Rachel Loizos in Legal, Condo Buying Tips, Home Buying Tips
In his recent article, Condo Buyers should prepare for ‘phantom’ rent, Terrence Belford of the Globe and Mail highlights an issue confronting purchasers of new condominium units; the often unexpected cost of carrying your condo before you own it. This period of time, known as the interim occupancy period, requires that unit purchasers pay the monthly cost of their unit (common expense fees, property tax, and interest on the unpaid balance of the purchase price) to the developer.
In a previous post, New Condominium Interim Closing, I discussed this process. Once the building is ready to be occupied, determined by the municipality by way of an Occupancy Certificate issued to the developer, the HomeBuyers can move in. The HomeBuyer does not yet own the unit – ownership can’t be conveyed until the final registration of the unit is complete. The HomeBuyer is effectively renting the space from the developer. This has been referred to variously as a ‘phantom mortgage’ or ‘phantom rent’.
Whatever you prefer to call it, the result is the same. Payments will be made to the developer until the units are registered, however long that may take. Unfortunately, developers have very little control over the process as registration involves having each unit properly described and recorded in the land registry system.
The largest part of the interim occupancy fee or ‘phantom rent’ is the interest on the unpaid balance of the price of the unit. As an example, if the purchase price for your unit is $300,000 and you have paid $50,000 in deposits at the time of interim occupancy, this means you still owe $250,000 to the developer to buy your unit. Roughly, interest at 6% on this unpaid balance will result in a monthly payment of $1,250. That amount is strictly interest on the unpaid balance owing, it does not include the estimated common expenses or the estimated realty taxes.
Although it may seem intuitive to try to increase your deposits throughout the development in order to reduce the amount you will owe on closing, bear in mind that the more money you have in a project, the more you stand to lose if the project goes south and you have not built in additional protection in your Agreement to purchase the unit. Recently, the Brad Lamb project, Leslieville Lofts, was scrapped when the Ontario Municipal Board ruled against the proposal. In this case, purchasers were permitted to take a refund, transfer the funds to another Brad Lamb project, or wait for the new ‘Leslieville’ plan. But what would happen where the developer goes belly-up? There are statutory and Tarion protections, but Tarion will only insure deposits for registered condominium projects up to $20,000.
One possible way to lower the risk of losing your deposit is to negotiate with the developer to ensure that any deposits in excess of the Tarion protected amount are covered by the developer’s own insurer to guarantee 100% of your deposited funds. A typical condo contract is usually quite detailed. Unless you are very familiar with these kinds of contracts, it is wise to retain an experienced real estate lawyer to review your Agreement of Purchase and Sale during the 10 day rescission period.
Rachel Loizos is an associate lawyer at Sotos LLP in Toronto. She practices in the areas of real estate, corporate and commercial law, estate planning and administration.
Photo Credit: Phantom Inc.
