chair
Chris Huband Blake, Cassels & Graydon LLP
September 19, 2017
Commercial Real Estate TRANSACTIONS 2017
*CLE17-0090500-A-PUB*
DISCLAIMER: This work appears as part of The Law Society of Upper Canada’s initiatives in Continuing Professional Development (CPD). It provides information and various opinions to help legal professionals maintain and enhance their competence. It does not, however, represent or embody any official position of, or statement by, the Society, except where specifically indicated; nor does it attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein should be used prudently, as nothing in the work relieves readers of their responsibility to assess the material in light of their own professional experience. No warranty is made with regards to this work. The Society can accept no responsibility for any errors or omissions, and expressly disclaims any such responsibility.
© 2017 All Rights Reserved
This compilation of collective works is copyrighted by The Law Society of Upper Canada. The individual documents remain the property of the original authors or their assignees.
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Library and Archives Canada Cataloguing in Publication
Commercial Real Estate Transactions 2017
ISBN 978-1-77094-823-6 (Hardcopy) ISBN 978-1-77094-824-3 (PDF)
1
Chair: Chris Huband, Blake, Cassels & Graydon LLP
September 19, 2017 9:00 a.m. to 12:00 p.m.
Total CPD Hours = 2 h 30 m Substantive + 30 m Professionalism
Donald Lamont Learning Centre The Law Society of Upper Canada
130 Queen Street West Toronto, ON
SKU CLE17-0090501-A-REG
Agenda
9:00 a.m. – 9:05 a.m. Welcome and Opening Remarks
Chris Huband, Blake, Cassels & Graydon LLP
9:05 a.m. – 9:20 a.m. Letters of Intent and Other Preliminary Real Estate Arrangements
Brennan Carroll, Borden Ladner Gervais LLP
9:20 a.m. – 9:30 a.m. Tips about “Tricky” Purchase Price Adjustments and How To Deal with Them
Xue Yan, Borden Ladner Gervais LLP
Commercial Real Estate TRANSACTIONS 2017
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9:30 a.m. – 9:45 a.m. Due Diligence Issues: Access, Deliveries, and Confidentiality Lanette Wilkinson, Stikeman Elliott LLP 9:45 a.m. – 10:00 a.m. Interim Operation Before Closing: Things That Can Go Wrong Rod Davidge, Osler, Hoskin & Harcourt LLP 10:00 a.m. – 10:15 a.m. Unable or Unwilling (The Unofficial Guide to Answering Requisitions) Simon Crawford, Bennett Jones LLP 10:15 a.m. – 10:30 a.m. Coffee and Networking Break 10:30 a.m. – 11:00 a.m. Lawyers’ Obligations in Sending, Receiving, and Holding Funds (30 m Professionalism )
Jeffery Citron, DLA Piper (Canada) LLP
Gary Goldfarb, Meyer, Wassenaar & Banach LLP
Chris Huband, Blake, Cassels & Graydon LLP
Michael Lieberman, Norton Rose Fulbright Canada LLP
11:00 a.m. – 11:15 a.m. Estoppel Certificates: What are They Good For?
Absolutely Something! Melissa McBain, Daoust Vukovich LLP 11:15 a.m. – 11:30 a.m. Effectively Allocating Post-Closing Risk.
Daniel Schwartz, Lax O’Sullivan Lisus Gottlieb LLP
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11:30 a.m. – 11:45 a.m. Issues Concerning Third Party Reports: Surveys, Environmental Assessments, Building Condition Reports
Simon Lam, Bogart Robertson & Chu LLP
11:45 a.m. – 12:00 p.m. Question and Answer Period
12:00 p.m. Program Ends
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Chair: Chris Huband, Blake, Cassels & Graydon LLP
September 19, 2017 9:00 a.m. to 12:00 p.m.
SKU CLE17-0090501-A-REG
Table of Contents
TAB 1 Letters of Intent and Other Preliminary Real Estate Arrangements …………………………………………………………… 1 –1 to 1 – 5
Brennan Carroll, Borden Ladner Gervais LLP Mario Pedro, Associate, Borden Ladner Gervais LLP Anthony Deluca, Articling Student, Borden Ladner Gervais LLP
TAB 2 Tips about “Tricky” Purchase Price Adjustments and How to Deal with Them …………………………………… 2 – 1 to 2 – 2
Xue Yan, Borden Ladner Gervais LLP
TAB 3 Agreement of Purchase and Sale Due Diligence Provisions Checklist ……………………………………………..…… 3 – 1 to 3 – 3
Lanette Wilkinson, Stikeman Elliott LLP
Commercial Real Estate TRANSACTIONS 2017
2
TAB 4 Interim Operation Before Closing: Things That Can Go Wrong …………………………………………………………..……. 4 – 1 to 4 – 7
Rod Davidge, Osler, Hoskin & Harcourt LLP
TAB 5 Unable or Unwilling (The Unofficial Guide to Answering Requisitions) …………………………………………. 5 – 1 to 5 – 20
Simon Crawford, Bennett Jones LLP
TAB 6 Estoppel Certificates: What are They Good For? Absolutely Something! ………………………………………….. 6 – 1 to 6 – 10
Melissa McBain, Daoust Vukovich LLP Kenneth Pimentel, Daoust Vukovich LLP
TAB 7 Effectively Allocating Post-Closing Risk ………………….. 7 – 1 to 7 – 4
Daniel Schwartz, Lax O’Sullivan Lisus Gottlieb LLP
TAB 8 Issues with Third Party Reports: Surveys, Environmental Site Assessment Reports and Property Condition Assessment Reports ………………… 8 – 1 to 8 – 17
Simon Lam, Bogart Robertson & Chu LLP
TAB 1
Letters of Intent and Other Preliminary Real Estate Arrangements
Brennan Carroll, Borden Ladner Gervais LLP Mario Pedro, Associate, Borden Ladner Gervais LLP
Anthony Deluca, Articling Student, Borden Ladner Gervais LLP
September 19, 2017
Commercial Real Estate TRANSACTIONS 2017
1
Letters of Intent and Other Preliminary Real Estate Arrangements
Brennan Carroll, Borden Ladner Gervais LLP
Introduction
The first step in completing a commercial real estate transaction is typically the drafting of a letter
of intent (LOI). While an LOI may appear to be a simple document, it is filled with legal traps that if
missed, can have serious ramifications for the parties to a proposed transaction. An LOI, despite its
brevity, must be drafted carefully and should be fully understood before being signed. Specifically,
parties to an LOI must be aware of whether or not the LOI is drafted to be binding or non-binding. The
distinction between a binding and non-binding LOI can easily become blurred when parties fail to
explicitly state their intention in the LOI. As a result, parties can be left in a situation where an LOI they
thought was non-binding, is actually binding (and vice-versa). Accordingly, it is important for parties
entering into a proposed real estate transaction to be aware of the potential legal issues that can result
from signing an LOI, as well as the drafting tips and strategies to ensure that their intentions are properly
articulated.
What is a Letter of Intent?
An LOI is used by parties to a proposed real estate purchase and sale transaction to set out the
principal terms of the proposed deal, as well as to facilitate the drafting and negotiation of the definitive
purchase agreement. The LOI is typically an attempt to ensure there is a “meeting of the minds” on key
business terms before the more detailed legal and less material business terms are addressed, which can
be a time-consuming and expensive undertaking. An LOI is used to indicate a willingness to enter into a
subsequent agreement or can also be used as a commitment to certain terms and obligations, regardless of
whether a subsequent agreement is completed. An LOI will typically include information such as the
proposed parties, timelines and important dates, confidentiality and exclusivity obligations, the purchase
price, the form and timing of the purchase price, and the closing date.
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Is a Letter of Intent Binding or Non-Binding?
When drafting an LOI, an important consideration is whether it will be legally binding or non-
binding. Typically, most provisions of an LOI will be non-binding and will be used to simply set out the
parties’ intentions as a guide for negotiating the more formal and binding purchase agreement. It is
common, however, for parties to draft an LOI that is generally non-binding, but includes certain
provisions which are legally binding. For instance, a proposed buyer will want to include a binding
exclusivity provision in an LOI to be sure that the proposed seller cannot “shop” the transaction around to
another buyer. Additionally, if the parties have not already entered into a confidentiality agreement, the
parties will want to ensure that the terms of the LOI remain confidential by including a binding
confidentiality provision in the LOI.
Parties to an LOI must ensure to explicitly state whether the terms of the LOI will be binding or
non-binding. Failure to do so can leave open the possibility that the distinction between what is binding
and non-binding becomes blurred. For instance, in Wallace v. Allen1, the court was tasked with
determining whether an LOI for the share purchase and sale of four companies was binding or non-
binding. The court looked at the language used in the LOI and the conduct of the parties prior to and after
signing the LOI in determining that the LOI was in fact a binding contract.2 The court explained that the
use of contractual type language in the LOI (such as reference to “this agreement” and statements such as
“it is agreed” and “upon acceptance”) indicated an intention to be bound.3 While the LOI contemplated
entering into a further agreement, it did not explicitly state that the LOI was subject to entering into that
further agreement. The conduct of the parties also indicated that the LOI was intended to be binding.4
Wallace began to work in the business immediately after signing the LOI and also began to incorporate
1 Wallace v. Allen, 2009 ONCA 36 (CanLII). 2 Ibid at para 30-32. 3 Ibid at para 28. 4 Ibid at para 32.
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his sons into the business.5 Allen also announced his retirement and the sale of the business, while
introducing Wallace as the new owner.6
Additionally, Hartslief v. Terra Nova Royalty Corporation7 provides guidance on what courts
will consider in determining if an LOI is a binding contract. In that case, Alan Hartslief sought a
declaration from the court that a binding settlement agreement had been reached between himself and his
former employer, Terra Nova Royalty Corporation. In looking at the totality of the evidence, the court
determined that a binding agreement had been reached, despite the fact that a formal agreement had not
been signed.8 The court relied on the following statement from Bawitko Investments Ltd. v Kernels
Popcorn Ltd9. in making its decision:
“When the parties agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.”10
The court explained, however, that when the understanding or intention of the parties is that their legal
obligations are to be deferred until a formal contract has been approved and executed, the original or
preliminary agreement cannot constitute an enforceable contract.11
Drafting Tips
Parties can avoid having a court determine that an LOI they thought was non-binding is actually
binding by being aware of simple drafting tips. When drafting an LOI, it is advised that parties to a
potential transaction expressly state their intention that the LOI be binding or non-binding. In doing so,
the parties will ensure that both sides to the transaction have the same expectations regarding the
5 Ibid at para 33. 6 Ibid at para 34. 7 Hartslief v. Terra Nova Royalty Corporation, 2013 BCCA 417 (CanLII). 8 Ibid at para 17. 9 Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CanLII 2734 (ON CA). 10 Supra note 1 at para 9. 11 Ibid at para 9.
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consequences of the LOI. Additionally, when drafting an LOI that is intended to be non-binding, parties
should avoid the use of language such as “it is agreed” or “this agreement”. As the Wallace v. Allen case
demonstrated, such language indicates an intention to be bound12. Instead, when drafting an LOI, parties
should use language such as “it is intended” or “the parties intend”. The use of terms of intention
indicates that the LOI is not meant to be binding. Parties should also ensure that they manage post-LOI
conduct. Communications with employees, public announcements, letters to clients and all similar
communications and correspondence should all be carefully managed to ensure that they do not indicate
that a deal has been made.
In order to keep the transaction moving forward, an LOI should include a timeline setting out
important dates, including the specific date for the signing of the definitive agreement. It can also be
helpful for parties to include what missing information will be determined before the signing of the
definitive agreement.
The Bhasin Decision and the Duty of Good Faith
Overlaying the discussion above is the 2014 Supreme Court of Canada landmark decision in
Bhasin v. Hrynew13. In Bhasin, the Supreme Court of Canada established good faith contractual
performance as a general organizing principle of the common law of contract14. The court also created a
specific duty of honesty in contractual performance15. The court explained the duty of honesty in
contractual performance as follows:
“This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance.”16
12 Supra note 3. 13 Bhasin v. Hrynew, 2014 SCC 71 (CanLII) [Bhasin]. 14 Ibid at para 33. 15 Ibid at para 73. 16 Ibid.
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Bhasin was silent on whether the duty of good faith applies when parties are negotiating an agreement or
whether the duty would apply to pre-contractual negotiations such as a non-binding LOI. However,
moving forward, the Bhasin decision may indicate a trend to expand the duty of good faith to include pre-
contractual negotiations. If such a decision was to occur, one can expect a significant shift in how LOI’s
are drafted. Establishing a duty of good faith in pre-contractual negotiations would open the door to new
types of liability claims. For instance, when drafting a non-binding LOI, it will be possible to bring a
claim if one party lies or intentionally misleads the other party about a matter in the LOI. Accordingly, if
the Bhasin decision was to expand to pre-contractual negotiations, it could result in parties to a
transaction being legally obligated to be more respectful and co-operative in their negotiations. While the
Bhasin decision has yet to result in a duty of good faith in pre-contractual negotiations, this may change
moving forward as courts continue to review how the Bhasin decision impacts contractual performance.
Conclusion
Parties to an LOI are advised that while an LOI may seem like a simple document, if drafted
improperly, it could lead to serious legal ramifications. Parties to a proposed transaction must be aware
that if there is any discrepancy regarding whether an LOI is binding or non-binding, it could result in a
court inferring that an LOI that a party thought was non-binding, is actually binding. Parties can avoid
this situation by keeping in mind simple drafting tips such as stating whether the LOI is intended to be
binding or non-binding, being aware of the language used in the LOI, and managing post LOI conduct.
Moving forward, parties to a proposed transaction should also be aware of the potential impact of the
Bhasin decision. While the Bhasin decision has yet to impact LOI’s, it is possible that courts will expand
the duty of good faith to pre-contractual negotiations, such as the drafting of an LOI.
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TAB 2
Tips about “Tricky” Purchase Price Adjustments and How To Deal with Them
Xue Yan Borden Ladner Gervais LLP
September 19, 2017
Commercial Real Estate TRANSACTIONS 2017
Tips about “Tricky” Purchase Price Adjustments and How to Deal with Them
Xue Yan Borden Ladner Gervais LLP
What is a Purchase Price Adjustment?
• What we typically see on a Statement of Adjustment
• Purchase price reduction or bonus payment
Causes of a Purchase Price Adjustment
• Changes in facts or understanding
• Timing of acquisition
Changes in Facts or Understanding
• “Tricky” to lawyers: often a “business” term
• Tip: What is the client buying or selling?
Examples:
• Purchasing/selling for development purposes
• Acreage - “developable acreage” – may not be as objective
• Density
• Purchasing income producing properties
• Support for / guarantee of lease revenue in respect of vacant leased premises
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Timing of Acquisition
• “Tricky” to lawyers: not simply prorated
• Tip: business operational perspective
• Examples:
• Rents and receivables from the tenants• Timing: leasing year v. closing
• Realty tax refunds• Tenants’ right to recover
• Leasing costs• Imbalance of obligations and benefits• Whether the party has played a part in negotiating such costs
• Accounts receivables• Rents received from a tenant that were in arrears prior to closing
• Mortgage assumption• Mark to market
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TAB 3
Agreement of Purchase and Sale Due Diligence Provisions Checklist
Lanette Wilkinson Stikeman Elliott LLP
September 19, 2017
Commercial Real Estate TRANSACTIONS 2017
THE LAW SOCIETY OF UPPER CANADA, CONTINUING PROFESSIONAL DEVELOPMENT COMMERCIAL REAL ESTATE TRANSACTIONS 2017
AGREEMENT OF PURCHASE AND SALE DUE DILIGENCE PROVISIONS
CHECKLIST
Lanette Wilkinson, Stikeman Elliott LLP
Deliveries Provisions Checklist
□ Complete list of due diligence deliveries is included in APSo Sample deliveries: existing surveys, as built plans, drawings or specifications,
property tax assessments and tax bills, rent rolls, income and expensestatements for the property, financial statements, structural reports, buildingcondition reports, engineering or environmental reports, copies of contracts,leases and warranties, lists of chattels, insurance policies, etc.
