Conducting appropriate due diligence is a fundamental part of any commercial real estate transaction. For purchasers, due diligence is a necessary step to determine the nature, use and condition of the property, and to assess the covenant of the vendor before committing to the purchase. This article will outline how commercial real estate lawyers can assist purchasers with their due diligence in respect to the purchase of commercial properties.

It is paramount for purchasers to establish and consult with a team of professionals when conducting their due diligence. Depending on the nature of the commercial transaction and property being purchased, the team members required may differ. Brokers who have experience dealing with commercial transactions should be used to assist in the negotiation between the purchaser and vendor of the business terms of the deal. Planning consultants would be consulted to help with advising on the development, zoning and land use planning aspects of the transaction. If the property may be contaminated or the transaction involves some environmental risk being assumed by the purchaser (e.g., due to the nature of the vendor’s (or any previous owners’) current and past business activities or the purchaser’s intended business activities on the land), then environmental consultants should be involved. If buildings and other structures are intended to be built or renovated, construction experts and possibly architects should be involved. Accountants would be vital to your team when there are important tax consequences that need to be understood. Finally, although lawyers must be retained to close the transaction, they should also be consulted during the due diligence process to perform and advise on title searches, off-title searches, and searches against the vendor.

A title search will be one of the most critical due diligence procedures that commercial real estate lawyers will conduct on behalf of their purchaser clients. By reviewing the title search, the lawyer will be able to advise on the registered owner(s) of the property, confirm any rights of way or easements affecting the property, identify any registered encumbrances that cloud the vendor’s ownership (e.g., mortgages, liens), confirm the accuracy of legal descriptions for the subject lands, determine if the property has legal access to a highway or public road, reveal any violations of the Planning Act, and more.

While a title search will reveal the quality of the title, the quantity of the title will require reviewing a survey of the property. An up-to-date survey will reveal the dimensions of the property and location of boundary lines, the location of public and private improvements relative to the boundary lines along with the setbacks to the property boundaries, the location of adjacent properties, roads, lanes, etc., as well as the location of easements and rights of way and other encroachments on the property. Although almost all real estate transactions involve obtaining title insurance to cover defects that would have been revealed by an up-to-date survey, reviewing a current survey is still highly recommended, especially if the purchaser is making substantial alterations or renovations to the property or building on it. If there is no survey available, the purchaser must decide whether the cost of hiring a certified land surveyor to develop a survey would be worthwhile; this can be an item of negotiation between the purchaser and vendor.

Off-title searches are inquiries made to governmental authorities to determine the existence of outstanding claims, restrictions and regulations affecting the property being purchased. Many governmental regulations can have a significant impact on the use of real property and because some do not need to be registered against title, they will not be revealed by reviewing the property’s parcel register. The nature of the property, its intended use and the time available are all factors that will dictate which type of off-title searches should be undertaken. Some of the off-title searches that should be considered include, but are not limited to, the following:

• Realty Tax Certificates (to determine if there are tax arrears) and local improvement charges;
• Public Utility Certificates (to disclose if there are arrears under any existing water or sewer accounts);
• Building/Zoning search (to determine the current zoning of property, and the existence of any open permits, work orders or deficiency notices);
• Fire Department search (to determine if there are any violations of the fire code);
• Electrical Safety Authority search (to reveal if there are any open or outstanding notifications pertaining to electrical work improperly done at the property);
• Technical Safety Standards Authority search (to check for compliance with certain safety regulations)
• Conservation Authority search (for greenbelt and other rural properties);
• Environmental searches (to check for any records of non-compliance with environmental laws);
• Public Health search (to check for outstanding matters or breaches of the regulations under the Health Protection and Promotion Act (Ontario), or under any applicable municipal by-laws);
• Condominium Status Certificates (for condominium properties);
• Unregistered Hydro Easements;
• Liquor License Board (for restaurants, hotels, bars, etc.);
• Development charges and occupancy permits (for new construction or redevelopment properties).

If there will be agreements to be assigned to the purchaser on closing, there may be additional “off-title” due diligence required, such as reviewing commercial leases, service contracts, licenses, permits, etc.

Searches against the vendor should also form part of the purchaser’s due diligence process. When the vendor is a corporation, a corporate profile report and certificate of status should be pulled to ensure the corporation remains in existence and is in good standing, and to reveal the directors/officers of the corporation for signing authority. Other recommended searches against the vendor include the following:

• Personal Property Security Act search (to indicate whether the personal property of the vendor is subject to security interests of a secured creditor);
• Execution search (to identify any outstanding judgements against the vendor);
• Bank Act search (to determine if any bank has taken security over any of the vendor’s inventory and/or equipment);
• Bankruptcy and Insolvency Act search (to reveal if there is any record of any bankruptcy or insolvency proceeding against the vendor or whether the vendor is or has been bankrupt);
• Litigation searches (to identify if there are any formal legal proceedings involving the vendor at various levels of court and in various jurisdictions).

In addition to assisting in the due diligence process, a commercial real estate lawyer should also be involved in preparing or at least reviewing the agreement of purchase and sale while it remains conditional. The lawyer will work to ensure a purchaser’s intentions are clearly acknowledged, risks are mitigated through appropriate conditions and representations and warranties made by the vendor, and, more generally, that the purchaser’s rights are protected.

Feel free to contact our lawyer Stephen Sfroza for your queries via email at stephen@durhamlawyer.ca or call 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.”