Last week, I went to breakfast with my good friend and economist, Ben Rabidoux, and some folks from the United States East Coast to chat about real estate.
We covered a lot of ground!
I always love getting different perspectives on our real estate market, the Canadian economy, the world’s economy, or just chatting about business in general.
The funny thing about get-togethers like this is that no matter how intelligent the individuals or the group as a collective is, the differences in geography and jurisdiction are always going to create confusion.
Case in point: some of these guys had never heard of the “occupancy period” that exists in the world of new condominium development.
And to be fair, why should they have?
I don’t know of another place on the planet where we sell, build, and transfer residential real estate like this!
Like what?
How about a brief refresher for those who know what we’re talking about and a quick lesson for those who don’t?
In order to build a condominium in Ontario, the developer will pre-sell units, that don’t yet exist, and when a certain threshold is met (ie. 80%), one of the major banks will finance the project and give the go-ahead to begin construction.
A condominium is a corporation. Or at least, it becomes a condominium at the very end of the development’s journey.
It takes time and there is a process for the developer to bring the building from a construction site, to a completed tower of individual units with shared amenities, and eventually to a fully functioning corporation that is independent of that developer
Essentially, the land and the building were owned by the developer, but eventually came to be owned by the individual residents who make up the “condominium corporation.”
But what happens in the interim?
Oh boy.
That’s where we get to this idea of “interim occupancy.”
Consider a 40-storey building that’s, rather obviously, built from the ground up.
Suffice it to say, that Unit #501 would likely be completed before Unit #1501, which would likely be completed before Unit #2501.
Right?
But when Unit #501 is completed – and I mean deemed completed by the developer, the buyer of this unit takes “interim occupancy.”
No, they don’t yet own it.
No, they can’t put a mortgage on it.
But yes, they take a “possession” of sorts via this concept of interim occupancy and begin to pay a monthly fee that’s made up of a phantom mortgage, an estimate of maintenance fees, and an estimate of taxes.
Can the buyer refuse interim occupancy?
Absolutely not. In fact, refusal could result in the developer deeming a breach of contract and taking the unit back.
Here’s the important question at this juncture:
How long does it take to go from interim occupancy to registration?
That period of time is indeterminate.
The longest I’ve ever heard in Toronto is twenty-six months.
So think about that, for a moment. Over the course of twenty-six months, the “buyer” of the condo, who is not the “owner” of the condo yet is required to pay a monthly fee to the developer, but cannot sell the condo – because he or she doesn’t own it.
Got it?
That individual is the buyer and the interim occupant but not the owner.
Two weeks ago, I received a call from a listener of my podcast who asked if I would help her sell her condo.
Sure thing!
Except she didn’t own her condo.
In fact, she was merely the “interim occupant” of the condominium in question, and I had to inform her that she wasn’t allowed to sell her condo because she didn’t own it.
She said, “Well, I can assign the condo to a buyer!”
She was right. Technically. Legally.
But practically, she had paid about $1,700 per square foot for the condo in pre-construction several years ago, and the condo wasn’t worth anywhere near that today.
Even if she could find somebody who would buy her assignment, which I don’t think she would, she’d be looking at a loss of $150,000 plus costs.
I told her, “My best advice, if you don’t want to secure a massive net loss, is to keep the condo for a year, or two, or three. Lease it out, lose a few hundred bucks per month, but avoid a catastrophic loss by doing so.”
Don’t even get me started about the price that was paid in pre-construction. You know I’ve never sold a pre-construction condo in twenty-one years in this business, so as you can imagine, the idea that somebody paid $800,000 for a one-bedroom condo in 2019 doesn’t sit well with me.
Her unit was on the 11th floor of a 60-storey building in downtown Toronto, and she had just been notified by the developer that her unit was complete and that she would be required to take interim occupancy in a few days.
So did that mean that everybody in the building was going to be taking interim occupancy in a few days?
No.