□ All listed deliveries are in Vendor’s possession and control□ Vendor can provide listed deliveries without breaching contractual or legal
obligations to third parties or any applicable law□ The location of the due diligence deliveries is defined (example: data site, property
management office, Vendor’s head office, other)□ The timing of delivery is defined□ Deliveries are specified as being subject to the confidentiality provisions of the APS
Additional clauses
□ Vendor is not obligated to disclose any information that would jeopardize privilegeor breach contractual or legal obligations to third parties
□ Purchaser can request additional disclosure prior to due diligence date□ Vendor can make subsequent disclosure prior to the due diligence date, without
consequence□ Obligation of Vendor to obtain reliance letters
Access Provisions Checklist
□ Purchaser is provided with access to the property to conduct due diligence during itsdue diligence period/prior to closing, at Purchaser’s sole cost and expense
□ Access will be made during normal business hours and with prior notice to Vendorunder the supervision of a representative of Vendor
□ Purchaser will not conduct intrusive or invasive testing, without approval of Vendor□ Vendor will authorize Purchaser to correspond with governmental authorities for
off-title due diligence, but Purchaser will not request or cause any on-siteinspections to be conducted on the property
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□ Purchaser to keep the property free of liens arising from its inspections or tests□ Purchaser will notify Vendor of any damage caused by its access, will repair and
restore any damage caused by it to the property, and will indemnify Vendor for thecost of repairing any such damage
□ Obligation to indemnify Vendor for damage caused during access and Purchaser’sobligations to repair and restore the property to survive termination of the APS
Additional clauses
□ Purchaser’s access is subject to the rights of tenants of the property□ Purchaser will not speak to tenants or employees (other than as expressly permitted
by Vendor)□ Purchaser will minimize interference or disruption to the normal operations on the
property (by the Tenant or otherwise)□ Purchaser required to comply with safety policies and procedures of any tenants or
any business being operated on the property□ Purchaser will maintain insurance, naming Vendor as additional insured, and will
provide a certificate of insurance to Vendor prior to accessing the property□ Purchaser will provide the names and titles of individuals who will be accessing the
property, details on the duration of the visit and a description of the purpose of theaccess/activities to be conducted
□ Treatment of newly commissioned reports – Vendor’s request to receive/not toreceive copies
□ Purchaser will not be liable for uncovering any adverse facts or circumstancesaffecting the property or pre-existing conditions
Confidentiality Provisions Checklist
□ Purchaser (and, if applicable, its representatives, agents, consultants and advisors)to keep all property information, documents and materials related to the property instrict confidence until closing (or if closing does not occur, from and aftertermination of the APS)
□ Purchaser to notify Vendor if any disclosure is required by law or judicial process□ If the transaction is not completed, Purchaser to return all property information,
documents and materials to Vendor, including any copies, and will destroy allmaterials prepared on the basis of that property information
□ Confidentiality provisions are stated to survive the termination of the APS
Additional Clauses
□ Purchaser is permitted to disclose confidential information to lenders or investors,shareholders, or professional advisors, to the extent such parties agree to keep theinformation confidential on the same terms as set out in the APS
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□ Purchaser can retain any materials, data or electronic records required by applicable laws or by corporate data retention policies
□ Purchaser to deliver an officer’s certificate following termination of the APS confirming destruction or return of property information as required by APS
□ Restriction on issuing press release or other public announcement without mutual approval of Vendor or Purchaser (exception for disclosure required to comply with laws or rules of any stock exchange)
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TAB 4
Interim Operation Before Closing: Things That Can Go Wrong
Rod Davidge Osler, Hoskin & Harcourt LLP
September 19, 2017
Commercial Real Estate TRANSACTIONS 2017
LEGAL_1:45778777.1
INTERIM OPERATION BEFORE CLOSING: THINGS THAT CAN GO WRONG
Rod Davidge, Eric Choi and Sarah Sharp
Osler, Hoskin & Harcourt LLP
1. INTRODUCTION
Any number of things can go wrong between signing the agreement of purchase and sale and closing: the largest tenant in a shopping mall can go bankrupt; acres of farmland can be contaminated with hazardous waste; a profitable factory can burn to the ground.
At common law, the purchaser bears the risk of loss in the interim period between executing the agreement of purchase and sale and the date of closing and, unless expressly contracted for, the purchaser has no right to claim the proceeds of the vendor’s insurance. This may be viewed as being unfair to the purchaser since the vendor enjoys the benefits of the owning the property, including receiving the income from the property, while the purchaser obtains none of the benefits but carries much of the risk. In light of this, a standard agreement of purchase and sale will typically hold the vendor responsible for certain problems which arise during the interim period, thereby reversing the allocation of risk between the parties. Of course, the extent of the vendor’s responsibility for unexpected events will depend on the relative bargaining power of the parties.
Two provisions in an agreement of purchase and sale which protect the purchaser’s interests are the vendor’s representations and warranties and the damage and destruction clause. Purchasers can claim damages or, in some cases, terminate the agreement on the basis that the vendor’s representations and warranties are not true as of the date of closing. Representations and warranties can anticipate and provide a remedy for many problems arising in the interim period, including tenant default, tenant disputes, environmental contamination, pending litigation and employee claims. Damage and destruction clauses similarly provide purchasers with a remedy for damage that occurs to the property in the interim period. Such clauses may provide purchasers with the right to the vendor’s insurance proceeds or the right to terminate the agreement.
The significant risks to the purchaser at common law can and often are ameliorated by express provisions of the agreement of purchase and sale. Accordingly, it is crucial for parties to understand their position at law regarding loss during the interim period before such loss occurs and set out the applicable remedies in the purchase agreement.
Rod Davidge is a partner and National Real Estate Practice Group Chair, Eric Choi is an associate in the Real Estate Practice Group, and Sarah Sharp is a student-at-law with Osler, Hoskin & Harcourt LLP.
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LEGAL_1:45778777.1
2. COMMON LAW
Purchaser at Risk
At common law, the legal risk shifts from the vendor to the purchaser after the parties have executed the agreement of purchase and sale. This transfer of risk arises because an agreement of purchase and sale is simply a contract to buy an estate in a piece of real property1: the characteristics of the property (such as whether it has buildings or the condition of those buildings) can be separated from the sale of the estate. A purchaser may, in fact, enter into an agreement of purchase and sale because the land contains a store in good condition that is leased to an excellent tenant. However, at common law, the purchaser has contracted only to acquire legal title to the land itself, and will not suffer any loss if either the tenant or the store does not exist as of the date of closing.
The doctrine of equitable conversion sets out that a purchaser obtains an equitable interest in land upon the execution of a valid agreement of purchase and sale for that land.2 As owner of the property in equity, the purchaser is responsible for any problems that arise after the agreement of purchase and sale is executed. The classic formulation of this principle is found in Lysaght v. Edwards3:
[I]t appears to me that the effect of a contract for sale has been settled for more than two centuries … It is that the moment you have a valid contract for sale the vendor becomes in equity a trustee4 for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser.
As trustee, the vendor must use reasonable care in preserving the property.5 However, if the property damage or loss occurs through no fault of the vendor and the contract provides no protection to the purchaser by specifying that “the property remains at the risk of vendor”, the purchaser will be responsible for any loss during the interim period.6
1 Brian D Bucknall, “Insurance, Patent Defects and Changes of Condition” in Bruce Salvatore, Craig R Carter & Paul
M Perell, eds, Agreement of Purchase and Sale (Toronto: Butterworths, 1996) 251 at 255.
2 The purchaser gains an equitable interest only where the remedy of specific performance is available. If specific performance is inapplicable because of a defect in title, misrepresentation, or other reason, then the purchaser does not gain an equitable interest in the property. See Cornwall v Henson (1899) 2 Ch 710 at 714.
3 (1876), 2 Ch D 499 at 506 [Lysaght]; aff’d Simcoe Vacant Land Condominium Corporation No 272 v Blue Shores Developments Ltd, 2015 ONCA 378.
4 The relationship is not a typical trusteeship and the vendor is not a bare trustee: the vendor has a “personal and substantial interest in the property, a right to protect, and an active right to assert that interest if anything is done in derogation of it.” While case law has not been consistent in describing the trustee relationship between vendor and purchaser, there is agreement that, at common law, the purchaser bears the risk of loss to the property that occurs through no fault of the vendor. See Buchanan v Oliver Plumbing & Heating Ltd (1959) OR 238 (Ont CA).
5 Lysaght, supra note 3 at 507.
6 D H Lamont, Real Estate Conveyancing (Toronto: Law Society of Upper Canada, Department of Continuing Education, 1976) at 68-69 as quoted in George Alexandrowicz, Real Estate Transactions, Cases, Text and Materials (Toronto: Emond Montgomery Publications Limited, 2003) at 252.
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LEGAL_1:45778777.1
Vendor and Purchaser Insurance
One method of protecting a purchaser from certain losses to the property that occur in the interim period is through insurance. However, at common law, there is no requirement on the vendor to maintain an insurance policy.7 Even if the vendor does have an insurance policy, the purchaser may not be entitled to receive the proceeds of that policy despite bearing the cost of the damage or loss.8 Moreover, insurance would not cover losses arising from circumstances other than damage and destruction, such as a tenant’s bankruptcy. In Wile v. Cook,9 the Supreme Court of Canada commented on the plight of a purchaser relying on the common law:
The common law is harsh on a purchaser of real property that is damaged by fire or otherwise between the date of the agreement of sale and the date of closing. Unless otherwise provided by the agreement, the purchaser must go through with the purchase and pay the full purchase price. And he is not at common law entitled to the proceeds of any insurance on the property in the absence of express or implied arrangements for the purpose.
A purchaser could obtain its own insurance over the property for the interim period. However, it is uncommon for purchasers to obtain this insurance, and doing so may be difficult or impossible.10 Holding such insurance may also lead to some practical problems in the event of damage, as both the vendor and the purchaser may have claims with separate insurers that need to be resolved comprehensively to determine the net loss and who should be responsible for that loss.11
3. AGREEMENTS OF PURCHASE AND SALE
Careful drafting of the agreement of purchase and sale can ease the impact of caveat emptor and equitable conversion on purchasers.12 At common law, caveat emptor, or buyer beware, is the principle that purchasers should be diligent and cautious in determining the amount and nature of their legal interests and take the property “as is”. In the context of problems arising in the interim
7 Paine v Meller (1801), 31 ER 1088. The closing date for the sale of houses had been postponed, and the vendor’s insurance ended as of the intended closing date. After the intended closing date but prior to the actual closing, the houses were destroyed by a fire. The court held that the vendor was not required to maintain insurance coverage or to inform the purchaser that the insurance policy had been terminated. The purchaser was required to fulfill the contract and was responsible for the loss.
8 Rayner v Preston (1881), 18 Ch D 1 (CA). The purchaser was unable to claim the proceeds of the vendor’s insurance policy following a fire because neither the agreement of purchase and sale nor the insurance contract specified that the vendor’s insurance could be extended to the purchaser. Subsequently, the insurance company recovered the insurance money from the vendor, as only the purchaser (and not the vendor) had suffered a loss.
9 [1986] 2 SCR 137 at para 11.
10 Bucknall, supra note 1, at 264.
11 Ibid and Craig Brown, “Protecting the Purchaser’s Interest”, The Canadian Bar Review Volume LXII (The Canadian Bar Association: 1984) at 513-514.
12 See Beatty v Wei, 2017 ONSC 3478. The doctrine of equitable conversion is subject to contractual terms negotiated between the vendor and purchaser, the vendor’s duty to disclose latent defects, and material misrepresentation.
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LEGAL_1:45778777.1
period, both caveat emptor and equitable conversion are counter-intuitive: the purchaser is liable for loss or damage occurring at a time when the purchaser had no control over the property, and the purchaser could not have uncovered the issue with sufficient diligence prior to signing the agreement of purchase and sale because the event or problem had not yet arisen. Accordingly, virtually all agreements of purchase and sale in Ontario reverse the common law position and specify that the risk of loss is borne by the vendor until the date of closing.13 This paper will focus on two provisions which can be used to protect purchasers: the vendor’s representations and warranties and damage and destruction clauses.
I. Vendor Representations and Warranties
Representations are factual statements made in order to induce the buyer to purchase the property, while warranties are promises that statements of fact are true14; in practice, there is little distinction between a representation and a warranty. Breach of either a representation or warranty set out in the agreement of purchase and sale will generally result in a remedy of damages rather than a right to terminate the agreement. However, many purchase agreements will explicitly provide that the innocent party will have a right to terminate in the event of a breach while preserving any other remedies it may have available (such as an action in damages or right to indemnity).
There are two main purposes served by representations and warranties in a purchase agreement. The first is to provide information to the purchaser about the vendor and the property, thereby reducing the extent of due diligence required to be performed. The second is to allocate the liabilities and risk as between the parties. In order to minimize liability, vendors will want to limit the number and extent of representations and warranties provided, particularly with respect to those items that the purchaser can verify through its own due diligence investigations. The purchaser, on the other hand, will seek the most extensive representations and warranties.
Often, an agreement of purchase and sale will provide not only that the representations and warranties contained the agreement are true as of the date of execution, but also that they will be true as of the date of closing. This opens the possibility that a vendor will be in breach under the purchase agreement, in many cases due to no fault of its own, as a result of an unforeseen event which causes a representation or warranty that was true as of the execution date to no longer be true as of closing. In addition, vendors will often have an obligation to disclose to the purchaser any information that may affect the validity of a representation or warranty. As the interim period can be quite lengthy in real estate transactions, vendors often take a significant risk where representations and warranties are to be true as of the closing date.
Generally, there are three distinct types of representations and warranties covering the areas of: the status and authority of the vendor; the status of the real property; and the operation and
13 Ramsey T Ali, “Equitable Conversion and Damage Prior to Closing” (Paper delivered at the Six Minute Real Estate Lawyer, 14 November 2007).
14 Edward A Peterson, “The Effective Use of Representations and Warranties in Commercial Real Estate Contracts” (2009) at page 2: <https://c.ymcdn.com/sites/acrel.site-ym.com/resource/collection/8CD585C9-0FD8-42C5-A162-9590402FE64E/a002089.pdf>.
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maintenance of the real property.15 The latter two types of representations and warranties are most relevant in protecting purchasers from problems that arise during the interim period.
Select examples of representations and warranties that can protect purchasers from problems arising during the interim period include:
Representations and Warranties regarding the Status of the Real Property
Assurances that there is no active, pending or threatened litigation that affects or isrelated to the property;
Assurances that no portion of the property is the subject of a pending condemnation;
Assurances that there are no violations of any environmental laws and no release,discharge, emission or disposal of any hazardous materials;
Representations and Warranties regarding the Operation and Maintenance of the Real Property
Assurances that there are no pending or threatened unfair labor practice charges orcomplaints relating to the property, nor any strikes or other measures that mayinterfere with the regular operation of the property;
Assurances that the rent roll is accurate and complete, and that there have been nodefaults under any of the leases either by the vendor or the respective tenants;
Assurances that the vendor has received no notice that any tenant intends tosublease, vacate all or part of the premises, or assign its lease;
Assurances that there are no disputes by any tenants regarding the leases, thepremises, the payment of rent or the payment of maintenance fees, operatingcosts, tax, or other payments; and
Regarding the status of operating agreements and other contracts.
