COVID-19 and the real estate development industry: Important next steps for new home builders

9 minute read
19 March 2020

Beyond the significant impact the novel coronavirus, COVID-19, is taking upon individuals' personal lives, COVID-19 is also making a notable impact upon multiple sectors of the global economy. Following the World Health Organization's declaration on March 11, 2020 that COVID-19 is officially a pandemic, businesses everywhere have faced increasing uncertainty about the effect of COVID-19 on their operations, and on the economy as a whole. Many in the real estate development industry have been left asking: how is COVID-19 going to affect new home construction projects? This article outlines the important next steps that builders of new homes in Ontario should be taking at this time, as well as some key considerations they should keep in mind, as they navigate the current new reality imposed on the economy, and society, by COVID-19.

Impact of a Pandemic on New Home Construction – Unavoidable Delay:

Provided builders take the proper steps, they may be afforded protection from any damages that purchasers of new homes may claim as a result of an Unavoidable Delay, which includes a pandemic and other matters that are beyond a builder's control that impact construction timelines and the delivery dates of new homes to purchasers.

Builders may be able to extend their home delivery timelines without compensation to purchasers due to COVID-19 if the pandemic affects the completion of the new home. For example, COVID-19 may have an impact on the availability of trades, government permits and inspections, and may disrupt supply chains for materials. Builders should assess how exactly COVID-19 will impact their new home projects and should make decisions based on the individual circumstances of each new home.   

Important Next Steps – Providing the First Notice:

If a builder concludes that COVID-19 will lead to an Unavoidable Delay in the completion of a new home construction project, the builder must notify each purchaser that there will be a delay before either:

a.     the next Critical Date; or

b.     20 days after the builder knows or ought to reasonably know that COVID-19 is or is likely to affect the closing of the home.

The First Notice to the purchaser should state:

a.     the reason for the Unavoidable Delay (i.e. – the COVID-19 pandemic); and

b.     the extent and duration of the Unavoidable Delay.

While it is typically recommended that builders provide the exact length of the Unavoidable Delay in the Notice, in circumstances such as this, it is incredibly difficult to make this determination; the situation is evolving on a daily basis, and is clouded by uncertainty. Based on the decision by the Ontario Licence Appeal Tribunal (the "Tribunal") in 9725 v Tarion Warranty Corporation (summarized further below) that it is acceptable for builders to advise purchasers that closing is delayed indefinitely because it is impossible to estimate the length of an Unavoidable Delay, builders can take comfort in issuing Notices to purchasers once they know that this pandemic will effect their delivery or before the next Critical Date, advising that the extent and duration of the Unavoidable Delay resulting from the COVID-19 outbreak is uncertain at this time, and as a result, it is impossible to estimate the exact length of the delay.

End of the Pandemic – Providing the Second Notice:

It is likely that delays will continue even after an Unavoidable Delay has ended. This additional period of delay that is directly caused by an Unavoidable Delay is known as the "Remobilization Period". The Remobilization Period can involve such activities as scheduling trades and inspections, as well as any backlogs of materials. As a rule of thumb, builders have 30 days to assess the aftereffects of an Unavoidable Delay, whether a Remobilization Period is applicable in the circumstances and the total length of the Remobilization Period, if any. A Remobilization Period may not be applicable in all cases, such as where there is no backlog in scheduling trades and inspections as a result of the Unavoidable Delay.

Once the pandemic has ended and builders have assessed the aftereffects of COVID-19, they must send out a Second Notice to each purchaser. The Second Notice must be sent within 20 days after a builder has fully estimated the length of the Remobilization Period, and must state:

a.     that COVID-19 has caused an Unavoidable Delay;

b.     the end date of the Unavoidable Delay Period (i.e. – the number of days of the Unavoidable Delay plus the Remobilization Period); and

c.     the new Critical Dates.

It is important to note that only future Critical Dates can be extended; past Critical Dates cannot be extended. Further, Critical Dates can only be extended by the period of the Unavoidable Delay plus the Remobilization Period, and cannot be extended for any other reason. Lastly, the Second Notice can only be sent once, and the Critical Dates can only be extended once as a result of the same Unavoidable Delay. As such, builders should be certain that the Unavoidable Delay has ended and that they have accurately accounted for the Remobilization Period prior to sending the Second Notice because if the new Critical Dates cannot be met, the homeowner may be entitled to make a delay compensation claim.

A Practical Example – 9725 v Tarion Warranty Corporation, 2015 CanLII 20251 [9725]:

In 9725, the Tribunal considered the impact of an elevator strike on the construction of a new condominium building in Ottawa. As a result of the strike, the builder was unable to finish the upper floors of the building and thus invoked the unavoidable delay provisions of the purchase agreement. The purchaser argued that the builder did not comply with the Unavoidable Delay Procedure set out in the purchase agreement and sought delayed occupancy compensation as a result thereof.  Tarion issued a decision in favour of the builder, which the purchaser appealed to the Tribunal.  The Tribunal subsequently found that the builder did in fact comply with its obligations under the Unavoidable Delay Procedure and denied the purchaser's claim for delayed occupancy compensation.

The builder had sent a letter to the purchaser when the strike began, stating that it was impossible to estimate the length of the strike, and that closing would be delayed indefinitely as a result. A Notice of Firm Occupancy Date was subsequently sent to the purchaser a week after the end of the strike, setting a new occupancy date and outlining the steps that needed to be taken to address the Unavoidable Delay. The Tribunal held that it would be unreasonable to conclude that the Unavoidable Delay Period had ended when the Notice of Firm Occupancy Date was sent, as the Remobilization Period had to be taken into account. At the time the Notice of Firm Occupancy was sent, work still needed to be completed, inspections scheduled and permits issued. The Tribunal found that all events were beyond the reasonable control of the builder, and the builder had made a best estimate for the completion of all outstanding work in the Notice of Firm Occupancy Date. Even though the Notice of Firm Occupancy Date did not use wording that stated that the Unavoidable Delay would end on a specific date, the Tribunal found that by setting a firm closing date, the builder had confirmed that the delay would be resolved by that date, thus putting an end to the Unavoidable Delay Period. The Tribunal further stated that there is no prohibition against setting the date for the end of the Unavoidable Delay Period and the new Critical Date on the same day.

Final Considerations:

It is important that builders undertake steps quickly and in any event before the next Critical Date or within 20 days from when they ought reasonably to have known that Critical Dates would be delayed in order to comply with the above procedures in their response to COVID-19.  If a builder fails to comply with these steps in a timely manner, it runs the risk of being unable to extend delivery dates for new home construction projects and opens the door to delayed occupancy claims from purchasers. As the situation is continually evolving, the full impact of COVID-19 remains to be seen. As such, it is prudent for builders to continually re-evaluate matters as things unfold and change.

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