BILD – A Thirteen Year Retrospective

by Leor Margulies

On Tuesday evening at the BILD Chairman’s Dinner attended by over 500 guests, I was honoured to receive the Chair’s Award of Merit from the current Chairman, Paul Golini of Empire Communities.  The award is given to a member who has shown dedication and made significant contributions to the Association over the years.  It was indeed a very special night for me.

It has been my pleasure to serve on the BILD (formerly GTHBA) Executive and Board of Directors since 1999.  BILD is an outstanding association, successfully representing its members with the media, to the public and to the government, both defending their interests whilst ensuring that consumers’ rights are enhanced and safeguarded.

Over the past 15 years, I have seen tremendous changes in the industry and our association.  Our membership has grown from 970 members to almost 1,400 members.  BILD is now recognized by all levels of government as a significant force, well beyond its mandate of representing GTA builders.  The GTA represents over 50% of new home sales in Ontario and 25% of new home sales in Canada.  All levels of government respect and give credence to our positions when presented.

We have had an array of outstanding Presidents over my tenure on the Executive, both men and women, who have devoted their time selflessly on behalf of our industry.  There have been many memorable moments over the last 13 years.  In the late 90′s, BILD was instrumental in the passing of provincial legislation which prohibits strikes for more than 6 weeks in the residential construction industry, and only once every 3 years.  In 1998, without that legislation, industry strikes wreaked havoc for consumers and builders. 

The growth of consumer protectionism from Tarion has been a significant factor with residential builders over the last 10 years.  I have witnessed Tarion taking on a much more consumer protection agency role, well beyond the original building warranty insurance/surety role it was set up for.  New home consumers have the best warranty and other legal protections in the world.  Ontario has become a leader in addressing residential new home consumer rights and the industry has adapted to the Tarion requirements and worked with Tarion to implement them.

The merger of GTHBA, the builders association, and UDI, the land development association in 2006 was a milestone.  The merger represented the evolution of the building industry whereby most major builders are now integrated and cover both land development and house/condominium building.  It was only natural that there should be one voice for this one land development/building industry, and it is now BILD.  I was proud to assist the Association and Desi Auciello, our President at the time to implement this merger, along with the hard work of our late CEO and President, Stephen Dupuis. 

I have witnessed the crises in the industry involving continuing the government restrictions on land development by way of greenbelt legislation and places to grow legislation.  I have seen the ever increasing amount of taxes including the dreaded HST imposed on new homes to the point where a new home could have in excess of $100,000.00 of built-in taxes.  One of the biggest challenges facing the industry and the government is how do we make homes affordable when there is no land for development, thereby increasing land costs and ever-increasing taxes which impose a huge chunk of cost on the purchase price.  BILD successfully lobbied the province in March 2009 to amend the HST legislation to allow for the eligibility of the $400,000.00 threshold rebate to apply to all homes and not only those sold for $400,000.00 or less.  A huge victory!

The Association has defended the interests of its members in many legislative and legal challenges.  The most recent victory was the OMB Decision of the Orangeville development charges case which upheld the existing, more conservative interpretation of population growth that has served as the accepted basis for the calculation of development charges, and as a result, there have been significant reductions of the increases in development charges that were otherwise going to be imposed pursuant to a new and more liberal interpretation being espoused by certain municipalities. 

The most memorable experience of all has been the fact that for the last 13 years, I had the honour and privilege of working with Stephen Dupuis, our late CEO and President.  I watched him grow in his abilities and stature in representing the industry.  A better representative for BILD, I cannot imagine.  His elevation in 2006 to CEO and President was well deserved.  His foresight, his humor and ability to “herd the cats” and yet retain the respect of both developers and politicians was unparalleled.  I will miss him deeply and only hope that we can find a replacement that can come close to what he brought to the table.

I look forward to continuing my long association with BILD.

