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What happens if your builder goes bankrupt?

What happens if your builder goes bankrupt?

The slow unraveling of Toronto builder Urbancorp has been a nail-biter for the 188 townhouse buyers hoping to own their idyllic place of their own in the city’s Corso Italia neighbourhood at Lansdowne and St. Clair.

As the company digs deeper into legal proceedings after filing for bankruptcy back in May, it’s becoming all too apparent these people aren’t getting their homes. But what is compounding the grief is whether or not they will get their deposits back, with some putting down $82,000 for the $810,000 townhouse.

KSV, a court appointed monitor who took over after Urbancorp filed for bankruptcy protection and is tasked with figuring out how to pay back creditors including homeowners, issued a statement at the end of June saying that “based on value estimates received by KSV from several realtors – creditors may have a significant recovery of their claims, including home buyers.”

KSV says it hopes to complete the sale of assets to pay back creditors by September 2016. Failing that, there are some options for homebuyers who find themselves in a situation where they’ve put a deposit on a home and the builder goes bankrupt, explains Michael Lamb, a sole practitioner of real estate law and an adjunct professor at Western University’s Faculty of Law in London.

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“Buyers of condos or single family homes get protection for their deposits up to a maximum of $40,000 from the Tarion warranty program,” he says, pointing to the non-profit, which provides protections and warranties for Ontario homebuyers. “However, the builder has to be registered.”

He urges homebuyers to check out Tarion’s website, which lists all the builders who are covered under the warranty. Deposits paid for condominium units are protected by Tarion up to $20,000.

But it’s not the same across Canada.

Only B.C., Quebec and Ontario have made warranty coverage mandatory and outlawed residential new build construction without first registering. In provinces without the program, some builders simply just opt-out of provincial warranties under the auspice of saving buyers on registration fees.

But in cases like Urbancorp where $40,000 amounts to less than half of some of the initial deposits, Tarion’s protection is less than ideal. If you’re planning on putting down more of a deposit than $40,000, Lamb recommends working out another place to hold some or all of the funds.

“Buyers are better off if they can have the realtor or lawyer hold the funds in trust especially if the deposit will exceed the protection of Tarion,” says Lamb.

In addition to ensuring the builder is registered with a provincial homebuyer warranty program before they commit, house hunters should do their research on the builder via the Better Business Bureau or a review site like HomeStars.com.

“Reputation is a key factor – friends, family, etc… can help there,” says Lamb. “I would definitely recommend not buying where the builder has a bad reputation no matter how much you love the property.”

While the buyer can terminate a warranty agreement in an extreme situation, it’s far less arduous to be diligent before signing the dotted line and educating yourself on the specific builder’s warranty and when the due dates are.

“When buying a new home the builder has to give buyers a special addendum to the agreement which is required by Tarion setting out the possible delay dates and the compensation which buyers may be entitled to,” he explains. “Of course this is not much help if you have your own deadline but that is one of the risks when buying a new home to be built.”