The nature and scope of the representations and warranties will differ depending on the type of property being purchased, whether an operating business is being purchased alongside the property, and the interests and bargaining position of the parties.
It is easy to see where things can go wrong in the interim period. The property may become subject to litigation, a neighbouring property may have had a spill which affects the property, or a major tenant may have stopped paying rent. To reduce the risk borne by the vendor, it may wish to use qualifiers such as setting a materiality threshold or dollar threshold which the purchaser must meet to make a claim for breach, or setting a cap on the amount of damages it will be liable for. A vendor may also consider negotiating carve-outs for certain representations and warranties (especially those relating to items that are not in the vendor’s control) whereby the vendor will not be liable for unforeseen events that may occur prior to closing. However, in the course of negotiations,
15 Ibid.
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purchasers may argue that major events that have a material impact on the value of the property warrant a right to terminate the agreement.
In situations where the agreement of purchase and sale does not set out the remedies available for a breach of a representation or warranty in the interim period, more often than not it would be preferable for both vendor and purchaser to negotiate a mutually satisfactory resolution, if possible (for example, by way of a credit in favour of the purchaser, holdback, indemnity or undertaking to complete an item post-closing), so that the parties will be able to close the transaction and avoid the uncertainty of litigation. However, counsel should assess the magnitude and significance of the breach to determine whether the situation can be sufficiently remedied to client’s satisfaction.
II. Damage and Destruction Clauses
In general, agreements of purchase and sale, including the OREA standard form agreement, shift the risk for damage and destruction occurring in the interim period to the vendor. These damage and destruction clauses are drafted with the intent that the vendor’s insurance will protect both the vendor and the purchaser. A typical clause provides that the property and its buildings and chattels remain at the risk of the vendor until closing, and that the purchaser has some rights over the vendor’s insurance in respect of the property and/or has a right to terminate the agreement, although the right to terminate is often drafted such that it can only be triggered when there is substantial damage. Where there are multiple properties being sold under a single purchase agreement, the purchaser may have the option to drop a damaged property from the transaction.
There are two potential issues that lawyers should be aware of with respect to the wording of standard damage and destruction clauses: the threshold of substantial damages and the availability of insurance proceeds.
The first issue is that there is little guidance on the meaning of “substantial damage”. Where a purchaser’s termination right depends upon meeting the threshold of substantial damage, there is uncertainty as to how such damage would be measured (e.g., in relation to an area percentage of the buildings or in relation to the value of the property as a whole), and whether the court would apply an objective or a subjective test. This lack of clarity could increase the likelihood of litigation, and the purchaser would be required to close if the court ruled that the damage is not substantial. In commercial agreements, this issue is often resolved by assigning a threshold dollar amount as a trigger for the purchaser’s right to terminate.
The second issue is that many damage and destruction clauses, including OREA’s standard clause, do not require that the vendor carry insurance. In such a case, the purchaser’s only option is to terminate the agreement, as there are no insurance proceeds to cover the damage. For substantial damage, the purchaser has the right to terminate, but does not get what the it originally bargained for – the property in its original condition. In the case of damage that is not substantial, the purchaser does not even have a right to walk away. The same problem arises if the vendor is unable to collect on insurance or if the proceeds of insurance are accounted for by prior claims, such as
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that of a mortgagee. Finally, there may be difficulty accessing insurance proceeds if the purchaser does not discover the damage that occurred prior to closing until after the transaction has closed.16
One way to protect the purchaser is to add an obligation to maintain insurance, specifying the nature of the insurance and the value of the insurance policy in the agreement of purchase and sale. The parties would have to consider whether to contract for insurance to the full replacement value or to market value, and would have to account for co-insurance provisions and deductibles.
Another way to protect the purchaser is to draft the damage and destruction clause to permit termination even if the damage is not substantial: the purchaser may prefer to terminate if it is uncertain as to the availability or amount of insurance proceeds. However, the vendor would likely reject a provision that permits the purchaser to terminate in the case of minor damage to the property, and it would be unfair to allow the purchaser to use the occurrence of such damage to terminate a transaction. A similar issue arose in Champlain Thickson Inc. v. 365 Bay New Holdings Ltd.,17 in which the purchasers refused to close on a purchase worth $24.5 million on the basis that the vendors failed to satisfy a condition precedent to fix the elevators, a job contracted to cost $6,200. The court was satisfied that the purchasers could refuse to close the deal and ordered the return of the deposit.
Finally, the purchaser could be provided with the option to choose an abatement of purchase price in the amount equivalent to the damage, with all insurance proceeds being paid to the vendor.18 While permitting the purchaser to bypass issues of insurance altogether, the vendor may be unable to satisfy its payment obligations (for example, mortgage pay outs due on closing) without the full proceeds of sale and may be unwilling to risk that the insurance proceeds will not be available to cover substantial damage. In these circumstances, the vendor may take the position that the purchaser is adequately protected through the right either to terminate the contract or to proceed while relying on the insurance placed by the vendor. As vendors and purchasers have different concerns depending on the severity of the damage, it may be beneficial to have different remedies available for minor and substantial damage.
16 Bradley McLellan, “Property Damage and the Agreement of Purchase and Sale” (Paper delivered at Disasters in
Real Estate Practice: Tools and Strategies for Effectively Managing the Unexpected, 4-7 February 2015).
17 [2007] OJ No 3254; 160 ACWS (3d).
18 See the alternative damage clause suggested in Bucknall, supra note 1 at 263.
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TAB 5
Unable or Unwilling (The Unofficial Guide to Answering
Requisitions)
Simon Crawford Bennett Jones LLP
September 19, 2017
Commercial Real Estate TRANSACTIONS 2017
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UNABLE OR UNWILLING
Simon P. Crawford Partner Bennett Jones LLP
Much has been written about valid requisitions, and what constitutes a valid requisition, and
much has been written about a vendor's right to deny requisitions made, where those requisitions
are invalid.
What is not often written about, is the vendor's right to not remedy a valid requisition that has
been made by a buyer.
Advantage, Buyer
When one steps back from a real estate purchase contact for a moment, and considers the notion
of requisitions in the first place, one might question why a vendor should have any right to refuse
to remedy a requisition validly made. Isn't it the point of the contract, in the first instance, to
ensure that the buyer gets good title? And on a balance, does it not make sense that a vendor who
bargains to deliver good title, should not thereafter have the right to refuse to make that title
good, should a defect be discovered, or at the very least, an obligation to convey what that
vendor does own (subject to that defect) with an abatement?
If you answer is yes, then you are entirely correct at law, assuming of course that you are
practicing law before the 1800s. It was about that time that agreements of purchase and sale and
offers to buy land were changing to specifically address the problem that vendors could be
compelled to complete the sale of real estate with a valid title deficiency (that the vendor could
not or did not want to remedy) through the remedy of specific performance, with an abatement.
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The Contractual Right of Rescission
The change that was being made to agreements of purchase and sale is what we now commonly
refer to as the rescission or annulment clause. Over the last two hundred years, it has been
variously worded and modified, but has always amounted to something like the following: if a
valid requisition is made by the buyer within a certain period, and the seller is unable or
unwilling to remedy or remove the subject matter of that valid requisition, then the seller may
terminate the agreement and shall return the deposit.
And so by contract, the balance of power (in respect of handling valid requisitions) appeared to
shift in favour of sellers. On the plain reading of the rescission clause, the seller could exercise
its discretion so as to determine that it was unwilling or unable to address the requisition and to
unilaterally get out of its bargain. Even the plain wording of the modern OREA form appears to
give a vendor a plain, unfettered and unilateral right to terminate the contract:
"If within the specified times referred to.any valid objection to title or to any outstanding work order or deficiency notice, or to the fact that the said present use may not lawfully be continued, or that the principal building may not be insured against risk of fire is made in writing to the Seller and which the Seller is unable or unwilling to remove remedy or satisfy, or to obtain insurance save and except against risk of fire (title insurance) in favour of the Buyer and any mortgagee, (with all related costs at the expense of the Seller), and which the Buyer will not waive, this Agreement, notwithstanding any intermediate acts or negotiations in respect of such objections, shall be at an end and all monies paid shall be returned without interest or deduction…" (emphasis added)
Advantage, Vendor
And for some time, courts were prepared to accept that the parties had contractually shifted the
balance of power in the context of valid requisitions, from buyer to seller.
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In 1884, the High Court of Justice in Dames v. Wood, In re1 considered the following similar
language in the contract:
"If the purchaser shall take any objection, or make any requisition as to the title, evidence or commencement of title, conveyance or otherwise, which the vendor is unable or unwilling to remove or comply with, the vendor may, by notice in writing delivered to the purchaser or his solicitor, and notwithstanding any intermediate negotiation, rescind the contract for sale, and the vendor is, within one week after such notice, to repay the purchaser his deposit money…".
On the facts, the purchaser made its requisitions in a timely manner, and the vendor had
answered the requisitions. The decision does not set out the specific nature of the requisitions or
the answers made. However, what is clear is that the purchaser did not accept the vendor’s
answers. The vendor then sent notice stating that it was unable or unwilling to comply with the
purchaser's objections and requisitions, and was exercising its contractual power to rescind the
contract. In the face of this rescission, the purchaser withdrew its objections and requisitions and
stated that it was willing to complete the purchase.
The purchaser's counsel argued that ""inability" or "unwillingness" on the part of the vendor
must be reasonable and the vendor ought to give notice to the purchasers as to which of the
requisitions he was unable or unwilling to comply with".
The court did not quite agree. In fact, the court weighed in heavily in favour of the plain meaning
of the contract and the right of the seller to make a unilateral and unfettered decision to terminate
the contract:
"The question turns upon the meaning of the words "unable or unwilling." What do these words mean? The vendor knew that unreasonable and improper requisitions might be tendered to him, and accordingly he sought to protect himself on two grounds,
1 Dames v. Wood, In re (29 Ch D 626; 54 L.J. Ch 771; 53 L.T. 177; 33 W.R. 685
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unwillingness and inability to comply with them. He says in the first place, "I may be unable to answer these requisitions except at great trouble and expense, and I wish to protect myself accordingly." Or he may say, "The requisitions may not be of such a nature that I cannot comply with them, yet may they be so unreasonable and unjust that I may be unwilling to comply with them, by reason of the expense or otherwise, and in this case, also, I wish to protect myself" The conditions appear to me to contain a clear stipulation, namely, that the vendor may at any time say, in answer to requisitions, "I am unwilling to go on; I decline to answer them." No one has a right to inquire why he is unwilling; at any rate he is not bound to give his reasons".
The court enforced the plain meaning of the contract - that seller may terminate the contract if it
is unwilling or unable to answer or address requisitions, and need not give reasons why. Full
stop. Thanks for coming out.
And so begins the reason for this paper. To consider how, in the face of what was once treated as
an absolute seller right of rescission, the courts have since brought equitable principles to bear so
as to rebalance the rights between sellers and buyers dealing with valid requisitions.
Good Faith – Equity Intervenes
In 1907 an Ontario court in Crabbe v. Little2 considered the purchase and sale of two properties
on Spadina. The agreement provided that "if any objection or requisition is made by me which
you are unable or unwilling to comply with, you shall be at liberty by notice in writing to rescind
this agreement without interest". The purchaser presented "very lengthy requisitions" and the
seller responded that he was "unwilling to go to the expense of complying with the requisitions",
and he rescinded the contract.
2 Crabbe v. Little 1907 CarswellOnt 604, 14 O.L.R. 631, 9 O.W.R. 551
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The court (unlike the court in Dames v. Wood) took a different view in considering whether the
rescission was validly exercised. The court stated:
"The vendor, I find, acted in good faith; he had no improper motive in attempting to rescind the contract; he was advised by his solicitor that the expense of complying with the requisitions would amount to many hundreds of dollars, and that, even then, there were matters he could not obtain evidence upon, and so he was both unable and unwilling to comply with the requisitions".
And so what was recognized in this decision is that there were criteria for when the right of
recession could be relied upon by a vendor; or perhaps more correctly, it was recognized that
there may be certain equitable reasons why a seller would not be permitted to avail itself of this
contractual right of rescission.
The case did not turn on the point at the time, but the court referred to two indicia that might
have disqualified the seller from such reliance:
(a) had he not acted in good faith; and
(b) had he had an improper motive in attempting to rescind the contract.
While these were imperfect tests, they constituted judicial recognition that equity played an
important role in understanding the rescission rights of the seller.
Sweet Will
Some fourteen years after Crabbe v. Little, the Ontario Court of Appeal wrote (what is now) one
of the more quoted decisions on the subject, in Hurley v. Roy3.
In this case, the seller contracted to sell a property but he and his wife each owned half the
property. His wife took the position that she would join in the required conveyances but only if
she received half the money. When the buyer requisitioned that it receive a conveyance from
3 Hurley v. Roy 1921, CarswellOnt 243, 50 O.L.R. 281, 64 D.L.R. 375
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both spouses, the seller refused (on the grounds that he would have to relinquish half the
purchase price to his wife to do so), and purported to rescind the contract.
The court considered his claim that he was unable or unwilling and stated:
"The provision enabling the vendor to rescind has no application to the facts. The vendor can convey if he allows his wife to have her share of the price. This provision was not intended to make the contact one which the vendor can repudiate at his sweet will. The policy of the Court ought to be in favour of the enforcement of honest bargains, and it should be remembered that, when a contract deliberately made is not enforced because of some hardship the agreement may impose on one contracting party, the effect is to transfer the misfortune to the shoulders of the other party, though he is admittedly entirely innocent".
So without stating it expressly, the Court in Hurley v. Roy was further limiting the availability of
the rescission right, by in effect reversing the onus – stating that the exercise of the rescission
right, where such exercise would amount to terminating an honest bargain because of undue
hardship on the seller, was invalid.
For a time, there In Louch v. Pape Avenue Land Co4 the court accepted the trial court's finding
that the objections made had been valid, and that "there is no suggestion of bad faith". The court
then found that, in the absence of bad faith, the Vendor could avail itself of the rescission clause
even it if had bargained to sell something that it can't prove ownership:
"Take, for instance, the case where a piece of land is included in the description to which a title cannot be made out: regard must be had to the importance of that particular piece, and the amount of compensation which would have to be paid. I think it quite reasonable for the vendor to say "I will reserve to myself a mode of escape from all the trouble of these enquiries and investigations and expenses of arbitration. I desire to settle the price myself; and if the purchaser insists on his objections to my title, I will retain in my own hands the power to rescind".
4 Louch v. Pape Avenue Land Co 1928 CarswellOnt 47, [1928] 3 D.L.R. 620, [1928] S.C.R 518
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Louch v. Pape moved the needle back in favour of the vendor, and focused on the rescission
clause as a defence to the exercise by the purchaser of a right of specific performance with an
abatement. In doing so, Louch tacitly took the position that the only way to be disqualified from
exercising the rescission right, was to have acted in bad faith (even if it had agreed to sell
something it could not prove good title to).
The Reckless Cases
All along, however, running along a parallel track to the good faith cases, were a collective of
cases I affectionately call the "Reckless Cases". In Re Jackson and Haden's Contract5, Master of
Rolls Collins stated:
"It is to be noted that, in dealing with this right to rescind, the learned judges have always criticized most carefully the conduct of the parties to the contract, and the purpose for which the particular condition must be supposed to have been introduced, with a view to seeing whether or not it is, in the circumstances of the particular case, a condition that ought to be applied for the benefit of the person who had introduced it. In this particular case, there is no doubt that this clause was introduced for the benefit of the vendors. The Court considers whether or not the vendor has so acted in the matter as to avail himself of that condition: or it may be put in other words. Can we construe this condition [sic], in the circumstances, as applying to the particular state of facts which has caused the difficulty."