Owners of units on the 12th floor, 13th floor 14th floor, and all the way up to the 60th floor weren’t taking interim occupancy at the same time.
Why not?
Well, the building is still an active construction site!
“Interim occupancy” was being given a floor-by-floor basis, and just as interim occupancy had been given to buyers of units on the tenth floor last week, this week, it was buyers of eleventh-floor units.
I’m not actually sure if every floor was entering interim occupancy on a weekly basis, but even if they were, it meant to get up to the sixtieth story of the building, it would take another thirty-nine weeks!
I told my new friend, “You’re required to start paying your interim occupancy fee as soon as you get the keys next week and you’ll want to rent this unit as soon as possible in order to offset that cost. You’re likely looking at anywhere from 6-18 months until the building is registered, then you’ll own it, and then you can do with it what you please.”
She asked if my team would handle the listing and leasing and I agreed.
I pulled in Matthew from my team and had him take the lead, and two days later, Matthew came into my office looking puzzled.
“Dave, something is up. I need your input on this”
I assumed that Matthew wanted my advice on how to keep a happy, healthy marriage, but alas, he was talking about real estate.
“All the listings in this building are canceled after only a few days,” he told me. “The history on MLS shows a ton of units being listed but nothing is shown as leased.”
That was definitely odd.
“My spidey-sense is tingling,” Matthew said, and I assumed that he was referring to his disappointed new bride coming home to the condo to find that the dishwasher hadn’t been unloaded, but alas, he was referring to a situation that he had encountered in the summer of 2024.
Last year, Matthew was asked to lease a condo that was also in the interim occupancy period.
The condo belonged to a good friend of his from school who had actually intended to live in the condo, but who moved to the United States for work and thus required our help finding a tenant.
Matthew listed the property for lease on the MLS system but within two days, he received an email from a law firm.
It was essentially a “cease and desist.”
The letter was from the condominium developer’s law firm who told us that, under no uncertain terms, we were allowed to advertise the property for lease on MLS.
Matthew brought this to the attention of his friend and client who, unfortunately, had absolutely no idea what this was about.
After investigation, we determined that in the very lengthy, very iron-clad Agreement of Purchase & Sale that the developer had his friend and client sign six years ago when she bought in pre-construction, there was a clause saying that the developer reserved the right to limit advertisement of the condominium for lease during the occupancy period.
In this case, “advertising the listing” meant listing it on the MLS system.
The interim occupants were allowed to lease their units, but they could not post the units for lease on MLS.
There are other places to list properties for lease, of course. But MLS is king, and I personally don’t welcome the caliber of inquiries or prospective tenants that one would find on Facebook Marketplace.
Matthew was able to find a tenant who was interested in leasing the unit, but we encountered yet another snag in the process.
The developer’s lawyer sent us the following:
There are several steps that need to be followed in order to lease during interim occupancy.
Please note: you are not permitted to post your listing on MLS & No Short-Term Listings Permitted (minimum 12-month lease term & no early termination clause)
Tenant Requirements:
- Credit Score of 680 or higher
- PDF copy of Photo ID
- Completed Ontario Lease Agreement (must be sent to {developer’s email address} 10 days prior to the commencement of lease )
- Letter of Employment (Must Include An HR Contact)
- Credit Report
- Completed 2-page Resident Information Form (signed & dated by owner)
Once these are gathered, you would send these to {developer’s email address}
They will then review and once approved provide the owner two documents for signing:
- Right to Lease Amendment
- Tenant Acknowledgement: ‘Acknowledgment RE Interim Occupant’
Once these are signed and returned to sales, they will email property management and copy the owner/agent that they are confirmed able to lease, and include the completed PDFs. Property management will always require the signed lease and completed Resident Information Form.
This was fascinating!
And it was the first time that we had seen this; surely not the last.
The developer was allowing the interim occupants to lease their condos, however they could not advertise the units on the MLS system, and the developer was reserving the right to “approve” prospective tenants.
