Real Estate and Urban Development

AMUrban and Civil

Feb 13, 2012 (6 years and 5 months ago)


Real estate is a broad category that covers buying, selling, developing, leasing and financing. Canadian real estate offers numerous lucrative opportunities in the industrial, commercial, residential and recreational sectors, and attracts businesses and individuals from far and wide to invest in its varied real estate assets.



Real Estate and

Urban Development
Real estate is a broad category that covers buying, selling,
developing, leasing and financing. Canadian real estate

offers numerous lucrative opportunities in the industrial,
commercial, residential and recreational sectors, and

attracts businesses and individuals from far and wide to
invest in its varied real estate assets.
81 | doing business in Canada
1. Foreign Investment
Several legal structures are available for investment in
Canadian real estate. Understanding the principal
issues involved in acquiring, developing, leasing and/or
financing property in Canada is critical to properly
assessing the risks and rewards associated with any
proposed foreign investment.
The provinces have primary responsibility for property
law in Canada. In all provinces except Québec, property
law has developed through the English common law
process. In Québec, property law is governed by the
Civil Code of Québec,
which is derived from the Napole
onic Code. There is no constitutional protection for
property rights in Canada. Consequently, property can
be expropriated by government and quasi-governmental
authorities, but appropriate compensation must be
paid by the expropriating party.
Interests in land are generally held directly in fee sim
ple or by leases as leasehold interests. Condominium
or strata title ownership is also common throughout
Canada. All provinces maintain a system of public land
titles registration whereby ownership can be verified
and through which interests in land are registered.
2. Investment Vehicles
There are several legal structures available for invest
ment in Canadian real estate, including: a corporation
(either federally or provincially incorporated), general
partnership, a limited partnership, co-ownership (often
referred to as a “joint venture”), a trust, real estate
investment trust, personal ownership or any combina
tion of the foregoing. The choice of an appropriate
investment structure is governed by factors such as tax
planning requirements, liability issues and business
considerations, and each foreign investor’s rules and
a. Real Estate Investment Trusts
A Real Estate Investment Trust (REIT) is a trust estab
lished to consolidate the capital of a large number of
investors for the purpose of investment in real estate,
often through the direct acquisition of income-produc
ing real estate assets. In addition to investing in
income-producing properties, REITs may also buy,
develop, manage and sell a wide variety of real estate
assets. Investors in the trust are usually issued units,
which represent an undivided beneficial interest in the
trust, and are then allocated a
pro rata
share of the
income and losses of the trust.
The REIT structure has grown in popularity over the
past decade, as it provides a number of advantages to
both real estate companies and REIT unit holders.
These include favourable tax treatment and improved
tax efficiency on distributions to unit holders, improved
access to equity markets for real estate companies,
and a generally stable stream of income with the
potential for high-yield capital growth for real estate
b. Joint Venture Structures
Commercial real estate properties may also be held
through a joint venture structure. A joint venture exists
where two or more entities have invested their assets
or carry on business together in order to realize a
profit. There are a variety of joint venture structures,
with the most common being joint venture corpora
tions, partnerships, co-ownerships and co-tenancies.