Record Condo Sales Mask Low-Rise Shortage

by Leor Margulies

The times that we are living in are “usually uncertain” according to both Mark Carney, CEO of Bank of Canada, and Ben Bernanke, Chairman of Federal Reserve Bank in the U.S.  So if these times are so uncertain, why are we breaking records in the GTA for new home sales and condominium sales?  At the RealNet Conference held on Friday, January 20, 2012, for 300 of GTA’s top builders and financiers, George M. Carras revealed that 2011 saw the second best new home sales in the GTA ever with 45,926 total sales, second only to sales of approximately 54,000 new homes several years ago prior to the last recession.  Of those sales, over 28,000 were high-rise condominiums, breaking an all time record in the GTA.

Behind the euphoria of these numbers, however, is the stark reality of dwindling land supply, a shortage of single family homes and a dramatic increase in the cost of purchasing single family homes in the GTA. 

Inventory for low-rise homes is at an all time record low of only 4 months with record land prices being achieved for low-rise and high-rise sales.  The figure of 17,460 new low-rise sales was the third lowest on record.

The average price for a new low-rise home was $545,000, clearly not an entry level number even with low interest rates.  Even though average new condominium prices have dropped 2% to $434,000, this was only achieved by reducing the average size of units by 52 sq. ft. in 2011 and over 100 sq. ft. since 2010.  I am not certain people are getting smaller as well to fit into these tiny units which are not being built to accommodate families but merely singles and 2-income couples.  Notwithstanding the significant price differentials between condominiums and low-rise housing, there still remains very little demand by families for condominium units. 

The provincial government’s efforts over the last few years to reverse land sprawl and intensify existing urban areas has clearly been achieved by the reversal of the split between new low-rise and high-rise sales.  Ten years ago, the split was 75:25.  Now, it is 35:65 for low-rise/condominium.

Although the state of the housing industry appears to be healthy with great demand and low interest rates to finance acquisitions, there is a dramatic reduction in choice for new home purchasers and families in particular.  Commuting times are being extended dramatically given the lack of new housing in the GTA with people purchasing further afield in order to be able to afford the housing they require. 

In addition to the government’s policies of intensification, increasing red tape and massive indirect taxes included in the purchase price are rendering both low-rise and high-rise units unattainable for many lower or middle income purchasers.  When taking into account development charges, building permit fees, parkland dedication fees, HST and a myriad of other municipal and provincial charges, at least $100,000 is being paid out on account of taxes.

The good news is the development industry has managed to deal with numerous regulatory and tax obstacles in their way to date by switching to an investor driven high-rise market.  However, with the lack of available choices and increasing costs, it would only take interest rates to move a couple of points to really render the market very vulnerable.  The last thing we want to do is end up in a country where people have their children living with them into their 30′s (“bambalinos” as they are called in Italy) because they cannot afford housing, something which is common in Europe.

As well, it was noted at the conference that land costs are rising dramatically with the potential for increasing construction costs definitely a potential.  With those 2 significant cost components rising, when added to the already high cost of taxes, the ability of the marketplace to absorb price increases, whether high-rise or low-rise, will become questionable.

Both the economists and the statisticians at the conference were of the view that a breather in the marketplace is critical to ensure that land costs do not get out of hand and affordability is still maintained.  But to do that, the government needs to participate in the process as well in respect of the taxes it applies, the red tape it creates, and the services it creates, particularly infrastructure and roads.

So as I have said before in previous blogs, the word for 2012 is “caution”.

New Standards for Scaffolding

by Tara Welat

The phenomenal rise in the number of condominiums across the City of Toronto has not only meant a change in our skyline but also in our cityscape as pedestrians and vehicles face (or attempt to avoid) the growing number of scaffolding, hoarding and other construction staging structures that are set up throughout the lengthy construction process. 

 The City is now engaging developers to find ways to replace traditional scaffolding structures with ones that are more aesthetically pleasing.  At a recent Toronto Chapter meeting of BILD, Andy Koropeski, the Director of theTorontoand East York District Transportation Services, explained that the City will be engaging with various stakeholders prior to implementing amendments to Chapter 743, commonly known asToronto’s “Streets By-law”. 