Say what you want about the “fairness” herein, but don’t forget:
The developer still owns the condo during interim occupancy. The buyer isn’t the owner – yet.
The stringent criteria included above, plus the complicated process required, might result in a significant thinning of the tenant pool.
But it doesn’t matter.
At least, not to the developer.
The developer set the “rules” back when buyers purchased in pre-construction sales centres and the developer is still the legal owner of the condo.
Now, back to Matthew’s “spidey-sense” for a moment and you can see why he was having flashbacks to this experience.
Matthew had noted that about twenty properties in the building had been listed for lease, all of them on the 11th floor or lower, and all of them had been terminated.
“I think it’s quite clear that the builder won’t allow any advertising on MLS,” Matthew told me, but if only it were that simple.
Folks, what I’m about to explain to you is something that you’re going to label “unfair,” and while I agree, I want to get out ahead of this by reminding you of this concept of “personal responsibility.” More on that in a moment…
Matthew and I called a few of the listing agents for units in the building, which had been terminated, and we learned that it wasn’t only that the developer wouldn’t allow advertising of lease listings on MLS.
No.
It was way, way worse.
In this building, the developer wouldn’t allow any of the units to be leased out during the occupancy period.
Yup.
It’s an absolute financial disaster for the buyers of pre-construction units in that building who now have absolutely zero way to recoup costs associated with the “interim occupancy period.”
Those buyers, er, occupants, would be paying $2,500 per month in occupancy fees, but they weren’t allowed to lease the units at the same time.
As I said above, you’re going to call this “unfair.”
It is. Absolutely.
But then again, it’s not. Not by definition.
In fact, by definition, it’s completely fair.
Why?
Because this was noted in the boiler-plate purchase agreement that every buyer signed six years ago!
“Who reads that stuff?” you might ask.
But this is exactly the problem!
Most pre-construction buyers don’t read the contracts, or if they do, they don’t understand it. Many of them don’t use a buyer agent because they lack the experience to know they need representation, or because they feel they’re getting a “deal” by purchasing through the developer’s agent.
Worse still is that during the government-mandated ten-day cooling off period, many of these buyers don’t hire a lawyer to read the purchase agreement for them.
So in the end, every buyer in this pre-construction project agreed at the time of signing that they would not be permitted to lease out their unit during the interim occupancy period.
It’s not ideal. But it’s not, in any way, unfair.
So let’s get back to the plight of our cold-caller for a moment.
She can’t sell the condo because:
a) It’s worth $150,000 less than she paid
b) She’s in the interim occupancy period and can’t sell, but could assign
c) Nobody is buying assignments
So she has no choice but to take interim occupancy and pay $2,500 per month.
But she can’t lease the condo in the meantime, and registration is likely anywhere from six to eighteen months away.
Best-case scenario, the condo is registered in six months and she only has to pay $30,000 in occupancy fees that are completely lost.
Worst-case scenario, the condo is registered in eighteen months and she’s out an additional $90,000 in occupancy fees.
I have a feeling that she, along with many other people in the building are going to illegally lease their units, and I personally don’t blame them.
And what’s to lose?
July 23rd, 2018, I wrote: “Price-Fixing In The Toronto Rental Market?”
This was a story about a west-end project where the developer did allow buyers to lease during interim occupancy, however the developer fixed the minimum lease price.
The problem here was that if the buyer(s) didn’t agree, then the developer could slap them with “breach of contract” and take their units back. The units had all increased in value dramatically and thus the buyers feared losing their huge gains.
In the case of our most recent cold-caller, if the developer slapped her with a breach of contract and then took the unit back, that would be a dream! She was underwater by $150,000, after all.
If you’ve randomly found this blog post on Google, chances are, you searched, “can your developer stop you from leasing your unit?”
By now, you know that the answer is a resounding, “yes.”
I just hope you’re Googling this before you purchased, and not after…