Then the court addressed the standard – the elements of behaviour that might prevent a Vendor
from relying on the rescission clause:
"It may stop short of fraud, it may be consistent with honesty; but at the same time, there must be a falling short on his part – he must have done less than an ordinary prudent man, having regard with his relations to another person, when dealing with him, is bound to do; and therefore where, knowing the exact facts, he has recklessly made a description of them which would mislead another person who did not know as much as himself (even though he thought that person might know as much as himself), there is a clear failure of duty on the part of the vendor which fairly disentitles him to say that
5 Re Jackson and Haden's Contract, [1906] 1 Ch. 412
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a clause introduced into the contact for his benefit is introduced to meet such a case as that which has arisen here, namely a reckless disregard by the vendor as to accuracy of statement when he is making a statement which a view to the other people acting on it as correct. On that ground it is enough to say that this particular condition must be read (as against the persons who are taken to have introduced it for their own benefit) as not applying to the particular case to which they seek to apply it, namely, something arising wholly and solely out their own recklessness in the manner in which they have formulated the contract."
In Merrett v. Schuster6, the court distinguished In Re Jackson and Haden's Contract as standing
for the principle that "recklessness" only applied to situations where the vendor had made an
untrue statement without having substantial grounds for belief in its truth. Instead the court stated
that the right of rescission should be allowed, even in the face of untrue statements having been
made by the vendor, so long as the vendor acted in good faith and reasonable belief in those
facts.
In Lavine v. Independent Builders Ltd.7, the Court confirmed and applied the recklessness test
from In Re Jackson and Haden's Contract in a situation where "on the evidence this was plainly
not a mere oversight or mistake upon the part of the vendor" and that the vendor "stated that the
vendor owned the lands to the read and could give the lane desired". As it turned out, he couldn't,
and was found to have been reckless.
Recklessness and Bad Faith
And then it happened. In a 1958 decision, the Supreme Court of Canada acknowledged that both
recklessness and bad faith had roles in limiting the vendor’s right of rescission.
6 Merrett v. Schuster, [1920] 2 Ch. 210 7 Lavine v. Independent Builders Ltd. (1932) CarswellOnt 72, [1932] 4 D.L.R. 569 [1932] O.R. 669
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In Freedman v. Mason8, the vendor agreed to deliver a deed containing a bar of dower and later
attempted to terminate the contract on grounds that he was unable to obtain one. The court found
that "his duty was, at the very least, to make a genuine effort to obtain what was necessary to
carry out his contract and that there can be no doubt in this case that he made no such effort".
The court found that both husband and wife wanted out of the transaction and that the inability to
obtain the bar of dower was perhaps not genuine.
Then the court gave us a first taste of how the concepts of recklessness and bad faith can co-exist
in the analysis:
"A vendor who seeks to take advantage of the clause must exercise his right reasonably and in good faith and not in a capricious or arbitrary manner. This measure of his duty is the minimum standard that may be expected of him, and there are cases where a cause which might otherwise be valid as justifying rescission will not be available to him if he has acted recklessly in entering into a contact to convey more than he is able."
And there we have it. The recklessness test applies to the point in time when the contract is
entered into. A vendor cannot avail himself of the right of rescission if it acted recklessly in
bargaining for something it could not convey.
The bad faith test is one that is applied at the time the vendor is otherwise allowed to respond to
the valid requisition and exercise the right of rescission in the contract. It can only do so if it is
acting in good faith and not in a capricious or arbitrary manner.
Which then raises the question, how does one act capriciously or in bad faith? The court went on:
"his attempted rescission was arbitrary and there was a complete and deliberate failure on his
8 Freedman v. Mason [1958] CarswellOnt 73, [1958] S.C.R. 483, 14 D.L.R. (2d) 529
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part to do what an ordinarily prudent man having regard to his contractual obligations would
have done".
Is this the entire test? Not quite. It is only an example. The court went on to state: "I doubt that it
is possible to formulate in the abstract and apart from the actual conditions of a case the precise
limits within which the clause may enable a vendor to rescind."
In Paulter Holdings Ltd. v. Karrys Investment Ltd.9, the court determined that, in getting a court
order to determine that an instrument on title did not constitute a registerable encumbrance on
title, a vendor had satisfied its duty to evidence to the purchaser that its title was not affected
thereby. An effort had been made.
Just two years later, in 1963, the Privy Council in Selkirk v. Romar Investments Limited10
illustrated how the British courts were on a parallel track. In a manner not unlike Freedman v.
Mason, the court noted that there are two distinctly recognized ways in which a vendor can
disqualify itself from being able to exercise its right of rescission, both of which are rooted in
principles of equity. By way of preamble, the court recognized the longstanding notion that, but
for such principles, the contractual right in favour of the vendor would stand on its terms:
"If a vendor, having stipulated for or been conceded such a right, is to be precluded from asserting it in any particular context, it must be by virtue of some equitable principle which enures for the protection of the purchaser; and it is not in dispute that Courts of Equity have on numerous occasions intervened to restrain or control the exercise of such a right of rescission in contracts for the sale of land, despite what, on the face of the contract, its terms seem to secure for the vendor."
9 Paulter Holdings Ltd. v. Karrys Investment Ltd. [1961] CarswellOnt 122 [1961] O.R. 579, 28 D.L R. (2d) 642 10 Selkirk v. Romar Investments Limited [1963] 1 W.L.R. 1415, [1963] 3 All ER 994 (94)
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That said, the court then recognized the longstanding cases that established the principle of good
faith:
"Thus it has been said that a vendor, in seeking to rescind, must not act arbitrarily or capriciously or unreasonably. Much less can he act in bad faith. He may not use the power of rescission to get out of a sale "brevi manu", since by doing so he makes a nullity of the whole elaborate and protracted transaction."
and as to the standard of behaviour, the court remarked:
"…a vendor has to be reasonable: he does not have to be beyond criticism before he can exercise his right of rescission".
The court also turned its mind to the separate notion of recklessness:
"Above all, perhaps, he must not be guilty of "recklessness" in entering into his contract, a term frequently resorted to in discussions of the legal principle and which their Lordships understand to connote an unacceptable indifference to the situation of a purchaser who is allowed to enter into a contract with the expectation of obtaining a title which the vendor has not reasonable anticipation of being able to deliver".
It is on the point of "recklessness" that the court then focused, and despite that it is a decision of
the Privy Council, the colour provided by the court is helpful in our understanding of the
principle as it has been and will, I expect, be applied by Canadian courts. On the issue of
recklessness, the court stated (and for convenience, I provide three excerpts that collectively
illustrate the concept):
"what is now at issue, which is simply the question whether the respondent is to be held guilty of "recklessness", in the legal sense, in not warning the appellant before the contract was signed that there were certain evidential gaps in the proof of its title that it was unlikely to be able to fill up"
…
"While there have indeed been some instances in which a vendor has been deprived of the right of rescission for entering into his contract in circumstances in which he had no reasonable assurance that he could convey the whole title for which he was contracting,
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his disqualification arises out of his carelessness or lack of prudence in the particular circumstances and not out of a mere failure to disclose a defect of title, much less a defect in the evidence of title, which rendered the title he had to offer less than complete"
…
“A Vendor's position for this purpose has to be ascertained as at the date when he enters into his contract.”
And so in many respects the concept of recklessness amounts to a failure of a duty to warn the
purchaser in advance of entering into the agreement of purchase and sale that the vendor cannot
(or may not) be able to evidence and deliver good title to the property, and such failure has to be
because the vendor exercised carelessness or a lack of prudence in the particular circumstances
(an "unacceptable indifference to the situation of a purchaser"). To put it another way, it is not
that the vendor doesn't have good title, or has an evidentiary issue in proving good title, it is that
it acted recklessly in inducing the purchaser to enter into the contract for good title, in the face of
that known deficiency.
The Modern Canadian Position on Good Faith is Established
So far we have considered some of the pivotal developments in the case law, both British and
Canadian, up to the 1960s. In this part of the discussion we will track what has happened in the
Canadian courts in the last 40 years.
The discussion begins with Mitz v. Wiseman11. The Ontario High Court of Justice addressed
arguments related to the degree of effort that a vendor put into answering valid requisitions, and
whether having regard to that effort, its subsequent rescission of the contract amounted to bad
faith. While the case does not add to the test in any way (it being acknowledged that the facts of
11 Mitz v. Wiseman [1971] CarswellOnt 192
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each case determine its application), the decision is interesting because it points to certain things
that a vendor need not resort to in evidencing its good faith exercise of its rescission right.
Speaking of the vendor, the court stated:
"I do not believe that it is necessary for him to engage on an extensive and expansive law suit, or to commence mandamus proceedings….this would place the vendor in an intolerable position for at any moment, after a reasonable time, the purchaser could withdraw from his obligations on the ground that the sale was not being completed within a reasonable time".
It is also a helpful decision because the court expressly rejected that vendor has to evidence "best
efforts" in resolving a valid requisition before exercising its right of rescission.
The good faith concept was developed a little further in 1982 in Koccoris v. Cordery12. Like
some of the earlier cases, this was one in which the vendor had contracted to sell real estate, but
had to compel his wife to bar dower in order to satisfy the purchaser's valid requisition. In
assessing whether the "good faith" test in Mason v. Freedman was met, the court remarked that
the vendor had "made real, honest, genuine, bona fide and reasonable attempts to get his wife to
bar her dower", and that therefore he was “unable” to satisfy the requisition.
However, for further colour, the court also reaffirmed that the vendor has the right to be
unwilling to satisfy the requisition, albeit a restricted right. Reaffirming Mason v. Freedman, the
court stated:
"While the right to be unwilling is a restricted one in the sense pointed out by Mason v. Freedman there remains the right on the part of the vendor to decline the exercise of his will in favour of removing the objection. The clause cannot be used to make a valid agreement terminable at the defender's will, but it does leave him with a choice. In my opinion if he acts reasonably in making that
12 Koccoris v. Cordery [1982] CarswellOnt 683, [1982] O.J. No 2314, 20 A.C.W.S. (2d) 57, 28 R.P.R 75
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choice then the clause is operative to render the transaction null and void."
And then in a manner curiously similar to Mitz v. Wiseman, the court confirmed that "a Court
must be very careful before it says that a person is not genuinely attempting to fulfill his
contractual obligations when he declines to make an application to a Court which could lead
directly or indirectly to protracted litigation or an abatement of the purchase price".
In 1988, two decisions advanced our understanding of what the standard of performance is in
order to assert that one is unable to satisfy a valid requisition:
1. In Mink Printing Inc. v. K.J. Choi Ltd.13, the court suggested what a
minimum standard might be in evidencing that one acted in good
faith when asserting that it was unable to satisfy a requisition. The
court stated that a vendor must "at the very least, make a genuine
effort to obtain what was necessary to carry out his contract". This
is the first time that the notion of a "genuine effort" was suggested
to be the minimum standard in this regard.
2. The discussion was advanced by a Master's decision in 777829
Ontario Ltd. v.616070 Ontario Inc14, (appeal refused by Ontario
High Court of Justice), which considered a situation in which the
purchaser requisitioned the removal from title of a certificate of
pending litigation. The vendor brought an application for its removal
that same day, and extended the closing date, but when the
certificate was still not vacated by that extended closing date,
13 Mink Printing Inc. v. K.J. Choi Ltd. [1988] CarswellOnt 624, 2 R.P.R. (2d) 170, 55 D.L4th) 614, 66 O.R. (2d) 737 14 777829 Ontario Ltd. v.616070 Ontario Inc
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refused to extend the closing date further, stating that it had used its
best efforts to vacate the certificate by the closing date and was
terminating the contract. The order to vacate the certificate was
made by a court four days later. Although the vendor had stated that
it had been unable to obtain the order by the closing date, the court
found that, on the facts (and presumably the fact that the order
happened on the heels of the termination), the vendor had been
unwilling (and not unable). The purchaser argued that the vendor
had sought an order that was returnable after the date that the vendor
extended the closing date to, which indicated a lack of good faith.
The trial judge considered Freedman v. Mason, and came to the
conclusion that "in the absence of some binding authority as to how
the "annulment clause" is to be applied in the circumstances of the
within case, I am obliged to accept the plain meaning of the words
of clause 12 of the agreement of purchase and sale"…and that those
words "clearly allow an unwilling vendor, without qualification, to
withdraw from the agreement in the circumstances of the within
case”. Going further, the court went on to state that it was prepared
to rely on the ruling in McNiven v. Pigott for the proposition that a
vendor need not litigate to make good title where there was no
collusion or deliberate failure by the vendor to cloud title.
What is interesting about this judgement is that, when one steps back
from the facts, it appears that the vendor could have completed the
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transaction had it simply agreed to extend the closing date by a short
time, in order for the process to run its natural course, but that it had
deliberately extended the closing date to an earlier date just shy of
when it would have been able to complete the process. What the
court was apparently unwilling to do, was to find that the vendor had
an obligation to act reasonably or in good faith when it came to
granting extensions of closing in order to satisfy a valid requisition.
As for the standard of behavior to evidence "good faith", the court
stated: "No authority has been cited to me in support of the
proposition that the defendant in the within action is obliged to do
whatever is necessary (even "reasonably" necessary) to remove the
cause of a requisition on title, when that cause (in this case a
certificate of pending litigation) was unknown to him at the time of
entering into the contract".
The fact that the court in 1988 at affirmed that a vendor does not have to do what is “reasonably
necessary” to satisfy requisitions in order rely on the annulment clause, resonated five years later
when, in Grant v. Tiercel Digital Ltd.15 the Ontario Court of Justice (General Division)
considered a situation where the vacation of various construction liens from title was
requisitioned. On the facts, the court found that the vendor had made "significant efforts" to
settle the lien litigation and "at the very least were not standing idly by". And on the applicable
standard of performance, the court stated that "it is apparent from the cases that it is the
reasonableness of the vendor's efforts to satisfy the requisition that are important." The Ontario
15 Grant v. Tiercel Digital Ltd. ([1993] CarswellOnt 602, 32 R.P.R. (2d) 51, 40 A.C.W.S. (3d) 369, 9 C.L.R. (2d) 1
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Court of Appeal16, dismissed the appeal but relied more broadly on the principle that the trial
judge had concluded that the vendor had not acted in bad faith.
A light shone through the judicial fumbling as it relates to the recklessness test, when the Ontario
Court of Justice, General Division, released its decision in 11 Suntract Holdings Ltd. v. Chassis
Service & Hydraulics Ltd17.
The court considered the judicial canon, both British and Canadian, on the rescission of real
estate contracts, and provided us with the following pithy points, which can be considered to be
“good law” in Canada today:
1. “the limitations on a vendor’s conduct are twofold, are independentof one another, and impose on a vendor separate and distinct dutieswhich arise at different times in the transaction; the first being at thetime that the Agreement of Purchase and Sale is entered into and thesecond being after an objection is made to the vendor’s title;”
2. “If the vendor has no knowledge of the title defect, or the purchaserdoes have knowledge of the title defect, whether actual or imputed,a Court is more likely to find that the first limitation does not apply.It will go on to consider the second limitation in order to decidewhether the vendor did all that it could to make good the title beforepermits the vendor to repudiate the contract”; and
3. the Court confirmed that the test for ”recklessness” applies at thetime the contract is entered into, but left open whether the test is thatthe vendor showed “unacceptable indifference” (the test in Selkirkv. Romar) or showed a “falling short” (the test from Jackson v.Haden’s Contract).