The “Urban Umbrella” (http://www.flickr.com/photos/62159569@N08/6488957037/) first implemented in New York City was touted as an example of a structure that could serve a similar function as a scaffold but create a new standard by combining it with cutting edge lighting and material.  The “Urban Umbrella” was the winning design from the Urban Shed International Design Competition and hailed by New York Mayor Bloomberg as the new prototype for scaffolding and the “perfect combination of design elegance and construction safety.”  http://bit.ly/Ag3oKi

Perhaps the most encouraging aspect of the design is that the Urban Umbrella apparently costs the same as conventional scaffolding.

With 130 condo projects currently in construction, it is evident that a similar creative effort is desperately needed for the City ofToronto.  Whether we adopt the Urban Umbrella or the City engages artists, architects, engineers and designers to create other cost-effective alternatives, there’s no reason why the traditional eyesore should not be a thing of the past.

Ford Budget Gets Passed – What’s Next?

by Leor Margulies

In its front page headlines yesterday, the Toronto Star totally ignores the Ford’s administrations efforts to reduce the operating deficit to create efficiencies in the City of Toronto’s bloated administration.  http://bit.ly/Ar8DwS

Rather than focusing on a budget which limited the property tax increase to 2.5%, reduced the draw in City reserves by over $250,000,000 from the year before, and substantially reduced expenditures, the Star chose to focus on relatively small amendments to Ford’s proposed budget that Council ultimately approved totaling $20,000,000.

Having Council agree to restore certain cuts in the budget is merely evidence of a democracy working well.  It should not be viewed as a defeat to the Ford administration which accomplished its goal of substantially reducing expenditures and draws on reserves.  It should be viewed as a recognition that the municipal system operates substantially different from the provincial and federal government systems where one party controls all of the decisions.  The Mayor has only 1 vote on Council.  Out of all of the major cuts, only $20,000,000 was restored by Council.

Politicians do not win popularity contests for cutting expenses which will naturally result in programs being cut, reduced or user fees increased.  That is the reality that cities must face and that countries around the world are facing. 

Now that this year’s budget has been passed, the next major hurdle will be the negotiations with City staff.  Either way, the City loses.  If the administration caves in to avoid a strike, the inefficiencies and costs that were strongly objected to during the last strike will continue.  If the strike, however, is allowed to take place in order to achieve an equitable and finally acceptable result to the City, the cost to the City in lost revenues and the economic price will be huge.  On the development side alone, delays in processing zoning applications, permit applications, inspections, etc., could result in millions of dollars of additional carrying costs for numerous projects, either in the planning stage, in the midst of construction or approaching completion in the case of condominiums, registration.

We can only hope that resolution to the labour dispute can be achieved quickly but without sacrificing the economic goals that the administration is trying to achieve for the City and its citizens, while maintaining a fair resolution for the City employees.

HOUSING IN 2012?

by Sheldon Goodman

Now that 2011 has come to a close our attention must shift to 2012.  2011 has ended and in review, the year was a banner year for most markets. Sales were up, prices were up and interest rates were low.

The results of 2011 seemed to match the expectations of the development community and significantly surpassed the expectations of the analyst and financial  communities.

Where are we headed for 2012?

The first indications may have been forthcoming from an investor conference in Toronto this past week where the presidents of the Royal Bank and the Bank of Montreal spoke. Both have concluded that a slump in the Canadian real estate market is looking very likely with particular focus on the condo markets in Toronto and Vancouver, where capacity is significantly overbuilt. No one is predicting a drastic collapse in prices as seen in the US, however, the excesses that they see in the Toronto and Vancouver markets are of significant concern.

So who is right ?

