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May 2022

Deposit Protection for Pre-Construction Condominiums

By Slonee Malhotra

With rising construction costs, increasing delays in the closing date and uncertainty around builder terminated agreements, prospective buyers are starting to question whether they should be investing their money in pre-construction homes. The questions we are asked most often are “How will my deposit be protected?” and “What happens to my money if the project is cancelled?”

When a buyer pays a deposit toward a condominium unit, their funds are held in an escrow agent’s trust account and cannot be used unless the builder has the appropriate insurance.

The deposit must be held in trust with an escrow agent.

This is a requirement as per Section 81(1) of the Condo Act. Typically, the escrow agent will be the law firm that represents the builder.[1] Within 10 days of receiving the deposit funds, the escrow agent is required to provide the buyer with a Form 4 deposit receipt, confirming that the funds have been received. These funds are to remain in the trust account of the escrow agent until they are disbursed to a person entitled to receive said funds or until security is provided for their release.

The builder must be registered with Tarion.

To build and sell standard condominium dwelling units, builders must apply to Tarion for Enrollment Confirmation. This process mandates that the builder has insurance in the amount of $20,000 per unit.

Deposit protection insurance will guarantee the return of the buyer’s funds in the event that the builder files for bankruptcy, breaches the Agreement of Purchase and Sale (APS), or when the buyer has the statutory right to terminate the APS.[2] A builder might choose to breach a contract for several reasons, including a lack of expected sales or an inability to access required development approvals.[3]

Tarion deposit insurance covers the buyer’s deposit made after signing the APS, but has also been extended to include other payments made to the builder, such as payment towards upgrades and extras. [4] The balance of the buyer’s deposit funds must remain in trust pending completion of the project, unless excess deposit insurance is obtained.

The builder may arrange for “Excess Condominium Deposit Insurance” (ECDI).

Buyer’s deposits are often used to finance construction however a builder cannot utilize deposit funds unless the appropriate insurance coverage is in place. ECDI authorizes the escrow agent to release the remaining buyer’s deposit funds to the builder. Once ECDI is obtained and the ECDI provider’s conditions are met, deposits can be released in conjunction with Tarion deposit releases.

Have a question about deposit protection? We would be pleased to review with you. This post was written by Slonee Malhotra, a qualified real estate lawyer with SorbaraLAW. 


[1] Condominium Act, 1998, S.O. 1998, c. 19 at s 81(1)

[2] Deposit Protection For Your New Home, online: Tarion <https://www.tarion.com/homeowners/making-purchase/deposit-protection> [Tarion Deposit Protection].

[4] Tarion Deposit Protection, supra note 2.

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