Commercial real estate in Canada: overview

A Q&A guide to corporate real estate law in Canada.

The Q&A gives a high level overview of the corporate real estate market; real estate investment structures, including REITs; title; tenure; sale of real estate; liability; due diligence; warranties; real estate tax, including VAT and stamp duty/transfer tax; climate change targets; restrictions on foreign ownership; real estate finance; commercial leases; and planning law.

To compare answers across multiple jurisdictions, visit the Corporate Real Estate Country Q&A tool.

This Q&A is part of the global guide to corporate real estate law. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestate-guide.

Richard Burgos, Lavery, De Billy, LLP
Contents

The corporate real estate market

1. What have been the main trends in the real estate market in your jurisdiction over the last 12 months? What have been the most significant deals?

In the past few years, Canada has undoubtedly experienced a very strong and dynamic real estate investor community, with proven public market investment trusts, pension funds and private equity investors playing central roles in this evolving market.

There is a steady influx of global investors who are tapping into the commercial real estate market, whether as individuals or through strategic ventures with Canadian real estate entities.

Many recent larger transactions in Canada have concerned a repositioning of pension fund holdings, and the sale and monetisation of real estate holdings by property holders (retailers and landlords) into newly created, single purpose real estate investment trusts (REITs).

Also of note, with the limited number of quality assets and since many of Canada's major pension funds are already heavily weighted with real estate assets in Canada, many Canadian institutional real estate holders have looked abroad for real estate opportunities.

 

Real estate investment

2. What structures do investors typically use for real estate investment in your jurisdiction and what are the main advantages and disadvantages of each (for example, flexibility and tax transparency)?

The following investment structures are commonly used:

  • Partnership:

    • general partnership. In this structure, the liability of each partner for the debts and obligations of the partnership is unlimited;

    • limited partnership. The liability of each limited partner, except the general partner, is limited to the amount each has contributed to the partnership, plus the partner's share of any undistributed income.

A partnership is not a taxable entity, although it is recognised as a separate entity for the purpose of calculating income.

Unlike in a corporation or a trust, the losses incurred by a partnership flow through to the members and can be used to shelter other sources of income.

  • Co-ownership. Two or more parties own a particular property, in which each has an undivided interest. Even though the liability of each owner may be clearly specified in the co-ownership agreement, the risk of exposure to joint and several liability is high. Unlike a partnership, the use of co-ownership permits each investor to claim a capital cost allowance and other discretionary deductions independently of other co-owners.

  • Corporation. A limited liability company is the main vehicle used to purchase real estate. A corporation is a separate taxable entity and, as such, losses, cashflow and capital cost allowances do not flow through to the shareholders.

  • Bare trustee corporation. A shell corporation or nominee is often used to hold the legal, and not the beneficial, ownership of real estate, and is disregarded for income tax purposes. The use of a nominee structure can in certain provinces avoid land transfer tax.

  • Trust. This is a vehicle under which property is held in trust for its beneficiaries. A trust is typically a separate taxable entity, but which can distribute revenues to its beneficiaries which would be taxable to their account.

  • REITs. In this form of trust, the beneficiaries are unitholders. A REIT operates essentially as a revenue flow-through vehicle for tax purposes, subject to conditions relating to, for example:

    • the percentage of rental property which must be held;

    • how rental income is distributed.

 
3. What are the main sources of finance and types of investors for real estate investment in your jurisdiction? Does your government encourage overseas investment into real estate in your jurisdiction, for example through real estate investment legislation?

Sources of financing for real estate are generally debt financing as well as equity or a combination of the two. Commercial mortgage financing is fairly competitive, with interest rates currently mirroring base rates plus applicable margins.

Publicly traded owners often access both equity and debt or bond markets for unsecured loans as well. The securitisation market is currently much less active than it has been.

There are no governmental provisions that generally encourage real estate investment by residents or non-residents.

Legislation was recently passed to limit access to residential mortgage finance by increasing minimum loan-to-value ratios, due to an active residential market and high debt levels of consumers.

Restrictions on foreign ownership or occupation

 
4. Are there restrictions on foreign ownership or occupation of real estate (including foreign ownership of shares in companies holding real estate)? Are there restrictions on foreign guarantees or security for ownership or occupation and on lending for the purchase of real estate?

Under Canada's constitutional framework, real estate regulation is a subject for the provincial legislature. Except for the provinces of Prince Edward Island, Saskatchewan, and Nova Scotia, there are generally no direct or indirect foreign ownership restrictions.

However, some provinces apply restrictions on the transfer of agricultural property to non-residents, with varying thresholds and limitations, as follows:

  • Alberta limits non-residents to two plots of agricultural or recreational land, up to a total of 20 acres.

  • Saskatchewan restricts the sale of agricultural land to non-residents to ten acres.

  • Manitoba prevents non-residents from owning more than 40 acres of farmland, and requires that they move to the province within two years of purchasing the land.

  • In Québec, the acquisition of agricultural land over four hectares is subject to governmental approval.

There are generally no statutory restrictions on non-resident, secured financing transactions.

Non-resident owners of commercial real estate in Canada must complete registrations and filing formalities relating to corporate taxes, income tax and VAT, sales taxes, as well as corporate disclosures which may vary from province to province.

 

Title to real estate

5. What constitutes real estate in your jurisdiction? Is land and any buildings on it (owned by the same entity) registered together in the same title, or do they have separate titles set out in different registers?

