What are some key considerations for tenants when negotiating a commercial lease? Tenants must carefully consider a variety of factors in the process of negotiating a commercial lease in order to protect their business, maintain the landlord-tenant relationship and avoid unexpected costs. This article outlines some key factors and considerations that tenants should consider when reviewing and negotiating the terms of a commercial lease. More Than Just Base Rent—Operating Costs & Additional Rent Most commercial leases today are net leases, wherein a tenant is responsible for some or all of the costs associated with the property in addition to paying the base rent, such as costs for utilities, property taxes and insurance. Additionally, landlords incur a multitude of other expenses in order to operate, maintain, repair, replace and manage the common areas of the commercial property. These are called operating costs. Most landlords will attempt to transfer some of these operating costs over to the tenants by using broad or unspecific language in the lease. These operating costs are paid by the tenant as additional rent. When negotiating the lease, a tenant should fully understand and be very clear about what operating costs they are responsible for and how those costs are calculated. The tenant might also consider implementing specific language in the lease that limits or prevents the landlord from charging certain costs back to the tenant that both parties agreed the tenant would not be responsible for. A tenant can include a positive obligation on the landlord in the lease to annually provide an estimate of additional rent on a per square foot basis, respond to any and all questions relating to calculating operating costs, along with an obligation to produce substantiating documentation for those calculations. A tenant should also always negotiate to include in the lease an obligation on the landlord to provide an annual statement (ideally audited) setting out the additional rent for the property/project for that fiscal year and the tenant’s proportionate share of the additional rent. The lease should stipulate how discrepancies between the amounts in annual statement and the amount of additional rent paid in such fiscal year by the tenant will be handled. Repair and Maintenance Where a lease requires that a tenant assume responsibility for repairs, restoration and maintenance, the tenant should negotiate the terms of the lease to limit the extent of its responsibility in this regard. For example, the tenant’s repair and maintenance obligations should exclude reasonable wear and tear, structural and capital repairs and repairs arising due to the negligence of the landlord or its contractors. Furthermore, if a landlord requires the tenant to repair or replace mechanical and electrical systems in the leased premises, the tenant might want to add the condition that it will be assigned any of the landlord’s current warranties with respect to such systems, and that the landlord provide its own warranty as to the good operating condition and repair of such systems on the commencement of the lease. Hazardous Material and Environmental Liability A landlord might require a tenant to remove any hazardous material from the premises, but this requirement should be limited to only those hazardous materials brought onto the premises by the tenant during the lease. A landlord might also attempt to hold the tenant liable for environmental contamination regardless of whether the contamination was caused by the tenant or another source during or before the tenant’s occupancy of the premises. The tenant should negotiate provisions in the lease that would protect them from being held liable for environmental contamination that was not caused by them. End-of-Term Restoration Tenants need to pay special attention to requirements at the end of the lease term, where the landlord might impose an obligation on the tenant to return the premises to its original, pre-occupation condition. The removal of leasehold improvements can be an onerous and highly expensive process. A tenant’s goal, in turn, might be to limit their obligation only to removing its own trade fixtures and chattels, and not any leasehold improvements (especially if not installed by the tenant, but rather a previous tenant). Aside from the lease itself, a helpful tip to tenants would be to take photos and videos of the premises as soon as the tenant takes possession. This media would provide a clear point of comparison for the condition of the premises at the end of the lease term. Redevelopment There are times when landlords may wish to decide to make significant improvements and changes to their property that could directly impact their tenants and cause them to terminate their lease. Examples of these improvements can include major renovations, reconfigurations, and building residential units above a mall. Landlords usually include redevelopment clauses in their leases to give them the flexibility to make these decisions at their discretion. Tenants, however, prefer to remove or limit redevelopment clauses because of the potential disadvantages to their business’ success and stability. There are various ways that tenants can negotiate a redevelopment clause. Ideally, a tenant should ask that the redevelopment clause be removed altogether, even if the odds of the landlord accepting that demand are slim. A tenant might also restrict the landlord from enacting such a clause until a specific date is reached or subject the landlord to a mandatory notice period that is long enough for the tenant to find new suitable premises before the lease is terminated. Furthermore, the tenant should require that all its costs and expenses incurred in the moving process be paid by the landlord. Relocation Like redevelopment clauses, a tenant should attempt to remove relocation clauses altogether because relocating to a new premises could disrupt the goodwill that the tenant established at its current premises. Nevertheless, relocation could be used as a solution in favour of the tenant when a landlord requests to redevelop. That is, a tenant could negotiate to implement an obligation on the landlord to relocate the tenant to similar premises in the development, rather than terminate the lease when redevelopment occurs (if the redevelopment clause provides the landlord with the option to terminate the lease). If the landlord has more properties in close proximity to the current property that is to be redeveloped, the tenant could require the landlord to relocate them to one of the nearby properties, thereby limiting the disruption to its business. A tenant can also ask the landlord to pay for any expenses related to the improvements. Where the landlord insists on the option to relocate the tenant, the relocation clause in the lease should be carefully drafted to ensure minimal interference with the tenant’s business. Extending the Lease Term Tenants are often interested in ensuring that they have the option to renew or extend their lease beyond the original term. This would allow for the continuation of the tenant’s business operations at the premises. It is important that this option to renew/extend that is granted to the tenant speaks to the manner in which notice of the tenant’s intention to exercise this renewal option must be provided (e.g., written notice to be provided no earlier than twelve months and no later than six months before the end of the current term), and the terms of the lease during the renewal period (e.g., all terms remain the same, except for base rent, which would be negotiated by the parties and based upon the then market rent). Where the rental rate for the renewal