with builders and purchasers over the past several years.

[photon]

Originally Posted by onetwo_threefour

However, you do need to be careful, as asking the builder whether they are willing to let you out of your contract could be considered an anticipatory breach of contract if handled improperly, and it would be a good idea to get a legal opinion specific to your situation and the particular contract you signed.

This is interesting.. what's the possible risk here?

If you bring it up but don't actually do anything (i.e. you close as per the contract), there's no negative consequence is there?

And if you do breach the contract, you're on the hook for all the damages anyway so how could it get worse?

What kind of scenario would the builder use an anticipatory breach of contract argument and what would be the possible impacts to the buyer?

[onetwo_threefour]

Well,I'm posting from my blackberry and don't want to get into too much detail, but say one wanted to explore the option of backing out with the builder's blessing, or assigning the contract to a third party for example, but without running the risk that the builder may have an alternative buyer waitng in the wings and use the inquiry as a means to declare a breach of contract, retain the deposit and sell the unit to another party at full price, thereby making an extra profit. Admittedly, in the current market this is a fairly unlikely scenario, but depending on the location and desirability of the unit, it is still possible, especially if it was a sold out building. If there is also a large deposit in play, the builder has the option of grabbing it back and marketing it at a lower price to try and preserve its profit or as much of it as possible since they have a large deposit as a buffer against any losses.

The way I could see this arising would be a buyer sending a note or email to the builder along the lines of, "based on recent market movements I will be unable to complete the purchase of my unit. I would like to discuss alternatives with you."

Unfortunately, the first sentence may be loose enough to give the builder the option of teminating the deal without further notice or discussion.

That's just off the top of my head and all I want to type on the BB.

[photon]

Ok makes sense.

[pepper24]

Force Majeure is an act of God such as earthquakes, tornadoes etc. A downturn in the real estate market is mans fault (not an act of God)

If you buy any investment you have to live with the pros and cons of what can happen over a period of time, especially when you buy before a project is complete. Many of these condo projects can take years to build and the market can change a lot within that time.

[Potty]

Originally Posted by llama64

Condo builder's make me sick.

They use the market as a Force Majeure to get out of their existing contracts just so they can force much higher prices on buyers in a blatent attempt to milk the local realty market. Now that the pendulem has swung the other way, people who signed those ridiculous contracts are now stuck with them despite being in very much the EXACT same position the builders were in when they pulled their crap.

I'm a partner in our family development company in a small city in BC. We've been building mostly condos for the past 5 years. I'm so fed up with listening to sob stories from buyers looking to get out of their contracts. A couple years ago, investors were buying our pre-sale units and flipping them a year later for $30k-$50k profit. We didn't reneg our sale prices. Now that the shoe is on the other foot, we're greedy s with no heart. Very few builders pulled stunts like you describe, and why did all these buyers sign sales contracts that gave the builder the option of doing it anyways?

We invested $3M and borrowed another $9M based on sales contracts we had. The bank won't let us off the hook. Why should we let our buyers?

[onetwo_threefour]

Yep, I've got a couple of developer clients that are really feeling the pinch. As I said before, why would or should the developer bear the market risk?

The sad stories are the people who bought to live in but had their financing disappear on them. This is actually fairly rare though.

[ikaris]

Originally Posted by Potty

I'm a partner in our family development company in a small city in BC. We've been building mostly condos for the past 5 years. I'm so fed up with listening to sob stories from buyers looking to get out of their contracts. A couple years ago, investors were buying our pre-sale units and flipping them a year later for $30k-$50k profit. We didn't reneg our sale prices. Now that the shoe is on the other foot, we're greedy s with no heart. Very few builders pulled stunts like you describe, and why did all these buyers sign sales contracts that gave the builder the option of doing it anyways?

We invested $3M and borrowed another $9M based on sales contracts we had. The bank won't let us off the hook. Why should we let our buyers?

During the peak of the real estate boom, developers in Calgary regularly had clauses that would allow them to nullify a contract and reprice units to maximize their profits. I would definitely stand by the comments referring to the greedy developers (at least in Calgary).

A respectable developer would allow for price adjustment (at least partially) to help with the hefty losses.

