Can a Home Builder Cancel a Contract?

home builder cancel contract

Yes, a home builder can cancel a contract if site plans and permits to do not get approved, or if the builder believes there is no reasonable timeline for the home to get built.

We purchased our home from a home builder in August 2019 and signed our contract at the end of the month; which was then cancelled by the builder. Due to this, it is possible for a builder pull out of a contract. In our situation, the builder was not able to get approvals for the site plan.

A home builder spends several thousand dollars on just the legal paperwork that supports their business. A purchase agreement from the home builder has multiple lines of clauses. One of these clauses allows the home builder to cancel a contract under specific situations.

Are you, the buyer trying to back out of the contract? You might want to read, Can You Back Out of a New Construction Home Contract?

When Can a Builder Terminate a Contract

A builder can terminate a contract to build a home if the builder permits and site plans do not get approved, or if the builder knows that there is a low probability of the home being built. Every purchase contract will include a cancellation clause by the builder.

There are a few scenarios where a builder can terminate or cancel a contract.

Unapproved Site Plans and Permits

When a home builder is starting a new community build, there are no structures that have been laid out. In fact, there is no work that has started on the ground. For most first phase communities; the builder is just starting the permitting and site plan process.

The builder will submit site plans and permit applications for approval from the city and various permit offices. There are situations where permits get declined and site plans are not approved. Even if a builder is heavily invested in a community and has other projects – site plans can get declined.

When a site plan gets declined, the home builder needs to go back to the drawing board. In this case, the builder is not reasonably sure about when the project will come back, and when they can finish the build. When site plans get denied by the city, it can cause the home builder to pull out and cancel the purchase agreement contract.

Once a contract cancellation is confirmed by the builder, they will have their lawyer’s office initiate the process for the nullification.

For example, we first received a soft copy email from the lawyer’s office regarding the contract cancellation and returning of our deposit cheques.

If a builder does back out of the contract, they cannot re-sell immediately after. In our case, the builder had to wait a few months to get their site plans approved.

Lot Specific Requirements to Build

When a home builder is building on a specific lot, there could be a variety of reasons that could lead to permits not getting approved.

There was a new build project from a pre-construction home builder that was building a detached home on a corner lot. In this situation, the neighboring landowner had certain setback requirements which prevented this home from being built. The solution was for the builder to build another model home with different plans.

A builder can start selling their project without starting to build. In most cases, builders put up a lot of money on the project upfront, and wait for their return. When a site plan gets delayed or rejected, it can cost the builder in many ways.

Lack of Sales for the Builder

Yes, this is indeed a reason why a home builder contract can get cancelled. If the builder does not receive enough sales for the project (80% required sometimes), they can cancel the contract.

Although this is not all that common in recent months, this is one of those things most contracts will include. If you’re purchasing a pre-construction condo in Ontario, there is some protection provided by Tarion. You will need to ask your real estate lawyer for details.

Zoning Approvals

If a builder doesn’t have the appropriate zoning approval at the time of purchase, they are required to provide the buyer with a confirmation of zoning approval within 10 days. These rules will be stipulated in the contracts, and can lead to a home builder to cancel a contract.

Contract Cancellation Clauses

Starting in January of 2020, Tarion set forth new conditions for purchase agreements and sales whereby, information sheets are provided to new construction home buyers. The information sheet will inform buyers that there is a chance that a condominium unit may never be built.

Every purchase agreement will include a First Tentative Occupancy Date, which is the earliest date you can move into your home. However, based on home building experience, we can say that this is just an estimate. The date can get pushed for a variety of reasons.

Make sure to read the section titled statement of critical dates.

Every purchase agreement for a new build home contains early termination conditions. The following conditions will need to be met and if not, the builder can cancel the contract:

  • A date will be provided, before which a pre-determined amount of sales have been completed.
  • A date will be provided, before which specific site plans and permits are approved.
  • A date will be provided, before which sufficient amount of financing have been confirmed.

Upon cancellation of your condo contract cancellation, the builder must return your deposit with pre-determined interest.

Can a Home Builder Increase the Contract Price?

Yes, a home builder can increase the contract price of the home if only an offer is made by the buyer, or if the builder has not signed off on the contract. A purchase agreement is not binding until both legal parties have signed on the contract and agreed on the price.

There are situations where a home buyer can sign a contract and provide the initial deposit, only to have the builder come back with changes. Unfortunately, one of these changes can be the base price of the home.

A home builder’s salesperson may offer an outdated price to the buyer, and the builder may come back and say, “due to a miscommunication with our partners”, the price of the home is now higher. In this case, the builder is required to provide the buyer with their deposit.

When this occurs, you can sign the new contract at the higher price – or request the builder to offer additional home upgrade credits, etc. Usually, there is a considerable markup on the upgrades, so they may be willing to work with you on this front.

In Ontario, contracts will also include clauses regarding increases in the cost of development fees charged by the city. If such a clause is in your contract, the home builder can charge the home buyer at closing for these costs.

If you’ve made an offer, it is merely an offer. There is no binding agreement – so the builder is free to make changes.

No matter what type of pre-construction project you are purchasing into, there will always be a contract. If you can manage to understand the pitfalls and conditions outlined, it will greatly help you down the road. Always remember, never refuse to close on your pre-construction home – the builder anticipates this and adds clauses in the contract.