At this point in time it is too early to hazard an opinion. However,  if the banks decide to limit their exposure to the condo market and decrease their lending activities, there will be an impact on the market.

by Darrell Gold

“Reasonable Efforts”, “Commercially Reasonable Efforts”, “Best Efforts” – Choose Your Words Wisely 

Typically, commercial agreements include conditions that must be satisfied for a binding un-conditional agreement to arise. Those conditions tend to contain expressions requiring a party to expend “reasonable efforts”, “commercially reasonable efforts”, “best efforts” etc. in attempting to satisfy the condition. The intent of adding an “efforts” standard is to clarify the parties’ expectations as to what a party needs to do in attempting to satisfy a condition under an agreement, before that party is in a position to then terminate the agreement if the condition was not satisfied.

“Reasonable efforts”, “commercially reasonable efforts”, “best efforts” and similar phrases differ in terms of what is required of the party with the performing duty. The law in Ontario provides as follows:

Minimum Standard –The minimum standard is to act reasonably in carrying out rights and obligations. It is an objective test that assesses what other reasonable persons would have done in the same circumstances.

“Reasonable Efforts” – Means: “using sound judgment – exercising a logical, fair and sensible view”. An objective test that assesses what other reasonable persons would have done in the same circumstances. It does not mean “every effort”

“Commercially Reasonable Efforts” – What is reasonable or not, is dependant upon the commercial realities in the situation in question which may also include a subjective element. It seems to me that “commercially reasonable efforts” is a qualified “reasonable efforts” and thus less onerous.

“Best Efforts” – “Best efforts” imposes a higher level of obligation than “reasonable efforts” or “commercially reasonable efforts”. It means taking in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and “ There is conflicting case law on whether or not “best efforts” means you need to sacrifice your own economic interests in carrying out your obligations.

The Lessons:  When drafting agreements give careful consideration as to what the expectations are for the efforts to be expended in order to try and satisfy a condition, and be wary of the obligation to use “best efforts”. If you don’t choose any standard, you run the risk on the courts implying one and that can include the “best efforts” standard.

Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.

Christopher Hume likes tall buildings

by Leor Margulies

It is a rare day that I agree with anything as Christopher Hume has to say, for but once, there is much merit in his article in the Toronto Star, December 24 edition (http://bit.ly/sj1fQZ). In his article, he interviews a number of architects and planners who either participated or had opinions on the exhibition “To Tall” currently on display at Harbourfront Centre until December 31.

Hume interviewed a variety of architects and planners who unanimously agreed that for the city to enter the 21st century and recognize the realities of increasing population growth with limited land availability, coupled with the governments’ clear desire to avoid sprawl and intensify built-up areas, tall buildings, appropriately designed and located are inevitable, and the way of the future.

Although Toronto leads the world in high-rise development, the NIMBY-ism of local counselors and their constituents continues to wreak havoc on good design and maximization of density in appropriate locations. Developers are forced to seek excessive height requirements for their high-rises because inevitably no matter what they asked for, the community, the counselors and often the planners will arbitrarily object height to the proposed and automatically seek a reduction. This results in an inefficient and wasteful use of resources and extends the time for approvals and construction, only adding to the ultimate cost, passed on to the consumer. As long as there is a ward based municipal system inToronto, as opposed to citywide elections and representation as is the case inVancouver, NIMBY-ism will not go away.

Peter Clewes, a renowned Toronto architect, commented to Christopher: “Still there is a general sense in the city that height is bad, that the planners’ job is to cut these towers down to size. It is an emotional response, if not the tall poppy syndrome, certainly the tall tower complex. As a rule of thumb, the city reduces the height other proposed building by 10%. Asked for 50 stories, expect 46.” It is actually quite amazing that development proceeds in the city at all notwithstanding the political and community resistance. It is only by having an independent forum, the OMB, which is the final arbiter for zoning approvals and which can overrule the city and its counselors, that allows development to proceed. If this institution was removed, development would grind to a halt in the city.

Without the growth of high-rise condominium towers over the last 15 years, the rental market in the city would be severely constrained. As it is, the vacancy rate of 1.4% is far too low, resulting in is a residential landlord’s market. UnlessTorontopoliticians want to close the door to new immigrants to the GTA, they will have to recognize that high-rise living, is the only available alternative to house new families and newcomers to GTA.

