Audrey
Mulholland,
Avocate associée, De Grandpré Chait
June 2015 - eSpace Magazine
Article

Introduction

Sales of commercial real estate without legal warranty are very trendy as of late. Vendors no longer wish to make representations and warranties as they once did. Instead, they prefer that the purchaser assume the responsibility of making the pre-purchase verifications required to determine whether they are satisfied with the property. How can purchasers protect themselves and minimize potential damage, especially in the context of a real estate financing with a hypothecary lender?

The offer to purchase is the first step in the process, forming the foundation for any real estate transaction. The key terms and conditions that govern the transaction are set forth in this document and constitute the agreement between the parties. The offer contains the essential elements of the transaction, such as the identification of the parties, the purchase price and the description of the property. It also contains the steps to follow before the official conclusion of the transaction, the process, the timeline for completing due diligence (both documentary and physical), the representations and warranties of the vendor and the purchaser that will guide and survive the transaction as well as the transactional documents that must be completed at the closing, held at either a notary’s office or the office of another legal professional. At this point, it is very important to provide realistic time limits for the performance of due diligence and to ensure that the list of representations and warranties is complete. Frequently, the offer to purchase is conditional on obtaining financing with a hypothecary lender. One must bear in mind that the financing takes place simultaneously with the acquisition and that the information obtained during the due diligence period will be used to reassure the hypothecary lender.

The signature of the offer to purchase and delivery of the due diligence materials mark the beginning of the due diligence period. The following are the important components of a real estate acquisition without legal warranty.

 

Title Search

Is the vendor the true owner? What rights or encumbrances affect the property and how do they impact the acquisition?

The performance of a thorough analysis of the Index of Immovables and of the different deeds obtained from the Land Register is crucial, among other things, to verify what encumbrances affect the property. Are there any hypothecary loans? Do they have to be reimbursed or assumed? Are there servitudes of access or egress on the property that must be respected by the purchaser? Could such servitudes adversely affect the purchaser’s construction or development project on the property in any way?

The certificate of location, prepared by a land surveyor who is a member of the Ordre des arpenteurs-géomètres du Québec, plays an important role in a real estate transaction. The certificate of location consists of a report and property plan which is prepared by the land surveyor following a visit by the latter to the property which, in accordance with the Regulation respecting standards of practice for location certificates, allows the land surveyor to state his or her opinion on the current situation and state of immovable property in relation to the ownership titles, the cadastre and the legislation in force.

Under the Civil Code of Québec, “the seller is bound to hand over to the buyer the titles of ownership in his possession and, in the case of the sale of an immovable, a copy of the act of acquisition of the immovable, of any previous titles and of any location certificate in his possession” (Section 1719). In the context of a commercial real estate transaction, in order to protect the interests of the purchaser and the hypothecary lender in the offer to purchase, a recent certificate of location would be preferable, addressed to the purchaser and the lender for reliance purposes.

A purchaser acquiring a property “as is” must be satisfied with the charges on title prior to completing the transaction. When in doubt and in the event that rectifying the issue is impossible, title insurance is an excellent form of protection for both the purchaser and the hypothecary lender. This insurance protects the purchaser against certain defects of title that could be harmful to the purchaser or hypothecary lender. Title insurance is also used to address non-title issues, such as zoning problems.

 

Off-Title Search

Have you obtained, from the vendor, all the authorizations required to gain access to the information held by various government entities? What are the other verifications that must be made in order to avoid any unpleasant surprises?

The federal and provincial laws governing access to information permit you to access a wide range of information about the vendor and the property concerned with the written consent of the owner. By sending requests to different governmental entities (ex.: the Commission de la construction du Québec, the Commission des lésions professionnelles, the Commission des relations du travail, the Commission de la santé et de la sécurité du travail, the Commission des normes du travail, the Régie du logement (if residential), Environment Canada, Gaz Métro Limited Partnership, Hydro-Québec, the Ministry for Sustainable Development, the Environment and the Fight against Climate Change, the Régie du bâtiment, the Tribunal administratif du Québec and the city or borough in which the property is located), you can verify if their files contain any documents or information in relation to an amount due, an investigation, an infraction, a complaint or non-compliance with a law, by-law or standard, whether environmental or statutory. This information provides an overview of the property’s history and can reveal important details that could potentially deter you from going through with the transaction.