[ken0042]

^^ Yes, but how many developers were doing that? We would hear about it on the news, but what were the numbers? 1 in 4, 1 in 10, or 1 in 100?

Anecdotally, I know of nobody personally who that happened to; but I do know of dozens of people who made some money by signing the contract in 2005 for a building to be done 18 months later.

[Potty]

Originally Posted by ikaris

During the peak of the real estate boom, developers in Calgary regularly had clauses that would allow them to nullify a contract and reprice units to maximize their profits. I would definitely stand by the comments referring to the greedy developers (at least in Calgary).

A respectable developer would allow for price adjustment (at least partially) to help with the hefty losses.

No one is forced to sign a contract with a clause like that in it. Don't like it, don't sign it. I wouldn't ever buy a unit under those conditions. And not knowing is no excuse. Pay a lawyer a couple hundred bucks and explain the contract to you.

A respectable developer would allow for price adjustments? Our buyers don't allow us a price adjustment if the market swings up, why should we adjust if the market swings down?

[photon]

I agree with ken, I heard a lot of talk about these clauses, but I've never spoken to anyone that actually had the clauses exercised on them, especially from an established reputable builder. I only know of one company that went through that to a great degree (can't remember the name, Jager's premiere builder), and that was because they were basically forced to do it or go under due to really bad processes on their part, not because they were "trying to maximize profit".

People take risks to make a business barely make ends meet in the bad times and no one offers to help if they go under. Then times get good and if they try to make some money then they're greedy. Times go bad again and they're expected to help out the people who called them greedy.

During the times when rents were flat and costs were going up and up, I didn't see anyone offering to pay me more rent.

And really what good reason is there to ask for a price reduction?

If you bought it to move into it, you bought it based on your income and debt servicing, so there's no reason to ask for a price reduction. If you lost your job and can't take it, you can't pay for it anyway so there's no reason to ask for a price reduction. If you bought it to rent or sell, then you are running a business and that's part of the risk, so there's no reason to ask for a price reduction.

Other than "I made a bad choice and want someone else to take the responsibility for it", what's a good reason to ask for a price reduction? Honestly, I can't think of one.

[looooob]

Originally Posted by photon

I only know of one company that went through that to a great degree (can't remember the name, Jager's premiere builder), and that was because they were basically forced to do it or go under due to really bad processes on their part, not because they were "trying to maximize profit".

.

Alan Ridge?

[ikaris]

^^ I know of four separate examples with three different builders that this type of clause was put in the contract. In only one case was the clause removed. In the other three times, the developer refused to change the clause and in the end, the buyers refused to commit to that contract.

Perhaps my view is jaded, but I think it's despicable that a developer would even try that. As for price renegotiation, I've already been able to do that on a condo that I've purchased. The developer that I have been dealing with has been very respectable and reasonable. It's not like I expect the developer to absorb the loss entirely, but they were happy to help share the pain in order to keep me as a customer.

[photon]

Originally Posted by looooob

Alan Ridge?

Yeah that sounds right. I heard a few stories where they basically walked away from builds.. but those cases were quite extreme, circumstances where people were taking a year or more to make all their choices, so by the time the place actually got built the cost of building was actually a lot more than the person had paid (the contract signed before the run up, built while the costs had jumped significantly).

[photon]

Originally Posted by ikaris

^^ I know of four separate examples with three different builders that this type of clause was put in the contract. In only one case was the clause removed. In the other three times, the developer refused to change the clause and in the end, the buyers refused to commit to that contract.

Oh definitely, many builders were putting that clause into their contracts. I think I even had one contact like that myself.

But the important part is did they exercise them? And under what circumstances? If costs are spiraling out of control and you don't know from one week to the next how much it will cost to build a place, having something like that to protect yourself makes some sense. I don't agree with it, but they're fully within their rights to do so.

In fact one of the people down the street built a place where something happened that the builder ended up having to spend like $40,000 extra to fix. They could have exercised that clause at that time to get out of paying, but they didn't. It was the builder's own mistake, so not using the clause was the right thing to do and would have been my expectation of them, but legally they weren't obligated.

