The following is a guest post by Tammy Evans, a partner with Blaney McMurtry LLP. In her practice, Tammy focuses on mixed use and condominium development and construction contract law. She is the co-editor of a monthly bulletin, Blaneys on Building, which focuses on the legal aspects of the development industry.
By now most parties interested in condos will have overheard, discussed or read the news regarding the recent and ongoing investigation into the improper transfer of millions of purchaser deposits from Ontario lawyer Meerai Cho’s trust account to her client developer, who failed to complete the project and deliver up the condo units and allegedly absconded with said deposits.
This news has, understandably, raised considerable concern in the marketplace, and while the investigation is still ongoing and we do not yet know whether Cho’s actions were intentional or negligent — whether she acted alone or with others — condo purchasers, who regularly pay significant deposit funds to new construction developers – are left wondering how susceptible their deposits may be in the hands of the developer’s lawyer.
I hope to provide some comfort to purchasers with this article. Purchaser deposits for new condo units are protected, legislatively and contractually.
Section 81 of the Condominium Act, 1998 requires that all payments made toward the purchase of a proposed unit (ie. condo not yet registered) are to be held (a) in a separate trust account; (b) of a prescribed trustee or the developer’s solicitor. This section further requires that evidence of where the deposits are being held must be delivered to each purchaser. A ‘prescribed trustee’ is defined in the Regulations to the Act as a lawyer licensed to practice law in Ontario, a law firm, or an escrow agent for deposits who has entered into a deposit trust agreement with the developer to hold the funds in trust. A developer is not a permitted escrow agent.
A deposit trust agreement essentially requires that deposits be held in trust unless these are authorized to be released by the escrow agent/lawyer and required security has been put in place. This agreement helps to protect the purchaser by having the parties (developer and lawyer) agree that deposits must be held in a separate trust account at all times and cannot be released without compliance with the Act. Prescribed security is either a specific type of policy insuring against the loss of the deposit (for the benefit of the purchaser) or a deposit receipt executed by Tarion (again for purchaser’s benefit). For condominiums subject to and enrolled with Tarion, purchasers have the benefit of Tarion’s deposit warranty protection up to $20,000. The Tarion deposit receipt is the evidence for the purchaser of the warranty protection to the purchaser for that first $20,000 of the purchaser’s deposit.
For deposits in excess of the first $20,000 where the developer wishes to have these released from the lawyer’s trust account, the form of prescribed security that must be put in place to allow such release is called excess condominium deposit insurance or ECDI. ECDI insurance must be put in place before any release of deposits over and above the first $20,000 (protected by Tarion) can take place. These insurance policy providers (surety companies) will charge a premium and require some developer security in exchange for extending the deposit protection to the purchaser. The typical Agreement of Purchase and Sale between purchaser and developer for a new condo unit will set out the Act’s requirements and the developer’s intentions with respect to who will hold purchaser deposits and how these may be released.
So although deposits can be released to the developer, the Act’s requirements for such release must first be met, and considerable security put in place to protect these deposits for the purchaser, by way of Tarion deposit receipt, deposit trust agreement and/or ECDI or a combination of these.
So what happened in the Cho case? All of the facts are not yet available to us, as the matter is still under investigation. What we do know is that the Province has in place strict requirements for release of deposits through the Act’s provisions, and reputable condo developers and condo development lawyers are fully aware of and do comply with these requirements. Those purchasers who may have lost deposits should review carefully their options for recovery.
All purchasers should take time to review the Act’s deposit protections and confirm which law firm will be holding the deposits.