Joint venture corporations are generally structured
such that each party holds shares in the corporation
and enters into a shareholders agreement to govern
the corporate relationship. Joint venture corporations
enjoy many of the same advantages as corporations in
general, including limited liability, ease of administra
tion and a certainty of legal rights and obligations.
A joint venture may also hold property in either a gen
eral or a limited partnership. A partnership agreement
is typically used to govern the relationship between the
persons carrying on the business and to allocate prof
its and losses between them. One of the primary
advantages of the partnership structure is its flexibility,
as it allows for varied and other non-proportionate shar
ing of the profits and losses.
doing business in Canada | 82
A tenancy in common (or “undivided co-ownership”),
which is a relationship between two or more parties
with a direct or indirect ownership interest in property,
is also common. Each co-tenant or co-owner has an
undivided interest that provides an equal right to use
and possession. Co-tenants or co-owners typically
enter into a co-ownership agreement that governs this
relationship and the ability of each party to deal with
its interest. Co-tenants bear no responsibility for the
debts of other co-tenants or co-owners and have no
right to act as agent for any other co-tenant or co-
owner. Each co-tenant or co-owner is considered its
own entity; thus, each co-tenant is entitled to sell or
finance its interest in the joint venture property.
3. Acquisitions
To acquire real estate in Canada, parties typically enter
into a letter of intent, an offer to purchase or an agree
ment of purchase and sale. Whatever parties call the
document, the agreement should contain all necessary
business terms for the transaction, including, without
limitation, the description of the land, purchase price,
deposit(s), closing date, title and/or due-diligence peri
ods, representations and warranties, and any other spe
cial terms and conditions to which the parties agree.
Some provinces and jurisdictions have real estate
boards that dictate the form that is typically used, but
parties are generally permitted to use their own form if
they wish. It is always advisable to have a lawyer review
any preliminary deal document, such as an offer or
agreement of purchase and sale, before it is signed.
It is important to seek advice on the various federal,
provincial and, in some cases, municipal taxes that
may apply to a particular transaction, such as land
transfer tax, withholding tax for foreign investors, har
monized and provincial sales tax, capital gains tax,
developmental and educational charges and taxes, etc.
It is always best to have local people involved in your
real estate transactions, regardless of whether you are
buying or selling.
4. Due Diligence
Once the agreement of purchase and sale is signed, it
is generally the responsibility of the purchaser (usually
through counsel) to conduct due diligence concerning
the property being acquired. This includes title to the
real estate and any personal property assets being
acquired as part of the agreement of purchase and
sale, assorted off-title enquiries, road access, adjoining
lands searches, zoning compliance, utilities, conserva
tion authority or environmental investigations, heritage
designations, registered and unregistered easements,
municipal agreements, airport zoning bylaws, and sur
vey and lease review. In addition, when purchasing a
building or structure, it is also recommended to con
duct structural, mechanical, electrical and plumbing
5. Title Insurance
While title insurance is a recent phenomenon in Can
ada, it is available right across the country. In fact, in
some provinces, including Ontario, lawyers are required
to inform residential purchasers that they can rely on
one of the following:
A solicitor’s opinion;