The costs associated with these requests may vary depending on the entity and the law that governs it. According to the Act respecting Access to documents held by public bodies and the Protection of personal information, access to documents held by provincial entities is free. However, under the Access to Information Act, federal entities have the right to require a payment at the time the request is made. Both federal and provincial laws provide that governmental entities may charge the applicant an additional fee for the transcription, reproduction or transmission of the document. Moreover, the governmental entity requiring such fees must inform you of the approximate amount that will be charged for the transcription, reproduction or transmission of the document.

Once a government entity has received a request for access, the person in charge of granting access to documents for that particular organization must send the applicant a written confirmation of receipt indicating the date the request was received, the period within which the person in charge must respond and the consequences for failing to respect that time limit. The confirmation of receipt must also mention the remedies available to the applicant, if any. Provincial entities have a period of up to 20 days to respond, while federal entities have 30 days. If an entity is not able to meet its deadline due to a large volume of requests, among other things, the deadline may be extended on the condition that the person in charge notifies the applicant of this delay in writing.

If the off-title search reveals any infractions or areas of non-compliance affecting the property, an extended delay may be useful to obtain the information required to properly assess the impact of these issues on the acquisition and, if necessary, to correct these issues before moving forward. A prudent purchaser should bear this information in mind while drafting the offer to purchase and evaluating the appropriate time frame for the transaction.

The hypothecary lender is also interested in the results of the off-title search and will generally require a copy. Among other useful searches, it is wise to check the Register of personal and movable real rights, Bankruptcy and Insolvency records (BIA), the System of registration of security interests (Bank Act) and the court records for Québec. These searches specifically concern the vendor and the claims that may be made against the latter. Note that these searches are performed in conjunction with a physical and environmental inspection of the property, carried out by a qualified professional who will then submit a report summarizing all relevant information.

Among other elements that must be considered, does the purchaser intend to keep any of the employees currently working on the premises? Prior to closing, the purchaser should take all appropriate legal measures to avoid any misunderstandings or conflicts with the employees once the transaction has taken place. Moreover, does the vendor have any existing contracts that the purchaser wants to keep, and do these contracts require the consent of a third party to be validly transferred to the purchaser? If so, the process can be time-consuming, so the parties must allow a reasonable amount of time prior to closing to complete these transfers.

 

Zoning Search

Does the use of the property comply with current regulatory standards? Are the existing buildings and the purchaser’s construction plans in compliance with the applicable urban planning by-law? What must be verified? What must be done if the use of the property does not comply with the regulations?

Whether the transaction is done with or without legal warranty, zoning is a fundamental element governed by the municipality. Zoning by-laws are used to determine if the manner in which a property is used or the type of structure is in compliance with current municipal regulations. Moreover, a prudent purchaser should consider the range of permitted uses. Zoning that is too restrictive may diminish the value of the property. It is best to know whether the property is compliant with zoning regulations prior to signing the deed of sale so that the purchaser may make an informed decision about the transaction.

What happens when a zoning issue arises? More specifically, what happens when the purchaser’s construction plans or its intended use for the property does not comply with the applicable regulations?

Any construction, planning or development project must comply with the urban planning by-law of the city or borough in which the property is located. Depending on the nature of the zoning issue, the purchaser can either request a minor variance or request that the zoning by-law be amended in order to bring the property into compliance with the prescribed regulation. Minor variance cannot be used for issues involving use or density, so a by-law change is the only recourse available.

The procedure to be followed in making these requests, governed by the Act Respecting land use planning and development, includes several steps and may be very costly. Either type of request can take several months. Note that change of zoning is subject to a referendum process, which could delay and even derail the request.

Conclusion

Once due diligence has been completed to the satisfaction of the purchaser, the parties may proceed with the signature of the deed of sale. This document contains the terms and conditions as well as the representations and warranties provided in the offer to purchase. Any incidence of non-compliance revealed by the investigation performed during the inspection period may give rise to a price reduction negotiation. The purchaser could also consider the use of a holdback (the withholding of a sum of money from the purchase price) until the vendor has rectified the non-conformity.

The real estate market continues to show strong growth in Québec and elsewhere in Canada. Real estate transactions are often complex and involve numerous steps that require vigilance from all parties involved. In addition to providing useful advice, the present article also constitutes an invitation to be vigilant.