period is to be negotiated by the parties, there must always be an arbitration clause included that provides for an arbitration procedure in the event the parties cannot agree on such market rent. Transfer Provisions Sometimes a tenant needs a way out of a lease for a variety of reasons, or the tenant sells its business to a third party purchaser. For these reasons, it is critical the lease contains a transfer provision that deals with transferring the lease to another person, including by way of assignment or by subletting the premises. Leases typically limit a tenant’s ability to transfer the lease to another person without the landlord’s prior written consent. The landlord may also impose conditions that must be met by both the tenant and prospective transferee prior to the landlord granting its consent to the transfer. Some of these conditions can be onerous, unnecessary or unduly intrusive. The landlord may require further deposits, detailed financial records of the prospective transferee, and impose a consent fee along with a requirement that the tenant pay the landlord’s legal fees with respect to such transfer. Some leases even provide the landlord the option of terminating the lease upon receiving a request for a transfer of the lease. A tenant would be prudent to negotiate these transfer provisions in the lease to ensure they are reasonable and that they include certain transfers where obtaining the landlord’s consent is not required. Events of Default Leases will list the types of events that will constitute a default by the tenant, such as failure to pay rent or comply with a non-financial obligation. The rights and remedies of landlords upon such tenant defaults need to be reviewed and considered carefully by tenants. Most leases will allow the landlord to terminate the lease, accelerate rent, lock out the tenant, seize the tenant’s property, and continue to hold the tenant liable for all rent obligations for the remainder of the term of the lease. The tenant should ensure that these default provisions are coupled with an obligation on the landlord to provide adequate prior notice in writing to the tenant with respect to any default committed. Such notice of default should also allow for a reasonable cure period, so the tenant can work to remedy the default within such cure period and thereby avoid the landlord exercising its aforementioned rights and remedies. Personal Indemnifiers If the tenant is a corporation, most landlords will require one or more personal indemnifiers to be bound on the lease. These indemnifiers provide additional security to the landlord in the event that the corporate tenant defaults in its obligations under the lease, as the landlord can pursue the personal indemnifiers as well as the corporate tenant for recovery. Of course, whenever possible, the tenant should try to resist providing such form of personal indemnity or guarantee. If unavoidable, the tenant should consider limiting the indemnification period to a period of time (e.g., the first two years of the term). Special Rights Examples of special rights include parking use and/or assignment, roof-top rights to install equipment, signage, and exclusive use restrictions to limit competition from other similar businesses. Where a tenant expects to have a special right included in their lease, they must ensure the special right is written into the lease with sufficient detail and clarity. Prospective commercial tenants should seek legal advice to avoid unreasonable costs and risk while they have the chance in the process of negotiating the offer to lease and the formal lease. If you or someone you know is a prospective tenant looking to negotiate a commercial lease, contact Stephen Sforza at stephen@durhamlawyer.ca or call 289-220-3239. “This article is intended only to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer.” This blog was co-authored by Law Student, Sanaz Sakhapour. By Fauzan SiddiquiBlog, Real EstateJune 21, 2023June 21, 2023
The Importance of a Real Estate Lawyer in Pre-Construction Property Purchases When purchasing a pre-construction property, it is essential to be aware of the legal implications that stem from the agreement of purchase and sale. This article highlights the invaluable advice which can be provided by a real estate lawyer prior to embarking on such a transaction. In Ontario, builders are required by law to provide a “cooling period” for purchasers. The right to a cooling period is confirmed by Section 73 of the Condominium Act. This period affords purchasers the opportunity to have their selected counsel review the agreement of purchase and sale and, upon review and discussion with their counsel, to terminate the transaction if they are ultimately not agreeable to the terms posed by the builder, following which, a release of their deposits is provided. Time management can be crucial, as following the cooling period, this opportunity is no longer afforded to the purchaser. The cooling period is mandated at (10) days for condominiums and can vary with respect to freehold properties. Benefits of having a real estate lawyer review the agreement of purchase and sale within the cooling period: Of most significance, real estate counsel can highlight and pinpoint clauses or language that is ultimately not favorable to a prospective purchaser. This would allow for, following a discussion with the purchaser, counsel to conduct negotiations with the builder to eliminate, alter, or add language to the benefit of their client prior to the agreement becoming firm. Highlighted topics of note that can be discussed are warranty implications afforded to the purchaser, restrictions, and obligations of the purchaser as well as the builder, additional costs embedded within the agreement as well as acts or omissions that may place the purchaser in default. A crucial item to assess and discuss with counsel prior to your agreement becoming firm is adjustment costs – builders typically use the term ‘adjustment’ to include any additional charges that a purchaser is to pay in addition to the purchase price. Typical charges will include, but are not limited to: The Tarion enrolment fee Costs associated with utility meters and installation Tree planting fees Levies (charges imposed by the Town and Municipality where the property is located) Increases in existing levies and development charges. Mortgage discharge fees It is of note that HST is payable in addition to these sums, and often, the agreement will not disclose the monetary sum associated with same – an important item that should be addressed with the builder, negotiated, and effectively capped and or deleted, provided the builder permits same. Until recently, these types of charges would be dispersed within the agreement and often overlooked by prospective purchasers. Builders are now required to list all such charges on a Schedule B to the Tarion addendum which forms part of the offer to purchase. This is a costly section of the offer that should be discussed at length with a lawyer, prior to firming up and within the cooling off period, should one be provided. Discussing your agreement of purchase and sale with selected counsel can provide a sense of comfort for a purchaser. Real estate transactions can often feel complex and stressful, and the discussions had with counsel prior to being bound to an offer to purchase allow for a purchaser to feel secure in knowing not only the additional costs to assess, but timelines, restrictions and rights in favor of the builder that can have an effect on the course of the transaction. In conclusion, when purchasing a pre-construction agreement in Ontario, it is highly recommended that purchasers take advantage of the cooling period and have a real estate lawyer review their agreement with sufficient time to discuss the comments issued. A lawyer can identify potential issues, aid in the negotiation of favourable terms, ensure that a purchaser is aware of all the legal implications of the agreement and provide a sense of stability during what can be a complex and nerve-wracking process. Undeniably, the selection of a real estate lawyer prior to embarking on a purchase transaction and engaging in a detailed review of their offer to purchase can save a purchaser from what could be costly oversights down the road, as well as ensure that they are making a fully informed decision about one of the most substantial purchases in their life. If you have any further questions about pre-construction properties, or you would like to speak with someone for further legal real estate inquiries, please contact Woitzik Polsinelli’s lawyer Jonathan Dippolito at jonathan@durhamlawyer.ca “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see or speak to a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiUncategorizedMay 3, 2023July 10, 2023