Real estate is held by title to the land parcel, and generally includes the land in that title together with any buildings or other structures on it.

Some jurisdictions permit variations to this rule, for example vertical or air use rights in condominium or strata ownership, where title to such rights is distinct from title to the land.

Many jurisdictions, notably Québec, allow separate title to buildings and land, as well as long-term leases, subject to the applicable rules (see Question 9).

 
6. How is title to real estate evidenced? What is the name of the public register of title and the authorities responsible for managing it? Is electronic access and electronic conveyancing available?

Title is evidenced by registration in the relevant public land registry office. Registry or land title offices are operated by governmental or quasi-governmental authorities in each province.

There are two types of land registration systems. In both systems, title is made fully opposable to third parties and enforceable, and in some cases valid, by registration of the instrument through which title to the land is transferred or otherwise affected (see Question 7).

Land titles or Torrens system

This is the more modern of the two systems. The three main components are the:

  • Mirror principle, meaning that the register is a perfect mirror of the state of the title.

  • Curtain principle, meaning that a buyer need not investigate the history of past dealings with the land.

  • Insurance principle, meaning that the province or territory guarantees the accuracy of the register and compensates any person who suffers loss as a result of an inaccuracy.

The Torrens system is becoming the dominant system in the common law provinces of Canada, and is the only method of registration in the provinces of Alberta, British Columbia, Saskatchewan, Northwest Territories, Nunavut and Yukon.

The system is not used in Québec, and is only partly used in Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Prince Edward Island.

Registry system (Land Registry)

In contrast to the Torrens system, the Registry system merely provides a system for registering instruments affecting title, without legally confirming ownership or title.

It is mainly used in Québec, and partly in Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Prince Edward Island.

Ownership is ascertained by reviewing the various registered documents or instruments that concern a property. The registry amounts to a collective record or depository of the instruments affecting a specific property. It reflects both the identity of the legal owner and any other legal interests affecting the title.

The legal interests that affect the land are ranked based on priority of registration, subject to certain exceptions.

Electronic access and electronic registration of instruments is generally available in each province, each with different requirements, and is usually efficient and cost effective.

 
7. What are the main information and documents registered in the public register of title? Can confidential information or documents be protected from disclosure in the public register of title?

Types of documents

Under both land registration systems (see Question 6), any document creating or evidencing a title interest in the property can be registered, if it transfers or otherwise affects title, including the following:

  • Deed of sale.

  • Mortgage.

  • Assignment of a mortgage.

  • Lease.

  • Easement or other restriction on title.

Form of documents

Other than what may be prescribed under regulation or law, or required under the terms of a particular transaction, the form of the instrument to be registered need not disclose all business or registration terms.

In fact under the Registry system, several mechanisms exist to register a form solely for the purpose of official registration, while keeping some of the terms of the deal off-title. In practice, a document is usually registered in its entirety, subject to certain exceptions and formalities.

Under the Torrens systems, only prescribed forms that summarise the title document are filed.

In all cases, the following details are required:

  • Full description of the property.

  • Identity of the parties involved.

  • Description of the right(s) related to the title being affected.

In many cases, the applicable law will require additional prescribed information, notably the consideration paid, as this is commonly required for determining payment of transfer taxes.

 
8. Is there a state guarantee of title? Is the authority that manages the public register liable to pay compensation for any errors it makes in relation to title registration? Is title insurance available and is it commonly used?

State guarantee

Under the Torrens system, title is guaranteed by the applicable act of the province or territory in question. Compensation is granted as a result of any prejudice incurred.

There is no guarantee of title under the Registry system.

Some Québec courts have decided that the land registrar must pay compensation for errors it made in relation to title registration, but these cases are relatively rare.

Title insurance

Title insurance is commonly available in Canada and its use continues to develop.

The objectives of title insurance are to:

  • Remove most of real estate liability exposure from lawyers' professional liability insurance coverage.

  • Ensure that appropriate standards of practice are met.

This type of insurance is available from specialist companies, and is underwritten on an occurrence basis. It is available for both residential and commercial transactions and can offer owner and lender coverage. The policy is usually in place until the insured disposes of its interest in the property.

 
9. How can real estate be held (that is, what types of tenure and other main ownership rights exist over land)?

The holding of real estate in Canada is subject to Canada's dual systems of law. Canadian law has its origins in English common law, except for Québec. Québec law has its origins in French civil law and the French Civil Code.

In Canada, other than Québec, real estate is held as freehold or leasehold. Leasehold estates are granted for a definite term. Freehold estates are granted for an indefinite period of time.

There are three types of freehold, and the difference between them is their potential duration:

  • Fee simple: this is the most common form of land ownership. Its holder owns all the rights and obligations over the land, subject to any statutory and common law restrictions.

  • Life estate: these are increasingly rare, but still exist and can still be created. The grantee has an interest in the property until his death, when the interest in the land reverts back to the original grantor.

  • Fee tail: the estate passes property only to the lineal descendants of the grantor.

In Québec, rights to ownership are divided into two broad categories:

  • Right of ownership: ownership is the most complete real right existing under Québec laws. It grants the owner the right to use, enjoy and dispose of property, subject to any law or regulation restricting such use. Under Québec civil law, in contrast to Canadian common law rights, ownership is viewed as an exclusive and individual right belonging to one owner.

