Changes in regulation
When a new home is being built, it is no surprise that a significant part of the planning revolves around meeting regulatory and statutory requirements. These requirements cover all elements of home building, and also apply to the relationships between the parties involved in the home building process, including tradespeople, contractors, and owners.
Tarion, a not-for-profit consumer protection organization established by the Government of Ontario, has traditionally played a large role in the home building process. Prior to 2021, Tarion alone provided oversight for licensing requirements for builders and vendors, as well as for warranty obligations. In 2021, Tarion transferred its licensing function to the Home Construction Regulatory Authority (the “HCRA”). The HCRA is now responsible for regulating and licensing new home builders and vendors, while Tarion administers warranty plans and related obligations. The two entities operate in conjunction with one another.
If contractors involved in the construction of a new home fall under the definition of a “builder” under the HCRA, then that new home must be enrolled in Tarion’s warranties. Conversely, if they do not fall under the definition of a builder under the HCRA, then the home is neither required nor eligible to be enrolled in Tarion’s warranties. So, when does a contractor meet the definition of a builder, and when does the new home need to be registered with Tarion?
When do you classify as a builder?
The answer to this question is often fairly evident; think of your standard new suburban development. Whether the HCRA is applicable may be limited by the relevant statutes. For instance, conversions of existing buildings may not fall under the jurisdiction of Tarion or the HCRA. In other situations, the line may not be as clear, such as with a custom home builder who builds a few homes in connection with other commercial or agricultural construction, or a builder involved in a substantial renovation of an existing privately owned home.
In practice, prior to commencing construction on a new build, the details of the project will be outlined in an agreement between all parties involved, specifically defining the roles and scope of work to be completed by the contractors. Under that same agreement, simply renaming the contractors as “general contractors” or “project managers” will not suffice to avoid the title of builder. Instead, to determine if a contractor meets the definition of a builder, the degree of control apportioned between the builder and owner is analyzed. If the owner is deemed to have sufficient control over the contractors, decision-making, and materials, the home being built will classify as an “owner-built home.” If the home classifies as an “owner-built home,” then Tarion’s warranties and the HRCA builder obligations will not apply. Consequently, there will be no requirement to enroll in Tarion’s warranties or for the contractor to be compliant with the HCRA.
How is control determined?
Control can be determined by examining three main elements: (i) the allocation of responsibilities, (ii) the actions of the owner, and (iii) the work materials and supplies.
The allocation of responsibilities: The allocation of responsibilities is a key determinant of control over the home building project. Practices that indicate owner control include:
- the owner’s right to direct, contract, and choose trades in the construction process;
- the owner’s right to approve, direct, or review changes in the construction process;
- the contractor’s obligation to consult the owner on work, materials used, and the designs in the construction process; or
- a contract between the owner and contractors stating that Tarion’s warranties do not apply.
The actions of the owner: The steps and actions of both the owner and contractor in a project can also demonstrate the owner’s level of control. Practices that determine control include:
- who applied for and obtained any required permits;
- the contractors not being licensed as builders;
- the owner supplying work or materials;
- the owner being on site regularly;
- the trades and suppliers understanding that they were under contract with the owner; or
- the contractor consulting with and confirming any changes in work, materials, or design with the owner.
The work materials and supplies: The work and materials supplied by both the owner and the contractor are considered. Significant contributions of work and materials by the owner can demonstrate owner control, depending on the nature, value, or quality of the work or materials. This involves considering:
- the type of the work or materials supplied;
- the monetary worth of the work or materials supplied; or
- the amount of materials supplied in terms of the percentage of the overall construction of the home.
While the three elements of control outlined above can be written into an agreement between owners and contractors, the execution of the agreement is also important, though it may not be determinative. Additionally, the circumstances under which it is appropriate to enter into such an agreement may vary. The determination of whether a contractor is considered a “home builder” under the HRCA is fact dependent. It is important to evaluate the individual situation carefully and use a well-crafted agreement to determine whether HRCA compliance and Tarion warranty enrollment are necessary.