Unfortunately some decisions since 11 Suntract have potentially reinstated that judicial
fumbling. For example, in Progressive Recycling Inc. v. 1530937 Ontario Inc.18, the Ontario
Superior Court reverted to stating (or inferring) that the test at the time the contract is entered
16 Grant v. Tiercel Digital Ltd. [1994] CarswellOnt 4539, 48 A.C.W.S. (3d) 1278 17 11 Suntract Holdings Ltd. v. Chassis Service & Hydraulics Ltd (1997) CarswellOnt 4804, [1997] O.J. No. 5003, 15 R.P.R (3d) 201, 36 O.R. (3d)
328, 49 OTC 112, 76 A.C.W.S. (3d) 207) 18 Progressive Recycling Inc. v. 1530937 Ontario Inc., (2007) CarswellOnt 4163
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into may be determined solely on the basis of whether the vendor had brought about the
deficiency. That is not the test. The test is recklessness.
However, there have been decisions that have worked to solidify 11 Suntract and to summarize
in better terms the law of the land today.
In Toth v. Ho19, the court added (or if not added, recharacterized) one important element of the
consideration of whether a vendor can rely on the rescission clause. The court hived off “matters
of conveyance” as being distinct from “matters of title” and stated that requisitions that are a
matter of conveyance never lead to the right of rescission, because they are by nature matters that
the vendor can compel the delivery of. The law has long recognized matters of conveyance as
being subject to their own “bucket” of requisitions. The notion was that certain discharges of
instruments (for example) are completely within the control of the vendor to obtain or deliver,
and therefore the vendor cannot rely on the “unable or unwilling” concept in order to avoid
delivering them on closing. In this case the court considered whether a requisition for the
discharge of a closed mortgage was a matter of conveyance or a matter of title, and concluded
that it was a matter then went to title because the vendor could not compel the discharge of a
closed mortgage simply by redirecting closing funds to the mortgagee.
A reasonable summary of the current state of the law is contained in the 2015 decision in
Business Development Insurance Ltd. v. Caledon Mayfield Estates Inc.20, which decision
19 Toth v. Ho (1998) CarswellOnt 5215 20 Business Development Insurance Ltd. v. Caledon Mayfield Estates Inc. (2015) CarswellOnt 4290, 2015 ONSC 1978, 253 A.C.W.S. (3d) 489, 54
R.P.R. (5th) 300
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provides us with confirmation that the following long-determined principles of equity will
govern a court’s determination:
1. “rescission is not readily available to a vendor who entered into the
agreement recklessly and with full knowledge or his or her inability
to remove a defect in title.” This is considered at the time the vendor
enters into the agreement. If the vendor has no knowledge of the title
defect, or if the purchaser does have knowledge of the title defect,
whether actual or imputed, a court is more likely to find that this
limitation does not apply.
2. “for a vendor to rely on the annulment clause in an agreement of
purchase and sale, the vendor must exercise his rights reasonably
and in good faith. This means that those rights must not be exercised
in a capricious or an arbitrary manner.” This is considered at the
time the vendor is asked by the purchaser to consider an objection
to title. The court went to say that “the vendor is obligated to act in
good faith and to make efforts to rectify the defect in title that has
been raised by the purchaser. However the law does not require the
vendor to engage in litigation to remove an objection to title”.
3. “A matter of conveyance was defined as an encumbrance which the
vendor can compel and has a right to discharge. A matter of
conveyance involves an element of control in the hands of the
vendor to address the matter or thing to which the requisition
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applies, and to compel or insist on the performance of a legal right
to discharge that matter or thing. If a vendor is not entitled as a right
to discharge an encumbrance, it is an objection to title. It is an
objection to title that allows a vendor to rely on the annulment clause
or right of rescission in an agreement of purchase and sale”.
Although the foregoing three principles are now considered good law in Ontario, one must be
careful when relying on the distinction between matters of conveyancing and matters of title.
Most of the cases before Toth v. Ho were careful not to rely on this particular distinction when
determining whether the rescission clause was available, in part (for example) because there may
be matters that are entirely within the vendor’s control to compel, but that it may only compel at
great cost (and which in the absence of this distinction, a court might have found the vendor to
be acting in good faith in declining to do). And so while this is the law, now doubly affirmed,
this author considers the matter not yet completely explored.
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TAB 6
Estoppel Certificates: What are They Good For?
Absolutely Something!
Melissa McBain, Daoust Vukovich LLP Kenneth Pimentel, Daoust Vukovich LLP
September 19, 2017
Commercial Real Estate TRANSACTIONS 2017
1
ESTOPPEL CERTIFICATES: WHAT ARE THEY GOOD FOR? ABSOLUTELY SOMETHING!
Prepared By: Melissa McBain & Kenneth Pimentel
Daoust Vukovich LLP
Estoppel Certificates
The delivery of estoppel certificates by vendors/borrowers to purchasers/lenders on or
before closing or funding is typically a condition precedent in any purchase or financing
transaction involving real estate that is encumbered by leasehold interests. However,
misconceptions abound regarding the purpose, content and utility of estoppel certificates. Can
purchasers, lenders or even vendors rely on the statements made by a tenant in an estoppel
certificate to support a claim against, or defend a claim by, a tenant? Are tenants required to
execute estoppel certificates and, if so, what information are they required to provide or confirm?
Can leases be amended by the statements made in an estoppel certificate? Do purchasers derive
any benefits from receiving executed tenant estoppel certificates? The purpose of this paper is
to answer these and other important questions surrounding the use of estoppel certificates. But
first, it is important to understand what estoppel certificates are and what they are not.
What are estoppel certificates?
An estoppel certificate (also referred to as a status statement or tenant acknowledgement)
is intended to be a statement of facts that sets out the key terms of a lease or other agreement
upon which the party requesting such information may rely.1 The utility of estoppel certificates
is premised on the doctrine of promissory estoppel, an equitable doctrine that prevents a party to 1 2454 Bloor Street West Ltd v 2107733 Ontario Inc, 2013 ONSC 6501.
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a contract from insisting on strict compliance with their rights under a contract where: (a) they
represented to another that they would not insist on their strict legal rights under the contract; and
(b) the other party has detrimentally relied on their representation.2
The most common lease-related facts detailed in an estoppel certificate are:
• list of all agreements that amend the lease from its original form;
• the term of the lease, including commencement and expiry dates;
• any outstanding options to renew or extend;
• the size of the premises;
• the rent payable by the tenant and any increases in rent that will be occurring over the
balance of the lease term;
• the amount of prepaid rent or security deposit paid to the landlord, if any;
• confirmation that all tenant allowances or inducements have been paid in full by the
landlord;
• list of any special rights, including options to terminate, signage rights and rights of first
refusal; and
• confirmation that there are no outstanding defaults under the lease and if there is a
default, details respecting the default.
Estoppels are not amending agreements
Lenders will often ask tenants to execute estoppel certificates which include wording to
the effect that the tenant will agree to subordinate its priority to that of the lender (to ensure that
the lender’s charge ranks ahead of all leasehold interests in the property) and attorn to the lender
(to ensure that the tenant will recognize the lender as the landlord in the event of a default by the
2 McKeller General Hospital v ONA, [1986] OLAA.No 5.
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landlord under the mortgage). However, an estoppel certificate will not alter the terms of a
lease.3 This is because an estoppel certificate is a confirmation of the facts relating to a lease
agreement. It is not intended to modify the lease between the parties. This is supported by the
fact that estoppel certificates are only signed by the tenant, so there is no privity of contract
between the tenant and the purchaser/lender requesting the amendment. Further, amendments
included in estoppel certificates will often only benefit the lender/purchaser and therefore will
lack consideration and be invalid. As a result, if a lease amendment is needed, or a new
covenant is required, it should be reflected in a separate agreement and not just a statement in a
tenant estoppel.4
Even if the tenant makes a mistake while completing an estoppel certificate, a
misstatement regarding the terms of a lease set out in an estoppel certificate cannot change the
terms of the lease.5 In Porte Development (Main) Ltd. v. Janus Production Inc.,6 an estoppel
certificate stated that the lease in question consisted of both an expired lease and a renewal
agreement. The landlord wanted to terminate the lease on the basis that the tenant had violated
the expired lease four years before the landlord purchased the property. The landlord argued that
by signing the estoppel certificate with these terms, the tenant had confirmed that the lease
included the expired written lease. The Court dismissed the landlord's argument, concluding that
a misstatement of the legal effect of the lease in the estoppel certificate could not change its
actual legal effect. The Court held that the estoppel certificate did not restore the privity of
contract that ended with the expiry of the term of the original lease. The Court held that
3 Vancouver City Savings Credit Union v New Town Investments Inc, 2008 BCSC 1617; Firkin Pubs Metro Inc v Flatiron Equities Ltd, 2011 ONSC 5262. 4 Credit Union Central of Ontario Ltd v York Region Condominium Corp, 2004 CarswellOnt 1749. 5 Porte Development (Main) Ltd v Janus Production Inc, 2007 BCSC 670. 6 Ibid.
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representations made by the tenant in the estoppel certificate applied only in relation to the
renewal lease.
What does a typical estoppel clause in an agreement of purchase and sale look like?
A typical clause in an agreement of purchase and sale dealing with the delivery of
estoppels will usually contain the following:
- It will form part of the vendor’s closing deliveries, meaning the estoppel certificate will
need to be delivered by the vendor prior to the closing of the transaction (usually 5-7 days
before closing);
- It will contain a covenant from the vendor to obtain a certain minimum number of
executed estoppel certificates from tenants. Depending on the size of the property, the
tenant mix, and even lender requirements, this minimum number will vary; however, it is
not uncommon for estoppel certificates to be required from all tenants;
- In the event that the minimum number of estoppel certificates cannot be obtained by the
agreed upon deadline, provision for the vendor to provide a certificate signed by a senior
officer of the vendor in lieu of obtaining signed estoppel certificates confirming the
details of the leases for those tenants sufficient to meet this minimum threshold, if
required; and
- It may contain a reference to a draft form of estoppel certificate (which might be attached
as a schedule to the agreement of purchase and sale). Before committing to a specific
form, prudent vendors will review their leases with major/anchor tenants, banks and
governmental entities because these leases may dictate the form and content of estoppel
that the tenant is required to deliver. One should also consult with any proposed lender to
confirm whether it requires the use of a particular form of estoppel.
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Extent to which you can rely on estoppels is limited
The doctrine underlying the use of estoppel certificates is that a party will be estopped
from making a claim based on facts contrary to those contained in the estoppel certificate. For
example, if a tenant confirms in an estoppel certificate that rent under the lease is X dollars per
month, it cannot later claim that rent was actually less than X dollars.
However, there are exceptions to this general proposition. For instance, the doctrine of
estoppel can only be used as a shield, not as a sword. 7 In other words, it is generally settled law
that the doctrine of estoppel may be raised by way of defence to an action, but may not be
utilized to create a contractual right upon which an action for breach of contract can be founded.8
In the context of estoppel certificates, it is unlikely that a landlord or tenant could successfully
start a claim based on information contained in an estoppel certificate. However, the landlord or
tenant could use that information as a defence to a claim, assuming the prerequisites for
establishing estoppel have been met. Specifically, the party relying on the information contained
in the estoppel certificate will need to demonstrate that: (1) the tenant intended to affect the legal
relationship between it and the recipient of the estoppel; and (2) the recipient relied on the
estoppel certificate and then acted to its detriment.9 An estoppel is born out of a legal
relationship and not vice-versa. Therefore, in order to satisfy part one of this test, a legal
relationship must have pre-existed the estoppel certificate.10 The courts have broadly applied part
two of this test, meaning that reliance can be shown in a variety of ways. In the past, courts have
considered something as small as the continued payment and receiving of rent to be reliance.11
7 Gilbert Steel Ltd v University Construction Ltd, 1976 CarswellOnt 830. 8 GHL Fridman QC, The Law of Contract in Canada, Sixth Edition (Toronto: Thomson Reuters Canada Ltd, 2011). 9 HREIT Holdings 36 Corp. v. R.A.S. Food Services (Kenora) Inc., [2009] 80 R.P.R. (4th) 64 (Ont. S.C.J.) 10 Alcan Aluminum Ltd., [1997] OLRD No 1830. 11Re Med-Chem Health Care Inc, [2000] OJ No 4009.
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Furthermore, the estoppel would only apply to the extent that the tenant knew or ought to
have known of the matters described in the certificate. As a result, if the tenant claims it was
unaware of a particular default at the time it signed the estoppel certificate, it will not be
estopped from asserting facts contrary to those set out in its estoppel certificate.
Are tenants required to sign estoppel certificates?
A tenant is not required to provide an estoppel certificate for the benefit of another party
unless there is a clause in their lease requiring it to do so. Without the lease requiring delivery of
an estoppel certificate, a landlord has no right to force a tenant to sign one.
Nonetheless, sometimes in the absence of an estoppel clause a tenant may cooperate with
the landlord and provide an executed estoppel in order to simply maintain a positive commercial
relationship. Since this behaviour is gratuitous on the part of the tenant, prudent landlords will
ensure their lease forms contain the requisite provision.
From a landlord’s perspective, each lease should provide that the landlord has the right to
require the tenant to deliver such a certificate within a fixed time after written request, as well as
specific language detailing the statements of fact the tenant is required to make. The following is
an example of a lease clause requiring that the tenant deliver an estoppel certificate:
“Within five (5) business days after written request therefor by the Landlord or upon any sale, assignment, lease or mortgage of the Premises or the Property by the Landlord, the Tenant hereby covenants and agrees to deliver in the form supplied by the Landlord and to such person as may be designated by the Landlord a certificate stating (if such be the case) that:
(a) this Lease is unmodified and in full force and effect (or if there have been any modifications, that this Lease is in full force and effect as modified and identify the modification agreements, if any);
(b) the date of the commencement and expiry of the Term;
(c) the date to which the rent has been paid under this Lease including prepaid Minimum Rent;
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(d) whether or not there is any existing default by the Tenant in the payment of any rent or other sum of money under this Lease, and whether or not there is any other existing default by either party under this Lease with respect to which a notice of default has been served, and if there is any such default, specifying the nature and extent thereof;
(e) the details of any existing options to extend or terminate this Lease;
(f) all Landlord’s Work has been completed to the satisfaction of the Tenant; and
(g) the Landlord has paid in full all Tenant inducements and allowances, if any.
The Tenant shall, in addition to the information set out above, provide any such further information as the Landlord or other person or entity may reasonably require.
Each of the parties hereto shall pay their own costs for preparation and execution of any such status statement.”
If a tenant refuses to provide an estoppel certificate in the face of a requirement in their
lease to do so, and such failure causes a purchaser to walk away from a transaction, the tenant
might be liable for damages relating to the Landlord’s loss of bargain.12
Estoppel certificates are good for something
Although the use of an estoppel certificate has its limitations, they can be useful for a
number of reasons.
First, an estoppel certificate can provide a purchaser/lender with information about a
particular tenant and/or lease that it would not otherwise be able to glean from its review of lease
documents. For example, it could draw attention to an outstanding dispute between the landlord
and tenant. Tenants may use this opportunity to air out their grievances with the landlord in the
hopes of forcing a resolution prior to closing or waiver. As a result, estoppels could be a good
12 Ibid.
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indicator of issues that may be brewing in the landlord and tenant relationship and red flag any
possible expenses.
Second, estoppel certificates can, in certain circumstances, prevent (or estop) a tenant
from making a claim against a landlord based on facts contrary to those contained in the estoppel
certificate. However, as noted above, a landlord will need to show that: (1) the tenant intended
to affect the legal relationship between it and the purchaser when it signed the estoppel; and (2)
the purchaser relied on the statements contained in the estoppel certificate to its detriment and
changed its position as a result, before estoppel can be raised as a defence to a tenant’s claim.
Often one or both of these requirements is missing when the defence has been raised in court.