Assignments of Agreement of Purchase and Sale – An Overview What is an Assignment? The assignment of an agreement of purchase and sale is a legal transaction whereby a party to a contract transfers their rights and obligations in that agreement and associated property, to another party. It is commonly used in Ontario real estate transactions as a means of selling a property before the original purchase agreement is completed. Assignments are often pursued by buyers or investors who wish to purchase a property for a lower price than the original purchase price or who seek to benefit from a changing market or financial circumstances. In an assignment, the original purchaser (the assignor) sells their rights and benefits under the agreement to a third party (the assignee) for a negotiated price. Benefits, Disadvantages, and Uses of an Assignment Transaction There are several benefits to pursuing an assignment. For the assignor, it may provide an opportunity to sell the property at a profit without having to close on the purchase themselves. It may also allow them to avoid closing costs and other fees associated with the purchase. For the assignee, an assignment can offer an opportunity to purchase a property at a lower price than the original purchase price, particularly if the market has changed or the original purchaser is in financial distress. However, there are also potential drawbacks to assignments, such as uncertainty regarding the closing date, tax implications, higher than anticipated closing costs and the potential for disputes between parties. Assignment Process The assignment process typically involves several steps. First, the assignor must find a willing assignee who is willing to purchase their interest in the property. They may need to advertise the property and assignment (provided this is permitted by the original vendor in a pre-construction transaction) and negotiate a price with the assignee. Once an assignee is found, the parties must draft an assignment agreement that outlines the terms of the assignment, including the purchase price, closing date, obligations of each party and other relevant details. The assignment agreement must be signed by both the assignor and assignee and may need to be registered with the relevant authorities, such as the Land Registry Office. Finally, the assignee assumes the rights and benefits of the original agreement and is responsible for completing the purchase on the closing date. Throughout the assignment process, it’s important to seek legal advice and follow the requirements outlined in the original purchase agreement. Fees and Default Assignment agreements generally include an ‘Assignment Fee’ payable by the assignee to the assignor in exchange for the right to acquire the property. It is important to determine when this fee is payable. If any funds are to be released to the assignor prior to the completion of the original transaction, it must be specified. Otherwise, the default is that they are to be held in trust by the assignor’s solicitor, until the completion of the original agreement of purchase and sale. If a seller defaults on the original agreement (i.e. fails to close the transactions), the assignment becomes null and void. The funds are returned to the assignee, and the assignor is not liable for any expenses or losses incurred therefrom by the assignee. The assignor can commence legal proceedings against the seller for failing to close the transaction, however, the assignee has little to no such legal remedy available, even in the face of changing market conditions. Other Considerations On a final note, the tax implications of assignments can be complex, and it’s important for buyers and sellers to seek legal advice before pursuing an assignment. Depending on the circumstances, both the assignor and assignee may be subject to various taxes, such as capital gains tax, HST, or land transfer tax. For example, while the resale of a residential property is naturally not subject to HST and, accordingly, there is no HST payable on the assignment fee, extra steps must be taken to ensure the same result for new-build properties; the assignment agreement must include a provision stating that part of the consideration is attributable to the reimbursement of a deposit paid by the assignee to the builder. As with the Land Transfer Tax, it is payable by the assignment after the completion date of the original transaction, on the aggregate purchase price (including the assignment fee). Conclusion Assignment of agreements of purchase and sale are a common tool used in Ontario real estate transactions to transfer property ownership rights and benefits. They can offer benefits such as flexibility and financial gain but also carry risks and challenges. Understanding the legal, financial, and practical implications of assignments is crucial for anyone considering pursuing this approach. If you have any questions about assignments of agreement of purchase and sale or real estate law generally, please contact Jonathan at 289-220-3229 or jonathan@durhamlawyer.ca By Fauzan SiddiquiUncategorizedApril 24, 2023July 10, 2023
Non-Canadians Will be Prohibited from Buying Canadian Residential Property in 2023 Proposed in the Federal Budget of 2022, and passed in June of 2022, the Government of Canada has enacted the Prohibition on the Purchase of Residential Property by Non-Canadians Act[1] (the “Act”). As is made clear by the title, the Act prohibits the purchase of Canadian residential property by non-Canadians, directly or indirectly. ‘Indirectly’ refers to scenarios where a purchase is attempted through a trust, partnership, or an unincorporated association. Interestingly, the Act overrides section 34 of the Citizenship Act[2], which otherwise explicitly grants this right to non-Canadians. The Act will be enforced for a two-year period beginning January 1, 2023 and does not apply if a non-Canadian becomes liable or assumes liability under an agreement of purchase of sale of residential property before this date.