Brian Phillips and Paul Steacy- New Build Home Purchase Contracts

New Build Home Purchase Contracts

We often find that realtors will have their new home buying clients submit an offer to a new home builder with a condition specifying that the offer is conditional for a short time upon the buyer’s lawyer reviewing and being satisfied with the terms of the offer. It has been our experience that most new home builders are not particularly prepared to negotiate the fundamental terms of their standard form new home buyer agreement.  When we are dealing with a seller’s market, there is very little chance that the builder will want to bother with requested amendments to their agreement since there will likely be another buyer standing in line who will not push for changes. As the market becomes more balanced or if and when we find ourselves in a buyer’s market, builders may become more willing to consider amendments to their standard agreement, but as of the date of this article (April 2024), we are not quite there yet, and it is not clear whether or when we are headed in that direction.

Note that most builder’s standard form new home buyer agreement is unique to each builder, they are not the same for all or even most builders.  Almost none of the builders use the standard Ontario Real Estate Association basic real estate purchase/sale agreement.  However, notwithstanding the differences, the agreements all have at least some fairly similar content.

Where the new home is yet to be built (not a model or an already built home that the builder has almost finished), the most important provisions of the agreement for most buyers are the details in the agreement which describe how the home being purchased will look and how it will be finished.  Your real estate agent, if you have one, will ideally guide you through this part of the process to ensure that the appropriate floor plans and elevations (sketches of the anticipated appearance of the back, front and sides, and the internal layout) of the home will look upon completion.  Interior changes impacting the floor plan need to be clearly marked on the floor plan.  If the buyer wants finishings above and beyond the basic “Specifications” that the builder provides, those altered finishings should be listed and described in sufficient detail to be clear as to what is to be provided and the detail should also indicate what the builder is charging for the upgrades (including a “no charge” designation if the builder is providing some or all of these extras without further charge).  Similarly, if portions of the basic Specifications are being removed, or credits or allowances are being given for any reason, they should be described in detail. Most builders these days will require that the upgrades be paid for at the time that they are ordered and not when the home is completed. Always keep in mind that most builder’s models, used to attract buyers, are finished well above and beyond the finishing grade of their standard model.  A new home with higher end finishings can easily cost much more than the price of  the base model, often by many thousands of dollars.  You will sometimes see builders specify that allowances are offered for flooring and lighting.  The flooring (typically so many dollars per square foot) is often reasonable but we almost never see a reasonable lighting allowance.  Do price out in advance the flooring and lighting that you would like in order to see whether you will need to budget extra where any such allowances are concerned.  Builders also often have a base kitchen and/or a base bathroom which will not be as attractive or functional as the kitchen and bathroom that they display in their model home.  Make sure that you are clear on what you are getting where these allowances are concerned.  When we conduct our review of the agreement of purchase and sale, we cannot really comment further on these areas of the agreement, or the specifications in general, since we have not seen the model home and don’t know what your expectations are or what negotiations you have had with the builder. Such matters are not legal in nature and are beyond the scope of our legal review. Do make sure that before you sign an agreement with the builder that you have a good look at all of these details with your agent’s assistance if you have an agent.

In our review of the agreement, we do review the provisions in the builder’s agreement dealing with potential extra costs.  It has become common for some builders to reserve the right to charge extra if their costs increase between the time that the agreement is signed and the completed home is delivered.  This can be a difficult area to negotiate and can possibly result in significant additional costs, so it must be reviewed carefully and well understood. Fortunately, at least in the London area, it has been uncommon for  builders to run into extra costs which they will want to pass on to the buyer, but these sorts of provisions become more common when the builder’s timeline between the signing of the agreement and the delivery of the finished home becomes longer and longer.  This concept of extra charges was likely first developed in the Toronto market where some homes were being sold even before subdivision plans and condominium plans had even been finalized.  New condominium units were often taking two years or even much longer from the date of the agreement to build and delivery to the buyer.  With such lengthy timelines, the builders wanted to be certain that any unexpected increases to municipal levies and charges relating to the property development were passed on to the unit buyer.  The construction market has also experienced significant inflationary increases in both materials and labour over the past several years.  In an effort to protect their profit margins, builders are often including clauses permitting them to pass on construction cost increases to the buyer.  If you are confronted by such a clause in your new home purchase agreement, it presents a substantial risk to you, and we recommend that the builder be asked to at least cap the potential increase amount. We have seen builders agree, for example, that the cost increase will not exceed a fixed percentage of the original purchase price.  We have also seen builders agree that if they are planning to pass on any such cost increases to a buyer that they must notify the buyer at least 120 days before closing.  The best qualifier may be a clause requiring the builder to notify the buyer at least 120 days before closing and also offering the buyer the opportunity to walk away from the deal if they cannot see their way clear to pay the additional amounts (not a pleasant situation but perhaps better than being hit with charges that you simply cannot afford).  What is to happen to the deposit should be clearly dealt with in such a situation. Amounts paid in advance for upgrades and extras may be lost. These provisions have become more commonplace in new home purchase agreements.  Be ready to look carefully at such provisions and assess whether you may need to be ready to have additional funds available to eventually close on the purchase or whether you have a way out if the charges get out of control.

We also review the agreement for other charges which can sometimes add significantly to the purchase price. Almost all builders now pass on the Tarion Warranty registration fee to the buyer, requiring the buyer to pick up that charge as an adjustment on closing.  The cost is based upon the price of the home and the builder can likely advise you at signing what the adjustment will be.  It is also not unusual to see a builder pass on the cost of any tree planting (usually in the boulevard and usually at a cost which is less than what you might pay going to the nursery yourself to order the tree) and sometimes fencing along a walkway or at the rear of the property if it backs onto open space of some type, like a school or a park.  There can also be other surprising adjustments in the builder’s agreement that all add up, so the agreement must be read carefully.

Always keep in mind that the Tarion provisions (a standard new home warranty required by the Province) attached to the purchase agreement typically will provide mechanisms for the builder to extend the closing date for a number of reasons, including if the builder encounters a shortage of materials or a shortage of labour.  These extensions can be quite long. It is always a good idea to have a Plan B for where you will continue to live if the builder is not able to deliver your home on the initially promised date.  In some cases you may be entitled to compensation for delays but typically only if the builder has failed to meet the notification timeframes in the Tarion provisions.  There are numerous online articles describing the Tarion warranty.

In summary, once you have signed an offer, if it is accepted by the builder, it is a legally binding agreement. If you should then want to back out of it at a later time, there can be significant legal consequences, not the least of which may be the loss of your deposit, but it may not end there, and you may be responsible for substantial monetary damages suffered by the builder.  It is therefore important for you to do your homework and due diligence before you sign the agreement.  This may include using the expertise of your own real estate agent and having your lawyer review the agreement before it is signed.

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