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Posted by ravi@ravibhindi.ca on October 17, 2023

What is a Price Adjustment Clause in a Presale Condo Contract?

If you’re in the market for a presale condo, you’ve probably come across the term “price adjustment clause.”

These clauses have become increasingly common in presale contracts, and understanding them is crucial for any prospective buyer.

In this blog, we’ll delve into the world of price adjustment clauses, why builders use them, how to protect yourself as a buyer, and what to look for in your presale condo contract.

Why builders use Price Adjustment Clause?

  1. Material cost: One of the most significant contributors to construction cost fluctuations is the price of materials, such as steel, concrete, and lumber. Builders purchase these materials at the beginning of a project, but prices can fluctuate significantly during the construction timeline. Price adjustment clauses enable developers to pass on some of these increased costs to buyers rather than shouldering the burden themselves.
  2. Labour expenses: Skilled labor is a critical component of any construction project. When labor costs rise due to demand, changes in labor laws, or other factors, builders can use adjustment clauses to ensure that these additional costs are shared with buyers. This helps maintain the project’s financial viability.
  3. Economic uncertainity: Economic conditions can change rapidly, impacting the cost of borrowing, inflation rates, and overall market stability. Builders may include price adjustment clauses in the contract of purchase and sale to mitigate the risks associated with such uncertainties, allowing them to adapt to changing economic landscapes without jeopardizing their bottom line.
  4. Supply chain disruption: Disruptions in the supply chain, such as the ones experienced during the COVID-19 pandemic, can lead to delays and increased costs. Price adjustment clauses in a presale condo contract provide builders with a mechanism to address these disruptions by adjusting prices in response to supply chain challenges.
  5. Government Regulations: Changes in local or national regulations can require builders to make costly adjustments to construction plans or materials. Adjustment clauses allow them to transfer some of these unexpected expenses to pre construction condo buyers while still adhering to regulatory requirements.
  6. Maintain profitability: Ultimately, builders are in business to make a profit. Price adjustment clauses help ensure that they can remain profitable even when faced with unforeseen cost increases. This profitability is essential for the sustainability of the construction industry and the creation of quality housing options for pre construction condo buyers.

Builders use price adjustment clauses in a presale contract to protect themselves from rising construction costs, including materials and labor.

These price adjustment clauses allow developers to adjust the purchase price of presale condos if certain cost factors increase between the time of contract signing and project completion.

This practice helps builders avoid absorbing unexpected expenses and maintain profitability on their projects.

These clauses serve as a financial buffer, primarily protecting developers from the impact of escalating construction costs, which can encompass a wide range of factors, including materials, labor, and other associated expenses.

Price Adjustment Clause Example?

Here’s a simplified example of a price adjustment clause in a presale condo contract:

“In the event that material costs, such as concrete and steel, increase by more than 10% from the date of contract signing to project completion, the purchase price of the condo unit will be adjusted to reflect these cost increases.”

Are Adjustment Clauses Legal in Canada?

Yes, adjustment clauses are generally legal in Canada. However, they must be transparent, reasonable, and not unfairly disadvantage the buyer. Canadian provinces may have specific regulations governing the use of price adjustment clauses, so it’s essential to familiarize yourself with local laws and seek legal advice if needed.

How to protect yourself as a Presale Condo Buyer?

As a pre-construction condo buyer, you can protect yourself from potential price increases by taking the following steps:

  1. Thoroughly Review the Contract: Carefully read and understand the contract terms, especially the section related to price adjustment. Seek legal advice if necessary to clarify any ambiguities
  2. Negotiate Terms: If you’re uncomfortable in your presale condo agreement of purchase and sale with the adjustment clause, negotiate with the builder to modify or remove it from the contract. Builders may be willing to make concessions to secure a sale.
  3. Budget Accordingly: Account for the possibility of a price increase when budgeting for your purchase. Ensure you have enough financial flexibility to cover potential additional costs.
  4. Monitor Construction Progress: Keep track of the project’s progress to stay informed about any cost increases that could trigger the adjustment clause.
  5. Stay Informed: Stay updated on market conditions and trends in construction costs to anticipate potential price hikes.

What to Spot in Presale Condo Contracts?

As a pre-construction condo buyer, you can protect yourself from potential price increases by taking the following steps:

  1. Price Adjustment Clause: Clearly understand the terms of the adjustment clause, including the specific conditions that would trigger a price increase.
  2. Completion Date: Note the expected completion date of the project as delays can impact whether the adjustment clause is invoked.
  3. Caps & Limits: Check if there are any limits or caps on how much the price can escalate. Some contracts may limit increases to a certain percentage or amount.
  4. Dispute Resolution: Understand the dispute resolution process in case disagreements arise concerning price adjustment

5 Other Essentials to Examine​:

In addition to the price adjustment clause and contract terms, consider these five factors before signing a presale condo contract:

  1. Deposit Structure: Understand the deposit requirements and payment schedule, including any milestones tied to construction progress.
  2. Amenities and Common Spaces: Review the planned amenities and common spaces to ensure they align with your lifestyle and preferences.
  3. Warranty and Maintenance: Familiarize yourself with the warranty coverage and maintenance responsibilities for your unit and common areas.
  4. Financing Options: Explore financing options and secure pre-approval for your mortgage to ensure you can meet your financial commitments.
  5. Builder’s Reputation: Research the builder’s reputation, previous projects, and customer reviews to gauge their reliability and quality of work.

In Conclusion

In conclusion, having a presale expert realtor by your side is imperative when buying a presale condo.

They possess the expertise to decipher complex contracts, guide you through potential pitfalls, and negotiate favorable terms on your behalf.

Their market knowledge, understanding of local regulations, and advocacy provide invaluable peace of mind, ensuring that your presale condo purchase is a well-informed, secure, and rewarding investment.

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