[3] To understand the extent of the application of the Act to potential purchasers, it is important to pay close attention to the Act’s definition of a “non-Canadian”. The definition is as follows: an individual who is not a Canadian citizen, permanent resident of Canada or registered as an Indian under the Indian Act,[4] a corporation that is not incorporated under the laws of Canada or a Canadian province, a private corporation that is incorporated in Canada but that is controlled by a person referred to in paragraph (a) or (b) above. In addition, “purchase” means to acquire or agree conditionally or unconditionally to acquire a legal or equitable interest, or an immovable real right in a residential property. There have been proposals to preclude certain situations under this term, specifically those pertaining to an acquisition resulting from divorce or separation, the rental of a residential dwelling unit, or an acquisition resulting from succession. These proposals are expected to be included in a set of Supporting Regulations (the “Supporting Regulations”) that will be released to provide additional detail regarding the application of the Act. Exemptions As is common to many laws and regulations, the Act provides for certain exemptions. These exemptions include: temporary residents within the meaning of the Immigration and Refugee Protection Act[5] who satisfy prescribed conditions set out in the Supporting Regulations; a refugee; an individual who is a non-Canadian and who purchases residential property in Canada with their spouse or common-law partner if the spouse or common law partner is a Canadian citizen, person registered as an Indian under the Indian Act[6] permanent resident or person referred to in paragraph (a) or (b) above; or, a person of a prescribed class of persons under supporting regulations.[7] Penalties, Enforcement and Liability Under section 6(1) of the Act, anyone who contravenes or counsels, induces, aides or abets a contravention of the Act, or attempts any of the above, is guilty of a summary conviction of a fine of not more than $10,000. Additionally, if the offence is committed by a corporation, then any officer, director, or agent or other authorized individual that “directed, authorized, assented to, acquiesced in or participated in” the commission of the offence is a party and is held equally liable, regardless of whether the corporation was prosecuted.[8] Note that a contravention of the Act will not void a contract to purchase residential property from an innocent vendor. However, if a non-Canadian is convicted of having contravened the Act, a court may order that the property be sold in a prescribed manner and under prescribed conditions. Subsection 8(2) of the Act indicates that when a court orders the sale of residential property bought by a non-Canadian in contravention of the Act, the non-Canadian cannot receive more than the purchase price paid for the property from the proceeds of sale. Given the implications of the Act, individuals who are involved in the real estate industry, such as real estate agents, mortgage brokers and lawyers, should take extra care to ensure that they confirm the residential status of purchasing clients. Real estate professionals should independently verify their clients’ identity, document their clients’ Canadian status, and have the clients confirm their status in writing. Real estate professionals acting for the vendor in a transaction should also be wary about contravening the Act unintentionally. Even though it may not be the direct responsibility of the selling party to verify the Canadian status of the purchaser, do not be quick to conclude liability may not extend that far. It would be good practice to include certain provisions within an Agreement of Purchase and Sale to shield the selling party from potential liability at the outset of the transaction. If you have additional questions or concerns regarding the Prohibition on the purchase of residential property by Non-Canadians Act, please feel free to contact Jason Lane at 289-220-3241 or jason@durhamlawyers.ca. This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with legal advice tailored to your specific situation and needs. [1] SC 2022, c. 10 s. 235 [2] RSC, 1985 c. C-29. [3] Supra note 1, s. 4(5). [emphasis added] [4] RSC 1985 c.I-5. [5] SC 2001 c.27. [6] Supra note 5. [7] Supra note 1, s. 4(2). [8] Ibid, s. 6(2). By Fauzan SiddiquiUncategorizedJanuary 16, 2023June 10, 2023
The Buyer’s Guide to Rural Properties With over 250,000 lakes and vast expanses of countryside, Ontario is home to thousands of cottages and other rural properties. Buying a rural property is often an exciting time for purchasers. However, whether you are looking forward to sipping your morning coffee by the lakeside or are interested in buying an investment property on a large piece of land, purchasing a rural property often involves greater due diligence. Does the property use a well and/or a septic system? While the majority of urban residential properties operate using their respective municipal sewer and water systems, many rural properties do not have this luxury. Often more isolated and less dense, rural municipalities are unable to construct an efficient system to meet all of their residents’ needs. For example, to dispose of waste, these properties frequently operate with a septic system or holding tank. When purchasing a rural property with a septic system, it is crucial to ensure that the system is in good working order prior to closing. Requiring the vendor to provide a warranty in the Agreement of Purchase of Sale that survives upon closing relating to the septic system is recommended. It is also advisable to require that the vendor pump the septic system prior to the transaction closing. Similarly, many rural properties often rely on private wells for their supply of water. To ensure that the water is safe to drink and free from contamination, purchasers should obtain multiple water potability tests from their local Public Health Station. It is also a good idea to make your Agreement of Purchase and Sale conditional upon a satisfactory inspection of the well and related pump prior to closing. Is this a Waterfront Property? When you expect a property to give you access to a body of water, it is important to determine whether the property actually includes the shoreline. If your property does include the shoreline, it comes with a set of rights known as “riparian rights”. This means that you will have the right to access the water, the right to the undisturbed natural flow of the water, and the right to withdraw water for your own use. However, not all rural properties include the shoreline. Many bodies of water in Ontario are surrounded by shoreline reserves, also referred to as “shoreline road allowances.” These are reserves that remain either with the provincial crown in the unincorporated territory or with the municipality in the incorporated territory. If you do not own the shoreline, you do not possess any “riparian rights” and therefore may not have legal access to the water. This further means that any structures that have been built or that you plan to build on this shoreline may not be legal. If the shoreline allowance bordering the property is not owned, it is possible to make an offer to purchase it from the Crown or municipality, pursuant to the Public Lands Act, RSO 1990 C P.43. This can be a lengthy process so it is important to determine whether a property is affected by a shoreline road allowance prior to making a firm offer to purchase the property. Does the Property Have a Legal Road Access? For many urban properties, the road directly leading the property is often a public roadway that is owned by the local municipality. However, for rural properties road access is not always so simple. Many properties are located adjacent to private roadways. If these private roadways are not conveyed with the property, it is vital that your solicitor confirms that you have a legal right of way to access the property through that private roadway by way of ownership or easement. Building and Zoning Implications When purchasing a rural property, prospective buyers often have predetermined plans for the use and enjoyment of the land. These can