Are you looking to buy a home in Toronto with a laneway suite? Thinking that a laneway suite will solve your problems of additional space or bring rental income? Think twice before pulling the trigger on your purchase.
The City of Toronto allows the construction of secondary suite, also known as laneway or garden suite, on residential properties that share a property line with a public lane subject to certain criteria. A laneway suite is a self-contained residential unit usually located at the back of the property on the same lot as “primary” residence. There are several programs in the City of Toronto (“ the City “) that grant the owner who wishes to build a laneway house some financial relief.
Development Charges Deferral Program: How It Works
One of the major ways in which the City of Toronto assists with the looming issue of housing shortage and encourages homeowners to build additional dwelling on their property, is deferral of development charges. When a person is applying for building permits with the City of Toronto, or any municipality for that matter, the person must pay development charges based on the size of the dwelling they wish to build. The City of Toronto will allow the owner to defer their development charges if certain criteria are met. If the owner of the property remains the owner for the duration of the agreement, there will not be any issue with respect to the deferral agreement unless the owner themselves breaches the said agreement. However, should the owner decide to sell the property, this is where things may get complicated.
The owner who builds a garden/laneway suite may signs an agreement with the City deferring the payment of development charges. The agreement states that if all conditions are met and the owner is not in default of the deferral agreement, then after 20 years the development charges (“ the charges”) are waived. It is important to note that the charges are not reduced with each passing year but calculated based on the development charges rate for that particular year should the owner decide to pay development charges out earlier. The agreement is registered on title as a restriction giving notice to the buyer that there is a limitation on what can be done with the property and notifies the buyers that the agreement must be assumed by the new owner or development charges are to be due and payable.
Challenges When Selling a Property with a Laneway Suite
There are several issues that can impact a buyer as well as the seller if development charges deferral agreement is in place. The deferral of charges is conditional on the owner NOT severing the laneway suite from the rest of the residential property. If the new owner wishes to sever the laneway suite from the main residence in the future and convey it to a third party, this action will trigger a default condition under the deferral agreement which would result in having to pay outstanding development charges due at the time of default. The sum of charges levied would depend on the year when these. The development charges would be calculated based on the current year development charge rate. Meaning that if the development charges rate increase from year to year, the amount of charges owing would also increase. Until the owner reaches a 20 year mark from the date of the deferral agreement, at which time the rate would revert to zero. Therefore, the seller may be incurring a much higher pay out amount if they wish to pay off development charges any time before the 20 year mark.
The deferral agreement is very clear that it requires the consent of the City for any title transfers. Therefore, the buyers/sellers must reach out to the City to receive consent. The City would not withhold their consent, the application for consent is merely a bureaucratic formality. But through this process the City ensures that the new buyers are aware of their obligation under the deferral agreement. This puts an onus on the seller to notify any potential buyers that there is a restriction on title as a result of development charges deferral agreement. If the seller fails to give notice, it could result in financial losses for the seller. It is important to note that, if the deferral agreement is not in default, the City would always give its consent to transfer the property as long as the new buyer agrees to assume previous owner’s obligations under the deferral agreement. Issues may occur if the buyer does not have notice of the agreement and does not want to assume it.
For example, if the seller lists the property and fails to advise potential buyers that there is a deferral agreement in place, the buyer may refuse to assume the said agreement and require the seller to pay outstanding development charges and provide clear title as required by s. 10 of the Agreement of Purchase and Sale. Failure to disclose creates material non-disclosure and could lead to big financial losses for the seller.
Should this situation arise, the seller has three options to remedy the situation. They can cancel the deal under s. 10 of the Agreement of Purchase and Sale, if the seller is unable to provide clean title. Both parties would sign a mutual release. At that point, the buyer would get their deposit back and would resume the search for another property. The seller would also re-list the property but now, noting the agreement on MLS and giving notice to any prospective buyers. This solution may suit some buyers, specifically those who are worried about future selling potential, or just want what they bargained for which is clear title to the property. While the agreement does not reduce the marketability of the property, the fact that the seller must give notice to an issue, this may create a stigma for some buyers and deter them from looking at the property even before doing an investigation on what deferral agreement is and what the new owners obligations may be.
Buyer Beware: The Risks of Non-Disclosure
The second option is the most expensive option for the seller, where the seller pays the outstanding development charges owing under the agreement. This will result in the City removing the restriction on title. The buyer would then have a clean title. While this option is ideal for buyers, it could cost the sellers a lot of money. The reason behind building a laneway suite for many sellers is the increase of property value that it brings. If the seller pays outstanding development charges as a result of non-disclosure, then the sellers’ profit is reduced by that amount.
The last option is to negotiate with the buyers to accept the restriction on title as a result of the development charges deferral agreement. This option may be optimal for the seller where the seller offers the buyer a certain amount to compensate the buyer for lack of disclosure. In return, the buyer agrees to accept the agreement on title. This is a great option for the seller as they do not have to pay a lot of money to the City to discharge the restriction. It can also be a great option for the buyer, especially when the buyer really loves the property.
Key Takeaways for Buyers and Sellers
The lesson for the seller here is that the seller must disclose that there is a restriction on property when listing their house for sale. While it may dissuade some buyers from looking at the property, the buyers who decide to put in the offer to purchase will be aware that they must assume development charge deferral agreement thus reducing last minute financial losses to the seller.
The lesson for the buyer is that when they are looking at a property that has a laneway house in Toronto, they should enquire if there is a deferral agreement in place. The easiest way is to ask the seller if they paid development charges at the time of building the property , or even better to ask your real estate lawyer to conduct a title search to confirm that title is clear and there isn’t anything that would hinder their ownership. If the buyer is proactive and checks for any potential issues before putting in an offer against the property, it will save the buyer time looking for another property. Properties with laneway suites could be great options for many buyers, as long as buyers are aware of what they are getting into.
If you are considering purchasing a property with a laneway suite or need assistance navigating a development charges deferral agreement, our team at MBLAW Professional Corporation is here to help. We provide expert legal guidance to ensure that you fully understand your rights and obligations before making a decision. Do not hesitate to reach out for a consultation – protecting your investment starts with the right legal advice.
