Up Up And Away With Condominium Deposit Interest Rates, Part 2 – Real Estate

Back on May 6, 2022, Real Estate Partner Leor Margulies had sent
out a bulletin to all of his developer clients and confreres
outlining the impact of the strikes that were ongoing at that time,
as well as the release of a little known regulation from the
Ministry of Government Services relating to interest payable on
condominium deposits. At the time, he had not fully appreciated the
enormous impact of the change in the rules on project budgets. He
does now. https://tinyurl.com/3nwfv3xc

Many clients have been very concerned about the significant cost
increases in interest payments payable to purchasers caused by both
the change in the regulations and the significant increases in the
Bank of Canada rates. Until now, because of the low interest rate
environment and the current regulations, developers have not been
required to pay any interest on deposits since the last financial
crisis of 2009. Unfortunately, as the song goes, the times they are
a changing.

As part of the government’s efforts to address the issue of
project cancellations, one of the items that the Ministry of
Government and Consumer Services looked at this spring, was the
fact that purchasers who had their agreements of purchase and sale
cancelled were receiving essentially no interest based on the
formula in the regulations. Pursuant to discussions between the
Ministry, OHBA and BILD, it was agreed that purchasers should
receive a reasonable interest rate on monies that were tied up for
potentially several years and returned as a result of purchase
agreement cancellations.

The new regulations that were issued on April 28, 2022 to amend
the interest rates payable on deposits were the result of these
meetings. Unfortunately, rather than focusing strictly on payment
of a higher interest rate where purchase agreements were cancelled
by developers without the fault of the purchaser, a blanket change
to the calculation of interest on deposits was made in respect of
all deposits, whether they were returned as a result of developer
cancellations, or the agreements closed and interest was payable on
closing. Below is a summary of both current regulations and
proposed changes:

1. For purchase agreements entered into prior to January 1, 2023,
   the existing calculation would apply. That is, the Bank of Canada
   minimum lending rate for
   short-term advances (“Bank Rate“)
   (currently 2.75%) minus 2% would be applied to all deposits from
   the date of payment to the date of either return or closing. That
   means that under the current regulations, interest at 0.75% would
   be payable. This applies to all existing new condominium purchase
   agreements as well.
   
   Calculations are made twice a year prospectively as of September
   30^th and March 31^st. Since the rapid increase
   in interest rates occurred after March 31^st, it is
   likely that interest will start actually accruing from and after
   October 1, 2022 on existing and grandfathered purchase
   agreements.




2. For all purchase agreements entered into from and after January
   1, 2023 (but excluding agreements in projects where at least one
   purchase agreement was signed prior to that date, essentially
   grandfathering all projects launched before January 1, 2023), the
   rules would be as follows:
   
   1. The benchmark interest rate would be the Bank of Canada
      policy rate and not the Bank
      Rate. The policy rate is actually 0.25% below the
      Bank Rate and is currently 2.5%. There would be no
      2% deduction, which means that the full policy rate would be
      applied to deposits under these agreements (an increase of 1.75%);
      and

   
   

   2. The same rules would apply for calculating the interest such
      that the rate is set twice a year prospectively on September
      30^th and March 31^st.

OHBA and BILD, together with industry representatives including
the writer, have been meeting with the Ministry to address the
serious and probably unintended impact of the regulatory changes.
The removal of the 2% deduction and the rapidly escalating interest
rates will mean that mean projects launched after January 1, 2023
could have yet another significant cost added to the project budget
which ultimately would either be passed on to the purchaser or
perhaps result in a delay or cancellation of the project. Finnegan
Marshall Inc. has been working with us and provided cost
projections for sample projects to support the industry positions
noted below.

The industry has been supportive of implementing the regulatory
change increase as it impacts on purchase agreements cancelled by
the developer, whether for early termination conditions or
otherwise (but not because of the purchaser’s default). We have
requested removal of this change for payment of interest on closed
purchase agreements as ultimately this additional cost would be
absorbed by purchasers through higher sale prices.

It has also been pointed out to the Ministry as well, that
leaving this January 1, 2023 date in place for all deposits, could
result in an unnecessary acceleration of the launch of projects
prior to January 1, 2023, which may not otherwise be ready to go,
in order to avoid the significant cost impact of these changes.

As indicated by the attached letter, which OHBA and BILD
received on September 2, 2022, we are hoping for changes in the
legislation within the next few weeks to address concerns the
associations have raised as it relates to costs for completed
units.