include installing docks, constructing decks, building structures and removing vegetation. Before committing to the purchase of a property, purchasers are encouraged to view the zoning regulations for the property, which will state the permitted uses for that piece of land. Furthermore, before constructing structures, homeowners should review the municipality’s building rules to see if any permits are required. To ensure the property is in conformance with all building and zoning bylaws prior to closing, your solicitor can obtain and review compliance letters, which can be provided by your local municipality upon request. Property Boundaries It may be difficult to visually inspect the boundaries of a rural property, as there is often vegetation between property lines, with no clear boundaries erected. Rural properties are often not registered on plans of subdivision, and therefore may require some extra investigation to determine the exact location of their boundaries. Maintenance of the Property Finally, rural properties often demand higher levels of maintenance. Whether it be a larger lawn to mow or a longer driveway to shovel, purchasers should be aware of the significant upkeep levels and costs required to maintain the property. Furthermore, since roads leading into the property are often privately owned, purchasers should be diligent in reviewing any private road maintenance agreements that come with the property. A good real estate lawyer, knowledgeable in rural property issues, is essential. If you are looking to purchase a rural property or have any questions, please contact Jason Lane, a lawyer at Woitzik Polsinelli LLP at 905-668-4486 ext. 241 or at jason@durhamlawyer.ca. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” This blog was co-authored by Jaimin Panesar* By Fauzan SiddiquiUncategorizedJuly 19, 2022July 10, 2023
Federal Foreign Buyer Prohibition on Residential Properties – A Viable Solution to Combat Soaring Housing Prices? Introduction The COVID-19 Pandemic has only complicated the real estate market in Canada. With lower lending rates accompanied with the highest inflation rate in over 30 years, residential dwellings in Canada have risen by over 20% since 2021. The national average of a home is now nine times more than the average household income. Both the federal and provincial governments across the country have been struggling to keep prices at an affordable rate. The quick surge in price has left many prospective first-time purchasers on the sidelines waiting for stability. The most recent tactic for the government to stabilize housing prices has been to restrict foreign nationals from investing in residential real estate. In Ontario, the provincial government decided to raise the Non-Resident Speculation Tax (NRST) to 20% in an effort to both deter foreign residential real estate investments and raise additional funds for the government. However, it was clear that more measures would be taken by the federal government due to both the Liberal’s and Conservative’s 2021 Federal Election campaign promises. 2022 Federal Budget This past April, the federal government released their 2022 budget, with one of the key goals being to make housing more affordable for all Canadians. While most measures focused on the supply of housing, the Trudeau government introduced a proposal to curb foreign investment; a measure to control demand. The proposal was to prohibit foreign enterprises and people from acquiring residential property in Canada for 2 years, with some exceptions[1]. Bill C-19 (Part 5, Division 12) On April 28th, 2022, the Liberal Party introduced Bill C-19 titled “An Act to implement certain provisions of the budget tabled in Parliament on April 7, 2022, and other measures”. Section 235 of the Bill outlines the prohibition. Subsection 235(4)(1) states that “despite section 34 of the Citizenship Act, it is prohibited for a non-Canadian to purchase, directly or indirectly any residential property”. The penalty for doing so is a fine of not more than $10,000 and, on the application of the Minster, a court order for the property to be sold. If sold, the offenders are not to receive more than the purchase price they paid. Moreover, the Bill leaves the Minister significant discretion to prescribe matters by regulation. In particular, the Minister is able to exempt certain classes of individuals from the ban and is able to change how key terms, such as “purchase”, are defined. These alterations can considerably change how the ban works in practice. It is important to note that the Bill is not yet law as it is still in its early stages in the House of Commons. If the bill is to pass through the House, it still must go through the Senate and then receive Royal Assent from the Governor in Council. There is no listed effective date for section 235, rather it will come into force on a day fixed by the Governor in Council. Section 236, the repeal section, is to come into force on the 2nd anniversary of section 235 coming into force (repealing and limiting the ban to two years). Constitutional Implications One potential issue related to the legislation is that it infringes on provincial power. Pursuant to the Constitution Act, 1867 and common law principles, real estate is of provincial jurisdiction. If challenged, the Federal government will likely argue that it is within their criminal law power to legislate over the matter. Furthermore, from a Charter perspective, it can be argued that the law discriminates based on nationality. While these constitutional challenges may have substance, it remains to be seen whether they would be successful in an application to the court. Impact on Housing Prices in Canada The real question is whether this ban will actually succeed in combatting surging housing prices. Most economists and real estate experts argue that the ban will have a minimal impact. The ban aims to decrease demand, but it appears that foreign demand is not the biggest issue for the housing market. Foreign buyers accounted for 1% of all purchases in 2020 compared to 9% in 2015. The 2019 CMHC Report also stated that only 3.3% of Ontario homes have at least one non-resident owner. Tackling surging housing prices is a difficult task for the government. With only so much control over the supply, the government appears to be taking desperate measures to control demand. Whether this ban will actually lower housing prices is a question that will remain uncertain for some time. If you have any further questions on the potential foreign purchasing ban, or you would like to speak with someone for further legal real estate inquiries, please contact Woitzik Polsinelli’s lawyer Colin Lyon at colin@durhamlawyer.ca or you can call him at 289-638-3181 for assistance with this matter. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see or speak to a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” This blog was co-authored by Jaimin Panesar* [1] Temporary residents within the meaning of the Immigration and Refugee Protection Act, non-Canadians who purchase with a Canadian spouse or people registered under the Indian Act are all exempt from the prohibition. By Fauzan SiddiquiBlogMay 27, 2022June 10, 2023
