Other matters

Other matters

I have dealt with the larger structural questions about the delivery model and some of the specifics of how a new regulator, warranty providers and independent adjudication might be structured and operate and how the need for consumer education might be addressed. The Terms of Reference for this Review included: whether to extend oversight of the Ontario Ombudsman, alignment with the Freedom of Information and Protection of Privacy Act, disclosure of compensation information, and Open Data policies. I have recommended that a new administrative authority regulator be established with powers and responsibilities, as well as government oversight, aligned with similar administrative authorities. Accordingly, decisions on the above four items should be consistent with the approach taken across administrative authorities generally. On the warranty side, as I have recommended a multi-provider approach that would include private sector insurance companies, decisions on these matters are best addressed by the financial sector regulator.

I now turn to other matters that were raised in the consultations. They are important and warrant individual comment.

Warranty coverage and duration and other protections

Content of warranty protection

I am not making specific recommendations about warranty coverage and duration with one exception. In light of the difficulties some home purchasers have faced as a result of Urbancorp’s financial problems, I am recommending an immediate review of deposit protection. I discuss this in more detail below.

Regarding the specifics of warranty coverage and duration, I have recommended a more inclusive and structured process for rule-making. Specific decisions on warranty coverage and duration are best addressed in that context.

Currently, the Act sets out certain basic provisions about warranty coverage and deposit protection. Any additions to the warranty or other protections are set out in by-laws under the Act. The Act gives Tarion the authority to make these by-laws. By-laws have been made providing for additional warranty coverage and other protection such as deposit protection, beyond what is provided for in the Act. 

As a rule of general application, the content of that warranty protection should be set out in legislation, either in the act or the regulations made under the act. Having warranty coverage set out in the legislation is necessary in a multi-provider model to ensure consistency and a minimum base line for warranty coverage and other protections. A new system requiring government approval of changes will introduce the necessary accountability over rule changes.

The subject of “latent defects” was discussed. Latent defects are defects that may be hidden or concealed or simply inactive for some time. They may be defects in the design, workmanship or materials that are not readily apparent, in some cases for many years, or until another problem calls for destructive testing and the problem becomes apparent. Some recommended a provision that would extend the period of warranty coverage, having it run from when a defect is discovered or could reasonably be expected to have been discovered – a discoverability clause. Others argued that this is a question of how long warranty coverage should last – what is the expected life span and when is a defect, if present, likely to manifest itself. Questions around latent defects and discoverability would benefit from being considered as part of a detailed review of warranty coverage and duration.

Deposit protection

Since February 1, 2003, the maximum amount of deposit protected by the guarantee fund for freehold homes has been $40 000 and $20 000 for condominium units^{footnote 1[1]}. The Act protects amounts that “the person paid to the vendor as a deposit to be credited to the purchase price under the closing"^{footnote 2[2]}." These amounts have not changed for 13 years. The provincial average price for all homes sold in October 2016 was a record $561 896, rising 19 per cent from a year earlier^{footnote 3[3]}. In comparison, the provincial average for homes sold in January 2007 was under $300 000^{footnote 4[4]}. The Greater Toronto Area alone saw a 21.1 % increase on a year over year basis in October 2016, with an average selling price for all home types of $762 975^{footnote 5[5]}. The amount of deposit that a purchaser is asked to provide will presumably have seen a corresponding increase.

In the condominium sector, funds paid in advance of closing, including funds advanced for some upgrades, must be held in trust in accordance with Condominium Act rules^{footnote 6[6]}. In the event of builder failure, absent a case of fraud or other criminal activity, the funds are available to reimburse the new home purchasers. This obligation to hold in trust applies to deposits toward the initial purchase price, including funds paid towards the cost of upgrades that are fixtures, such as countertops. Unlike deposits paid to purchase a condominium unit, deposits paid to purchase a freehold home are not required to be held in trust.

Also, for freehold homes, funds paid towards the cost of upgrades do not benefit from deposit protection. I have not been provided with a reasonable rationale for this distinction. For the purchaser, any money paid prior to closing is in effect a deposit.  

I am recommending that an assessment of deposit protection be initiated immediately and include consideration of whether:

• the current deposit amounts are reasonable considering the increasing price of homes;
• amounts should be indexed or tied to the purchase price of the home;
• the trust obligation could be extended to freehold homes without negatively impacting smaller builders; and,
• the distinction between money paid for upgrades and other amounts paid under the agreement of purchase and sale should be removed, with all monies paid in advance treated as deposit monies that benefit from the deposit protection.

Illegal building and owner built homes

Owner built home

Currently, someone building a home for their personal use is not required to enroll the home for warranty protection under the Act. The person building does not need to be registered as a builder and the home does not need to be enrolled for warranty protection. This owner built exemption has given rise to problems.

While a new home may initially be intended for personal occupation, there is no assurance that circumstances won’t change. The home might be sold on the resale market during the 7-year warranty period that would have applied to the home if it were not an owner built home. It is important that efforts be made to ensure quality construction for all new homes. A system of mandatory registration for all builders could be one approach to supporting that outcome.

There is also the question of mandatory warranty coverage for all new homes, including homes built by an owner for their personal occupation. It is my recommendation that warranty protection should be mandatory for all new homes, including owner built homes intended for personal occupation.

In principle, someone buying a new home during the warranty coverage period should not be disadvantaged because the owner builder did not need to have warranty protection in place when it was constructed. It is still a new home being sold on the open market during the warranty period, and consumers who purchase it should have every protection available to them.

