The Dirt: Advising buyers about development charges key to standard of care for real estate lawyers

As I wrote this column, Toronto city council was in the midst of deferring a decision to impose a massive increase in development charges on new building permits. In the Toronto residential market, the burden of such development charges would essentially fall on condominiums. While development charges would also apply to newly constructed freestanding homes, such infill sites are now few and far between in Toronto. The new development charges, which seem to have the political backing of Toronto’s usually tax-shy mayor, would see the fees almost double, on a typical two-bedroom condo unit, to about $24,000 from approximately $12,000 per unit.

Council has deferred the decision to increase Toronto’s development charges to September, and while a committee mulls over Toronto’s options through the summer, it might be a good time to consider the legal backdrop for them.

Of course, if you regularly act for developers or municipalities, then the legal framework of development charges would be second nature to you. But for most real estate lawyers, development charges remain a bit of a legal mystery. Although various municipal lot levies had always been a fact of life in new-home construction in Ontario, the government enacted the original Development Charges Act “to regularize a diverse system of municipal charges or levies imposed on development.” In theory at least, the act brought “certainty, uniformity, and predictability” to the funding of municipal and school capital infrastructure. The statute provides municipalities with a financing tool premised on the principle that growth pays for growth as new developments create additional demands on municipal infrastructure and that the cost should be borne by new building permits rather than the existing tax base.

Development charges are a form of tax that can, but need not be, imposed on new construction developers as a precondition for issuing a building permit in order to fund increased hard and soft capital costs for certain types of municipal infrastructure. Of the various provinces that allow their municipalities to impose development charges, Ontario is considered fairly liberal in terms of what infrastructure capital costs that can be recouped through them. Permitted hard costs include water supply, wastewater, storm water, highways, roads, and electrical power infrastructure. Permitted soft costs include, amongst other things, libraries, fire services, police, and ambulance services. There’s a list of specified exclusions (oddly enough, hospitals and solid waste management, for example), and there’s also a general 10-year rule that requires a municipality not to charge for an anticipated level of future service that exceeds the average level of that service during the preceding decade.

John Mascarin, a certified specialist in municipal law at Aird & Berlis LLP, teaches development charges as a component of his planning law course at Osgoode Hall Law School. Mascarin explains that development charges might be better understood for what they’re not. Contrary to popular opinion, development charges don’t need to be tied to or limited to the services required by a specific development. In fact, development charges aren’t a payment for specific services needed to facilitate the development of specific lands (unlike, for instance, s. 37 contributions). Accordingly, even if a developer can prove unequivocally that its proposed project requires no new municipal infrastructure at all, development charges may still be imposed.

There is, of course, much more to talk about in terms of the mechanics of development charges, but a real estate transactional lawyer closing deals in the trenches doesn’t need to know anything more. What transactional real estate lawyers most need to know is that development charges are increasing at what some would say is an alarming pace and are almost always an adjustment in favour of a developer, builder or vendor to be borne entirely by the purchaser. This is a fairly well-known adjustment, and buyers of new commercial and residential properties (especially in the suburbs outside of Toronto) are quite aware that development charges will be a sizeable transaction cost to be budgeted for on closing.

Of course, given that development charges are an optional funding tool for municipalities and vary significantly from jurisdiction to jurisdiction, a real estate lawyer acting for the purchaser is in no position to realistically estimate the development charges that will be adjusted for on closing until the vendor’s lawyer issues the statement of adjustments. From a standard of care perspective, it should be enough, however, to simply advise the purchaser that, ordinarily, development charges are the largest single line-item adjustment and may add thousands of dollars to the balance due on closing but that ultimately the amount depends on the development charges that were actually paid by the vendor to the municipality to acquire the building permit.

Counsel of perfection may go on to suggest possible amendments to the agreement of purchase and sale either to try to delete the development charges altogether or, more likely, cap the aggregate of the adjustments to a specific amount. In my view, a solicitor’s duty to better the deal for the purchaser is fairly limited (and rightly so). In a hot market, vendors will generally not agree to any such amendments and counsel has to be careful not to anticipatorily breach in their zeal to improve existing deals. Likewise, purchasers will often elect not to try to renegotiate, especially if the deal has already been signed, they sense that other buyers from the same developer haven’t done so, and they perceive that the market for those units remains hot. As long as the purchaser has been advised of the adjustment for development charges and the opportunity to try to amend the agreement to limit such exposure if there’s a business appetite to do so, it lies not in the mouth of a buyer to then complain about the adjustment for development charges when the bill finally comes in.

Jeffrey W. Lem is a partner in the real estate group at Miller Thomson LLP. His e-mail address is [email protected]

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