Share Purchase of a Business – Critical Issues Every Purchaser Must Consider Considering purchasing a business by way of shares and unsure of where to start? This article will outline some of the main issues to consider when deciding to proceed with such a transaction. Purchasing the shares of a business is when a purchaser opts to buy all the voting shares of the corporation(s) that own(s) the business to acquire a controlling interest. It usually also involves the purchaser being transferred all of the other outstanding and issues shares of such corporation(s). There are significant legal and tax implications that one must consider before entering into this type of transaction. A corporate accountant should be involved to discuss and advise on the tax issues. Share transactions should always involve both the purchaser’s corporate accountant and lawyer. Due Diligence Although every business transaction will involve some due diligence being conducted by the purchaser, share purchase transactions often require a more extensive amount of due diligence as the purchaser needs to learn of all of the corporation’s liabilities and assets in order to make an informed decision and structure the deal appropriately. The vendor will likely require the purchaser to sign a confidentiality or non-disclosure agreement prior to providing any due diligence material concerning the business or the corporation. Although the type and extent of due diligence will vary from one transaction to another, standard due diligence will usually involve reviewing the following: the corporation’s financial statements and tax returns; all material contracts and agreements involving the corporation (e.g., employment and independent contractor agreements, supplier and customer agreements, shareholder agreements, loan and security agreements, leases, insurance policies, etc.); all applicable governmental licences and permits; the results of public searches, including corporate profile reports, personal property, litigation, insolvency, Bank Act, Execution Act, intellectual property, real estate, etc.; the minute book of the corporation(s) The due diligence process should involve both the purchaser’s lawyer and accountant, and depending on the type of business being purchased, possibly other advisors too (e.g., financial consultants, insurance advisors, other industry professionals). This due diligence step also helps provide the foundation for which conditions (if any) and vendor representations/warranties the purchaser wishes to include in the share purchase agreement (SPA). Excluded Liabilities and Assets The due diligence process is such a significant part of any share purchase transaction because a purchaser needs to reveal all of the corporation’s assets and “skeletons” in order to enable it to evaluate which existing debts, liabilities, obligations and assets it is not willing or able to assume as part of the transaction. The SPA needs to expressly stipulate the specific liabilities and assets that are not part of the deal. With respect to the excluded liabilities, there need to be provisions around how such liabilities are to be discharged/removed or assigned to the vendor (with indemnity obligations in favour of the purchaser) on or prior to closing. Similarly, for excluded assets, the SPA should set out how these assets are to be retained by the vendor, whether by transfer or assignment from the corporation to the vendor on or prior to closing. Purchase Price and Payment Determining the fair value of the shares being purchased is typically the first step in establishing the purchase price. This valuation process involves evaluating the business’ key financial information and assets and is most accurately conducted by a professional business valuator to produce an independent assessment. Along with determining the value of the shares and agreeing on the purchase price, you will need to negotiate the payment procedure. The payment procedure outlines how and when the purchaser will provide compensation for the shares. Such compensation could be paid all on closing, over time, or after certain metrics are met, depending on how the parties wish the deal to be structured. For instance, if a purchaser believes that it will be difficult to finance and pay the entire purchase price on closing, it could be negotiated that a portion of the purchase price can be deferred and paid overtime, with security for the unpaid amount being granted to the vendor. Not only can this deferred payment arrangement be beneficial for the purchaser, but it may also benefit the vendor from a capital gains tax perspective and if there is interest to be earned on the unpaid balance. Purchase price adjustment clauses are also very common in share purchase transactions. One of the most common adjustments is for working capital. This type of adjustment is meant to ensure that the corporation has enough working capital funds to continue the day-to-day operations in the post-closing period of a purchase so that the purchaser does not have to immediately input capital for the business to keep operating. Employees In a share purchase, the purchaser will be acquiring all the existing employees of the corporation, including any accrued liabilities owing to such employees, unless otherwise expressly excluded in the SPA. The purchaser will certainly want to obtain a list of all employees, and the list should also contain all particulars regarding their employment, such as start date, salary/wage, vacation and bonus entitlement, etc. An employer obligation that is often hotly negotiated upon is employee severance. It is not always known whether, following the transition of the business to the new owner/purchaser, all employees will continue their employment. For longer-term employees that the purchaser plans on terminating on or following closing, there may need to be some negotiation at the outset as to the allocation of the severance costs between vendor and purchaser, which allocation would form part of the employee provisions in the SPA. Representations, Warranties and Indemnities A significant component of the SPA is the representations and warranties. These are assurances given by the parties to one another in order to induce the other to enter into the agreement and are meant to allocate risk among the parties. They also play a role in providing the basis for indemnification rights. The specific representations and warranties given by the parties will vary from transaction to transaction, depending on the type of business and other factors. Some standard representations and warranties given by vendors in share purchase transactions relate to the status of title and ownership of the vendor’s shares being purchased, litigation and claims against the corporation or business, the corporation’s financial statements and tax returns, residency of the vendor, and details of contracts and leases involving the corporation. An indemnity provision in a share purchase agreement typically provides that, if there is an occurrence of an event, such as the discovery of a misrepresentation made by one of the parties or a third party claim arising under the SPA, the party at fault promises to cover the innocent party’s losses sustained as a result of such event. An indemnity clause will afford the parties the ability to allocate any risk and is often a heavily negotiated part of the SPA. Some other notable considerations for purchasers in these transactions include: Through what vehicle will the purchaser be purchasing the shares? In his or her personal capacity or through a newly formed corporation? Is the purchaser buying all the outstanding and issued shares of the corporation? If not, will it be a majority shareholder? Who are the other shareholders? Are there multiple classes of shares with different rights? Is there a shareholders’ agreement or will one need to be prepared? Are there existing shareholder loans that will need to be repaid or shareholder guarantees that need to be discharged? Each proposed transaction gives rise to its own unique issues, topics of negotiation and possible solutions. There is no completely “standard” deal or “one-size fits all” approach. The vendor and the purchaser need to identify the aspects of the transaction that are important to them at the early stages to ensure that they are fully negotiated upon and drafted appropriately into the SPA. If you have any questions regarding the purchase or sale of shares in a corporation, please contact Stephen Sforza at stephen@durhamlawyer.ca or at his number (905) 668-4486 ext. 239. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” *This blog was co-authored by Angela Victoria Papeo* By Fauzan SiddiquiBlogMay 13, 2022June 10, 2023
