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Bill 16 Establishes Deposit Protection for Condo Unit Buyers

Bill 16 Establishes Deposit Protection for Condo Unit Buyers
April 1, 2020

Stories where an aborted new condominium project resulted in unit buyers losing their deposits are still all too common.

On December 6, 2019, the National Assembly of Quebec adopted Bill 16 entitled An Act mainly to regulate building inspections and divided co-ownership, to replace the name and improve the rules of operation of the Régie du logement and to amend the Act respecting the Société d'habitation du Québec and various legislative provisions concerning municipal affairs (Act).

This Act, which is intended to recast the laws governing divided co-ownership in Quebec, addresses the aforementioned problem by establishing a system to protect the deposits paid to a builder or developer for the purchase of a fraction of an immovable under divided co-ownership.

Previously, the only mandatory protection available to purchasers was the Garantie de construction résidentielle (GCR) for buildings comprising no more than four private portions stacked one above the other. However, the protection of these deposits was limited to C$50,000. Thus, for buildings with more than four private portions, no form of protection was mandatory and the builder or developer was free to choose whether or not to adhere to one of the three accredited optional guarantee plans: the Garantie des immeubles résidentiels (GIR), the guarantee plans of the Association de la construction du Québec (ACQ) and the Guarantie Habitation des Maîtres Bâtisseurs (GHMB).

ENHANCED DEPOSIT PROTECTION

With the adoption of the Act, the Quebec legislator corrected the situation by enacting the new Article 1791.1 of the Civil Code of Quebec (CCQ):

“1791.1 Notwithstanding any agreement to the contrary, any deposit paid to a builder or a developer toward the purchase of a fraction of an immovable under divided co-ownership must be fully protected by one or more of the following means: a guarantee plan, insurance, a suretyship or a deposit in a trust account of a member of a professional order determined by government regulation.

The deposit may also be protected by another means prescribed by government regulation.

The deposit is returned to the person who paid it if the fraction of the immovable under co-ownership is not delivered on the date agreed upon.”
This new article of public order imposes on builders and developers of residential buildings a mandatory obligation to protect the deposit paid to them by the purchaser.

In fact, Article 1791.1 of the CCQ requires that the deposit be protected by one or more of the following means:
  1. A guarantee plan;

  2. An insurance;

  3. A suretyship; 

  4. A deposit in a trust account; or

  5. Another means prescribed by government regulation.

COMING INTO FORCE

The majority of the articles of the Act came into force on January 10, 2020. However, some provisions will come into force when a regulation made under those provisions comes into force. This is the case, in particular, of the portion of Article 1791.1 of the CCQ that deals with the deposit in a trust account. However, no regulation has been made pursuant to this article to date.

INTERPRETATION AND APPLICATION

Aside from the deposit in a trust account, the other means of protecting the deposit are currently in effect. It is therefore necessary to question the interpretation and application of these means.
First of all, it is interesting to note that the deposit protection only applies to fractions of immovables under divided co-ownership. Why did the legislator not extend this new regime to builders and developers of the other types of immovables?

In addition, several questions arise as to the means by which the deposits are protected. For example, by referring to suretyships as a means of protecting the deposit, did the legislator intend to allow the builder or promoter to meet these requirements by having someone else guarantee his obligations? Could we instead base ourselves on the very intention behind this provision, which is to protect the deposit, and therefore the purchaser, to conclude that a corporation with no assets could not act as surety? It is also necessary to ask whether it is a suretyship imposed by law as provided for in Article 2334 of the CCQ? If so, are the other articles on suretyship of the CCQ applicable, such as Article 2338 of the CCQ, which provides that a debtor bound to furnish a legal surety may instead provide another sufficient security? According to this reasoning, a letter of credit, for example, would be a sufficient security to replace the surety bond.

Furthermore, the words "fully protected" suggest that the intent of the legislator was to protect the entire amount of the deposit and not a portion of it, as may be the case in other jurisdictions. This interpretation would make the most sense given that the GCR protection regime, previously available to purchasers, was limited to a C$50,000 deposit, an amount often insufficient to protect deposits made by purchasers.

In addition, this deposit must be returned to the purchaser if the fraction of the immovable under co-ownership is not delivered on date agreed upon. This addition to the third paragraph raises a number of questions, in particular as to the interpretation of the broad concepts of delivery and date agreed upon. In the absence of definitions for these concepts or additional nuances from the legislator, the parties will have to carefully circumscribe in their pre-sale contract what is expected in terms of product and delay. As for the delivery principle, it seems to refer to the description of the fraction in the pre-sale contract, taking into account the derogations that the builder or promoter has reserved the right to make, particularly with respect to capacity, compliance with plans and specifications, etc. However, can it be concluded that the third paragraph of Article 1791.1 of the CCQ reflects the legislator's intention to impose an additional guarantee of quality? The answer is unclear. With respect to the date agreed upon, other questions arise. It is customary to provide for a flexible delivery date in pre-sale contracts, a practice that is not prohibited by public order laws. Therefore, did the legislator, by using the term "date agreed upon," mean the flexible period of time during which delivery is scheduled? Finally, we must ask ourselves what happens if the fraction is not delivered on the date agreed upon. Does the buyer have the right to rescind the sale, or does the buyer have the right to take back the deposit as a penalty and demand delivery at a reduced price? As for the builder and the developer, are they entitled to avail themselves of the third paragraph to cancel the sale? All these points should be clarified.