IMF calls Canadian housing market “over heated”

by Leor Margulies

The doomsayers continue to gather. First  Mark Carney from the Bank of Canada, now the IMF, in its annual report on Canada’s economy, concludes that average home prices are 10% higher than they should be. From that conclusion, the IMF suggests that house prices could drop by that amount or more, depending on external shocks to our economy, which could result in a 1.1% drop in personal consumption, leading to a .5% drop in GDP. Check out Kevin Carmichael’s report December 23, 2011 in the Globe and Mail (http://bit.ly/s2lQft).

The IMF goes on to address the impact of  a drop in housing prices, which may be triggered by an abrupt drop in commodity prices, resulting in a severe downturn in construction. This could lead to a 2.5% loss in GDP over 2 years, which would have a dramatic impact on the on the Canadian economy and spending habits of Canadians who already have household debt equal to 100% of disposable income.

The usual potential impacts of external factors, such as US and European economies, and the resulting lack of exports are again the potential culprits for slowdown in the housing market.

However, nothing that has happened to date has impacted on the market. Our employment figures, although not stellar, are far better than most other countries. As well interest rates continue to remain at historic lows, making real estate, and residential real estate in particular, extremely attractive to homeowners and investors.

The IMF also suggested that the government review the rules that govern CMHC to ensure that there are sufficient oversight. It does not suggests there are any problems with CMHC, but suggest the government ensure that there is proper overview of  the Crown corporation  given its major role in back  stopping the residential mortgage market in Canada. Again, IMF raises alarm bells for no valid reason.

The IMF report does not really shed any new insight to the Canadian economy. External factors continue to hover around us. However, unless there is some major further economic catastrophe, there is nothing in the current environment that indicates any new shock that would be coming to impact our housing market.

Condo Market Downturn Fears are Unfounded

by Leor Margulies

Saturday December 17, 2011, must have been a slow news day.  The Toronto Star (Susan Pigg – Jittery Trump Buyers May Spell Trouble http://bit.ly/vS213V ) reported that a number of condominium purchasers in the Trump Tower were looking to back out of their agreements signed many years ago.  It also referenced a recent Court of Appeal case, Schneeberg v. Talon International Development Inc. involving an unhappy Trump Tower buyer, as an example of the potential pitfalls for condominium developers and the precarious position of the condominium market.

Rather than deal with speculation and innuendo, lets deal with the facts.  First of all, in the Schneeberg case, the purchaser signed an agreement of purchase and sale in August 2004 which provided for an occupancy date of March 20, 2009.  Normally, condominium agreements that were entered into before July 1, 2009 provide for the right of the vendor to extend the occupancy date for a maximum period of time usually somewhere between 24 and 30 months.  Since July 1, 2009, under the new Tarion delayed occupancy rules, there are fixed extensions allowed and a fixed outside date which must be inserted in the purchase agreement.

Unfortunately, the vendor did not provide for any extensions beyond the originally targeted occupancy date of March 20, 2009.  It argued, however, that it had rights to extend to any such date as was required to meet occupancy, but both the trial judge and the Court of Appeal were not buying this argument.  They both held that the purchaser had a right to terminate at any time after March 20, 2009 and gets its deposit back.  Case closed.

The Trump Tower has taken an exceptionally long time to get built and achieve occupancy, which is now targeted for some time in 2012.  The fact that one or more purchasers may be seeking to get out of their transaction for deals that were signed almost 8 years ago is not unusual and certainly not indicative of a precarious condominium market. 

Secondly, it should be noted that the Trump Tower is substantially a condominium hotel with units that are going to be created as part of a hotel condominium, sold to investors and then rented out to hotel guests.  This is a far different type of condominium from residential projects with year round rentals and are much more susceptible to business cycles.  The hotel market is a discretionary one and investors in that marketplace would have greater concerns over the economy than investors leasing the residential units, which is a very strong and stable market in the GTA right now.. 

