Extended and Collapsed Real Estate Transactions It is important to note that not all real estate transactions close on their targeted completion date. The recent rise in real property prices accompanied by strict lending requirements has resulted in a surge of real estate transactions dissolving or requiring an extension of the completion date. Whether you are the breaching party or the one being faced with the detriment, it is crucial to have a capable real estate lawyer to guide you through what can be a taxing process. What Occurs When a Party Indicates That They Cannot Close on the Originally Agreed-Upon Closing Date? When one of the parties reveals that they cannot close the transaction on the closing date stated in the agreement amongst the parties, they have committed what is known as an anticipatory breach of the Agreement of Purchase Sale. Although both parties can be subject to this breach, it is usually the purchasing party who cannot close the transaction on the originally targeted closing date, often attributable to issues related to their financing for the matter. The breaching party, once apprised of these circumstances, will customarily request an extension of the closing date through their counsel. Thereafter, the innocent party will receive the request for an extension of the closing date, and, through their respective counsel, will proceed to note the other party in anticipatory breach of the agreement, putting forward terms which would permit the extension, provided the breaching party assumes the costs incurred and agrees to the demands imposed by the innocent party. Note that the innocent party is not obligated to accept an extension request related to the closing date – however, it is often the most viable solution for all parties, with the intent to proceed in ultimately closing the transaction. Requests for an extension are often met with strict extension terms from the innocent party which are put forward as non-negotiable. The parties’ respective counsel will engage in negotiations, seeking favourable extension terms for their clients. The following is a non-exhaustive list of possible extension terms that a seller’s counsel may request in the event of a purchaser’s request for an extension of the closing date: The Purchaser is to pay for utilities and property taxes from the original closing date to the then extended closing date; The Purchaser is to pay the Seller’s cost of insurance for extending the transaction; The Purchaser is to pay an additional deposit to further secure their obligation to close the transaction on the then extended closing date; The Purchaser is to sign an Irrevocable Direction authorizing all deposits held in trust to be released to the Seller either immediately, or, in the event that the Purchaser fails to close on the then extended closing date; The Purchaser is to pay for the Seller’s per diem interest for any existing mortgages or bridge loans secured against the property in question; The Purchaser is to cover the Seller’s increased legal fees, if any. Once the terms of the extension are agreed upon and executed by all parties, the transaction is permitted to close no later than the agreed-upon extended completion date. While not a common occurrence, should a further extension be requested, and the innocent party is willing to grant the same, new extension terms would then be negotiated. What if the Seller Requires the Sale Proceeds for Their Own Purchase? Circumstances may arise where the seller in the extended transaction is also purchasing a property by way of a separate transaction. In situations where the closing date for the seller’s own purchase is prior to the then extended closing date of their sale, they will not be able to rely on the funds from their sale to immediately fund their purchase transaction. In such a circumstance, the seller will have several options: To obtain bridge loan financing to fund their purchase transaction in the interim, which would later be paid from their sale transaction funds; or Request an extension for their purchase transaction. A bridge loan occurs where a lender provides short-term financing for the purpose of a purchase transaction, with the payment obligation for the funds in question secured, albeit temporarily, against a property to be sold by the borrower (or against the property being purchased) – upon which, the funds would be issued to the lender, in addition to any applicable interest for the duration between the two closings. Note, as previously mentioned, that the lender can require the bridge loan to be secured against the property being sold, the property being purchased, or both. The bridge loan serves to rectify any funding issues that the seller may incur due to the purchaser’s anticipatory breach in requesting an extension of the original closing date. Essentially, the funds that you were expecting to use from your sale, had it closed on time, are substituted with the funds from the lender. This allows you to close your purchase on its original closing date when your sale funds are not available. Upon the closing of your sale, the bridge loan will be paid out in full using your sale proceeds. The second option that a seller has is to ask the seller in their own purchase for an extension. It is important to note that even if this extension is due to the purchaser in your sale and not the fault of the seller, in theory – this can still be viewed as an anticipatory breach of contract, and your lawyer will need to negotiate extension terms on your purchase as a