While I have recommended that all new homes should have warranty coverage, there are different ways to ensure warranty protection is in place in the event the home is sold during the warranty period. For example, consideration could be given to whether the mandatory enrolment of a home for warranty coverage should be at time of building or at the time of sale if sold during the period of warranty coverage.

Consideration could also be given to introducing a mandatory public builder registry system as has been done in Alberta. The registry is searchable by municipal address for every new home built as of February 1 2014^{footnote 7[7]}.

Illegal building

I also heard a great deal about “illegal building”. “Illegal building” captures unregistered builders (persons who construct a home for resale knowing that they should be registered as a builder with Tarion but were not) and “disguised builders” (persons who build new homes that they claim they are building for their personal occupation to take advantage of the owner built exemption but who intend to sell the home). While warranty coverage is available for homes built by unregistered builders who should have been registered but aren’t, it is not available for builders who take advantage of the owner built exemption and subsequently sell the home. Tarion has been working with municipalities to proactively respond to the problem of unregistered and disguised builders but it continues to be a problem. In either case, if the home is subsequently sold within the warranty period, the responsibility is on the purchaser to determine whether there is warranty coverage.

Tarion has initiated a pilot project to address some of the problems with illegal building. Before a building permit is issued, confirmation is required from Tarion that the home is not one that must be enrolled in the warranty program. This allows Tarion to determine whether the owner builder exemption from registration and enrolment applies before construction begins on the home. Notwithstanding these efforts, I believe more needs to be done to protect new home buyers from illegal building.

Alberta’s legislation has introduced a rule that no building permits are to be issued unless the applicant provides evidence that the new home has been registered and has the necessary insurance in place or is otherwise exempt^{footnote 8[8]}.There may be value in considering a similar approach in Ontario.

Changes to key definitions and other legislative provisions

Many of the changes that I am recommending, if accepted, will require changes to legislation. This is an opportunity to update key definitions and terms that have been problematic over the years, including the definitions of builder and vender, what constitutes a home for warranty coverage purposes and what is meant by “previously occupied”.

Builder/vendor definitions

The Act appears to have assumed that there would be one builder and one vendor associated with any given new home construction. However, today’s business structure for new home construction might have an umbrella group (a name but not necessarily incorporated entity) and several operating companies. Within one development there may be one or more operating companies. Some may perform specialized tasks such as marketing or after sales service. Regardless of the number of companies involved, only one will currently be registered as the builder/vendor under the Act in respect of a home enrolled in the warranty plan. A holding company may be involved to fund the registered builder/vendor. In some cases, the builder/vendor corporation will be dissolved or abandoned once the development is complete, and this might happen during the warranty period. Meanwhile, the new home owner is unaware of the complex legal corporate structures that are at play and while believing they are dealing with “their builder” for the entire warranty period, they may in fact be dealing with a completely different person or entity. Greater clarity and transparency is required.

It was suggested that warranty obligations should be extended to suppliers and subtrades. Some subtrades have their own licensing requirements and oversight bodies. To introduce a warranty obligation through a separate regulator could conflict with the function of those regulators and could seriously complicate the process from a consumer perspective. Builders and vendors can deal with liability issues through their contracts with those subtrades. Those are commercial arrangements, not consumer contracts, and I am not recommending that suppliers and subtrades be captured by the new regulator.

Definition of “home” for purposes of warranty protection

Not every building that can be used as a residence is covered by the warranty protection. For example, prefabricated homes are not covered as the builder is not supplying all the material or work. Also excluded are dwellings built for “seasonal purposes” such as cottages. And yet, depending on the zoning, those dwellings may be lived in for significant periods of time during the year. Whether these exceptions are still applicable in today’s real estate market should be considered.

Homes that were previously occupied are also excluded from the definition of home for purposes of warranty coverage. This could include, for example, a model home in a subdivision that was used as an office. The legislation should be clear on what degree of previous occupation results in no warranty protection and the meaning of “previously occupied” should be clear to avoid an inconsistency in the application of such a rule.

Some newly built homes have pre-existing elements in them. In some cases, a home will be treated as a renovation by Tarion and not covered by warranty and in other cases it will be treated as new construction and covered by warranty. For example, a builder may have demolished a home but kept the foundation or one of the outside walls. It is not clear what level of pre-existing elements will result in no warranty coverage. This should be clarified. There may also be value in considering whether warranty protection should extend to home renovations generally and if so, in what circumstances.

Condominium specific issues

The growth in condominium construction in Ontario has been significant. Today, more than 50 per cent of new homes being built are condominium units^{footnote 9[9]}.

Condominium ownership gives rise to unique problems that do not necessarily apply in a freehold home context. For example, in some condominiums, a purchaser may take occupancy of a unit before the common elements are complete and yet, the timelines for warranty coverage start to run as of the date of occupancy.

Unit owners may have an exclusive use common element, such as a balcony. As a common element, it may not be clear to the unit owner who is responsible for identifying defects. The role of the condominium board in the warranty claims process for common elements may not always be well understood by a unit owner.

Condominium corporations are required to have a performance audit of the common elements completed within one year of registration. This performance audit is filed directly with Tarion and a copy provided to the corporation. The performance audit identifies defects in the common elements and constitutes a claim for warranty purposes. A proper performance audit requires timely access to the appropriate supporting documentation, including drawings and plans. Measures should be in place to support that access.

The uniqueness of the condominium sector and the complexities that apply to it are such that there may be advantages to addressing the condominium issues separately in the legislation.