  • Right in property belonging to another owner. Also known as dismemberment of ownership, this is a right in property that someone else owns. It has some of the advantages of ownership, such as right of use, but is less complete than full ownership. A dismemberment is a real right that benefits its holder directly. Two types of such right are:

    • usufruct: the usufructuary has the complete and exclusive material use and enjoyment of property owned by someone else, but must preserve its substance and condition;

    • emphyteusis: this is a real right under a long-term lease of land belonging to another, whereby in consideration of the obligation to undertake construction, in essence the holder of the right the emphyteuta, assumes the right of ownership for a fixed term. At the end of the term, ownership of any such constructions on the land will revert to the owner.

 

Sale of real estate

Preliminary agreements

10. What types of preliminary agreements are typically used in the sale of real estate? Are they legally binding?

Types of preliminary agreements commonly used to establish the basic terms of real estate deals include a:

  • Letter of intent.

  • Memorandum of understanding.

  • Term sheet.

They are typically a non-binding pre-agreement. Recent case law, specifically in Québec and increasingly in the rest of Canada, has held that these types of pre-agreement, while generally non-binding, generally create obligations to act reasonably and in good faith, failing which liability may be incurred

 

Sale contract

11. Briefly outline the typical main provisions of a corporate real estate sale contract and main real estate provisions of a typical share purchase agreement.

Commercial real estate sale contract

The commercial real estate sale contract is commonly known as an offer to purchase or purchase and sale agreement. It is a binding agreement, usually drafted by the buyer, outlining the details of the transaction, including the following terms:

  • Price. The purchase price.

  • Price adjustments. Any adjustments to the purchase price, including payment of taxes, certain assessments, rentals, and pre-payments.

  • Assignment of leases and other contracts. All leases and contracts relating to the property will be transferred to the buyer, typically on completion, subject to applicable exceptions or conditions.

  • Obligations and undertakings of each party. Description of what each party must do to transfer the title to the real estate.

  • Representations and warranties. These are often heavily negotiated by the parties.

  • Conditions. Any other conditions that may apply.

  • Delays. The agreed times required for due diligence and/or completion.

In most transactions, the parties' obligations are subject to satisfactory due diligence, or in some cases satisfactory finance arrangements.

Share purchase agreement

The conditions in a share purchase agreement relating to real estate are similar to that of a real estate acquisition, but with the addition of share transfer provisions and terms relating to the entity being acquired.

Due diligence

 
12. What real estate due diligence is typically carried out before an acquisition and what key areas does it cover? Which documents are typically reviewed? Which specialist advisers are usually involved and which reports do they typically produce?

Due diligence for a real estate acquisition typically involves:

  • Title investigation. The extent of this depends on which title system applies (see Question 6). In Québec, title investigation is necessary and can be extensive. Subject to the nature and importance of the transaction and in consideration of limitation periods which may apply as to certain real property rights, searches are commonly undertaken with a review of the chain of title documents as well any encumbrances and restrictions on title extending back for either a minimum 30 years, for 51 years, or from the commencement of the Land Title Registry. For the rest of Canada and notably where the Torrens system is in place, title investigation is limited to review of land title registrations, which confirm the present title holder and encumbrances or restrictions.

  • Off-title searches. These include searches of public authorities for information on permitted uses, and compliance with various regulations and standards affecting the property. Such searches can be performed by any party, but the person requesting the information must usually have authorisation to access the records of the public authority.

  • Environmental reviews. These are performed by environmental consultants. They contain environmental information relating to the land and in many cases the building.

  • Lease reviews. Review of any leases relating to the acquisition, to determine matters including:

    • tenants' details;

    • rent(s) payable;

    • operating expenses to be recovered; and

    • any consents needed by the tenant(s) or the landlord for a transfer of the lease.

Such work is generally performed by counsel or specialised lease audit firms.

  • Review of major contracts. Review of major contracts affecting supply services to the real estate being acquired.

  • Financial. Rental or other income produced and valuations for purposes of the sale.

  • Property condition. Instead of or in conjunction with the environmental review, a buyer will commonly examine the condition of the building and the land.

Sellers' warranties

 
13. What real estate warranties are typically given by a seller to a buyer in the sale of corporate real estate and what areas do they cover? What are the main limitations on warranties, for example are they typically qualified by disclosure?

Sellers typically agree to give representations and warranties in relation to factual matters, such as the following:

  • The seller is duly authorised to sell the property.

  • The seller has delivered to the buyer complete copies of all leases and contracts affecting the property.

  • Its title to the property, and its right to convey the title to the buyer in the sale contract.

  • The property is free of all rights and encumbrances, except those he has declared at the time of sale.

  • No notices of breaches have been received.

In commercial transactions, representations and warranties are not commonly given in relation to matters that a buyer can investigate at the due diligence stage (see Question 12).

In Québec, unless expressly excluded by the terms of the sale contract, the seller is deemed to warrant valid title and that the property is free of defects. It is quite common in Québec for the seller to limit this warranty or exclude it altogether, as it is not required by public order or public policy.

However, most other jurisdictions in Canada require disclosure of defects or issues known to the seller, and which a buyer may not otherwise be able to discover which, as a matter of good faith, should have been disclosed despite no representation or warranty being made.

Liability

 
14. Does a seller have any statutory or other liability to the buyer in a disposal of real estate?

In Québec, the seller is liable to the buyer by law, under the legal warranty of quality and title (see Question 13) and may remain liable after completion of the sale for the following:

  • Any defects in condition or title, to the extent that these could not have been discovered by a buyer (see Question 13).