result. Steps to Take When the Breaching Party Walks Away from The Transaction, or Does Not Meet the Extension Terms Agreed Upon: As the seller, if the breaching party walks from the deal, or the closing day has passed without an extension, the property is often relisted and resold to mitigate damages. The seller may wish to also obtain litigation counsel to start a proceeding against the original purchaser for any loss or damages incurred. The most common source of damages that the seller would seek against the breaching party is the difference between the purchase price in the original agreement and the purchase price in the transaction that ultimately closed, should there be a shortfall or loss in resale value as a result of the original purchaser’s breach. Forfeiture of the Deposit in the Event of a Breach: A common question that the innocent party has upon breach of the agreement is “What happens to the deposit being held that was originally put forward by the purchaser?” Even though the innocent party bears no responsibility for the breach, they are not automatically given the deposit. The deposit can be released in two ways: If the breaching party consents to the release of the deposit in writing; or The innocent party applies to the court and receives a Court Order for the release of the deposit. The deposit will continue to be held in trust by the brokerage or counsel should one of these conditions not be met. Importance of Having a Competent Real Estate Lawyer Competent real estate counsel is essential for a smooth and efficient closing. Whether it pertains to negotiating favourable extension terms or noting a party in breach, a party will seek to ensure that they have a diligent, efficient individual acting in their best interests under the circumstances faced. If you are looking for a lawyer to act on your behalf in a real estate transaction or have any questions, please do not hesitate to contact the following members of our real estate team: Jason Lane – Jason@durhamlawyer.ca, 905-668-4486 ext. 241 Jonathan Dippolito – Jonathan@durhamlawyer.ca, 905-668-4486 ext. 229 This blog was co-authored by Articling Student, Jaimin Panesar* “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.” By alyssaBlog, Real EstateSeptember 11, 2023September 11, 2023
Importance of Having Your Status Certificate Reviewed If you’re planning on purchasing a condominium unit, it is vital that you have a real estate lawyer review your status certificate. Unlike the vast majority of freehold properties, when purchasing a unit in a condominium, you are also buying a “share” of the common elements and must abide by the Condominium Corporation’s governing documents. Once you purchase a unit, the Condominium Corporation has a considerable amount of power over the monthly common element fees, so it is imperative that you know if you are buying into a healthy Condominium Corporation. The financial health of the Condominium Corporation will determine its marketability and as such, you want to ensure that you are purchasing into a financially healthy condominium. What is a Status Certificate? A status certificate is a document that gives an overview of the current state and health of the Corporation at the time it is issued. The status certificate is often prepared by the Corporation’s property manager and is supplemented by several documents, which give further insight into the current condition of the Corporation. In accordance with Section 76 of the Condominium Act, the following is information that the Corporation must include in their status certificate package: a statement of the common expenses for the unit and the default, if any, in payment of the common expenses; a statement of the increase, if any, in the common expenses for the unit that the board has declared since the date of the budget of the corporation for the current fiscal year and the reason for the increase; a statement of the assessments, if any, that the board has levied against the unit since the date of the budget of the corporation for the current fiscal year to increase the contribution to the reserve fund and the reason for the assessments; a statement of the address for service of the corporation; a statement of the names and address for service of the directors and officers of the corporation; a copy of the current declaration, by-laws and rules; a copy of all applications made under section 109 to amend the declaration for which the court has not made an order; a statement of all outstanding judgments against the corporation and the status of all legal actions to which the corporation is a party. Are Status Certificate Reviews Mandatory? Although tremendously important, it is not mandatory for you to obtain or have your Status Certificate reviewed by a lawyer. Nevertheless, to limit their risk, most lending institutions may make it a requirement for your status certificate to be reviewed. When Should a Status Certificate Be Reviewed? The best time to have a status certificate reviewed is before you put in a firm offer for the unit. This allows your lawyer and real estate agent to include favourable provisions in your Agreement of Purchase and Sale that may reduce any risks associated with the unit and Condominium Corporation. For example, if the unit is default of common expense payments, your lawyer may recommend including a provision that the Vendor is to pay out same before closing. If the Vendors are not agreeable to such provisions, you still have the option to withdraw from the transaction. If you are unable to