Impact on real estate developers of the divided co-ownership legislation reform in Québec: review and analysis
[Updated February 27, 2020]
Bill 161 which was adopted by the National Assembly of Québec in December 2019 (the “Bill”) will substantially modify the legislative framework applicable to divided co-ownership in Québec.
This initiative, which was undertaken in the context of the growing popularity of condominium properties in the province of Québec, addresses various concerns relating to the maintenance of these types of buildings. These properties often suffer from a lack of maintenance and insufficiency of contingency funds, which can lead to costly special assessments being required from the co-owners. The data submitted to the National Assembly of Québec for the examination of the Bill indicates that the majority of co-ownership syndicates are self-managed, that they lack the necessary funds to carry out work and that the special assessment mechanism is often used as a catch-up strategy.
The Bill, which will be enacted on January 10, 2020, amends several provisions of the Civil Code of Québec (the “C.c.Q”) and of the Building Act in order to regulate building inspections.
Moreover, co-ownership syndicates will become subject to additional obligations, including those relating to the study of the contingency fund.
The Bill also imposes several additional obligations towards developers as summarized in this article, among which, the obligation to protect the deposits made by purchasers.
This being said, some of these amendments will probably require clarifications from the government, which, as of this date, are yet to be issued. On February 21, 2020, the Québec government made available to the public its working document entitled Portrait des mesures in order to clarify certain items regarding the application of the Bill (the “Working document”).
The developer who organizes the co-ownership’s special meeting in order to form a new board of directors of the syndicate must provide the new board of directors with the following documents within 30 days after the date of the meeting:
- the building’s maintenance log (content to be covered by a regulation which is not available as of this date);
- the contingency fund study (content to be covered by a regulation which is not available as of this date). As such, the Working Documents mention that the amounts to be placed into the contingency fund by the developer shall have to represent 0.5% of the building’s reconstruction value;
- the plans and specifications showing any substantial changes made to the building during construction in comparison to the original plans and specifications;
- the description of private portions;
- any other document or information prescribed by government regulation.
The Bill modifies article 1791 of the C.c.Q. to provide that the developer will be liable for the reimbursement of any difference superior to 10% between the sums indicated within his budget forecast and those actually disbursed by the syndicate during the first full fiscal year following the constitution of the new board of directors of the syndicate provided, however, that any such deficit does not result from decisions made solely by the co-ownership syndicate.
Consequently, developers will tend to adjust their budget forecast upwards in order to ensure that each budget item represents the actual situation once the building is occupied by the co-owners. This will most probably result in an increase in co-ownership fees as compared to what was precisely represented by the developers at the time of the sale of the units.
Obligation to protect purchaser deposits
Under the Bill the developer now has the obligation to entirely protect the deposit received with respect to the purchase of a condominium unit, by any of the following means:
- a guarantee plan;
- a suretyship;
- a deposit in a trust account of a member of a professional order determined by government regulation2;
- by any other means prescribed by government regulation.
Since the foregoing amendment is a public order provision, a developer may not ask his purchaser to waive the protection of his deposit.
Currently and as confirmed by the Working Document, the deposits cannot be protected by the deposit in a trust account of a member of a professional order. This protective measure shall be in effect once the government has adopted the regulation.
The notion of “deposit” includes any amount which does not represent the total payment of a condominium unit, notwithstanding the number of units and without limiting the amount protected. As these provisions are inserted in the C.c.Q. section dealing with residential co-ownership properties, they will not apply to commercial co-ownerships.
The guarantee plan currently offered by the government (the “Garantie de construction résidentielle”) protects deposits only up to a maximum amount of $50,000, which is often clearly less than the amount of deposits required by developers. Moreover, the GCR applies only to buildings containing a maximum of four floors of stacked private portions.
Consequently, the developer is no longer allowed to keep the deposits and/or use them to finance the construction of his project, unless a valid guarantee plan, insurance or suretyship has been implemented and the developer is able to provide his purchasers with evidence thereof. Otherwise, deposits must be transferred to a notary or lawyer, to be held in trust until such time as either the purchaser holds a good and valid property title or the developer demonstrates to the notary or lawyer holding the deposits, that an alternate means of protection has been implemented, failing which the Chambre des notaires does not recommend that deposits be remitted to the developer.
In the case of insurance or suretyship, the developer must provide evidence of its existence and demonstrate that such insurance or suretyship covers the amount of deposits up to the date of delivery of the concerned condominium units and does not contain conditions relating to its continued force and effect.
Information note (memorandum) provided to the purchaser
The government wanted to stress the importance of the information note to be provided by the developer upon the execution of the preliminary contracts. This information note is part of an objective aiming for more transparency on the part of the developer to ensure that purchasers are adequately informed of the management of the co-ownership.