Originally Posted by ikaris

Perhaps my view is jaded, but I think it's despicable that a developer would even try that.

Try to exercise it for the purposes of profit I agree.. Put the clause in to try and mitigate risk, I don't think it's a great move but the market forces dictate. For a while not every builder in Chestermere had that clause, and the ones that didn't I think saw more business. Eventually they all had it because there were SO many people trying to buy the builders could basically pick and choose the best buyer for themselves.

Now things are different, so those who didn't like that clause then can probably buy now without it.

Originally Posted by ikaris

As for price renegotiation, I've already been able to do that on a condo that I've purchased. The developer that I have been dealing with has been very respectable and reasonable. It's not like I expect the developer to absorb the loss entirely, but they were happy to help share the pain in order to keep me as a customer.

That's nice of them, and I'm sure it was a business decision for them to keep a customer (and to not have to deal with the hassle of taking it back and trying to sell it themselves). But I don't think it should be expected of them, and if they don't I don't think they deserve negative attitude.

And I don't understand, absorb what loss? You've said loss twice now, but what loss is there?

[photon]

Originally Posted by fotze

cough cough, Air Canada cough Bombardier cough Big 3 Automakers cough Quebec businesses cough Merrill Lynch cough so on....

I don't think "offer to help" is the right wording for those circumstances.. people are almost armed in the streets over helping the "fat cats".

And no one offered to help me.

[ikaris]

Originally Posted by photon

And I don't understand, absorb what loss? You've said loss twice now, but what loss is there?

What I mean is the current market value for the unit as per the purchase price as dictated in the original contract. In my particular case, it's not like I asked the developer to reduce the price to what exactly the unit is worth now, just to reduce the price comparably to the price reductions already given the new units that haven't been sold yet as compared to their original offering price (when I purchased my unit).

I'm not exactly sure either as to if these clauses have ever been used by the developer to maximize profit. I understand in the example you've provided as to why it would be understandable in those cases, and I think we agree that if a developer would use that clause to maximize profit that it would be pretty egregious.

[ken0042]

Originally Posted by ikaris

What I mean is the current market value for the unit as per the purchase price as dictated in the original contract.

Yes, but I think the point Photon is making is that until you buy, take possesion, and then re-sell; you have not lost any money. Yes, it sucks that had you waited you could have gotten a better deal. But one of the main reasons people buy a condo that is still 12+ months away from completion is anticipation that they will be getting a better deal by buying early. Just so happens that in the last while that isn't the case- people bought thinking they were buying at the right time; whereas the better choice would have been to wait until it was done and bought a spec condo.

Let's take me for example. I bought my house for $190K, and at one point I could have sold it for $380K. Now if I were to sell it in the condition it was in at $380K I would only get $320K for it. Did I lose $60K? Or am I up $130K? The answer is neither. Until I sell the house, the value of it has no bearing on what my mortgage payments are. I could end up selling it and making some good money, or property values could end up below what I paid for it. But on the day I signed the papers on my house, I was paying a price that I thought was fair.

[photon]

Originally Posted by ikaris

What I mean is the current market value for the unit as per the purchase price as dictated in the original contract. In my particular case, it's not like I asked the developer to reduce the price to what exactly the unit is worth now, just to reduce the price comparably to the price reductions already given the new units that haven't been sold yet as compared to their original offering price (when I purchased my unit).

I was sure that's what you meant. That's not really a loss, that's just a mental thing. Definitely not something a builder should be responsible for. EDIT: What ken said.

If I buy a TV and it goes on sale a few months later, I don't think of that as a loss, the only difference is the size of the $$. And the media does a good job reminding us all every day how much of a "loss" we're taking.

And yeah, asking them to match their current pricing is a reasonable request (them refusing is also reasonable IMO).

Originally Posted by ikaris

I'm not exactly sure either as to if these clauses have ever been used by the developer to maximize profit. I understand in the example you've provided as to why it would be understandable in those cases, and I think we agree that if a developer would use that clause to maximize profit that it would be pretty egregious.

I agree. It might be illegal too depending on the wording, the one I had had wording around the cost of building in it, so they couldn't just exercise it just to make an extra $50k from the guy in line behind me.