With the recent announcement of Cresford Developments entering into receivership, there is valid concern regarding potential scenarios in which a pre-construction purchase encounters a similar scenario. After all, its hard to believe that three luxury developments (The Clover on Yonge, Halo Residences, and 33 Yorkville Residences) could undergo bankruptcy. Recent sales figures released for the Toronto Real Estate Market, the Government of Ontario’s halt of non-essential businesses, and a mandatory pause on non-critical construction projects have property owners worried. The question remains, is any development safe?
What Happens If My Development Enters Receivership?
Most pre-construction contracts contain clauses that deal with issues of insolvency. The first question one should ask, as a future purchaser, is the availability of return of deposit. Developers usually place these deposits into a trust account. The deposit can be refundable under these circumstances. At times, the return of deposit might even include interest accrued. This is why review of the contract by a Lawyer as well as a REALTOR® is integral to a successful sale. If a construction company’s lawyer has written and approved a contract, shouldn’t you have the same advantage?
Should I “Wait it Out”?
The appointed receiver can proceed in a few directions with the insolvent development. They may opt to sell the project to another developer for a fixed amount of money, with the expectation that the new developer finish the project.
Another common scenario is the application of the receiver (on behalf of the insolvent construction company) to obtain DIP (Debtor In Possession) Financing. The terms of obtaining this additional loan are usually on very stringent terms and under strict scrutiny by the courts, strictly for the purpose of completing the project within an agreed upon timeline. DIP Financing isn’t viewed as a means for completing the project, but rather a bail-out by the government to avoid a deserted construction site in a densely-populated area.
As the purchaser of a future unit, it is often well within your right to maintain your reservation until completion of the development. If you’re looking for a longer-term move with no concrete date, you might be inclined to wait out the period until the project is complete.
However, in most city-projects, it is not uncommon for a developer to reserve (purchase) a certain number of units for themselves. These units can either be for personal use, or simply held for resale at a later date. The issue that arises here is if these units become available through the receivership process, they are usually conveyed at a price far lower than their pre-construction counterparts (by a process known as an assignment sale). This undercut in turn lowers the value of all similar units in the building. The result is the owner is pigeon-holed with a unit that now has a market value far less than the original sale price.
Not all pre-construction units that enter insolvency become a headache. If you are concerned about any of your investments or are considering pre-construction, I invite you to Contact Us for a no-obligation consultation.