The information note provided to the purchaser at the time of execution of the preliminary contract must be complete and accurate. Under the provisions of the Bill, should the developer fail to provide this information note, or if the provided information note contains errors or omits information that may cause an important prejudice to the purchaser, the purchaser may demand the annulment of the sale, along with damages.
This application for the annulment of the sale must be initiated, either by the purchaser or by the co-ownership syndicate for and on behalf of the purchaser, within 90 days following the sale of the unit.
Moreover, rather than requesting the cancellation of the sale, the purchaser may demand a reduction in the purchase price equal to the number of justified damages.
However, we question the right of the co-ownership syndicate to present a request for cancellation of the sale on behalf of a purchaser. In effect, the syndicate is a third party to the sale transaction between the developer and the purchaser and, moreover, any fees incurred by the syndicate with respect to such cancellation will be assumed by the co-ownership as a whole, which in our opinion, would be quite surprising.
Right of withdrawal of the purchaser
Prior to the enactment of the Bill, a purchaser had the right to withdraw its offer within a period of 10 days following the conclusion of the preliminary contract. Under the Bill, and in order to emphasize the importance of the information note, the right of withdrawal of the purchaser may now be exercised within 10 days following receipt of the information note.
Right of the purchaser to demand the remittance of its deposit
Should the developer fail to deliver the condo unit on the agreed date, the deposit must be returned to the purchaser.
The Bill provides no definition for the term “agreed date”, nor does it identify particular situations which may trigger such a reimbursement. We have several questions relating to the scope of the notion of “agreed date”, namely
- Can there be exceptions?
- Can the definition of “force majeure” be revised or modified by the developer?
- Can the developer benefit from a grace period?
- Must the developer commit to an agreed date immediately upon the signature of the preliminary contract or may it be confirmed at a later date?
This provision will certainly cause concerns for developers, particularly in the present context of important labour shortages in the construction industry.
Furthermore, we question the proposed wording regarding this provision. Is the preliminary contract considered cancelled by the remittance of the deposit or is such remittance simply considered to be to the advantage of the purchaser and the preliminary contract is still in full force and effect?
Within the Working Document, the government confirms that the developer can provide that the “agreed date” be modified following an unforeseen event by mutual agreement between the parties. The government does not define what constitutes an “unforeseen event”. Furthermore, this modification to the “agreed date” seems to remain subject to the purchaser’s prior agreement.
The Working Document further confirms that the developer can define the “agreed date” as a specific point in time or a specific period spread over a few months (example, autumn 2020).
Impact on construction financing
The Bill will certainly have an important impact on financial institutions when it comes to the qualification of deposits, the required guarantees and the level of risk associated with condominium construction projects. For borrowers, financing conditions will most probably become more rigorous and the amount of required cash equity will certainly increase, as deposits will no longer be considered as non-refundable by reason of:
- risks related to the non-compliance with the agreed date; and
- the possibility of demands for annulment of sale being initiated by purchasers with respect to the content of the information note.
Moreover, deposits guaranteed by their remittance to a notary or lawyer to be held in trust may not be used as cash equity in the project. The amount of financing will consequently need to be increased proportionally, or the Borrower will need to have access to additional equity.
An important question remains to be answered: how will financial institutions position themselves in relation to the risk relating to the agreed date? The non-compliance with delivery dates will become an intrinsic part of the lender’s analysis of the level of risk, since it could find itself in a situation where, after having disbursed almost all of the loan, several buyers cancel their preliminary contract.
Transitional measures with respect to deposits
The following three questions are relevant as to the impact of the Bill on ongoing projects:
A. Do deposit protection obligations apply to deposits received by a developer prior to January 10, 2020?
Answer: Following our review of the transitional provisions as described in the Bill and the Working Documents, the answer is no.
B. Do deposit protection obligations apply to forthcoming deposits relating to a preliminary contract entered prior to January 10, 2020?
Answer: Following our review of the Working Document, the answer is no. However, the Bill does not confirm this beyond a reasonable doubt.
C. Do additional obligations of the developer (reimbursement upon non-compliance of the agreed date, memorandum and right of cancellation) apply to preliminary contracts signed prior to January 10, 2020?
Answer: This question remains unclear. The Bill provides for immediate application as of January 10, 2020, and the Working Document does not provide for a specific response. This being said, if we apply a similar logic to the one used in the Working Document regarding the protective measure, we would believe that the additional obligations do not apply. However, we believe it is important for the government to rapidly clarify this question to allow developers to adopt the appropriate position with their purchaser.
By Audrey Robitaille
1 Bill 16: An Act mainly to regulate building inspections and divided co-ownership, to replace the name and improve the rules of operation of the Régie du logement and to amend the Act respecting the Société d’habitation du Québec and various legislative provisions concerning municipal affairs.
2 The Chambre des notaires confirms that the holding of deposits by its members constitutes an appropriate method of protection, provided the amount of the deposit does not exceed the amount of the maximum indemnity of the Fonds d’indemnisation de la Chambre, namely, $100,000.