  • Issues that happened during the seller's ownership, for example, contamination or non-released mortgages.

However, these are not matters of public order or public policy, and can be and are often excluded by agreement in commercial transactions, though this legal warranty is quite common in residential transactions.

In the rest of Canada generally, other than in connection to the obligation to disclose any known defects, not otherwise apparent, any liability after the completion of any sale would only be related to representations and warranties expressly or implicitly given by the seller under contract, which would survive for a length of period following closing. The duration of the period is agreed to by the parties.

When real estate is held as leasehold, the previous tenant and any guarantor typically remain liable after assignment of the lease, unless expressly released by the landlord.

In commercial leases, landlords are usually released from any future obligations from the time of the transfer of the real estate to the buyer, who assumes the obligations under the lease.

 
15. Briefly outline the environmental legislation and potential liability for a buyer in a purchase of real estate. Is it common to carry out environmental surveys and searches and to obtain environmental insurance? How is environmental liability typically dealt with in the sale contract?

In Canada, environmental legislation is issued at both the federal and provincial levels of government.

The legislation regulates remediation obligations, liability for contamination and authorisations for use and dealing with hazardous substances.

It is common to carry out environmental surveys or audits before buying real property as part of the due diligence process (see Question 12). This phase of the due diligence process is critical in assessing the environmental risks and liabilities involved in purchasing a property.

Surveys are typically carried out in two parts by specialist environmental consultants. An initial report known as a Phase I determines the probability of environmental contamination, based on initial reviews and observations.

The Phase I survey typically does not involve any invasive testing (for example, a detailed site visit and taking soil samples for testing). If the Phase 1 survey finds there is no risk of contamination or the risk is small, no further surveys are carried out.

If there is a material risk of contamination a second, Phase II audit is carried out, which does involve invasive testing.

Environmental liability can be owed to:

  • Regulatory authorities.

  • Third parties.

  • Buyers.

While a buyer may not have caused the environmental issue, it may incur liability for the issue on taking possession or ownership of the land. In some cases, the buyer will have the benefit of a warranty given by the seller in the sale agreement.

A seller who is responsible for harm incurred before the sale will remain liable to third parties and authorities, despite the transfer of ownership. The issue of dealing with liability is typically dealt with in the sale contract.

In a sale contract, environmental liability is negotiated based on a number of factors and the deal terms. It is common for the seller to remain liable for any liability incurred before the sale, although the assumption of this liability by the buyer may also be negotiated.

Environmental insurance is available but is not common. When it is obtained, it can be very expensive.

 
16. Can an owner or occupier inherit liability for other matters relating to the real estate even if they occurred before it bought or occupied it? Can a seller or occupier retain any other liability relating to the real estate after it has disposed of it?

While environmental laws and rules may vary depending on the province, the general rule is that under statute, an owner or occupier such as a tenant may inherit liability and responsibility in connection to pre-existing environmental conditions.

However, generally the statutes have provisions where, if there is evidence to show that either the tenant or new owner, acting diligently and reasonably, could not have known of the contamination, then this could serve as a defence to any such claim.

A seller or former occupier would retain liability after disposal, to the extent that it has itself caused the environmental condition, or having knowledge of the condition, has failed to make disclosure of it.

Completion arrangements

 
17. What are the typical arrangements and main documents required for completion of the sale? When does title transfer and what are the formal legal requirements to execute the sale documents, transfer the real estate and register the change of title? Is notarisation required?

Sale contract

The agreement of purchase and sale or offer to purchase (see Question 11) typically provides for a period of time in which to fulfil certain conditions precedent for the completion of the sale.

The agreement of purchase and sale will typically require an initial deposit to be paid with a second deposit payable on waiver of due diligence or conditions such as financing.

When legally binding

The agreement of purchase and sale becomes binding on waiver of due diligence or other agreed conditions. A failure to complete by the buyer would result in forfeiture of the deposit, and by the seller would result in a claim in damages or in specific performance.

Title is transferred when the seller and buyer execute the deed of sale or transfer in the required form.

Title usually passes on signature of the sale transfer contract and generally becomes enforceable against third parties on registration (see Questions 6 and7).

Registration

Registration of the sale contract documentation generally occurs on or immediately after closing. Lawyers handle the closing process in all provinces. In Québec, it is common to have the deeds of sale signed before a notary, although this is not legally required.

In British Columbia, the registered transfer document must be notarised by a lawyer or a notary public, who certifies the execution of the transfer instrument.

 

Real estate tax

18. Is stamp duty/transfer tax (or equivalent) payable on the purchase of real estate? Who pays, what are the rates and are there any exemptions? Does it apply to the transfer of shares in a company holding real estate and at what rate?

Each jurisdiction has different rules on transfer tax for the purchase of real estate.

Transfer tax is payable by a buyer of real estate, typically on registration of the transfer.

In Québec, transfer tax becomes due on receipt of a tax statement, which is usually issued within 30 days of registration.

Each jurisdiction has its own rate of transfer tax. A typical rate is 1.5% and 2% of the sale price. Rate variations are based on valuations of property, and would apply equally to commercial or residential properties.

Notably, with the intent of restricting foreign acquisition of residential property in Vancouver, British Columbia, which has led to exorbitant housing prices, the Province of British Columbia has imposed a 15% transfer tax on non-resident purchasers of residential properties, with the intent of cooling the market.

