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Jan 2023

Purchasing a Pre-Construction Condo in Ontario— Interim Occupancy versus Final Closing

By David Young

When purchasing a pre-construction condominium, as opposed to a resale unit, there are a variety of important differences. Perhaps the most important (and confusing) difference is that between “Interim Occupancy Closing” and “Final Closing”.

What is Interim Occupancy?

Interim Occupancy is a mechanism in which purchasers can gain access to their property to use and enjoy before the development is fully completed and title is ready to be transferred to the purchasers.

Interim Occupancy occurs once your unit is completed and fit for occupancy, but the building is not fully completed and registered as a Condominium Corporation. Often this means that your unit or floor is completed, but some other units, floors or amenities areas are not. The City will issue an Occupancy Permit confirming that your unit is habitable.

You then must pay Interim Occupancy Fees through to Final Closing. The average wait time is around 2 to 12 months, but most agreements have a contractual limit of 24 to 36 months.

When will Interim Occupancy Closing be?

Your Agreement of Purchase and Sale (APS) that you signed with the Developer/Vendor will contain a Statement of Critical Dates. This tells you:

  • The First Tentative Interim Occupancy Datethe earliest date that your unit may be ready for Interim Occupancy Closing;
  • Notice Period for an Occupancy Date Delaythe latest date in which the Vendor may inform you of a delay to the First Tentative Occupancy Date;
  • The Outside Occupancy Datethe Vendor may delay your Interim Occupancy Closing as many times as necessary until this date;
  • The Purchaser’s Termination Periodif the unit is not ready by the Outside Occupancy Date, you have 40 days until this date to notify the Vendor in writing that you wish to terminate the Agreement.

It is essential to understand these dates and what they mean for you. Delays are common. Once the Vendor is certain that Interim Occupancy can occur, they will set a Firm Interim Occupancy Closing Date.

Interim Occupancy Fees

Perhaps the most consequential aspect of Interim Occupancy to most purchasers is the requirement to pay Interim Occupancy Fees.

These fees are essentially a “rent” payment to the Vendor/Developer and are sometimes known as “phantom rent” or “phantom mortgage”.

Interim Occupancy Fees are made up of three components:

  1. Estimated Common Expenses/Maintenance Fees/Condo Fees. As with a resale property, the unit owner has to pay their share towards the costs of the Condominium Corporation. During Interim Occupancy, you are responsible for these monthly fees based on the proposed budget drafted by the Vendor/Developer, plus inflation;
  2. Estimated municipal Realty/Property taxes: Again, as with a resale property, the unit owner is responsible for payment of Realty/Property taxes. During Interim Occupancy Realty/Property taxes are not yet assessed, so the Vendor/Developer will charge a reasonable estimate towards the eventual Realty/Property tax bill. Some Vendors/Developers collect as high as 1.5% of the purchase price as an estimate;
  3. Interest on the unpaid balance of the purchase price: The Vendor/Developer is permitted to collect interest on the balance of the purchase price. For example, if you have put down a 20% deposit, they can collect interest on the remaining 80%. The interest rate is linked to the Bank of Canada 1-year conventional mortgage rate. As of October 2023, the interest rate is 7.84%.[1]

All three of these items roll together to equal the total Interim Occupancy Fee amount. These expenses can quickly add up and if you are purchasing a pre-construction condominium you should be prepared for them as these amounts do not count towards the purchase price or are seen as a deposit in any way.

It is important to know that Vendors/Developers are strictly prohibited by the Condominium Act, 1998, section 80(4), from profiting off of these fees.[2] They solely cover the carrying cost of the development during Interim Occupancy. For example, even if the Vendor’s construction mortgage interest rate is 15%, they can only charge the Bank of Canada 1-year conventional mortgage rate.

Do I have to pay these fees?

A common question from purchasers is if we can avoid Interim Occupancy Fees? The answer is unfortunately no. Whether you decide to reside in the unit during Interim Occupancy or not, you are responsible for the fees. There are ways to offset some of these costs, but it is impossible to eliminate them entirely.

The only way to offset some of these costs is to reduce the unpaid balance owing on the purchase price. I.e., increase the deposits paid to the Vendor/Developer. The greater the deposit, the smaller the interest payment. With the recent increase in interest rates, the savings can add up.

Another method is to reduce the length of time you are required to pay these fees for. As mentioned, the Interim Occupancy period can last months, or years. Most condominium developments are completed from the ground up. Therefore, some purchasers prefer to purchase units on higher floors, as their Interim Occupancy periods will be shorter than lower floors.

Finally, if you are able to rent the unit, you can use that rental income to cover these fees.

Can I rent or sell the unit once I have Interim Occupancy?

During Interim Occupancy, you as the purchaser are “like” a tenant. You have possession of the unit but the Vendor/Developer retains ownership. As such, you must obtain the consent of the Vendor if anyone but you or a close blood family member wishes to live in the unit. Those individuals who have purchased their property for investment purposes to rent out must ensure that at the time of signing their Agreement of Purchase and Sale, they obtain an Amendment permitting them to rent or lease to a third party during Interim Occupancy.

If you want to sell the unit during Interim Occupancy, you must sell the unit by assignment. Again, since you are only in possession and not ownership of the unit, you do not have the right to sell a unit that you do not own.

What is Final Closing?

What is Final Closing?

Final closing is when:

  • All units in building are complete;
  • All final inspections are complete;
  • The Condominium Corporation is registered with the Land Registry Office and comes in to a legal existence; and
  • Title can be transferred to the purchaser.

At this point you will pay the Vendor/Developer the remaining balance of the purchase price, whether out of pocket or through a mortgage from the bank. You will pay the closing costs including, but not limited to, Development Charges, utility connection fees, park levies, Land Transfer Taxes, legal fees, and other builder costs, as outlined in your Final Statement of Adjustments.

On the closing date, your lawyer will ensure that the funds and documents are delivered to the Vendor’s lawyer. Once received, the Vendor’s lawyer will authorize your lawyer to register. Once registered, the property is yours!

SorbaraLaw is available to answer any questions that you may have in regards to Interim Occupancy Closing, or Final Closing. As a reminder, it is very important that you have your Agreement of Purchase and Sale reviewed by an experienced real estate lawyer from SorbaraLaw before moving forward with a purchase.