August 27, 2014
Author: Leor Margulies
There have been numerous media reports on the alleged fraudulent release of purchaser deposits involving a company known as Centrust Development Group and an aborted project at 5220 Yonge Street, Toronto, and the recent arrest of the developer’s lawyer, Meerai Cho. The project was a mixed residential/retail/hotel condominium project. http://tinyurl.com/k88ns3g
Apparently, either through negligence, inadvertence or outright fraud, Ms. Cho who was holding all of the purchasers $13.9M of deposits in trust, released all of them to Centrust, except for only $10,000.
There has been much hype and hysteria in the press as to the lack of safeguards in the system to prevent this kind of thing happening. As far as this writer is aware, the incidence of lawyers either negligently or fraudulently allowing condominium purchaser deposit monies to be released from trust, and purchasers suffering losses as a result of same, is very rare. I am not aware of this occurring in my 33 years of practice.
The Condominium Act imposes an obligation upon vendors of all new commercial or residential condominium units to have an accredited trustee hold all deposits in trust. Deposits may only be released when prescribed security is obtained to protect purchasers. In addition, for residential purchasers, the first $20,000 of deposits is insured by Tarion Warranty Corporation, whether or not the deposits are even placed in a lawyer’s trust account. The developer is not permitted to go to market with a residential condominium project unless it is registered with Tarion and to do so, an agreement known as the Deposit Trust Agreement is entered into between Tarion and the lawyer holding the deposits, requiring those deposits to be held in trust and not released without Tarion consent.
Alternatively, new developers, and probably Centrust was one of them, are required by Tarion to get a bond from an accredited insurance company in favour of Tarion to permit registration (and subsequently by all developers) to allow for use of the deposits in a project. Again, purchasers are protected by Tarion for the first $20,000 of deposits released.
Normally, these deposits are permitted by the insurer to be released to pay for project costs once a developer has reached a certain level of pre-sales, obtained his construction financing and put into place all of the necessary permits and construction contracts. In addition, deposits in excess of $20,000 for residential or non-residential units are permitted to be released as well, provided that insurance policies are in place to protect purchasers. This is an accepted practice for financing condominium projects whilst protecting purchasers. The system has worked very well to date. There is really no advantage for a lawyer to release those deposits in breach of its fiduciary and statutory obligations as it would expose the lawyer to significant liability without any gain.
It would appear from the Lawyer Society’s initial investigations that the lawyer in question had never worked on this type of transaction and was “by far the biggest project on which Ms. Cho had worked”. Her lawyer, Bill Trudeau, indicated that she was unaware of her fiduciary and statutory obligations when the funds were released. They were released at the request of Joseph Lee, the representative of the developer, firstly to refund deposits to purchasers who apparently were entitled to them and then later allegedly for project costs. http://tinyurl.com/pmctunt
The protection of deposits for purchasers and their use under the current regime in projects work well both for purchasers and developers. The use of the deposits for project costs reduces the financing cost of the project (which benefit purchasers) while at the same time protecting purchasers via insurance policies (or a Tarion warranty, or both). In fact, there have been very few incidences of projects where funds were released into the project and which projects did not successfully close. In all of those cases, purchasers were able to recover their deposits either from the developer, from Tarion or from the applicable insurance company which insured these deposits.
The public should not be alarmed by this very unique and unfortunate situation at 5220 Yonge Street, Toronto. Lawyers go through rigorous training and are under stringent obligations to the Law Society, Tarion and/or the insurers. The safeguards are there and the public should be assured that it is highly unlikely that this will happen again. Even in this case, there doesn’t seem to have been any personal gain by the particular lawyer in question, merely ignorance and incompetence.
My advice to purchasers in the future when buying new condo units is to ensure that reputable and experienced law firms whose track record in these transactions is well known, hold their deposits where possible.