Builders Must Honour Their Contracts

Nov 7th, 2022

Since launching in February 2021, the HCRA has received several inquiries from concerned consumers on the topic of price escalations and project terminations, such as:

"I am closing on my new home in December, and my builder has notified me of a significant price increase to complete the project. I must confirm my interest and sign the new agreement in 5 days, or my original agreement is automatically terminated, is this allowed?

Let’s start with a simple fact: the HCRA expects builders to abide by the terms of their contract. Sometimes there are legitimate reasons why a builder might ask a purchaser to revisit a contract, such as unexpected increases in costs to the builder, but to do so the HCRA expects builders to act ethically and abide by the terms stated in their contract – also known as the Agreement of Purchase and Sale (APS).

Legal and Ethical Expectations

If a builder proposes a price increase, the purchaser must consent to the newly proposed terms, otherwise the proposed agreement is not valid. There should also be an opportunity for purchasers to negotiate the terms of an APS with their builder. A cap or a maximum limit on potential future increases can be negotiated between the builder and purchaser as part of the contract. These terms and conditions help to ensure that a builder approaches price adjustments in a way that is fair and ethical to purchasers. If no such stipulation exists in an APS, the builder is expected to honour the original agreement.

There must also be language in the original contract that allows for potential price increases. Such clauses must be drafted in a way that is clear and understandable to someone unfamiliar with the home building industry and should be based on objective and easily calculable figures.

Finally, builders must treat purchasers fairly, honestly and with integrity – it is the law, as per the Code of Ethics, failure to do so could be considered professional misconduct. In extreme cases, this could result in a licence suspension or revocation – the most severe regulatory action the HCRA can take. In other words, the HCRA is prepared to take the necessary measures to stop builders from operating in Ontario if they mistreat or take advantage of consumers.

Sufficient Information and Reasonable Time

As we said, there may be legitimate reasons for a builder to request a price increase – but, if a builder is planning to ask a purchaser to agree to a higher price, the HCRA expects the builder to provide sufficient information and a reasonable time period to respond to these requests.

Information that must be given to the buyer includes

  • Advising the amount of the proposed increase and the reason for it. This should include a summary of how the increase was calculated and how/why the new figure is different from the initial budget.

  • Advising purchasers of all their options. This includes the right to insist that the builder keep their obligations under the original contract.

  • Recommending that buyers hire a lawyer, particularly one familiar with real estate transactions

What is absolutely not permitted is a builder cancelling a project because the buyer doesn’t agree to a price increase. The HCRA takes project cancellations seriously, builders conducting illegitimate or unethical project cancelations will face serious consequences.

Know the Facts

In August, the HCRA issued a formal Advisory, reiterating to builders the rules and conduct expectations around changes to signed agreements.

The Advisory reinforces the expectations for ethical conduct for price escalations and also covers contract cancellations – again emphasizing that any such termination must adhere to the terms of the signed contract. It also serves as a warning to the industry to comply with expectations.

New homebuyers should use this advisory as a resource and guide should they find themselves in a similar scenario, and the HCRA would encourage homebuyers to discuss the content of the advisory with their builder for complete transparency.

Purchasers should also be aware of the clauses in their APS that may allow a price escalation or project cancellation. Buying a new home is the single largest purchase someone can make in their lifetime, and like any other large purchase, it comes with inherent risk. To protect yourself, understand those risks and be aware of the terms and conditions that are set out in your APS, and retain a lawyer if you need to further your understanding of certain contractual provisions. The bottom line: as a home buyer, you have rights. Familiarize yourself with your contracts and understand your risks. As a home builder, you have obligations. A contract is your word – and must be honoured.