have your status reviewed before making a firm offer, you should ensure that your Agreement of Purchase and Sale is conditional on your lawyer reviewing the status certificate. If the status certificate reveals issues and the Vendors are not agreeable to an amendment, you can still legally withdraw from the transaction. If you have your status certificate reviewed after your offer is firm, you run the risk of not being able to address any issues contained in the status certificate and accommodating documents. Vendors may be unwilling to sign any amendments and you will be legally obligated to close the transaction. What Does a Lawyer Look for When Reviewing a Status Certificate? When looking through a status certificate package, lawyers look for a variety of indicators. Firstly, in the status certificate itself, without limitation, lawyers will look for the following information: Ensure the unit number and address are correct; Note any parking or lockers conveyed with the unit; Determine the monthly common expense amount for the current fiscal year and whether the unit is in default of same; Whether common expenses have been increased or any special assessments have been levied in the current fiscal year; Any legal judgements against the Corporation or ongoing legal disputes that may result in increased common expenses; Overview of the budget and reserve fund of the Corporation; Whether the Corporation has adequate insurance in place. The governing documents of the Corporation with also be reviewed to highlight any provisions that may interfere with your use and enjoyment of the property. For example, many Corporations have restrictions on the number of pets, if any, that are permissible. It is important to review these documents so prospective purchasers are aware of any restrictions. Lawyers will also review the Corporation’s budget, audit, financial statements and reserve fund study. Although much of this information goes beyond the scope of a real estate lawyer, there are still many indicators to look for to ensure the Corporation is financially responsible and in a healthy state. This may include noting any large increases in liabilities, observing future funding recommendations, noting expected future increases to common expenses and determining whether the Corporation has been following their budget. Your lawyer’s objective when viewing the status certificate is to disclose any deficiencies or areas of concern so that you can make the most informed decision possible. A good real estate lawyer will often follow up with the Corporation on potential issues to gather further information or seek a solution. Your lawyer, however, will not provide a conclusive opinion on whether you should proceed with the transaction, nor will they provide in-depth financial insights. It is imperative that prospective purchasers review the status certificate themselves, as at the end of the day, you are the one making the final decision. A good lawyer, knowledgeable in condominium purchases, is essential for having a smooth real estate transaction. If you are looking to purchase a property or wish to have your status certificate reviewed, please contact Paria Rad, lawyer at Woitzik Polsinelli LLP at 905-668-4486 ext. 230 or at paria@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 alyssaBlog, Real EstateSeptember 5, 2023September 5, 2023
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
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
The Buyers Guide to New Construction Homes The purchase of a new construction home or condominium can differ from a property that is a resale. This is due to the fact that you are purchasing directly from the builder. The residential sector for the development industry is strong in Ontario. With the growing population and more residents moving outside the city, more new build development projects are expected to be completed to meet the province’s housing needs. However, purchasing a new construction home will come with additional obligations specific to the purchase of the new build. Outlined below is what to expect when considering purchasing a new construction home. New Build Agreement of Purchase and Sale New build Agreements of Purchase and Sale do not use the standard OREA form that is used in resale agreements. The ones provided in new construction homes are more descriptive and tailored to the developer. Included with the Agreement of Purchase and Sale are TARION Addendums which are added to include the following: Statement of Critical Dates Conditions Rights and Obligations Occupancy Termination Clauses Early Termination Conditions List of closing adjustments the vendor proposes. With these additions, it is important to have a lawyer review everything as some Agreements of Purchase and Sale can shift time frames for review. As well, there are a number of clauses and conditions that can be reviewed, removed, and negotiated for the purchaser’s needs. Along with hidden restrictions for Purchasers before purchasing the home, there are some that could come into place upon taking possession of the home. TARION Ontario’s new home Agreements of Purchase and Sale include a Warranty by the Tarion Warranty Corporation (“TARION”). This regulates and enforces the Ontario New Home Warranties Plan Act (“ONHWPA” or “Act”). Most new homes fall within the purview of TARION; with this, TARION Addendums. These will consist of a Statement of Critical Dates, which outlines the terms of the agreement and two schedules. Schedule A, the first schedule, will list types