Third, estoppel certificates can protect purchasers from the purposeful omissions of other
parties. For example, in Fisher v. Metropolitan Toronto Condominium Corp. No. 59613, a
purchaser received status certificates14 from a condominium corporation that did not indicate any
problems with the building even though the condominium corporation knew of potential
problems with the fireplaces and chimneys. Several months after closing, the purchaser received
a notice of special assessment pertaining to the cost of replacing the chimneys. When the
purchaser refused to pay the special assessment, the condominium corporation registered a lien
against the unit, forcing the purchaser to pay in protest. The purchaser brought an action against
the condominium corporation for the cost of the repairs. The Court held that there was no
evidence that the purchaser would have purchased the unit if the estoppel certificates were
13 Fisher v. Metropolitan Toronto Condominium Corp. No. 596, [2004] OJ No 5758. 14 In connection with purchase, sale and/or financing transactions involving condominium units, the condominium corporation produces a “status certificate”, which is a statement of facts about the condominium corporation and the applicable unit(s) in a prescribed form. The legal principles of estoppel discussed in this paper apply to such certificates.
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accurate. Therefore, the Court held that the condominium corporation was negligent in preparing
and delivering the estoppel certificates and were bound by them.
Similarly, in Durham Condominium Corp. No. 63 v. On-Cite Solutions Ltd.15, the Court
concluded that the purchaser of a commercial condominium unit was not required to restore a
structural wall that had been altered from its original state contrary to the terms of the condo
declaration. In this case, the condominium corporation was aware of the alteration made to the
wall prior to the closing of the sale transaction but did not raise it as an issue in the status
certificate. The Court found that the problem posed by the alteration of the wall could be
expected to impact the respondent’s decision to purchase the unit. Moreover, the status
certificate specifically required the condominium corporation to disclose information concerning
any potential increases or expenses for the unit. The Court held that the corporation was aware of
the problem with the wall and that the purchaser relied on the silence of the status certificate in
completing the purchasing the sale transaction. As a result, the corporation was estopped from
forcing the respondent to restore the wall.
Fourth, estoppel certificates can act as notice of a tenant’s exercise of an option to
extend/renew a lease. In 419219 Alberta Ltd v. 238709 BC Ltd16, the sublease required that the
subtenant provide written notice of its exercise of its option to extend. The sublandlord prepared
an estoppel certificate indicating that the term of the sublease had been extended. The subtenant
executed the estoppel certificate prepared by the sublandlord. However, the subtenant did not
provide further written notice of its intention to exercise its option to extend the term and the
sublandlord claimed that the subtenant was no longer entitled to exercise the option. The Court
15 Durham Condominium Corp. No. 63 v. On-Cite Solutions Ltd., 2010 ONSC 6342. 16 419219 Alberta Ltd v. 238709 BC Ltd, 2013 BCSC 1667.
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held that when the subtenant received, executed and returned the estoppel certificate that was
prepared by the sublandlord, and the sublandlord confirmed receipt, the parties indicated to the
outside world their intention to extend the term of the sublease. In the Court’s view, based on the
fact that the sublandlord prepared the estoppel certificate and that it was executed by the
subtenant by the deadline set out in the option to extend, it was reasonable to conclude that the
subtenant believed the estoppel certificate to be a written renewal of the sublease. The Court held
in favour of the subtenant and concluded that it validly exercised its option to extend the
sublease.
Conclusion:
Although they have their limitations, estoppel certificates continue to be a significant
component of any purchase/financing of commercial real property. Lawyers acting for
purchasers and lenders should carefully address the issue of estoppel certificates during the
negotiation of purchase agreements or commitment letters. It is prudent to review the estoppel
clauses in each of the governing leases to confirm the time period for delivery as well as any
requirements or limitations on the form and/or content of the estoppel certificate to be delivered
by a tenant. When estoppel certificates are received from vendors, they should be carefully
reviewed and compared with the rent roll for the property and lease documents produced by
vendors during the due diligence period. Otherwise, purchasers could find themselves buying
into a Pandora’s box of unwanted surprises.
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TAB 7
Effectively Allocating Post-Closing Risk
Daniel Schwartz Lax O’Sullivan Lisus Gottlieb LLP
September 19, 2017
Commercial Real Estate TRANSACTIONS 2017
Effectively Allocating Post-Closing Risk
Daniel Schwartz Lax O’Sullivan Lisus Gottlieb LLP
Outline
Exclusion clauses to allocate post-closing risk
Law of exclusion clauses
Recent examples of how exclusion clauses not applied
Scenario
Parties want to limit post-closing liability to certain scenarios, or set threshold and maximum amounts for claims.
Some examples: Maximum liability of $X, except for these types of claims; No liability for claim, unless amount exceeds $Y
Example: Limit Max Liability
The maximum aggregate liability of the Vendor to the Purchaser for any and all claims for indemnification or otherwise with respect to the matters described in this Section is not to exceed $X provided that the foregoing limitation does not apply in respect of any and all claims for indemnification under this Section with respect to any misrepresentation or breach of the warranties set out in Sections [A-B].
Example: Set Threshold
The Purchaser has no liability or obligation with respect to any single claim for indemnification or otherwise with respect to the matters described in this Section unless the amount of the damages with respect to such claim is greater than $Y. Notwithstanding the foregoing, this $Y threshold shall not apply to a claim made under subsection [C-D].
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Law of Exclusion Clauses
Tercon v British Columbia, 2010 SCC 4
• Three-step analysis:1. Does the exclusion clause apply in the circumstances?2. Was the exclusion clause unconscionable at the time the contract was made?3. Do overriding public policy considerations apply such that the exclusion clause
should not be enforced?
• Step 1 is generally the most applicable to commercial transactions betweensophisticated parties
Law of Exclusion Clauses
Tercon, Majority, at para. 63:
“Tercon’s claim is not barred by the exclusion clause because the clause only applies to claims “as a result of participating in [the] RFP”, not to claims resulting from the participation of other, ineligible parties. Moreover, the words of this exclusion clause, in my view, are not effective to limit liability for breach of the Province’s implied duty of fairness to bidders.”
Lessons from Tercon:
• Exclusion clauses are not a “get out of jail free” card
• Must avoid ambiguity in exclusion clauses
• Be specific if there is something you want to make sure is excluded
Clauses to Limit Damages
Two main ways to limit damages:
• Limit types of damages recoverable (e.g. consequential loss, loss of profit)
• Cap total damages recoverable (e.g. to total purchase price)
Recent Examples of Exclusion Clauses Failing to Limit Damages
Atos v Sapient, 2016 ONSC 6852 Failed to exclude lost profits
BDC v Experian Canada, 2017 ONSC 1851 Failed to exclude misrepresentation claims
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Singh v Trump, 2016 ONCA 747 Failed to exclude misrepresentation claims
Atos v Sapient, 2016 ONSC 6852
The exclusion clause: 18.6.1 Subject to Section 18.6.2, notwithstanding anything to the contrary herein, each
of Subcontractor and Sapient will be liable to the other with respect to this agreement and any other obligations related thereto only for direct damages …
For greater certainty, subject to Section 18.6.2, neither Subcontractor nor Sapient will be liable to the other for indirect, special, consequential or punitive damages or for loss of profits (collectively, “Excluded Damages”), even if the party has been advised of the possibility of such damages.
Patillo J., at para. 358:
Given the above grouping and inclusion of “loss of profits” as Excluded Damages along with “indirect, special and consequential damages”, in my view the reference to “loss of profits” in Section 18.6.1 refers to consequential or indirect lost profits, i.e., a breach that causes either Siemens or Sapient to lose profit from other work forgone as a result of the breach. Consequential lost profits do not include profits under the Subcontract but rather are indirect losses which are only recoverable when they are foreseeable or communicated to the defendant”.
BDC v Experian, 2017 ONSC 1851
20.1 Neither the Supplier or BDC shall, nor shall they purport to exclude or restrict liability for death or personal injury resulting from its negligence or that of its employees, servants or agents acting in the course of their employment, or resulting from fraud. Nothing in this agreement will seek to or operate to limit a party’s liability in respect of liability that cannot as a matter of law be excluded. … … the total aggregate liability of the Supplier under this Agreement in respect of each event orseries of connected events relating to any of the Deliverables, Document Deliverables, or Services, regardless of the form of action whether in contract, tort or otherwise:
20.2.3 will not exceed 100% of the Development Charges payable under this Agreement in the case of any event of breach occurring before the first day of the Support Period, and
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20.2.4 will not exceed 100% of the Support Charges payable in the Support Year in which the claim accrues in the case of any event of breach occurring on or after the first day of the Support Period.…
20.4 Neither the Supplier or BDC shall in any circumstances be liable to the other for the following losses:
20.4.1 lost profits, loss of business, loss of goodwill; or 20.4.2 and indirect or consequential loss,
in each case caused in any way by some act, omission, or misrepresentation (excluding any fraudulent or negligent misrepresentation) committed in connection with this agreement (whether arising from negligence, breach of contract or howsoever), even if such loss was reasonably foreseeable or specifically advised to that Party.
Singh v Trump, 2016 ONCA 747
APS provided: “The Vendor and Purchaser agree that there is no representation, warranty, collateral agreement or condition affecting this Agreement or the Property or supported hereby other than as expressed in writing herein.”
The entire agreement clause “would mean nothing to the Singh’s or Lee’s [the purchasers]. … They could not have reasonably been expected to have understood that this meant that the respondents were exempting themselves from any liability flowing from their misrepresentation that induced the Singh’s and Lee’s to sign the contract in the first place.”
“It would be grossly unfair to enforce these clauses to deny Talon’s tort duty not to make negligent misrepresentations to the plaintiffs.” (para. 122)
“[I]t would be unconscionable and would shock the conscience to allow a party to use an entire agreement or other exculpatory clause to escape liability for misrepresentations made in breach of the OSC’s terms for granting an exemption from the Securities Act requirements.” (para. 129)
Concluding Thoughts
Be specific, be precise, and avoid ambiguity
Check “General Provisions” − Contract out of tort liability − Don’t assume lost profits are indirect damages − Bullet proof entire agreement clause
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TAB 8
Issues with Third Party Reports: Surveys, Environmental Site Assessment
Reports and Property Condition Assessment Reports
Simon Lam Bogart Robertson & Chu LLP
September 19, 2017
Commercial Real Estate TRANSACTIONS 2017
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ISSUES WITH THIRD PARTY REPORTS: SURVEYS, ENVIRONMENTAL SITE ASSESSMENT REPORTS and PROPERTY CONDITION ASSESSMENT REPORTS
Simon Lam Bogart Robertson & Chu LLP
SURVEYS
I. Introduction
A. What Is a Survey?
Ontario legislation does not provide a well-articulated definition of survey, but does impose the requirement that it must be prepared by, or under the supervision of, a surveyor licensed under the Surveyors Act1. Courts have additionally held that in the context of a formal Agreement of Purchase and Sale, an official survey must include a surveyor’s signature, an identifying title, and a date.2
Surveys describe the quantity of title, meaning the extent of the physical attributes comprising the property. The features usually set out in a survey are the boundaries of the property and amount of area occupied, adjoining properties, buildings, fences, improvements, and natural features of the land. Conversely, quality of title cannot be ascertained from a survey alone; this second component of real property ownership requires the opinion of a solicitor experienced in real estate law. Absent an opinion with respect to the quality of title, a purchaser cannot guarantee that the property is unencumbered or that ownership of the property is the vendor’s to transfer.
The importance of a survey in describing quantity of title is highlighted by the 2013 decision of the Ontario Court of Appeal in MacIssac v. Salo.3 This decision confirmed that quantity of title is not guaranteed by the Land Titles Act and that the indefeasible title obtained when registering a transfer thereunder does not extend to the written description in the transfer. The physical state of the ground and not the registered description speaks to title and this state can only be determined by a surveyor giving an opinion as to what was intended when the grant was made:
“Indeed, prospective purchasers of property in the land titles system must understand that the parcel description of a property – including an incorporated reference plan – is not definitive of the boundaries or the extent of land. Only an up-to-date survey can confirm the location of boundaries of a parcel of land as they exist on the ground.”
1 Surveys Act, R.S.O. 1990, c. S.30, s. 2. 2 Pilarczyk v. Maslin and Borean, [1988] O.J. No. 2627. 3 2013 ONCA 98.
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A survey provides a snapshot of the property from the moment it was conducted. As seen in the quote above, courts often stress the importance of obtaining an “up-to-date survey”, without setting out the criteria that render a survey “up-to-date.” According to Lorraine Petzold, former executive director of the Association of Ontario Land Surveyors, an “up-to-date survey” is one that has been “certified by an Ontario Land Surveyor as reflecting the current conditions and extent of title.” The purchaser may alternatively rely on a declaration by the vendor that the survey in its possession accurately represents the property in its current state, effectively indemnifying the purchaser for any discrepancy that may be subsequently discovered.
Where a client elects to rely on the vendor’s survey absent a surveyor’s certification or a vendor’s declaration, the solicitor may compare the most recent survey as against the current state of the property. In such cases, the degree to which a survey is “up-to-date” seems to refer to the accuracy of the survey in relation to the property it represents in its current state. The currency of the survey is therefore more dependent on how much the property has changed over time than the amount of time itself. For example, in a Superior Court case tried in February 2016, the court held that the requirement of an “up-to-date” survey was satisfied by a survey dated May 19, 2006.4
Knowing what qualifies as a survey is vital to real estate lawyers in large part because it also implies knowledge of what is not a survey. The certification of the licensed Ontario Land Surveyor in effect shields lawyers with respect to quantity of title, so long as the lawyer accurately interprets the contents of the survey. A lawyer who advises a client in reliance on a sketch of the property, for instance, opens themselves up to liability if any issues arise from their advice.
B. Types of Surveys
As stated above, in Ontario every survey must be prepared by a licensed Ontario Land Surveyor to be considered an official survey under Ontario legislation. With respect to function, the primary similarity amongst all surveys for the purposes of the commercial real estate lawyer is their depiction of legal boundaries and features of the property.
It is worth noting, however, that “survey” is a general term used to refer to several specific forms of survey. The relevant type of survey will depend on the type of property it describes and on the purpose for which it was acquired. In real estate transactions, a “survey” can refer to any of the following:
1. Surveyor’s Real Property Report (SRPR)5
SRPR’s are typically acquired for residential properties due to the volume of residential transactions, but they can equally be obtained for apartment buildings, and commercial, industrial, or rural property transactions. SRPR drawings show the precise location of buildings, fences, and other property information, while an attached written report lists information relating to title, which may indicate encroachments from or onto neighbouring properties, or other problems with title that are not evident from the drawings themselves.
4 2144688 Ontario Ltd. v 1482241 Ontario Ltd., 2016 ONSC 1475. 5 See ss. 28-30, O. Reg. 216/10 of the Surveyors Act.
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SRPR’s are not registered on title, nor are they filed with the Land Registry Office. The surveyor who prepared the SRPR retains possession and copyright ownership of the report, which means that in addition to possible violation of Canada’s Copyright Act, the surveyor cannot be held liable for errors in the report that were relied on by third parties. This makes obtaining a declaration that the survey is up-to-date from the party that commissioned the survey essential. 2. Registered Plan of Subdivision6
Plans of subdivision are registered in the Land Registry Office upon an approved application to subdivide a property into multiple parts under Section 51 of the Planning Act. When prepared and registered on title, these plans subdivide property into multiple new parcels, units, blocks or lots, and set out the boundaries of the new lots for the first time. Government approval and oversight is required because the new plan effectively redefines the definition of land ownership in the described area. Displayed on a plan of subdivision are the surveyed boundaries, numbering and dimensions of lots, the location, width and names of streets, and the sites of future schools and parks. They do not, however, show specific building locations – for this information, a SRPR would need to be obtained. 3. Reference Plan (Planning Act)
A reference plan, like a registered plan of subdivision, is a survey of a parcel of land that delineates parts of that parcel that have been severed or subdivided, or that can be used to define the parcels one wishes to sever. Reference plans generally cost less and are prepared more quickly than plans of subdivision, and require less government involvement. For this reason, registered plans of subdivision are usually prepared for large-scale developments, while reference plans are prepared for the severance of a parcel involving fewer lots.
