Source: JD Supra —
This guide offers an overview of legal aspects of buying and selling real estate in the requisite jurisdictions. It is meant as an introduction to these marketplaces and does not offer specific legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship, or its equivalent in the requisite jurisdiction.
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER CANADIAN (ONTARIO) LAW
INTRODUCTION
Canada, a bijural country, utilizes both common and civil law. Except for Québec, a civil law jurisdiction, the common law operates in all remaining provinces and territories. Real estate transactions conducted in Ontario are governed by laws and rules that are specific to the province. This requires buyers and sellers to remain considerate of the Province’s particularities when transacting. This guide will provide a brief overview of important considerations when buying or selling property in Ontario.
I. PURCHASE AND SALE AGREEMENT
All real estate sales in Ontario require a formal written contract between the buyer and seller in order to comply with the Statute of Frauds and must contain the elements of a binding contract including offer, acceptance, consideration, and the meeting of the minds. The purchase agreement outlines all the obligations, responsibilities, and procedures in accordance with contract law. It also must accurately identify and describe the real property being purchased and usually includes both the municipal address and the legal description.
Buyers and sellers are typically bound to certain terms and conditions upon agreeing to make the purchase. For instance, a buyer who makes an offer cannot then revoke it until a specified period of time has elapsed. Within that time period the seller can accept, reject, or make a counteroffer. If no counteroffer is made, and the seller accepts the buyer’s offer, the offer becomes a legally binding agreement. A deposit is security for the performance of the buyer’s obligations and is usually held in the seller’s brokerage’s or lawyer’s trust account. It is not a limitation on damages in the case of a default by the buyer unless expressly stated as so in the purchase agreement. On closing, the deposit is credited to the buyer as partial payment of the purchase price.
The agreement of purchase and sale may contain conditions in favour of the buyer and/or seller. For example, a buyer may have a defined period of time in which to arrange suitable financing, conduct due diligence of the property and to be satisfied with their investigations of the property. If so satisfied, the buyer may waive their conditions and the agreement would then be legally binding. If the conditions are not waived, the agreement may terminate, and any deposits paid returned to the buyer in accordance with the terms of the agreement.
The agreement of purchase and sale may contain a clause on the right to assign the contract to a third party. If the agreement is silent on the right to assign, then under contract law, either party’s “benefits” can be assigned without the other party’s consent, but not their “burdens.” The buyer may need flexibility for tax planning, liability reasons or compliance with the Planning Act and so if the need to assign the agreement is important, it should be included as a term to the purchase agreement.
The Ontario Real Estate Association (“OREA”) is most commonly known for providing the standard forms for the purchase, sale, and leasing of residential and commercial properties. Each local real estate board within Ontario has adopted the standard OREA forms which may be used for residential and commercial real estate transactions. While these forms may be typically used, especially in a residential transaction, they are not mandatory and other forms of agreements and sales may be drafted. The standard forms may also be easily amended by adding a schedule with further clauses that are tailored to the particular transaction. The type of property being purchased also needs consideration such as freehold, leasehold or condominium. Great care must be undertaken when drafting the purchase agreement to accommodate local requirements in addition to the needs of the party the lawyer is representing.
Commercial
Many similar principles apply to a commercial real estate transaction as to a residential real estate transaction, although the dollar figures are usually larger. Additional considerations are required by the nature of the property, such as tenants and their leases, service contracts and employment contracts of salaried workers, future revenues from the property and future development plans for the property.
The commercial buyer normally requests in the purchase agreement that pertinent due diligence materials be provided by the seller such as realty tax records and appeals, environmental reports, surveys, building engineering reports, copies of all tenant files including leases, maintenance contracts, development files, etc. so that it can evaluate the property, its financial feasibility and intended use. The commercial buyer may need to evaluate cost sharing arrangements, easements, zoning, and environmental issues. The due diligence conditions and other conditions, if any, and timing of same are negotiated with the seller and must be detailed in the purchase agreement. The buyer’s lender may also have due diligence requirements, such as an appraisal and satisfactory environment reports. The buyer should ensure these are met prior to any waiver of conditions. Closing documents that will be required and if the seller or buyer are responsible for drafting same are also listed in the purchase agreement. Since commercial properties come in a variety of forms such as vacant land, commercial, retail, industrial, mineral, and agricultural property, tailoring the transaction to satisfy the buyer and seller, based on the type of business that was being conducted on the property or the buyer’s intended use of the property, is an integral part of the purchase agreement.
II. BROKERS AND AGENTS
Real estate agents and real estate brokers are governed by the Real Estate and Business Brokers Act, 2002 (Ontario) and its regulations. In Ontario, a real estate agent will have obtained the minimum mandated education, have passed a set of tests required by OREA, and be registered with RECO. To become a broker, in addition to the requirements to become an agent, an individual will have completed the Real Estate Broker Program and have been registered as a salesperson for at least 24 months. It is not mandatory to use a real estate agent or broker on a transaction. Listing a property in Ontario is making it known to potential buyers that the seller is looking for offers. The listing agreement is a contract between a seller and a real estate agent or brokerage. The agreement will specify a time period in which the brokerage will have exclusive access to list the property – usually 90 days. The price, while being stated on the agreement, will only be an estimate. The commission, often a percentage of the sale price to be given to the brokerage for its services, is also listed in the agreement and is often paid by the seller. If the buyer and seller have separate agents, the commission is typically split between the agents as may be set out in the agreement of purchase and sale or the listing agreement. Additionally, if the brokerage intends on collecting a flat fee or a finder’s fee, this must be stated in the listing agreement. A holdover clause is a clause that sometimes allows a brokerage to collect its commission after the expiry of its listing period if the brokerage introduced a buyer to a seller and such a clause can be stipulated in a listing agreement.
III. BUYER’S INSPECTION
Residential
When purchasing a home or commercial property the seller is required to the disclose some, but not all, physical defects. Patent defects are defects that can be easily detected though reasonable inspection and ordinary vigilance. If a buyer fails to detect a patent defect, ’caveat emptor’ – buyer beware prevails. Conversely, latent defects are defects that are not detectable through reasonable investigation. In Ontario, sellers are only liable for not disclosing latent defect if the property they sold is later found to make (1), the property unfit for habitation or poses future danger and (2) if the repair would be so expensive that it would severally reduce the property value. Failure by the seller to disclose latent defects when the aforementioned criteria are met may constitute fraud.
The buyer’s lawyer will examine title to the property for items such as mortgages (which are to be paid out by the seller or assumed by the buyer if agreed-upon in the purchase agreement), restrictive covenants and easements. The buyer’s lawyer may also determine whether there are government work orders or deficiency notices against the property, confirm if the present use as specified may be lawfully continued and if there are any arrears of realty tax or utilities that may form a lien. The buyer will also confirm if fire insurance can be obtained for the property. Any issues arising from title and off-title searches are called requisitions and are submitted to the seller’s lawyer in a requisition letter by the requisition date as stipulated in the purchase agreement.
