Condo Conversions (Part 1)
Bill 106 introduces changes to several statutes, not just the Condominium Act, 1998 (the "Act"). Amongst them are changes to the Ontario New Home Warranties Plan Act ("ONHWP Act"), which is the statute that establishes what are more commonly known as the Tarion Warranties for new homes, including most, but not all, newly constructed condominiums.
Notably excluded from Tarion Warranty coverage at this time are newly made but "converted" condominium units - meaning units that are part of a condominium project which is created by the re-development of a pre-existing building or structure. One of the most significant and sought after changes introduced by Bill 106 is the extention of Tarion Warranties to such "converted" condominium units. However, with that said, you might not be aware of some of the surprising limits to this change.
In this series of blog entries, we discuss that and other changes proposed in the bill that directly affect condominium conversions. In Part 1, we focus on just the major changes proposed to the Act, and in Part 2 we will begin to examine the more dramatic amendments that are proposed to the ONHWP Act that expand Tarion warranty protection to some but not all converted condominiums.
Current Provisions in the Condominium Act, 1998
Currently, under the Act, there are only three provisions dealing specifically with condominium conversions:
Subsection 9 (4) permits an approval authority to require an applicant for condominium plan approval with respect to the proposed redevelopment (conversion) of an existing residential rental building to have a certified engineer or architect report to the approval authority regarding “all matters that the approval authority considers may be of concern”. This provision is not proposed to be amended by Bill 106.
Under subsection 72 (3) (g) the declarant is required to include a statement in the disclosure statement provided to purchasers as to whether the proposed condominium property has been converted from a previous use. This provision is not proposed to be amended by Bill 106.
Under subsection 72 (4) 3, the declarant is required to indicate in the prescribed Table of Contents (part of the mandatory disclosure material for purchasers) where the statement required by subsection 72 (4) (g) is located in the disclosure statement. Subsection 72 (4) is proposed to be deleted by Bill 106 in its entirety. Bill 106 proposes to replace the prescribed Table of Contents form with a new prescribed "summary" of the proposed condominium project.
1. Defining the “residential condominium conversion project"
Perhaps the key proposal under Bill 106 is to create “residential condominium conversion project” (we'll call the RCCP's from here on) as a new defined term under the Act to identify conversion projects that receive the benefit of limited Tarion Warranty coverage and that are also subject of certain other new requirements.
To qualify as an RCCP, the development must:
- consist of a property or proposed property;
- include or be proposed to include units capable of being used as self-contained dwellings for year-round residential occupancy; and
- contain "pre-existing elements". (See below in this entry for what that term means.)
What's the big deal with this definition?
Primarily, the proposed definition for an RCCP draws a bright line between the types of condominium conversions that will fall within the scope of the expanded Tarion Warranty coverage and those that will not. In other words, fitting into the precise definition of a RCCP is a prerequisite for Tarion warranty coverage.
At the risk of stating the obvious, one thing that is clear from the definition is something we already knew: that a commercial condominium project that is a conversion from pre-existing buildings or structures will not be an RCCP, since these types of project will not include dwellings. This is not a significant issue as it relates to Tarion Warranty coverage, since that was never intended for commercial developments anyway. However, it also means that other important new provisions proposed by Bill 106 relating to conversions will not apply to those condominiums.
More interesting and controversial, perhaps, is the requirement that, in order to qualify as an RCCP, the project must contain "pre-existing elements". What is interesting about this is the restrictive nature of the definition of "pre-existing elements".
The term is another new one proposed by Bill 106. Its complex definition is dealt with in more detail in our next blog entry on condominium conversions, but for the purposes of this entry we note that the term is defined in such a way as to potentially exclude those projects that are conversions to condominium from pre-existing residential buildings or structures (such as a rental apartment building). That is, the definition of "pre-existence elements" requires that the prior use of such elements have been non-residential.
As a result, unless the definition is to be modified in regulations under the ONHWP Act (as suggested by one of the new provisions proposed by Bill 106), a conversion that is developed from a pre-existing residential property will not be an RCCP and therefore will not attract Tarion Warranty protection, even though the conversion will result in new residential condominium units. On the other hand, conversions of commercial-use properties (such as office buildings or factories) would be defined as RCCP's and therefore receive some limited coverage by those warranties. (The coverage is limited to the non-pre-existing elements.)
Does this division based on prior residential or commercial use surprise you? It is a bit surprising to us, primarily since there doesn’t appear to be any clear rationale for the distinction. We may be talking more about this in later blog entries, and hope to be able to report the issue is clarified or improved through the regulations once they are published.
2. New Registration Requirement
Another new requirement under Bill 106 helps ensure RCCP's actually get the warranties the bill promises will apply. It requires that each declaration tendered for registration of an RCCP must include confirmation from the Tarion Warranty Corporation Registrar (appointed under the ONHWP Act) that the RCCP, its builder and its vendor (sometimes, but not always, the same person or company) have been enrolled or registered with the Tarion Warranty Corporation. It is not specified what form this Tarion confirmation will take but we anticipate that it will be in the form of a schedule executed by the Registrar that will need to be attached to the declaration.
Presumably, this new requirement was added as a safeguard to prevent builders from registering a condominium conversion project without first registering it with Tarion; however, we note that Bill 106 does not impose this requirement for any new-construction (i.e., non-conversion) standard condominium projects, even though they are also required to have Tarion Warranty coverage.
3. Additional Disclosure Requirements
Lastly (for this blog entry), Bill 106 also proposes new disclosure requirements for RCCP's. When enacted, the new provisions state that the following must be included in the disclosure statement to be given to a purchaser of a unit or a proposed unit in an RCCP:
- a statement that the project is an RCCP;
- a list of the pre-existing elements as identified in a "pre-existing elements fund study" (a study mandated under the bill's proposed amendments to the ONHWP Act, which will be discussed in the next blog entry in this series);
- a copy of the pre-existing elements fund study;
- a statement that subclause 13 (1) (a) (i) of the ONHWP Act does not apply ( meaning that there is no warranty backed by Tarion with respect to the pre-existing elements being constructed in a workmanlike manner or being free from defects in material);
- a statement that the conditions set out in the new subsection 17.2 (1) of the ONHWP Act have been met (meaning that the Tarion Registrar has confirmed that the RCCP, its builder and vendor, are properly enrolled or registered with the Tarion Warranty Corporation); and
- copies of subclause 13 (1) (a) (i) and subsection 17.2 (1) of the ONHWP Act.
With the exception of the preparation of a pre-existing elements study, the proposed new disclosure requirements for an RCCP do not seem onerous for developers to bear and should not result in significant additional legal costs for them. They will serve to provide purchasers of units in RCCP's greater confidence and certainty that the new components of the property (i.e., not the pre-existing elements) have the benefits of Tarion Warranty coverage.
In the next blog entry in this series, we will review the definition of “pre-existing elements” under the ONHWP Act as well as the requirements for the related pre-existing elements fund and fund study. Stay tuned!