HST on Vacant Land in Ontario The rules surrounding vacant land in Ontario can be tricky. There are many factors to consider when purchasing and selling a vacant plot of land, especially those that determine the applicability of HST to the property in question. The applicability of HST to vacant land can either be taxable or exempt under the Excise Tax Act. This Act sets out the situations where HST is applicable to sales of vacant land and the requirements for land to be exempt from HST. It will help to determine if the land was entirely a personal asset of the vendor or if it was related to a business of the vendor. The following situations will determine whether the sale of your vacant land could be subject to HST or not: The sale of your vacant land can be subjected to HST if: The vacant land was used primarily in carrying on a business where the vendor had a reasonable expectation of profit. The sale of the land need not be the source of the profit for the business, the land simply needs to have been primarily used by the business. The sale of the vacant land was made in the course of a business of the vendor. Factors that are considered include the frequency with which the vendor engages in these types of sales and the amount of time and effort expended in activities related to the sale of the property. The property was created by the vendor by subdividing a parcel into more than two parts, excluding any parts conveyed to an authority having the right to expropriate, and the vendor is selling to an unrelated party. The sale of your vacant land can be exempt from HST if: The land was used for personal use by the vendor. The land was an adventure or concern in the nature of trade by the vendor. This is when a vendor had a primary or secondary intention to resell the property at a profit, when they purchased, but the vendor does not regularly engage in these activities as a business and did not expend significant time and effort on activities related to selling the property or preparing it for sale. The vendor subdivided a parcel into no more than two parts or, where the vendor has subdivided a parcel into more than two parts, to a transaction where the vendor is selling a part to a relative for personal use. What to look out for: If you are purchasing vacant land, be cautious if the vendor notes that HST will be “in addition to” the purchase price in the agreement of purchase and sale. This is often a red flag that the vendor believes HST will be applicable to the transaction and they are attempting to transfer the responsibility to the purchaser. It is also prudent to inquire whether the land has been severed and, if so, how many parts have been severed by the vendor. If the vendor has severed multiple lots, it is another indication that HST is likely to be a factor. Finally, consider whether the vendor appears to be carrying on a business from the land or whether they frequently flip parcels. In the event any of these risk factors are identified, it will be important to protect yourself through a well-worded agreement of purchase and sale. HST Reporting on a Sale Transaction: The burden of collection and remittance of the HST on vacant land is the responsibility of the vendor unless the purchaser is an HST registrant, If the purchaser is a registrant, the purchaser will have to self-assess the tax and remit the HST owing to the CRA on their HST return. However, it is up to the vendor to ensure that the purchaser is a registrant and that the purchaser’s HST number is valid before allowing the purchaser to self-assess and remit HST. If the purchaser provides an invalid HST number, the vendor may be held liable for the HST remittance under section 221(1) of the Excise Tax Act, as was the case in Maloff &Henriksen v. The Queen, 2004 TCC 537. If you have any further questions on the tax eligibility of your vacant land, or you would like to speak with someone about your purchase or sale of your vacant land, please contact Woitzik Polsinelli’s lawyer Colin Lyon at colin@durhamlawyer.ca or you can call him at 905-668-4486 for assistance with this matter. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see or speak to a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” This blog was co-authored by Angela Victoria Papeo* [i] Back to Basics: Understanding HST and LTT in Residential Real Estate Transactions, Law Society of Ontario, January 22, 2020. By Fauzan SiddiquiBlog, Real Estate, TaxMarch 22, 2022June 10, 2023
Material Misrepresentation of Property: MLS Listings and Agreements of Purchase and Sale Whether a buyer can terminate an Agreement of Purchase and Sale due to a difference in property dimensions in the MLS listing and its actual size depends on how material the misrepresentation is. This is demonstrated in two recent cases Lamba v. Mitchell, 2021 ONSC 1612 (CanLII) and Issa v. Wilson, 2020 ONCA 756. Lamba v. Mitchell, 2021 The recent Superior Court decision addressed the question of whether a buyer can terminate a transaction and receive their deposit back if the square footage of the property differs from that of the MLS listening. Lamba v. Mitchell, 2021 ONSC 1612 (CanLII) concluded that the buyers did in fact breach the Agreement of Purchase and Sale by refusing to close despite the discrepancy between the MLS listing and the actual square footage of the subject property. In July 2020, Mitchell and Bowring listed their Mississauga home for sale on the Multiple Listing Service (MLS). As described in the listing, the home was approximately 2,500-3,000 square feet. They were provided with all realtor’s photos of the home along with marketing materials, pre-listing home inspections and a floor plan which provided accurate dimensions for each room. The brochure that was also provided to prospective buyers visiting the home, stated: “buyer to verify measurements”. The Purchasers, took interest in the home and signed an agreement to purchase the subject property for 1.2 million with no conditions and had given a deposit of $20,000. Following Lamba’s signing of the Agreement, they had learned that the floor plan contained a discrepancy not shown in the MLS listing, a difference of at least 345 square feet. Both parties appeared in Court in January 2021, the issue at hand was to decide whether the buyers could terminate the contract based on the incorrect area of the home on the MLS listing. The buyers had asked the court to rescind the Agreement, the sellers had requested forfeiture of the $20,000 deposit. Based on the law in Ontario, an Agreement may be rescinded if there is a “material misrepresentation” of the property. A reasonable person would have to consider the misrepresentation to be a defining factor in the decision to enter into the agreement. It was found that the MLS listing although erred, was not a material misrepresentation that could have impacted the decision of the buyers as they were provided with all materials to ascertain this information on their own. Further Considerations The case of Issa v. Wilson, 2020 ONCA 756 demonstrates a scenario where the purchaser of a property was permitted to withdraw his purchase agreement and reclaim a deposit of $50,000 due to the