of permitted termination conditions. Schedule B, the second schedule, will identify all closing adjustments that the Vendor intends to charge the Purchaser. The Statement of Critical Dates is a crucial aspect of the new build agreement. Depending on the Firm Closing Date or a Tentative Closing Date, the Vendor could have the chance to extend the closing date numerous times. Similar to this is the Interim Occupancy Date which can be tentative or firm. This differs from the closing date as condominiums are generally available to occupy before the Vendor transfers ownership. If this happens, the Purchaser will pay Occupancy Rent until the closing date. If there are any delays in closing, there is compensation available through the TARION Warranty. This will come into effect after closing. Schedule B Adjustments in a new build agreement differ from resale purchases where the adjustments include property taxes and other common expenses. Purchasing a new home or condominium can come with lots of excitement. While there are new developments appearing every month, the importance of enlisting a real estate lawyer to thoroughly review your agreement of purchase and sale and other related documents is paramount. If you have any further questions on New Build Construction Homes or would like to speak to someone about reviewing your New Build Agreement of Purchase and Sale, please contact Woitzik Polsinelli Lawyer Jonathan Dippolito at jonathan@durhamlawyer.ca Or you can call him at 289-220-3229 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.” By Fauzan SiddiquiBlogAugust 27, 2021June 10, 2023
The Know On Shareholder Agreements What is a Shareholder? A party becomes a shareholder in a corporation when shares are issued to them from the corporation in exchange for money paid, property transferred, or past services rendered to the corporation. Shares can also be acquired through purchasing existing shares from another shareholder, as long as this complies with applicable securities laws. Shareholders hold certain rights, powers, and duties such as: Election of Directors Right to Receive Financial Statements Right to Appoint Auditors Approval of Fundamental Changes Submission of Proposals at Meetings, if they have voting power Shareholder Agreements There are risks and benefits to be aware of when establishing a new business or potentially investing in an existing corporation. Parties considering these ventures should create a contract to minimize risks and maintain the benefits. A shareholder agreement is a typical contract for corporations with more than two shareholders to manage these risks. There are several elements in shareholder agreements; however, they will vary depending on the individual needs. There is broad scope in negotiating and drafting a shareholder agreement. A shareholder agreement can potentially outline how the parties of the corporation will operate and how important decisions will be made. Critical Provisions for Shareholder Agreements: A shareholders’ agreement can address the following matters: The election and composition of the board of directors; What constitutes a fundamental matter, and who gets to approve them; When a shareholder can transfer their shares, and restrictions relating to that transfer: Right of first refusal Drag along Tag along Pre-emptive rights; and What happens if a shareholder dies, becomes disabled or is unable to work in the business (usually a shotgun clause). Shareholder Agreement vs. Unanimous Shareholder Agreement: While a shareholder agreement is a contract between more than one shareholder and is viewed as a commercial contract, it is subject to the articles and by-laws of the corporation and the provisions of the relevant corporate statute. A shareholder agreement binds only the shareholders that signed the agreement, and any future shareholders will have to expressly sign the existing agreement to be bound by it. A unanimous shareholders’ agreement, authorized by s.146 of the Canadian Business Corporations Act (“CBCA”), is in some facets created from the statute. Therefore, it can restrict the directors’ powers and bestow such powers to the shareholders of a corporation. This is done for the supervision and management of the corporation’s matters. A unanimous shareholder agreement does not require consent for future shareholders, as long as a notice is provided. The need for a unanimous shareholder agreement would be to: Override the discretion of directors; It forms part of the contesting documents for specific purposes; They are considered in all provinces except for British Colombia, Nova Scotia, and P.E.I. The provisions set out in a unanimous shareholders’ agreement allow shareholders to contract out of statutory requirements of the CBCA such as: limiting a director’s discretion in an individual capacity and requiring altered voting percentages for directors’ or shareholders’ resolutions. Why should you include a shareholders’ agreement or a unanimous shareholders’ agreement? Business relationships are constantly evolving. A complete and comprehensive agreement benefits your business because it avoids risks and conflict; it lays the foundation and groundwork for the guidelines and structure of your business. If you have any questions on whether you need a shareholders’ agreement or would like to discuss your corporate organization, please feel free to contact Stephen Sforza at stephen@durhamlawyer.ca or by phone at 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.” By Fauzan SiddiquiBlogJuly 28, 2021June 10, 2023
