It's coming: HST may scuttle condo deals

The boost to maintenance fees could be enough to trigger ‘material change' provisions in contracts – and send buyers running for the exits

Terrence Belford Globe and Mail

Next year at this time, the Ontario government – the same government that still maintains rent controls – will raise monthly maintenance fees for all condominium owners by between 5 per cent and 8 per cent.

Renters will face rent hikes based on operating costs for their buildings. Those increases will vary but could be in the $25-a-month range for a downtown one-bedroom suite.

Owners of older condos may face an even greater hike to top up their building's reserve fund if major work such as replacing a roof is slated for the near future.

At the same time, developers of projects with suites already sold but not yet occupied are scurrying to their lawyers. Their concern is an 8-per-cent hike in monthly maintenance fees may trigger the “material change” clause in purchase agreements and allow buyers to back out of signed deals.

The increases do not benefit builders; they go straight to government coffers because of the proposed HST – harmonized sales tax. In the past the 8-per-cent provincial sales tax component did not apply to services – things such as the cost of hydro and natural gas, and the salaries of concierges and the men and women who managed and maintained the properties.

After July 1, 2010, everything becomes taxable and the impact will apply not just to new homes but to every condo in the province and every rental unit as well.

While the province has announced changes that will soften the impact of HST on new condo buyers – not eliminate it – there is no similar relief being offered for renters or existing condo owners.

“Frankly, I just don't understand why the government is doing this,” says John AbedRabbo, a partner in Polyzotis & Co. chartered accountants. His company audits about 70 Toronto area condo corporations. “The impact on anyone who owns a condo or anyone who rents an apartment is going to be really significant.”

He says a review performed for his company's clients suggest the hikes in monthly maintenance fees will range from 5 per cent to 7 per cent with potential extra levies to top up reserve funds, the condo corporation's nest egg.

“If you have a 700-square-foot, one [bedroom] and den and now pay 45 cents a square foot for maintenance, your $315 in monthly fees will go up by between $16 and $25 a month,” Mr. AbedRabbo says. “If you rent, then that extra expense will pass straight through to you on top of whatever normal rent increase the landlord can charge.”

Tasso Eracles, president of Simerra Property Management Inc., which manages 22,000 condo suites mainly in the Greater Toronto Area, says Mr. AbedRabbo's figures may be conservative. He says the average increase for the 200 buildings Simerra manages will be 7.3 per cent – and 8 per cent at the upper end of the scale.

“This is going to have a tremendous impact on an already suffering condo industry and on the affordability of rental housing as well,” he says. “And unlike the impact of HST on purchase prices of new housing, this aspect of HST affects every condo and rental unit in Ontario.

“You have to wonder if the province thought all this through.”

Equally troubling, especially for builders, is the possibility that significant increases in monthly maintenance fees could trigger the “material change” provision in purchase contracts. The intent of that clause was to give purchasers a way out of a deal if the terms and conditions had changed significantly, says Harry Herskowitz, a partner in DelZotto Zorzi LLP and one of the city's busiest condo industry lawyers.

It was, in essence, consumer protection ensuring buyers got exactly what they agreed to pay for.

He says in past the rule of thumb was the 10-per-cent rule. If any factor increases the costs less than 10 per cent then there is no material change. If, however, after July 1 next year projected budgets come in 3 per cent over estimate and HST raises monthly costs by 8 per cent, the variation will be 11 per cent and buyers may indeed have legal reason to cancel their purchase.

Without HST there is no cause for triggering material change; add HST and the scales are tipped in favour of the buyer.

“I stress that this is only my own opinion, there is no case law on this issue,” he says. Neither the builder nor the buyer is at fault on this issue – the impact of HST could not have been predicted by either.

“But I think if it went to court judges would most likely favour buyers,” he says.

The potential impact of HST is indeed having an effect on the condo market, developers say. And with good reason, Mr. Herskowitz adds.

“There is so much uncertainty surrounding application of the HST and its impact as presented is profound,” he says. “Like many others I am at a loss to understand the reasoning behind its application to housing.”

Yes the province promises HST rebates when it comes time to file income taxes, but that is after the fact. The government seems to be taking its lead from Wimpy in the old Popeye cartoons. “If you give me a hamburger today, I shall gladly pay you next Tuesday.”

David Pylyp This is going to have a profound effect across the board for everyone that ownes a condominium unit and no one has yet started to address the issue. Yes Buying a home gets a rebate but this is a completely new tax on all condominum maintence fees.

What are your thoughts?