With the notable exceptions of Quebec and Ontario, a change of beneficial ownership and a related transfer of shares in the registered title holder will not result in transfer tax liability.

Transfer tax will not apply to the transfer of shares in a company holding real estate, there being no stamp tax equivalent, although income tax issues may arise.

A common exemption to transfer tax is property transfers between related parties.

 
19. Are any methods commonly used to mitigate real estate tax liability on acquisitions of large real estate portfolios? What is the general approach of the tax authorities in your jurisdiction to such schemes?

Real estate/nominee companies are used extensively to hold the legal title to real estate, so that the beneficial interest and the shares of the nominee company can be sold free of transfer tax (see Question 18).

 
20. Is value added tax (VAT) (or equivalent) payable on the sale or purchase of real estate? Who pays? What are the rates? Are there any exemptions?

Subject to the following, value added taxes are generally payable on the sale of real estate in Canada:

  • At the federal level, there is a goods and services tax (GST), at a rate of 5%.

  • Quebec, British Columbia, Manitoba and Saskatchewan also have a provincial sales tax (PST).

  • Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island have a harmonised sales tax (HST). HST essentially combines the GST and PST imposed in those provinces.

  • Alberta only has GST, without any HST or PST

The VAT rates vary, from 5% in Alberta to between 12% and 15% in the other provinces.

However, if the buyer is registered for sales tax purposes, sales taxes do not have to be collected by the seller on commercial real estate transactions, because the buyer will self-assess the tax payable. Therefore, most commercial real estate transactions are VAT exempt.

There is also a VAT exemption for existing residential property such as single family residences or residential properties.

For new residential constructions, there is no VAT exemption.

 
21. Are municipal taxes paid on the occupation of business premises? Are there any exemptions?

Municipal taxes are principally based on ownership of the business premises and are payable on a rate of the assessed value of the property. Rates vary on commercial and residential properties. The assessment of rates is based typically on various factors including income from revenue properties, comparisons with non-revenue generating properties and land and property costs.

Each municipality has different rules for business or occupancy taxes.

There are limited exemptions to municipal tax liability, including for public, quasi-public or not-for-profit organisations, or in certain zones where the local authority is encouraging development.

 

Climate change issues

22. Are there targets or incentives to reduce greenhouse gas emissions from buildings in your jurisdiction? Is there legislation requiring buildings to meet certain minimum energy efficiency criteria?

There has not yet been any legislation or incentives introduced by the provincial or federal governments in Canada to reduce greenhouse gas emissions.

There are voluntary guidelines and initiatives promoted by, for example, the Building Owners and Managers Association (BOMA), Leadership in Energy and Environmental Design (LEED), and industry participants. These are becoming industry standards, particularly for new buildings and improvements to existing buildings.

Most sophisticated landlords are generally green conscious, and do make related improvements as may be cost effective and sensible.

 
23. Are provisions relating to the energy efficiency of buildings commonly included in contracts for the sale of real estate or in leases (for example, green leases)?

Specific "green" clauses are not common in most property transactions involving existing buildings. Although tenants are starting to request green leases or green provisions, landlords have to pass the cost of them onto the tenant, and most tenants would find these costs too expensive.

Energy efficiency provisions are becoming more common in sole tenant lease transactions or transactions involving new buildings. A number of tenants do require a number of green criteria in leases, notably in new constructions or developments, where the cost of green efficiencies can be more easily covered than in an existing property.

 

Real estate finance

Secured lending involving real estate

24. Briefly outline the typical security package required by lenders in relation to real estate lending. How are the most common forms of security interest relating to real estate created and perfected (that is, made valid and enforceable)?

Lenders usually take security over the following:

  • The land and buildings owned by the borrower and for which it is lending.

  • Personal property, chattels and related property necessary for the land and buildings.

  • Insurance proceeds of the borrower.

  • Rent payments due by any tenant(s).

  • Any amounts that the lender can retain for prepayment such as municipal taxes, or any amounts of the loan not paid by the lender until certain conditions are met.

In Canada, the usual forms of security interest are:

  • A mortgage over land and buildings.

  • An assignment of rent and insurance proceeds.

  • A security agreement relating to chattels.

The security interests are created by the execution of the relevant agreements and perfected by registration in the required title offices and personal property registers.

In Québec, the main form of security interest is the hypothec, which can cover all the above. A hypothec must be signed before a licensed Notary of Quebec and must also be registered in the Quebec title office and personal property register.

 
25. What other real estate related measures do lenders typically take to protect themselves against default by the borrower?

Lenders typically require the borrower to give certain covenants in the loan agreement, including:

  • To keep the property insured.

  • Not to encumber the property without the lender's permission.

  • Not to sell the property without the lender's permission.

Lenders also typically require payments of real property taxes to them in advance, to ensure payment.

 
26. Can lenders incur environmental liability? What measures do lenders typically take to manage potential environmental liability?

A lender can incur environmental liability when it:

  • Appoints a receiver or receiver-manager according to its security interest.

  • Forecloses on the property.

  • Becomes involved in the management of a debtor's business.

Direct liability can arise in one of two ways:

  • Where the debtor caused environmental damage before the lender foreclosed on the damaged property or otherwise became involved in the debtor's business.

  • When the damage occurs after the lender has foreclosed on the property or becomes involved in the business.

The lender may also be indirectly liable for environmental damage where it has indemnified a receiver or receiver-manager.

Lenders must ensure they receive all appropriate environmental surveys, audits and reports on the property before the transaction, and monitor the borrower's activities afterwards.