Reference plans are “deposited” rather than “registered” at the local land registry office, and the difference is significant. Depositing a reference plan at a land registry office merely assigns the plan an identification number for later reference. The registration of the transfer, deed or conveyance is what creates the new lot or easement.
This type of survey includes graphical representations and descriptions of land, as well as representations of divisions of land under the Planning Act. Reference plans display the surveyed boundary and dimensions of the property, as well as any physical or documentary evidence that can affect title including fences, hedges, or retaining walls in relation to boundaries, as well as any easements or rights of way registered on title. Buildings and improvements are not shown unless they were used to position the boundary or they encroach on the property from adjoining lands. 4. Condominium Plan (Planning Act)
6 See s. 51, Planning Act.
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Condominium plans are a specific subset of plans of subdivision, used to create new parcels of land called units within condominium buildings. The major functional distinction from typical subdivision plans is that units are three-dimensional, with the building’s surfaces themselves serving as the parcel boundaries. The legal description of each unit must therefore specify the unit number, level number, and plan number.
II. Why Get a Survey?
A. Cost of a Survey
Is it financially cost-effective to forego the acquisition of a survey? From one perspective, obtaining an up-to-date survey can be seen as a significant cost on its face. In general, commissioning an up-to-date survey for commercial property will cost a minimum of $4,000, and prices increase from there in correlation with the square footage of the property, the complexity of the property and the level of detail and features required to be shown. A typical length of time between the request for the survey and its completion is 20 days, further explaining why time constraints can also act as a deterrent to obtaining a new survey.
From another perspective, the survey represents a small fraction of the total purchase price or loan value, and may result in significant net savings for the party acquiring the survey. Like any insurance policy designed to avoid future risk, the value of the survey is difficult to determine ex ante. It may seem like a frivolous cost if no title defects are revealed, or it may save thousands of dollars that would have been spent later to cure the defect.
B. Lawyer’s Duty to Examine the Survey
While acquiring an up-to-date survey is not a strict legal requirement, lawyers practicing real estate law should be cognizant of the risks associated with relying on alternatives. The overarching problem of performing a real estate transaction without carefully reviewing an up-to-date survey is that a purchaser cannot be certain of exactly what they are purchasing.
With respect to advising the client to obtain a survey, a solicitor’s standard practice should involve warning clients of the dangers of proceeding without a survey. Ontario courts have stated that obtaining a survey and reviewing it with the client is part of the real estate lawyer’s duty of care.7 In a case where the purchaser’s lawyer failed to realize that a three-car garage and laneway were not part of the purchased property, the court found that the lawyer’s duty of care required him to question the client or the surveyor concerning the discrepancy in the survey, and held that his failure to do so resulted in a breach of contract.
C. Title Insurance as a Substitute
1. Benefits of Title Insurance
7 Nielson v. Watson et al., [1981] 33 O.R. (2d) 515, 125 D.L.R. (3d) 326.
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To the extent that the decision to forego a survey results in title defects, a title insurance policy will obviate the need for a survey. Defects in title that may have been discovered by solicitor time spent reviewing the survey can instead be addressed by title insurance coverage, so long as the policy does not exempt the specific defects in question. Accordingly, although the policy may be more expensive than the survey process, it saves the purchaser or lender a significant amount of time and some of the cost of the policy is offset by the reduction in legal fees. Lenders will usually accept title insurance policies in lieu of either obtaining or updating a survey, and this is a particularly attractive option where the transaction has limited time to close and the vendor is not in possession of an up-to-date survey. As well, even the most detailed review of a survey by lawyers cannot address defects that are simply not disclosed by the survey while a title insurance policy will generally cover losses arising from such unknown defects.
2. Persisting Problems
Title insurance is a common substitute for acquiring an up-to-date survey, but the effect of a title insurance policy should not be confused with that of a survey. A title insurance policy provides protection against losses incurred as a result of unknown title defects for as long as the owner owns the property, including errors in title registration, encroachments on adjoining property, construction liens, lack of vehicular access, and fraud.
What title insurance cannot guarantee, however, is title itself. Title insurance indemnifies the owner from title defects, but does not cure title defects that would have been identified by a survey before the transaction. Consider, for example, a purchaser who takes possession of a property under a title insurance policy, only to discover later that a building encroaches an unopened road allowance. If the municipality were to later open the roadway and require the building to be removed, the insurance policy would cover the considerable costs of removing the encroachment, but it would not appease the owner if the building was a primary motivator in purchasing the property. A survey would have revealed the encroachment, and the purchaser could have made an informed decision with respect to whether she concluded the transaction or considered alternative remedies.
III. Survey Issues and Remedies in the Commercial Real Estate Context
Acquiring a survey from a licensed surveyor alone is not sufficient to guarantee the extent of title. The survey may reveal discrepancies between what is believed to be the property and what it actually is, or it may reveal issues that affect the marketability or value of title. These issues, however, are not necessarily evident from the survey on its face, especially for a client who may be inexperienced in real estate matters. Accordingly, once the survey is obtained, it is the solicitor’s duty to ensure they carefully review the it with the client.
Where issues revealed by the survey are significant, they can form grounds for the purchaser or lender to end the transaction altogether. In such cases, however, the parties will avoid transaction costs that would have been incurred had the problem only been discovered later in the transaction.
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More importantly, where a minor discrepancy is discovered through examination of the survey, the problem can often be fixed through negotiation and remedies depending on the type and severity of the problem, as discussed in more detail below. Issues discovered during the preliminary stages of the transaction allow for remedial options that are considerably more cost-effective and amicable than issues discovered near or after the closing date. Neither party benefits where litigation is the only remaining option amongst the parties, and the cost of resolution will invariably exceed that of initially acquiring and reviewing a survey.
A. Zoning 1. The Issue
Although surveys themselves do not identify zoning regulations applicable in the property’s municipality, a survey must be examined in conjunction with the applicable zoning by-law to ensure the property conforms with its requirements. The zoning by-law in force in the municipality establishes a host of requirements in respect of the property’s use. Many of the restrictions set out in the zoning by-law, like permitted uses of land, zoning, energy regulations and waste storage will not be verifiable through a survey as they do not contain the relevant information. Some zoning regulations, however, are directly related to the information provided in surveys, which should therefore be examined to ensure compliance. For example, the municipality will enforce requirements with respect to the total amount of the lot occupied by buildings, distances that buildings must be set back from boundaries or other buildings, and access of the lot to public roads, all of which can and should be checked against the survey.
Using the applicable by-law as a frame of reference, the solicitor must first consult the general requirements for commercial zones, then consult the requirements and exemptions applicable to the specific municipal zone in which the property is located, and finally examine the survey to ensure the property’s features fit within those restrictions or exemptions. If they do not, relief is potentially available through a variance application or legal non-conforming use as described below.
Title insurance can typically cover most risks related to non-compliance with zoning by-laws, and can therefore act as a reasonable alternative to checking the survey against zoning requirements, although practically speaking, for a commercial owner’s policy, the title insurers will require a positive statement from the solicitor as to zoning matters in any event. Some municipalities will review the survey for zoning violations for a fee but others may merely advise what category the land is zoned for and leave it to the solicitors to determine compliance with the zoning by-law by reviewing the survey in conjunction with the zoning by-law in the jurisdiction in question. 2. Remedies a. Variance Applications – Variance applications are the primary source of relief for purchasers and developers who wish to move forward with their intended plans without needing to make compromises or conform to the restrictions imposed by the municipal by-law. Where there are breaches in zoning by-laws, or uncertainty of whether legal non-conforming status applies, the
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lawyer can make a variance application to effectively permit the breach to continue. Rather than contesting the by-law as a whole, the variance serves to carve out an exemption for the specific feature in breach of the by-law. A prudent lawyer should identify the zoning issue during the preliminary stages of the transaction by consulting the survey, and avoid further costs by requesting that the vendor make the variance application at its own cost as part of the deal.
b. Legal Non-Conforming Use – Where a municipality enacts an amendment to the zoning by-law that would otherwise prohibit existing buildings or other uses of property, these property features can be grandfathered in as permissible despite their violation of the new regulations. Legal non-conforming use is not a remedy that one can seek out if the requirements do not naturally exist. To rely on the legal non-conforming use of part of a property, there must be evidence that the use existed before the by-law was enacted and has continued as such until the current date.
B. Easements
1. The Issue
An easement is a right over property owned by one party which provides some benefit to property held by another party. The parcel of land enjoying the benefit is known as the “dominant tenement”; the parcel of land through which the right is enjoyed is the “servient tenement”. Common examples of easements include rights of way over neighbouring lands to permit access to the property or rights held by municipalities or companies to permit access to the property to install and maintain utilities. Awareness of the existence and location of easements is vital, and presents another reason for real estate lawyers to carefully examine surveys with their clients.
Easements are not necessarily presented on the survey itself, but they are registered on title and will appear in a title search of the property. Once the location of an easement is ascertained, the solicitor should examine the survey to compare its location against the other features of the property. A plan to construct a building that will impede an existing easement is litigation in waiting, and the solicitor is aware of the client’s intention but does not warn them of the potential breach may be performing their job negligently.
Utility easements pose a particularly significant risk if the client wishes to forego a survey because unlike a right of way like a roadway or a beaten path, underground easements for water and telephone cable pathways are not evident on the property. These utility easements will be identified through registration, the location of which should then be cross referenced against the survey to ensure that no existing buildings or planned developments interfere with the utility.
Easements registered over the client’s property are not the only type to be wary of when reviewing surveys. Solicitors should consider obtaining up-to-date surveys of adjoining lands where the client’s property is the dominant tenement and its value relies on the benefit of the easement. A cautionary tale is offered by Ontario v. Syvan Developments8, where the
8 2006 CanLII 32430, [2006] O.J. No. 3765.
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purchaser’s lawyer examined an out-of-date survey showing the existence of a right of way over the neighbouring parcel, which provided the only road access to the property. In reality, part of the easement had been taken back by the municipality many years prior along with some surrounding land to create a parking lot.
2. Remedies
a. Acknowledgement – Where a client plans to build on the purchased property in a mannerthat partially impedes an easement, the simplest solution is to obtain an executed acknowledgement of the encroachment from the party enjoying the easement. If relations between the two parties are not already contentious, a reasonable request to move forward with the construction while disturbing the other party’s easement as little as possible can be seen as a sign of good faith. In a similar vein, where a solicitor performing their due diligence discovers that an existing structure partially impedes an easement, the safest course of action is to seek an official acknowledgement from the owner of the dominant tenement, rather than hoping they do not discover it themselves.
b. Consent Letter - Where the issue arises from a utility easement that is blocked, utilitycommissions and municipalities sometimes issue consent letters, allowing the owner to continue the encroachment. A consent letter is functionally the same as an acknowledgement and therefore relies on the commission or municipality’s ability to perform any necessary maintenance despite the encroachment.
c. Encroachment Agreement – An encroachment agreement is similar to a consent letter in thatthe municipality allows the owner to continue their use and enjoyment of a building, despite encroachment on an easement. The key distinction, however, lies in the municipality reserving its right to demand removal of the encroachment upon request.
d. Rectification – Where the issue arises from an incorrect survey due to mistake (e.g. showingan easement that goes through a rock outcropping rather than going around it, as in MacIssac v. Salo), the remedy of rectification is available. Legal descriptions are subject to beingamended under the Boundaries Act by the Director of Titles or by the court on a rectification motion under Section 160 of the Land Titles Act.
C. Boundary Disputes and Encroachment on Adjoining Land
1. The Issue
Perhaps the simplest property feature identified by a survey is the parcel boundary, yet it seems to be the issue that most commonly leads to disputes. The surveyor must take extreme caution to describe the property boundaries accurately, because even minor differences between the actual and described size of the parcel can cause significant unrest in owners. Likewise, a lawyer reviewing the survey should make sure they do not overlook any
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encroachments from or onto adjoining property, or any boundary discrepancies because they could be the one facing liability from the client if the error is subsequently discovered.
Unsurprisingly, these issues arise most frequently in residential property transactions which deal with land for people’s personal use which naturally leads to more emotional action, and frequently involves smaller parcels of land, leading to smaller margins for error.
Commercial transactions are not as prone to petty or emotional issues, but they are certainly not immune from survey issues leading to boundary disputes. For example, in a 2016 case before the Superior Court, property boundaries became a primary issue when a prospective purchaser made a requisition for confirmation that a building did not encroach on the adjoining land. The requisition was not satisfied and the purchaser abandoned the transaction, taking the position that the failure was sufficient to terminate the agreement. The court disagreed, noting that there was no evidence to substantiate the allegation of encroachment and therefore no reduction in value of either property, which was the purchaser’s cited justification for termination. Notably, the property was title insured but the policy was of no help to the purchaser because the lack of evidence of lost property value meant no actual damages that could be indemnified.9 Meanwhile, had the purchaser initially examined an up-to-date survey, the allegation would have never been made.
2. Remedies
a. Acknowledgement - If the encroachment of a structure onto adjoining land is sufficientlyminor and the owner of the parcel is amenable, it is worthwhile to request a written acknowledgement allowing the purchaser to enjoy the benefits of the encroachment.
b. Easement – Similar in effect to an acknowledgement, an easement can be agreed upon withthe owner of the adjoining land. The benefit of this approach is that the easement would be registered on title and run with the land thereafter, obviating the need to obtain a written acknowledgement from subsequent purchasers of the neighbouring parcel. Note the requirement for Planning Act compliance if the easement is for a term of 21 years or more or in perpetuity.
c. Abatement – The remedy with the widest range of applications is likely an abatementbecause any discrepancy, whether insignificant or substantial, can be accounted for through the appropriate adjustment of purchase price. For instance, where the lot is discovered to be smaller than believed to be before examining survey but the desired use of the land is not affected, the parties could negotiate a minor price reduction. The abatement may have to be more significant if the discrepancy is so substantial that the purchaser is forced to alter its development because its planned buildings can no longer fit on the lot.
d. Purchase and Severance – Where a building is found to encroach substantially onto anadjoining property, such that the three remedies above are not feasible, a remedy of last resort would be to purchase both parcels of land. This is an extreme remedy given the likely cost, but
9 Hercules Moulded Products Inc. v. Foster et al., 2016 ONSC 4967.
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could be an attractive option where the client is a developer and the transaction is of a relatively large scale. As an optional step, the purchaser could subsequently apply to have the purchased property severed to conform with their development needs, and sell off any unneeded parts of the property to justify the initial purchase, although this step would require approval under the Planning Act which is by no means guaranteed.
e. Line Fences Act – This statute allows fence disputes to be resolved through an arbitrationprocess, as conducted by municipally appointed fence-viewers. As the name implies, this remedy is only available where the dispute relates to the location of a fence in relation to the boundary, and is therefore more frequently used in residential disputes.
ENVIRONMENTAL SITE ASSESSMENT REPORTS
I. Introduction
An in-depth discussion of the legislative framework surrounding environmental law is beyond the scope of this paper. Similarly, the process of conducting an environmental site assessment (“ESA”) and an explanation of the findings within is better left to environmental consultants to weigh in on. This paper is instead meant to provide general background knowledge on ESAs and identify some issues related to them that may arise in the course of managing a transaction. In the event that environmental contamination is suspected or present, you may suggest that your client obtain counsel from an environmental law specialist to navigate through this area of law.
Environmental laws in Canada have created a regime by which owners, lenders, tenants, occupiers, managers and others who have or had control over a contaminated property, and those who caused or contributed to contamination of a property, can be liable for the environmental clean-up and compliance costs in connection to the property. In addition, such stakeholders may be liable for regulatory and criminal fines.
