I recently had the pleasure of meeting with the sales team at Sotheby’s International Realty to discuss legal considerations for realtors when dealing with new home sales. It’s a changing landscape for builders, vendors and realtors alike. Here are some key points realtors should keep in mind.
Basics of builder/vendor regulations
All vendors of a new, previously unoccupied home must be registered with the Tarion Warranty Corporation. With a mandate to protect consumers of new homes by ensuring builders abide by provincial legislation, Tarion administers the Ontario New Home Warranties Plan Act (ONHWPA).
In early 2020, it is anticipated that this regulatory role will be taken over by the Home Construction Regulatory Authority. Once designated, it will oversee builder licensing, code of conduct, the builder directory disclosure and compliance, as it administers the New Home Construction Licensing Act (NHCLA).
Beware of illegal builders/vendors
Since everyone who builds or sells new homes must be registered with Tarion, a realtor could face serious consequences for facilitating an illegal transaction with an unregistered builder or vendor. That could include being charged under the ONHWPA or ONCA for aiding and abetting the unregistered builder or vendor commit an offence. That doesn’t happen often but realtors have been convicted on this basis in the past when it was proven that they knew, or ought to have known, they were working with an illegal builder or vendor. If convicted, the registrant has an obligation to report this to the Real Estate Council of Ontario (RECO) and the conviction may also be reported from Tarion or the new regulator separately. The fact of the conviction could have serious implications for the realtors registration with RECO.
According to information from Tarion, vendors or builders found in violation of the law face fines up to $50,000 as well as imprisonment for one year. Corporations building new homes face the stiffest penalties with maximum fines of $250,000, with directors and officers subject to penalties up to $50,000.
Keep in mind that ignorance of the law is no defence.
Abide by the Code of Ethics
All realtors in Ontario are bound by the Code of Ethics found in the Real Estate and Business Brokers Act. Some of the key parts of that code are:
- s. 3 “A registrant shall treat every person the registrant deals with in the course of a trade in real estate fairly, honestly and with integrity.”
- s. 38 “A registrant shall use the registrant’s best efforts to prevent error, misrepresentation, fraud or any unethical practice in respect of a trade in real estate.”
- s. 39 “A registrant shall not, in the course of trading in real estate, engage in any act or omission that, having regard to all of the circumstances, would reasonably be regarded as disgraceful, dishonourable, unprofessional or unbecoming a registrant.”
If RECO rules the realtor has breached the code, the regulator can refuse to renew their licence or revoke it or add conditions to the licence. The realtor may also face disciplinary action.
If any of these things happen, contact me for advice. I can help.
What is an owner-builder?
Under the NHCLA, a person who constructs or manages the construction of a residential dwelling for their own personal use and who meets prescribed requirements does not need to register as a builder. While there are currently no published regulations to clarify what these requirements are, it is expected there soon will be.
Where it gets tricky is if the owner-builder decides to sell the house before they move in. Do they then need to register with Tarion? All I can say is maybe.
In one case, the Ontario Court of Appeal found the intention of the owner-builder crystallizes at the start of the project. Court documents show the defendant built a house that he and his wife were intending to live in. But they could not sell his old house so they decided to sell the newly constructed home instead. Tarion charged him with failing to register as a builder, but the court ruled that he was not a builder.
It is expected that the new regulations will provide better clarity around the definitions of builder and vendor, but until those regulations are published, it is uncertain what requirements will be placed on owner-builders to allow them to remain exempt from registration.
British Columbia has a robust model for owner-builders to ensure compliance, under strict conditions. For the time being, owner-builders are essentially exempt from the statutory regime based on the appeal court decision cited above, but this is likely to change in early 2021.
Bona fide occupancy
Some builders will construct a dwelling (generally an in-fill home), throw down a sleeping bag and say it was previously occupied in an attempt to avoid Tarion registration. If the builder had been living in the home in any manner, realtors have to be careful of listing it as a new home with a Tarion warranty.
Here are some things to look for to determine if the occupancy is real.
- bills that come to that address;
- that person does not own another home;
- furniture and appliances in the home;
- the water being turned on
- the person owns no other home; and
- the home being advertised as being “brand new.”
As long as the documents and any advertising to promote the home are honest, and realtors feel the builder may be living in the home in some fashion, it is likely to a bona fide occupancy.
Some homes are flipped
Property flipping occurs when investors purchase properties with the intention of quickly reselling them for profit. That is not the same as an assignment sale, where someone purchases a contract for a pre-construction condominium suite that has not been registered yet.
Under Ontario law, a person who sells a previously unoccupied home on their own behalf needs to be registered as a vendor. The flipper must apply for registration as a reseller from Tarion for $350 and they must sign a vendor agreement, but if the home is already enrolled with Tarion it does not need to be enrolled again.
The Code of Ethics includes a responsibility to ensure the client is aware of these requirements in order to protect themselves from liability. If acting for the vendor, it would be prudent for the realtor’s to advise the client whether or not they can sell under these conditions.
If a home is being flipped, Tarion has a Letter Agreement that sellers must provide to the ultimate buyer with a disclosure page that states the sale is effectively a resale. Information in the Letter Agreement must also include:
- disclosure of the original warranty start date;
- the status of the remaining warranty coverage; and
- contact information to enable the purchaser to check on the status of any claims made in respect of the home.
This Agreement is meant to protect the ultimate consumer so they understand they are essentially buying a re-sale home. The purchaser also needs to know if they have some recourse if problems arise within the warranty period.
Representing the buyer of a resale
If the home was constructed less than seven years ago by a builder (who was not the owner-builder) there will likely still be a warranty in place. Owners are advised to contact Tarion to find out the background and status of the home and enroll for a MyHome account. There may be warranty claims submitted by the previous owner that were not completed, which is a good question to ask of the vendor.
The rules around new home sales can be complex. Builders, vendors and realtors are welcome to contact me for advice and guidance.