A receiver named under the bankruptcy laws is generally exempt from liability. When the borrower is bankrupt and environmental issues are known about, lenders commonly appoint a receiver under the bankruptcy laws to enforce their security and avoid liability.

 
27. Briefly outline the main remedies for lenders in relation to the secured real estate if the borrower defaults on the loan. What is the effect of the borrower's insolvency on the lender's remedies?

The main remedies are:

  • Taking possession for purposes of managing the property.

  • Exercising the power of sale.

  • Foreclosure.

Taking possession enables a lender to manage and control the property before and pending a sale or foreclosure.

The lender must obtain a court authorisation to sell the property. On foreclosure, it becomes the owner of the property, thereby extinguishing its debt.

Each province has its own specific rules about the notices a lender must give the borrower before exercising any rights. These rules are typically of public order.

A borrower's insolvency may delay the execution of the lender's rights and will not prevent a secured creditor from realising assets subject to the security. Typically, secured lenders are dealt with separately to ordinary creditors. Insolvency rules recognise secured lenders as a preferred category.

 
28. Briefly outline key additional issues for lenders in relation to construction and development projects.

The main concerns in construction or development projects are:

  • Guarding against the registration of liens, which generally rank in preference to the lender's security.

  • Controlling cost overruns, which may affect the completion of the project.

Lenders usually monitor construction through an independent consultant, and fund ''process payments'' against contractor releases and waivers.

Each province has different rules on when to register liens (typically 30 to 40 days from completion of the work) and on the legal mechanisms to deal with liens. Lenders will often require the borrower owner to obtain construction bonds to ensure completion of projects.

Other real estate financing techniques

 
29. Are other real estate finance techniques commonly used in your jurisdiction? For example, real estate securitisation and sale and leasebacks.

Sale and leasebacks are commonly used by tenants to raise capital locked into real estate, in consideration of a long term lease. This mechanism often provides for greater liquidity than would be the case in a traditional loan.

Securitisation is still a common mechanism to create liquidity in the market, but is much less common than in the past, as the public market for this product is not as significant as it may have been in the past.

 

Real estate leases

Negotiation and execution of leases

30. Are contractual lease provisions regulated or freely negotiable? Which legislation applies?

Commercial lease provisions including rent terms are generally not regulated and are freely negotiable.

Each province has landlord and tenant statutes that provide for supplementary lease terms, which are mostly not of public order, that is, the parties may agree to provide for terms other than as provided under statute or are based on common law.

In Québec, the landlord and tenant rules are in the Civil Code of Québec.

Such statutes or rules of common law typically provide for rules relating to, for example, repair obligations, right of assignment and default terms.

The duty to act in good faith and reasonably could be considered a limitation on the freedom of negotiation. The principle exists both in Québec's Civil Code and in the rest of Canada under common law.

A recent decision by Canada's Supreme Court, Bhasin V Hrynew [2014] 3SCR494, stated that there is a common law duty of good faith applicable to all contracts. This was defined as a duty of honest performance requiring the parties to be honest with each other in relation to the performance of their contractual obligations.

While this case is not specifically about a lease, the decision is likely to have established the principle of good faith and honest dealing as a basis of any contractual negotiation, including leases.

 
31. What are the formal legal requirements to execute a lease? Does the lease have to be executed by certain parties or as a deed? How do the formalities differ for a company, partnership and for individuals?

Subject to any requirements for proof or registration, there are no formal requirements for the execution or form of a lease. Notably, no seals are required nor are there any specific terms as to which representative is to sign, such as director or officer. Lease agreements can also be verbal, but may then remain subject to any evidentiary limitations.

The formalities do not differ between the nature of the entities involved, as long as due authorisation is ensured.

To be binding, the lease must contain three basic elements, that is, an understanding on rent, term and premises.

Rent payments

 
32. How are rent levels usually reviewed and are there restrictions on this? Is stamp duty and VAT (or equivalent) payable on rent? Is a rent security deposit required and does it have to be managed in a certain way?

Rents are freely negotiated with no restrictions, other than those on rented dwellings which are commonly controlled in many Canadian provinces.

Leases generally have a fixed base or minimum rent for the initial term or parts of it, together with rent representing the tenant's share of the landlord's operating costs and real property taxes.

The base rent can also sometimes be fixed for an extension or renewal period. If it is not fixed, it can be agreed that the amount will be negotiated at the time of renewal or extension, or agreed by reference to a formula such as the cost of living index.

If the parties fail to agree on rent review, the rent may be determined by an arbitrator.

Sales and services taxes (see Question 20) must be paid by the tenant on the rent and collected by the landlord, who then pays it to the tax authority.

Stamp or transfer taxes are not payable on leases, except for long-term leases, which are generally for 40 years or more including any renewals. Each province has different terms relating to stamp or transfer taxes on leases.

Whether a rent security deposit is required depends on the terms of the lease and the negotiations between the parties. The parties also commonly provide for letters of credit or guarantee as forms of security.

Length of term and security of occupation

 
33. Is there a typical length of lease term and are there restrictions on it? Do tenants of business premises have security of occupation or rights to renew the lease at the end of the contractual lease term?

The length of lease term varies depending on the market and the tenant's business operation. Most leases are for a five-year or ten-year term. It is common for a tenant to negotiate an option for it to extend the term.