Since January 10, 2020, Article 1791.1 of the CCQ has applied to all deposits paid to a builder or a developer toward the purchase of a fraction of an immovable under divided co-ownership. However, the law does not explicitly state whether this deposit protection obligation applies to deposits already paid by purchasers before January 10, 2020.

POSITION OF THE CHAMBRE DES NOTAIRES DU QUÉBEC
 
Despite the absence of a regulation made pursuant to Article 1791.1 of the CCQ, the Chambre des notaires du Québec (Chamber) is of the opinion that the possibility for the notary to receive a deposit in trust for the purchase of a fraction of an immovable under co-ownership is not challenged. In fact, the Chamber favours a broad and liberal interpretation of the new article of the CCQ and believes that:

  • The actions taken by the notary in this context remain circumscribed by his counsel duty as well as by his other ethical and regulatory obligations;

  • The Compensation Fund, established to protect the public in the event that a member of the Order uses the amounts entrusted to him in trust for other purposes, is comparable to insurance within the meaning of Article 1791.1 of the CCQ; and thus

  • The deposit paid into the notary's trust account constitutes a sufficient means of protection to meet the requirements of Article 1791.1 of the CCQ (it being understood that the amount for each benefit does not exceed C$100,000, i.e. the maximum indemnity payable by the Compensation Fund).

Such an interpretation is based on the decision in Domaine Ti-Bo Inc. v. Comité exécutif du Barreau du Québec, which states that "the role of the administrative committee is to manage the compensation fund, which is a kind of 'insurance' that protects claimants in certain cases."
 
This interpretation is important for hypothecary lenders since they generally hold a hypothec on the rights of the promoter in pre-sale contracts, and therefore, on the deposits. Thus, in the event of default and the exercise of the developer's hypothecary rights, they will want to claim these deposits and force the purchasers to sign a final deed of sale.
 
As long as a regulation has not been made pursuant to Article 1791.1 of the CCQ, it does not appear that the new article can allow the hypothecary lender to hold the deposits himself, other than as the banker of the person who would hold them in accordance with Article 1791.1 of the CCQ. According to the reasoning put forward by the Chamber, the lender could request that the deposits be deposited in the trust account of any professional he trusts and who benefits from a protection similar to that offered by the Chamber's Compensation Fund.
 
POSITION OF THE UDI, APCHQ AND ACQ

The Urban development institute of Quebec (UDI), the Association des professionnels de la construction et de l’habitation du Québec (APCHQ) and the ACQ are of the opinion that the Quebec market is not ready to meet the new requirements of Article 1791.1 of the CCQ. In fact, after careful study of the new provision, the three organizations believe that there are no insurance products, guarantee plans or suretyship likely to meet the new requirements for deposit protection in Quebec. As a result, they wrote to Minister of Municipal Affairs and Housing Andrée Laforest in February 2020 to express their concerns. Specifically, they asked her to clarify the law in order to:

  1. To postpone the application of Article 1791.1 of the CCQ until insurance or surety products allowing real estate developers to comply with the new requirements are available on the market;

  2. To specify, with respect to the remittance of deposits, the terms and conditions related to the obligations of builders or promoters with respect to the delivery of fractions of co-ownership on the "date agreed upon"; and

  3. To exclude from the application of Article 1791.1 of the CCQ purchasers acting through a corporation and individuals whose fraction of co-ownership will not serve as the habitual residence of the purchaser himself or a relative.

This letter remains unanswered for the moment. We will therefore have to wait for a reaction from Minister Laforest in order to determine whether this request from three major players in the industry will have an impact on Article 1791.1 of the CCQ.
 
OTHER JURISDICTIONS
 
Quebec is not the first Canadian province to adopt a deposit protection regime. Since 2001, Ontario has provided similar protection in the Condominium Act, 1998. Ontario developers are required to register with Tarion Warranty Corporation (Tarion), the agency responsible for administering Ontario's New Home Warranty Plan, which has a deposit protection plan. Under Ontario legislation and regulations, deposits that builders receive must be paid to an escrow agent or lawyer to be placed in trust, which builders can only access if they meet Tarion's requirements. However, only a deposit of up to C$20,000 is protected under this plan.
 
Similar plans also exist in Alberta and British Columbia to ensure that deposits are held in trust by a lawyer and returned in the event of default by the builder or sponsor. The major difference with Ontario is that there is no limit to the amount of the deposit that is protected by these plans.
 
CONCLUSION
 
The Act introduces a new protection regime for Quebec buyers. The purpose of the new Article 1791.1 of the CCQ is to prevent the risk of a buyer losing his deposit in the event that the real estate project is not completed or in the event that the builder or developer becomes insolvent.
 
This change to the framework of the divided co-ownership is one that will most certainly have an impact on real estate development projects in Quebec. We may witness the emergence of new products on the market to meet the obligation of protecting the deposits such as specialized insurance or guarantee plans.
 
Notwithstanding all the questions that remain unanswered, Quebec builders and developers must be vigilant when entering into a transaction with a buyer to ensure that they meet the new divided co-ownership requirements set out in the Act.
 
For further information, please contact:

Pierre-Denis Leroux        514-982-4121
Géraldine Côté-Hébert   514-982-5042

or any other member of our Commercial Real Estate group.