Thirdly, the current sales numbers for the GTA condominium market militate against these warning bells.  For the period of January 1^st through November 30^th, 2011, high-rise sales surpassed the 2007 record of 23,324, for a total year-to-date sales of 27,224 units.  There were 3,137 condominium units sold in November 2011 alone, breaking the 2010 record for November by 21%.  And the year is not done yet.

So if investors and purchasers are getting worried about the condominium market, why are they still buying in such record numbers?  The reality is there is substantial confidence in the Toronto high-rise for both owner occupiers and investors.  Toronto is seen as a safe haven for investment and real estate with continuing growth in the economy and the population.  With interest rates remaining low and the lack of alternative investment opportunities elsewhere, Toronto promises to continue its healthy activity in condominium sales for the near to mid term at the very least.

Letters of Intent and the Risks of a “Non-Binding Agreement to Negotiate”

by Darrell Gold

Since 1978, Canadian courts have recognized an implied obligation on the parties to a contract to act in good faith in carrying out the contractual terms, including unilateral conditions precedent to an agreement such as property inspections, lawyer approval of a contract and obtaining mortgage financing. The “good faith” obligation requires each party to exercise his/her rights under the agreement “honestly, fairly and in good faith”.

However, what happens in the case of pre-contractual negotiations where no contract has been entered into yet? The general position is that Canadian courts have been very reluctant to recognize an implied duty of good faith during the bargaining. That position may have moved a little as a result of a decision of the Ontario Superior Court in July, 2011 in the Carttera case which did not expressly deal with a “good faith” obligation but did prevent a party from terminating a non-binding Letter of Intent.
In Carttera, the parties signed a letter of intent (“LOI”) for the purchase of a hotel in Toronto and carried out negotiations for a formal purchase and sale agreement (“APS”). The LOI provided for negotiations in “good faith” to finalize the APS. Before signing the APS, the Seller received information indicating it could realize a higher price than under the LOI and tried to terminate the negotiations with the Buyer. The Buyer applied for a certificate of pending litigation to tie up the property and prevent a sale pending a trial of the Buyer’s claim for specific performance i.e. completion of the sale on the terms of a finalized APS and essentially “signed” by virtue of email correspondence.

The LOI contained the material terms, such as price, deposit amounts, closing date, mortgage terms and other matters but also provided that it was “not contractual” (except for Confidentiality and Non-Solicitation of other offers during APS negotiations), and no binding agreement existed until the parties were satisfied with all terms and conditions and an APS “had been executed”.
The Buyer argued that the APS terms had been settled though email correspondence and only the execution formalities remained. The Seller claimed no APS was executed as expressly required by the LOI for a binding agreement and that the Seller’s emails expressly included boiler plate language that the email “was not a digital or electronic signature and could not be used to form a contract” and thus the Ontario Statute of Frauds (that provides for agreements for land to be in writing and signed by the parties) did not apply.

The Court found for the Buyer and granted the CPL pending a trial of the issues of whether an APS had been reached as evidenced by the emails communications and whether such communications amounted to a “signed contract”. The trial is pending and it remains to be seen if the court will find an APS was settled and electronically signed and that specific performance of the deal should occur.

The Lessons: A number of important considerations are gleaned from this case when using an “non-binding” LOI:

(a) an LOI can create an “interest in lands” notice of which can be registered on title if a dispute arises between the parties about whether or not an APS has been settled or signed – that will tie up the Seller’s property;

(b) email communications may be sufficient to create a “signed” agreement under the Ontario Statute of Frauds;

(c) a pre-contractual LOI may be subject to an implied “good faith” obligations that may prevent a party from “walking away” at any time should a better deal present itself;

(d) consider adding language to your “boiler plate” email form that it “is not a digital or electronic signature and cannot be used to form a contract notwithstanding anything to the contrary at law”.

Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.