Typically terms are also subject to the costs of improvements a landlord may be required to make to the property for the benefit of the tenant as such costs will be amortised in the rent payments over the term.

Generally, despite privity of contract, a buyer of real estate will be bound by an existing lease. However in many provinces, obligations and occupation rights under existing leases depend on whether the lease is registered, or whether the buyer had knowledge of the prior lease before concluding the new lease.

Disposal

 
34. What restrictions typically apply to the disposal of the lease by the tenant? Can the tenant assign or sublet the lease with the landlord's consent? Can tenants share their premises with companies in the same group? What is the effect of a legal reorganisation or transfer/sale of the tenant on the lease and on a guarantee of the lease?

The assignment of or subletting under a lease usually requires the landlord's consent, which cannot be refused without a reasonable motive. This issue is commonly dealt with by a provision in the lease.

Additional provisions in the lease deal with the tenant's other rights, such as sharing its premises with companies in the same group.

A lease commonly contains provisions dealing with a sale or reorganisation of the tenant's or the landlord's entity, which specify the:

  • Notices to be given,

  • Consents to be obtained

  • Timeframe for completing these.

A landlord will typically stipulate that it must be notified of any change to the tenant's corporate structure, in order to give its consent to the changes.

 
35. Does a landlord or tenant retain any liability under the lease after the lease is assigned?

Liability under the lease after the lease is assigned is usually decided between the parties in the lease.

On assignment of the lease, the original tenant usually remains liable to the landlord for the covenants in the lease, unless expressly stated otherwise.

In some circumstances an assignor tenant may be released or have limited liability, for example if:

  • The landlord and assignee tenant agree to amend the lease in respect of the term or in any other material aspects, the original tenant may be released from liability.

  • The assignee tenant and the landlord agree to payment of a higher rent, the assignor tenant may not be bound to pay more than the original rent.

In addition to any rights which arise under the assignment agreement, an assignor tenant is entitled to be indemnified by the assignee for any claim made against the assignor as the original tenant under the lease.

Typically, a landlord will provide an exclusion of liability on the transfer of its interest in the property and the related lease, which is generally subject to the new owner assuming the obligations under the lease.

Repair and insurance

 
36. Who is usually responsible for keeping the leased premises in good repair and for insuring the leased premises? Are there provisions for the ownership of lease improvements?

Repair

Under statutory or common law rules, minor repairs (subject to wear and tear) are the obligation of the tenant, while all others are the responsibility of the landlord.

However, in almost all commercial leases, the responsibility for cost, if not performance, will be passed onto the tenant, subject to common exceptions such as structural repairs due to defects in the construction of the building or inherent structural defects.

Repair terms and the question of who is responsible are often contentious negotiation elements, and may ultimately be matters for a court to determine.

Insurance

Landlords are usually expected to have insurance for:

  • The building.

  • Any improvements, including tenant's improvements.

  • Loss of rental income.

The tenant usually pays for the landlord's insurance through paying the landlord's operating costs under the lease.

Landlords may also require in the lease for tenants to carry insurance for:

  • The tenant's goods and property in the leased premises.

  • Equipment.

  • Business operation.

  • Injury to third parties.

  • Fire and water damage.

Ownership of leasehold improvements

Tenant's improvements may become part of the leased property once they are installed, and therefore become the landlord's property to the extent that they become a permanent part of the building, excluding any trade fixtures.

A commercial lease often provides for ownership of lease improvements, subject to the right of the landlord to require that they be removed at the expiration of the term, which is often commonly negotiated.

Landlord's remedies and termination

 
37. What remedies are available to a landlord for a breach of the lease by the tenant? On what grounds can the landlord usually terminate the lease and what restrictions and procedures apply? What is the effect of the tenant's insolvency under general contract terms and insolvency legislation?

The main remedies for a landlord in case of a breach by the tenant (which are commonly set out in the lease) are:

  • Right to re-enter the premises.

  • Right to terminate the lease on default of the tenant and claim any rent owing.

  • Specific performance.

There is also the common law right of distress, entitling landlords to priority rights to the tenant's assets in the leased property. However for a number of reasons, notably that the lease cannot be terminated while exercising this right, this remedy is not favourable in many cases.

In most provinces, but not in Québec, legislation provides that unless the parties agree otherwise, the landlord can re-enter the premises if the rent has been unpaid for a specified period of time. Many Québec leases provide this additional right in favour of landlords, though most tenants resist granting it.

Leases usually require the landlord to give notice to the tenant of a breach, which the tenant must cure within a specified time or provide the landlord with monetary compensation.

Insolvency restructuring of a tenant entity can stay landlord rights. Generally, tenants have a number of rights to terminate leases in the context of a corporate restructuring, while the landlord only has the right to contest the amounts proposed in settlement of the termination or the use of the premises during the stay.

 
38. Can the tenant withhold rent payments in certain circumstances, for example for serious damage to the leased premises? Can the tenant terminate the lease in certain circumstances?

There are three main circumstances in which a tenant may be able to terminate a lease:

  • In the event of a breach by landlord, the tenant under statute or common law has the right of set off or to withhold rent. However in most commercial leases this right is expressly waived by the tenant.

  • Where there is an express right to do so in the lease. There will usually be a termination provision setting out the permissible circumstances and what notice must be given to the landlord.

  • Where the landlord has deprived the tenant of substantially the whole of the benefit of the lease. In this case, the tenant must first give notice to the landlord that the tenant accepts the landlord's breach as a repudiation of the lease, and that it therefore wishes to terminate it.