misrepresentation of the square footage of the property. In this matter, the discrepancy was that of about 1,000 square feet. It appears based on the relevant case law, that the determining test is the intention behind the purchase and how substantial the misrepresentation is. The intention behind the purchase was to have a home big enough for five people, when the appraisal had shown home size as significantly smaller than what was advertised the purchaser rescinded the agreement. If the intention of the buyer was not affected, the remedy of rescission may not have been available, such as the case of the Lamba’s. The misrepresentation is required to be material to the agreement and has a direct enticement for the purchaser in entering into the agreement of purchase and sale of the property. Material Misrepresentation and Caveat Emptor Caveat Emptor is the general principle that states “buyer beware”. With the exception of defects that are not disclosed by the seller, if a purchaser enters into an Agreement of Purchase and sale with the dependence on a material misrepresentation the purchaser can seek the remedy of rescinding the agreement of purchase and sale. If you have any further questions on material misrepresentation, or you would like to speak with someone about the legal description of your property, please contact Woitzik Polsinelli’s lawyer Paria Rad at paria@durhamlawyer.ca or you can call her at 905-668-4486 ext. 230 for assistance with this matter. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see or speak to a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” This blog was co-authored by Angela Victoria Papeo* By Fauzan SiddiquiBlog, Real EstateJanuary 14, 2022June 10, 2023
Domestic Contracts (Cohabitation Agreements/Marriage Contracts) and What to Consider Congratulations! You have survived spending months of COVID-19 lockdowns with your significant other and still love each other! Perhaps you have now both decided that you are ready to move in together permanently. While the thought of a possible separation in the future is not at the forefront of your mind when you are in the process of happily building a life together, there are certain legal implications that are much easier and less stressful to address at the outset of your cohabitation, rather than in the unfortunate event of a separation. When you and your intimate partner 1) cohabit for at least three years, 2) have a child together and are in a relationship of some permanence, or 3) are married, you gain certain automatic rights in Ontario primarily pursuant to the Family Law Act (FLA). A domestic contract (also known as a Cohabitation Agreement or Marriage Contract) permits these automatic rights to be varied in order to better suit the intentions of the partners. There are a number of questions that can be answered and agreed upon through a domestic contract that may not be so stress-free and straightforward to answer in the event of a separation. What Impact Will Our Relationship Have on Our Property Rights? One of the main questions asked and argued about when partners decide to part ways is, “Who gets what?” Unmarried partners do not have automatic rights concerning property and therefore ownership is determined solely by who is named on an asset. For example, if your partner is the only individual named as the owner of the house that you are both living in, then you will not have any default rights to an interest in the value of the house, nor will you have a right to stay in the house in the unfortunate event that you separate. If you had been contributing to the house, it is possible to establish an interest in the property through an equitable claim in court. However, there are numerous legal thresholds to exceed in order to establish such an interest and the results of these types of claims are unpredictable. A domestic contract allows you and your partner to be clear as to who owns what, how assets will be distributed, and the permitted living arrangements in the event of a separation. It is also important to note that, if you become married without a domestic contract in place, there are certain property rights that you and your partner immediately acquire. While the details of these rights are beyond the scope of this article, the general impact is that 1) the value of most assets acquired by either partner during the marriage essentially become a part of the marriage and 2) the value of the “matrimonial home” becomes a part of the marriage, regardless of who owns it or when it was obtained. What is critical to understand here is that this means there is an obligation to split the value of the home that you live in with your partner, regardless of who owns the property or for how long they have owned it (even if it was owned prior to the marriage). A domestic contract remains enforceable in the event that you get married (and can also be entered into in the event that you are already married) and allows you to vary these automatic property rights in order to reflect your intentions with regard to your assets. Do Either of Us Expect Financial Support From the Other? If cohabiting or married partners separate, the partner with the lesser income may be eligible for spousal support payments pursuant to the Family Law Act. Unfortunately, the framework for determining whether spousal support payments will be ordered by a court is unclear and is very case-specific. In order to avoid unexpected surprises and expensive litigation, a domestic contract can contemplate whether spousal support will be payable in the event of a separation and if so, how much will be payable and for how long. While it is possible for a court to determine that the spousal support provisions of a domestic contract are unconscionable and therefore unenforceable, the fact that the partners have come to an agreement with regard to the matter will be a major factor considered by a court. If We Have Children, How Are We Going to Raise Them? The Family Law Act also permits partners to agree upon the education and moral training of their children as well as each partner’s support obligations for the children through a domestic contract. This allows partners to come to a greater understanding of each other’s values, beliefs, and intentions with regard to the upbringing of children ahead of the final hour. Note that partners are not permitted to determine the decision-making responsibility or parenting time with respect to their children within a domestic contract (this is only permitted to be contemplated in writing in the event of a separation). Preparing a Cohabitation Agreement Overall, a domestic contract allows you to outline the obligations and rights of each partner during their time living together. It also allows for you to determine how matters can be settled between you and your partner in the unfortunate event that the relationship comes to an end. If you are considering entering into a domestic contract, it is strongly recommended that you consult with a family lawyer in order to ensure that the agreement is enforceable and accurately reflects your intentions (see the article here on the enforceability of domestic contracts: Domestic Contracts – The Importance of Accurate Financial Disclosure and Legal Advice). If you have any questions about the impact that your relationship will have on your future rights and obligations or about the draft and execution of a domestic contract, please contact our family lawyer, Jason Lane, at jason@durhamlawyer.ca, or you can call 289-220-3241 for assistance. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see or speak to a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlogSeptember 23, 2021July 10, 2023