It stands to reason then that any stakeholder in a piece of commercial real estate should be interested in knowing what potential environmental liability exists in connection with the property. ESAs are the tool used by purchasers, vendors, financiers, insurers, tenants, real estate agents and lawyers involved in real estate transactions to determine potential or actual contamination on properties and to quantify the costs of remediating such contamination, if any.
Situations where such information would be important would include real estate due diligence for a buyer of the land or for a vendor positioning the property to expedite a sale but would also include financing and re-financing of the land, property insurance renewals, the commencement of a lease to establish a baseline condition, and the termination of a lease to assess if contamination has arisen/increased during the lease. The nature of the operations being carried out on the property, past or present, impact the risk of environmental contamination and hence the importance of obtaining an ESA. High-risk commercial activities would include any property with underground storage tanks, gas stations, private fuel outlets, drycleaners, large-scale printing operations, scrapyard/junkyards, dumps/landfills, or automotive or vehicle repair shops. High-risk industrial activities would include chemical plants, generating
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stations, battery manufacturing, asphalt manufacturing, electroplating, metal fabrication/machining, leather tanneries, circuit board manufacturing, steel work, ship & boat building/repair yards or textile mills. In these situations, one should be especially on guard for environmental contamination to be present.
A. Types of Environmental Site Assessments
A Phase I ESA is a non-intrusive preliminary study entailing site history and inspection and documentary research. In Ontario, Phase I ESAs are generally conducted in accordance with two protocols, depending on the purpose. For the real estate transaction purposes set out above, the Canadian Standards Association protocols (CSA Z-768/01 guidelines) are used but for changes of use of land for more sensitive land use requiring a Record of Site Condition or to satisfy Town/City Planning departments, legislated protocols (O.Reg. 153/04) are used, with the latter being more rigorous. The objective of a Phase I ESA is to establish whether there is evidence of actual and/or potential sources of environmental contamination on the property, including a review of properties located nearby the subject site to investigate the possibility of contaminant migration from adjacent properties. Phase I ESAs include a historical records review, site reconnaissance, interviews with knowledgeable persons and regulatory officials, an evaluation of collected information, and preparation and submission of a written report to the client or lender. A Phase 1 ESA does not include building materials, ground water, or soil sampling and testing. If there is evidence of expected, or potential contamination on-site then a Phase 2 ESA would be recommended.
The objective of a Phase II ESA is to quantify potential contaminants of concern found on the subject site subsequent to the Phase I ESA. Phase II ESAs include actual sampling and measurement through the drilling of boreholes, installation of ground water monitoring wells, collection of samples and submission for chemical analysis at a laboratory, interpreting and evaluating the laboratory results, and preparation and submission of a written report to the client. The consultants will assist in determining the number and location of boreholes necessary to investigate for potential soil or ground water contamination. Again, there are two general protocols used for the same two situations: a Canadian Standards Association standard (CSA Z769-00) and legislated methodology (O. Reg. 153/04). If the Phase 2 ESA reveals contamination, a program can be implemented to remediate the contamination.
A Phase 3 ESA is the report of a consultant that identifies the best available alternatives, costs and strategy for remediation and environmental risk management. It will set out the steps required to perform site remediation and follow-up monitoring for residual contamination including monitoring wells if needed. The Phase III ESA concludes with formal reporting when the site environmental cleanup is complete. This report will outline the follow-up monitoring for residual contaminants if necessary. It will confirm contaminant removal, treatment, and the current status of the site (including on-site soil or groundwater testing or laboratory data to support the engineer’s conclusions).
II. Issues
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ESA reports can generally be viewed as objective and fact-based since they are based on standardized protocols. Accordingly, the content of the reports ought not to vary greatly from one consultant to another provided the protocols are followed. That being said, some issues will arise with the consultant itself, rather than the content of the report.
A. Limitation of Liability
The environmental consultants retained to conduct the assessment and prepare the report may attempt to limit their liability under the report to an amount equal to the fee charged to conduct the assessment and prepare the report. The nature of environmental contamination lends itself to situations where the cost to remediate contamination that was undetected by a consultant could be significant and in most cases much larger than the fee paid to conduct the assessment and prepare the report. Lenders may find this unacceptable and refuse to accept the report, which would require a new ESA to be prepared. Accordingly, this should be discussed with the consultants prior to engagement.
B. Liability Insurance
Although more of a concern in the United States of America, some lenders will insist on a minimum amount of liability insurance being held by the consultants in the event that the report was misleading or negligent. Accordingly, the report commissioner should consider requesting that the consultant advise as to the amount of its liability insurance coverage prior to engaging the consultant. An amount of $1,000,000 would be sufficient for many lenders.
C. Reliance Letters
Environmental consultants typically include a reliance section within their reports indicating that the report may only be relied upon by the entity commissioning the report. Accordingly, the owner should ensure that the consultant is willing to provide reliance letters to future purchasers and mortgagees and how much these letters will cost.
D. “Not on List”
Owners should be aware that lenders may have a list of approved environmental consultants that will be acceptable to them (or on the flipside, a list of consultants that are not acceptable to them). These lists tend to be a soft list and exist as a way for the lender to begin a dialogue as to what their requirements may be as to the experience and reputation of the consultant. In the event that the environmental consultant that prepared the report is not on a lender’s list, rather than having a new consultant conduct a brand new assessment and report, the lender may accept the report provided it undergoes peer review to ferret out any deficiencies that it may have.
E. Recommendations
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Although it may seem foolhardy not to carry out recommendations to the full extent, one must keep in mind that the nature of tests and contamination guidelines create a binary system where a positive result above a guideline automatically flags the issue as a problem. That is, the presence of a contaminant that is just slightly under guideline amounts would not mandate a response but the same contaminant in just slightly higher amounts so as to meet or slightly exceed the guideline would suddenly make it a problem. Where contamination amounts only slightly exceed guideline amounts and other tests that have been conducted provide additional information, a legitimate question to consider is whether certain recommended tests can be forgone. This would be a good time to seek counsel from an environmental law specialist and other environmental specialists to assist the client with the decision.
From a legal perspective, one core concept to keep in mind which ought to inform the final decision is whether there is any impact to human beings in the building. For example, if a Phase II has identified the presence of subsurface volatile organic compounds that slightly exceed guideline, it may recommend that subsurface soil vapour sampling and indoor air quality sampling be completed in order to investigate potential health risks to indoor workers and construction workers who might be exposed to contaminated soil and vapours during excavation work beneath the floor slab. Provided the indoor air quality test was completed and indicated acceptable levels, one would need to consider whether a subsurface test is really required if the indoor air quality test indicated acceptable air quality and if there was no intention of redeveloping the site and breaking the building envelope to expose any soil vapours that might exist.
F. Holdbacks
Where the presence of contamination is confirmed and a remediation plan is prepared and costs quantified, stakeholders can conduct themselves accordingly by way of seeking abatement in purchase price or obtaining holdbacks of purchase monies or loan proceeds at a certain ratio (e.g. 150% of expected remediation costs).
PROPERTY CONDITION ASSESSMENT REPORTS
I. Introduction
For obvious reasons, a stakeholder in a commercial real estate property will want to know the condition of the buildings located on the property. A property condition assessment (PCA) report will disclose the general condition and remaining useful life of building components, such as the HVAC systems, elevators, plumbing, data and telephone, boilers, electrical, fire suppression systems, building evaluation, foundation, structure, roof diaphragm, interior finishes, building envelope, site improvements evaluated, pavement, drainage, signage, and lighting. In some cases, a PCA could be extended to a review of disability access as well. The report provides stakeholders with building deficiency information and forecasts possible
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future maintenance or repair requirements which information can be built into financial models for the property.
The typical work involved in a PCA consists of obtaining information regarding the property through site inspections, interviews, review of city building department records, etc. The data collected is then analyzed and made into a report that includes a summary of the building, its systems condition and tables that reflect the immediate and projected long-term costs of maintaining the building. From the data gathered, the owner can develop long-term maintenance programs that can address specific needs and conditions of the buildings and quantify the costs of doing so.
Unlike ESAs, which are grounded very much in science and accepted standards, guidelines and protocols, PCAs can be viewed as being more subjective in the sense that the level of review can vary greatly, depending on the consultant retained and the instructions given to the consultant. In the United States of America, the real estate industry has created two classes of PCAs – a general PCA for lenders for financial purposes (ASTM 2018), and a more thorough “equity” PCA for acquisition due diligence. An owner positioning a property for sale or for financing would retain a consultant to conduct a general PCA whereas a potential purchaser would want to commission a more detailed equity PCA of their own since they may have more specific needs or strategies going forward. For example, a long-term building owner like a pension fund may take a different approach to capital projects than an owner with a shorter-term ownership horizon. Accordingly, the type of PCA prepared is driven by the client’s instructions to the consultants to customize their assessments to meet the clients’ needs in a particular situation and the PCA author should strive to understand the ownership objectives so they can be considered when developing the list of forecasted projects in the PCA report.
A basic baseline PCA will discuss all major building systems and site improvements and include a Replacement Reserve Table and an Immediate Repairs Table. The Immediate Repairs Table identifies capital needs and prices all failing or damaged building systems and life safety issues. This PCA primarily acts as a financial tool to identify overall condition, fatal flaws, and cash flow over a specified period of time. These reports can be completed quickly to meet the schedule of the loan process and interest rate lock but due to time constraints, baseline PCAs are typically light on assessment and take a limited approach in estimating costs (e.g. straight-line estimates of replacement cost over remaining useful lifetime of system) and may not even be used by management or maintenance staff for day to day property maintenance. These PCAs are primarily financial tools used by lenders and the estimates are based upon extrapolation from a limited body of actual information and rely upon professional insight rather than extensive physical observation of the condition of the systems reviewed. Reports may lean towards simple and abbreviated critiques of the properties and little technical information may be provided.
Equity level PCAs are typically written for the purpose of property acquisition where clients are interested in ensuring that their investment and financial models will be accurate, with no surprises. Given this purpose and scope, equity work is more conservative, and more technical and often tailored to the asset and the investor's concerns. The consultant can be engaged to perform extremely thorough building assessments where all major systems are tested and evaluated. Equity reports typically focus more time and effort on explaining condition and recommendations with technical insights and thus time on-site and report writing may take
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a significant amount of additional time. While more thorough evaluations are generally more expensive, this may result in a net savings for clients by identifying major building deficiencies prior to the client taking ownership which can form the basis for seeking an abatement in the purchase price. Equity PCAs can also be used as a maintenance tool after the property is acquired to assist with forecasting and a client can attempt to achieve cost savings through proactive maintenance programs. Equity PCAs can also be enhanced by engaging specialists in a given system. These specialists can bring additional expertise and insight to the assessment, which ought to provide a more accurate estimate. It is often advisable to obtain a report commissioned by the purchaser to compare with any reports provided by the vendor. It also goes without saying then that a prospective purchaser would want to share the baseline level PCA with its lender rather than the equity level PCA.
II. Issues
Many of the issues that can arise with PCAs relate to what the PCAs don’t say. Yourclients should not be simply skipping to the replacement repair and immediate replacement tables and taking those numbers at face value (as one might with an ESA) since the context by which those tables and numbers were arrived at is just as important as the numbers themselves.
A. Replacement Standard
One would do well to question what standard of replacement was initially communicated to the consultant when carrying out their review. For instance, assume that a prospective purchaser obtained an elevator upgrade review prepared at the request of the vendor. In the absence of any comments in the report, one would not know what exactly the type of replacement was indicated. Class A buildings now are sporting more sophisticated elevator systems that assign passengers to elevator cars in the lobby. Consider the following statement in a follow-up letter from the elevator consultant:
“In the Possible Upgrades and Concerns section we recommended budgeting approximately $434,000 for upgrading the passenger cars and $142,000 for the service car. However, after further review we believe that the above recommendations may have been exaggerated to reflect upgrading the building to the vendor’s standards for a Class A building. Taking this into consideration, we believe that the modernization of all three cars could be performed for substantially less.”
Although in this case the difference worked to the purchaser’s advantage (lower future maintenance cost), this is an example of the degree of subjectivity in PCAs and the need to critically assess each line item and compare against other examples to determine whether the figures make sense in the circumstances.
B. Scope
As mentioned above, consultants often offer a la carte options to hire specialists to give a more detailed in-depth look at a particular system. The inference to keep in mind then is that
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without obtaining a specialist, the recommendations provided would be given by more a generalist, which for the most part may suffice but may not be an entirely accurate view of the situation. Using the example above, a specialist was obtained to provide a separate report on the elevator systems. The figures provided will have a greater degree of specificity and a more detailed investigation of the system in question will be made. This would assist in future forecasting much better than simple straight-line maintenance/replacement estimates that simply amortize those costs over the remaining useful lifetime of the equipment since replacement could be deferred with a proper maintenance program and smaller upgrades. The additional cost of such specialists may be worth the price if a particular system calls for additional review.
C. Missing Items in Estimates
While a vendor-provided PCA may be helpful in providing a picture of the property, since there is a high degree of subjectivity in the assessments, PCA reports may miss items entirely. With this in mind, as part of purchaser due diligence it can be advisable for the purchaser to commission their own report. Upon completion of the report, a comparison of the PCAs can be conducted not only to determine whether the vendor-produced PCA is generally within the same ballpark, but also whether it has not included any borderline replacements.
For example, a vendor-commissioned PCA may be of the view that insulated glass units (windows) that have no obvious defects need not be replaced. However, a purchaser-commissioned report might key in on the fact that while this is true, the windows are thirty years old and that proactive replacement of same is recommended. Again, these recommendations are subjective and the consultants are entitled to their own opinion so while the PCA would not be dispositive of the situation, it would definitely provide impetus for discussion on the matter and open up the possibility of adjusting the purchase price.
D. Mentioned Items in Estimates
When reviewing the PCA, one should read critically to uncover what may be hidden between the lines, since it may not be obvious what the implications of the statement are. For example, when discussing the HVAC system and providing recommendations and timelines, a report may include the following statement:
“All field device and zone temperature sensors have been converted to DDC (direct digital control) in about 60% of the tenant improvement spaces.”
This would seem to be an innocuous statement indicating that for these spaces, the system in question is ahead of the curve and all is well. The other interpretation of this, which may become painfully obvious only after closing, is that 40% of the tenant improvement spaces still need to be converted to DDC, either due to meeting the expectations of quality tenants that the owner is attempting to attract or to capture economies of scale for the DDC system.
In this particular case, the remaining conversions cost over a million dollars to complete. While this is not so much a cost that could be requested of the vendor, it is something that the purchaser may have wanted to be apprised of when preparing their financial models.
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E. Thresholds
As a way to streamline the report, the report commissioner may also instruct the consultants to refrain from inserting in their report any expenditures for maintenance and repairs under a certain threshold amount per year. This would be reflected in the report by a statement such as this:
“Consideration has been given regarding required ongoing maintenance and repairs of the major elements and at the direction of the Client, the Consultant has utilized a threshold of $10,000 per system, per year as a limit in determining and carrying anticipated expenditures.”
For a lender, this may be an acceptable threshold but a purchaser may want to know what the omitted items were since in the aggregate the costs may not be insignificant.
F. Tenant Costs
Depending on the type of use and the terms of the lease, a vendor can instruct a consultant to omit a certain system on the basis that the equipment in question is not an owner cost but a tenant cost. For instance, under a triple net lease of industrial space, a vendor could instruct the consultant to ignore the HVAC system which might result in a statement in the report as follows: “According to the Property Manager, repair and maintenance of this equipment is the Tenant’s responsibility, so no budgets for capital repairs or equipment replacement is included.”
While this may be acceptable from a vendor’s perspective, a purchaser may wish to retain their own consultant to review the system in order to obtain additional information as to the state of the system.
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Recommended
