Condo Conversions, Part 2:
What is a “Pre-existing Element”?
In this blog entry – our second on condominium conversions (read Part 1 here) - we break down the multi-pronged definition of “pre-existing elements” to better understand the limitations of the new Tarion warranty coverage for residential condominium conversion projects (referred to as RCCPs in the balance of this entry), proposed in Bill 106.
Note: The amendments by the Standing Committee to Bill 106 did not introduce any substantive changes to the provisions dealing with condominium conversions. The amended Bill 106 passed Third Reading on December 2, 2015 and received Royal Assent on December 3, 2015. Don’t, however, panic – 99.9% of Bill 106 will not become law until declared to be in force by proclamation of the Lieutenant Governor (this is expected to occur in a piecemeal fashion which could, but hopefully will not, take several years to complete). The small number of Bill 106 provisions that became law upon receiving Royal Assent are all housekeeping provisions.
The question is just how far Bill 106 actually goes in providing it.
It is not automatic that every condominium conversion project will get the benefits of this new, extended coverage. First and foremost, the project must be a RCCP. To qualify as a RCCP, a project must: (a) involve a property that is or is intended to be governed by the Condominium Act, 1998, (b)inlcude units capable of year-round residential use, and (c) contain “pre-existing elements”. In Part 1, we noted the definition of this last term is complex. You will now see why.
Down the rabbit hole we go
The definition of “pre-existing elements” can be found under subsection 154 (7) of Schedule 1 of Bill 106. This provision adds that definition (amongst many others) to the new subsection 17.1 (1) of the Ontario New Home Warranties Plan Act (“ONHWP Act”), and is reproduced below:
“pre-existing elements” means the physical portions or components of a property or proposed property,
(a) that are or will be incorporated into,
(i) a residential condominium conversion project by the commencement date of the project,
(ii) a phase of a residential condominium conversion project by the commencement date of the phase,
(b) that existed before the applicable commencement date mentioned in clause (a), and (c) whose primary use before the applicable commencement date mentioned in clause (a) was,
(i) a use other than residential, or
(ii) a prescribed use.
- it must be a physical part of a property (e.g., a building or part of a building, a fence, a parking space, etc.);
- it is or will form part of a RCCP;
- it must have existed prior to a specific date, being the “commencement date”;
- it must have been previously used (i.e., is not of new construction); and
- its primary use before the “commencement date” must have been non-residential, or some other “prescribed use” (i.e., a use set out in the regulations that are yet to be published).
Unpacking the meaning
Some parts of this definition make logical sense. Others appear circular, or create circular patterns or other complexities.
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First, being a physical part of the property (and not, say, an interest in land, such as an easement) is pretty much an obvious requirement. The relevant Tarion warranties only apply to physical elements of property.
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Also obvious are the requirements that the element have previously existed and been of some previous use, since the plain meaning of “conversion” requires that at a minimum something have these characteristics in order to be made part of something new or applied to some new purpose – in this case, to become part of a residential condominium project.
What is not so obvious is why certain prior uses, namely residential uses, will result in disqualifying an element from being treated as a “pre-existing element” (with the result that the project will not be defined as a RCCP and therefore not be covered by Tarion warranties), as is suggested by the proposed new s. 17.1(1) (c) (i).
As noted in Part 1 of this series, we cannot discern a rationale for this exclusion, and until the regulations under the ONHWP Act are drafted we won’t know if some distinctions might be made between different types of residential use, such that a specific residential use will be a “prescribed use” and thus qualify for Tarion warranty coverage under s. 17.1(1) (c) (ii) notwithstanding the general prohibition under s. 17.1(1) (c) (i).
It appears then, at least currently, that one of the most popular types of conversion – that of a residential rental complex into a condominium – is being purposely shut out from Tarion protection.
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Another part of the definition of “pre-existing element” that is eventually obvious, is the requirement that it must have existed on the “commencement date” of the project or phase of which it is a part. This term is given a separate definition under subsection 17.1 (1) of the ONHWP Act, but further reference to subsections (3) and (4) of the same section is necessary to fully understand it.
Basically, “commencement date,” means the date on which construction starts, which is the date of excavation or other preparatory work if the foundation of the project is not a pre-existing element, and, is the date of the start of work (any work, other than a prescribed work) on the project if the foundation is (or includes) a pre-existing element. Either way, it appears the commencement date is simply the date on which any construction-related work starts on the project.
Did you spot the circularity here? With respect to any component of the property, part of determining whether it is a pre-existing element involves a determination of whether the foundation is a pre-existing element; but that should also mean, then, that determining whether the foundation is pre-existing element is dependent on first knowing whether or not it is. To make this work, it appears that, in the case of the foundation, we simply need to know whether it meets all of the other criteria that would allow it to be defined as a pre-existing element and, sort of, ignore this one component of the definition.
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And, lastly, did you spot the other circular problem with the definition of “pre-existing elements”? It is that a RCCP is defined as a property that contains “pre-existing elements,” but the determination of whether or not an element is a “pre-existing element” includes a requirement that it be part of a RCCP. It is kind of a chicken-and-egg problem, and it almost seems as if, in principle, the legislature expects us to give the term “pre-existing elements” (as with the term “commencement date”, as with the term “residential condominium conversion project”) what would appear to be its plain and ordinary meaning regardless of its complex definition, while still expecting us to rely on and apply the definition when specially needed
What happens if no construction work is required to an existing building before it is registered as a condominium, so there is never a commencement date? Clearly the building is pre-existing, but the result of the definition of “pre-existing elements” would demand the conclusion that the building does not contain any and, therefore, will not qualify as a RCCP and will not attract Tarion warranty protection. Practically speaking, it would be rare for a conversion to be approved by a municipality without requiring some construction (repairs, changes or upgrades of some kind) – particularly where the project involves conversion from non-residential to residential use – but it should not be considered impossible.
What about conversions of mixed-use buildings that were used primarily for both residential and commercial purposes prior to the commencement date? Will the prior residential use of parts of the building exclude the entire project or just the prior residential portions from the Tarion warranties? Is it possible to determine that a project is a hybrid of RCCP and non-RCCP?
We’ve pointed out previously that conversions that result in commercial and industrial condominiums are necessarily excluded from the RCCP definition, as being non-residential, and that this makes sense, since Tarion warranties are intended solely to benefit purchasers of residential homes. But, as we’ve also indicated, some residential condominiums being built and sold by developers may also end up being excluded.
Further, the term “condo conversion” is sometimes used to refer to the conversion of an existing co-ownership or co-operative multi-suite residential property into a condominium. Co-ops and co-ownerships are two alternative ways of sharing ownership of common property with other individuals (each with its own flaws and virtues). Although these conversions result in residential use condominiums, they will continue not to attract Tarion warranty protection under Bill 106 for two reasons: One, such conversions of co-ops and co-ownerships are typically not carried out with the intention of offering the converted condo units for sale to purchasers (since the co-op members or co-owners will typically retain ownership of the individual units), which is another requirement for Tarion enrollment; and, two, such conversions may not qualify as RCCPs because all of their pre-existing elements were of prior residential use.
To be continued…
In next installments on condominium conversions, we’ll review the new requirements for preparing a pre-existing elements study and fund.