 

Planning and development controls

39. In what circumstances can local or state authorities purchase business premises compulsorily? Is the purchase price market value?

In Canada, public authorities generally have the right to acquire private property for public purposes, as long due processes are followed. A compulsory acquisition must usually relate to public use, but in certain exceptional circumstances it can apply to commercial or private developments, where the relevant authority sees public value related to it.

Owners are entitled to compensation. Market value is the main criteria for deciding this, but loss of business or profits can also be taken into consideration.

 
40. What authorities regulate planning control and which legislation applies? Is there specific protection for special categories of buildings such as historic buildings?

Each province and municipality has its own rules, regulations, procedures and zoning by-laws relating to town planning.

In most provinces and greater municipalities, there is specific protection for special building categories, including restrictions on demolishing or changing historic buildings.

 
41. What planning consents are required for building works and the use of a building?

Planning consents are usually obtained at municipal level, and are subject to local zoning and planning regulations.

Planning consents are typically required, for example:

  • When the landowner wants to change the use of the land and the new use is not allowed under the applicable bye-laws.

  • Before certain development or re-development proposals can proceed.

  • Before constructing a new building or making significant changes to an existing building, a building permit is required.

Planning consents can be contentious and time-consuming due to the number of parties needing to agree or at least have the opportunity to express their views, including local residents, planning committees and city council authorities.

 
42. What are the main authorisation and consultation procedures in relation to planning consents?

Initial consents

Each municipality has different authorisation and consultation procedures, but there is usually an initial review by an urban planning committee.

The planning application may then be submitted for public consultation if its size or nature so requires. After this, a recommendation will be made by the urban planning committee and sent for approval by the city council.

The authority granting the initial planning consent and the length of the decision-making process will vary, according to the nature of the project and where it is located.

Third party rights and appeals

Depending on the nature of the project and the municipality and province in which the project is located, third parties may be consulted and may have a right to object to the project.

Certain types of developments, notably those requiring zoning modifications, provide possible local resident referendums, which may impact on procedures and the time taken for approvals.

Typically, consultations are held to ensure that all parties' reach agreement on the terms of the development.

There is generally no right of appeal against a final discretionary decision by a council or planning committee under general administrative law, provided that all zoning or prescribed statutory terms are followed as to due process.

 

Reform

43. Are there proposals to reform real estate law and are they likely to come into force and, if so, when?

Real estate law is made by the provincial jurisdictions rather than at federal level, and is constantly being amended. Most changes are not fundamental in nature, and mostly concern improvements to the registration system or taxation.

 

Transfer tax on the sale of real estate

Jurisdiction

Is substantial transfer or registration tax payable on the sale of real estate? Who pays and what is the rate?

Is notarisation required? Who pays and what is the typical notary fee?

Are there any exemptions or methods to mitigate corporate real estate tax liability?

Canada

Transfer tax payable by buyer applies in most provinces on title transfer, at rates varying from 0.5% to 3%, depending on the province subject to British Columbia 15% rate for non-resident residential purchases.

In Québec, it is common to have the deeds of sale signed before a notary, although this is not legally required.

In British Columbia, the registered transfer document must be notarised by a lawyer or a notary public, who certifies the execution of the transfer instrument.

Subject to the notable exceptions in Quebec and Ontario, Transfer tax does not generally apply to the beneficial transfer of real estate, so real estate/nominee companies are commonly used to hold the legal title to real estate, so that the beneficial interest and the shares of the nominee company can be sold free of transfer tax.

 

Online resources

W www.e-laws.gov.on.ca

Description. This website is maintained by the Ontario Ministry of Attorney General, providing access to official copies of Ontario's statutes and regulations.

W www.gouv.qc.ca

Description. This website is maintained by the government of Québec, providing access to Québec statutes and regulations.

W www.gov.bc.ca

Description. This website is maintained by the government of British Columbia, providing access to British Columbia statutes and regulations.

W www.qp.alberta.ca

Description. This website is maintained by the government of Alberta, providing access to Alberta statutes and regulations.



Contributor profile

Richard Burgos, Partner

Lavery, De Billy LLP

T +514 877 2952
E rburgos@lavery.ca
W www.lavery.ca

Professional qualifications. Member of the Quebec Bar since 1986; LLM, London School of Economics, 1988; LLB, Université de Montréal, 1985

Areas of practice. Real estate law; real estate development; leasing; debt financing and banking; mergers and acquisitions

Recent transactions.

  • Acting for owners, purchasers and financial institutions in connection with sales, acquisitions and financings of real estate, including drafting and negotiating joint venture agreements, purchase and sale agreements, loan and security agreements and conducting due diligence reviews.
  • Regularly acts for several of Canada's largest real estate investment trusts and developers, in connection with their various acquisitions and financings in the industrial, retail, residential and hotel sectors.
  • Represents landlords and tenants in matters relating to commercial leasing in all sectors, including office, retail and industrial.

Professional associations/memberships.

  • Speaks regularly at conferences and panels in the real estate field, notably at the Montreal Real Estate Leasing Conference, the International Council of Shopping Centers (ICSC) and the Canadian Institute, on a variety of real estate subjects. Listed in the 2017 edition of Best Lawyers in Canada as a leading practitioner in the field of corporate law.
  • Canadian Bar Association.
  • Urban Development Institute.
  • Former lecturer in business law at Concordia University, Montreal.

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