Title insurance offered by the Law Society of Upper

Canada title insurer; or
A third-party title-insurance provider.

Considering the varying complexity of title registration
systems across the country, title insurance may not

be the best option for every transaction. A benefit of
title insurance in Canada is the cost savings on due-

diligence searches, but this is only relevant up to a

certain point.
83 | doing business in Canada
6. Land-use Planning
Some provinces in Canada have implemented land-use
planning legislation, bylaws and regulations to control
the manner in which real estate is developed. Land-use
planning is supervised at the provincial level, but signif
icant planning functions have been delegated to the
various regional governments and municipalities. Land
use is controlled through such instruments as the offi
cial plan (a long-range general plan for a region or
municipality) and zoning bylaws (which regulate, for
each parcel of land in the municipality, the uses permit
ted and other matters such as required parking and the
type, size, height and location of building and struc
ture). For the purchaser, both the official plan and the
particular zoning bylaws are crucial. Most municipali
ties require that site plans be approved before the con
struction of any new development. Site plans set out
the details of a development (including the location of
buildings and related facilities, such as landscaping
services, driveways and parking spaces). Most munici
palities require the developer to enter into an agree
ment ensuring construction and ongoing maintenance
in accordance with the site plans.
Land-use planning legislation not only affects the subdi
vision and transfer of land, but also often applies to
long-term leases and rights that are given over or in con
nection with land. In Ontario for example, any subdivi
sion of land requires the consent of the local committee
of adjustment or subdivision control committee, pursu
ant to the
Planning Act
(Ontario). This requirement also
applies to a mortgage or the grant of any other interest
in land (such as a lease) for 21 years or more (inclusive
of renewals), where the mortgage or interest is granted
over only part of a landholding. Failure to obtain such
consent when otherwise required will result in the failure
of the deed, mortgage or lease to create any interest in
the real property. Although there are a number of exemp
tions, most contracts for the purchase of real property in
Ontario are made subject to any required consent, and
the cost and responsibility for obtaining such consent is
usually assigned to the vendor.
Anyone wishing to subdivide land in Ontario or to subdi
vide and sell lots must obtain governmental consent
and may be required to submit a draft plan of subdivi
sion for approval. Normally, the municipality requires
the developer to enter into development agreements
with it, whereby the developer agrees to provide sew
ers, roads and other services for the subdivision and
dedicate certain lands for public use, among other pub
lic benefits. In Québec, the
Act Respecting Land Use
Planning and Development
gives to each municipality
the responsibility for the administration of its territory
for municipal purposes.
7. Leasing
Leasing is a highly complex area. There are several
ways to lease property in Canada.
a. Ground Leases
Property may be leased as well as purchased. One
form of leasing arrangement is a long-term ground
lease, in which a tenant leases vacant land and devel
ops it. Once the development is complete, the ground
tenant sublets space to retail, office or industrial ten
ants, depending on the type of development. Ground
leasehold interests may be bought and sold in a man
ner similar to fee simple property interests.
b. Commercial and Retail Leasing
Most commercial office and retail space, and much of
the standard industrial space in Canada, is available
only through a commercial lease. Most commercial-
lease transactions start with an offer or agreement to
lease. In Canada, unlike the United States, an offer or
agreement to lease is typically a binding agreement
that contains the business terms agreed upon by the
parties, including the space, term, rent and any tenant
inducements. Most commercial leases in Canada are
typically structured on a net-net rental basis, which
requires a tenant to pay, in addition to basic rent, a pro
portionate share of the realty taxes, insurance, utilities
and other maintenance charges for the commercial
building. In a retail lease, a tenant may also be
doing business in Canada | 84
required to pay rent based on a percentage of its
annual gross sales.
c. Residential Leasing
Residential leases are regulated by provincial legisla
tion. In some cases, provincial legislation overrides the
terms of the lease agreement, regardless of the inten
tion of the parties. In certain provinces, even the ability
of the landlord to increase residential rent is limited by
provincial regulation.
8. Financing
a. Sources of Financing
Most real estate financing is arranged through institu
tional lenders such as banks, credit unions,
, insurance companies, trust companies and
pension funds. Credit terms vary from institution to
institution and depend on the nature of the transaction
and the risks involved. There are five “Schedule A”
banks in Canada, all of which are regulated by the
(Canada). All financial institutions in Canada are
highly regulated.
b. Interest Rate
Interest rates on real estate financings can be either
fixed for a specified period of time or variable, based
on a “prime rate” set on a periodic basis by the lending
institution. The prime rate is announced by the Bank of
Canada (Canada’s central bank) from time to time. A
borrower may consider borrowing in other currencies
and has a choice of interest-rate pricing, including
applicable Government of Canada Bond Rates, the Lon
don Interbank Offered Rate (LIBOR) and bankers’
acceptances. Certain fees, such as commitment and
processing fees, are normally charged by lenders. Typi
cally, it will be the borrower’s responsibility to pay for all
of the lender’s legal and other costs in arranging prop
erty financing. The
Interest Act
of Canada dictates,
among other things, how interest rates are to be pre
sented to the public to ensure fairness and
c. Primary and Collateral Security
Lenders, whether they are financial institutions or third-
party arm’s-length lenders, usually take both primary
and collateral security in real property and related
assets to secure the loan. Typical primary security
includes: a mortgage or charge; a debenture containing
a fixed charge on real property; or, in some cases
where more than one lender is involved, a trust deed
securing mortgage bonds or debentures that includes a
specific charge over real property. Collateral security
often includes general and/or specific assignments of
leases and rents; general security agreements; assign
ments of contracts and insurance policies; and per
sonal guarantees.
d. Foreign Lenders
Because many foreign lenders in Canada are subsidiar
ies of the world’s major banks, they typically participate
by way of syndicated loans, which are often arranged by
major Canadian lending institutions. However, there are
also Canadian lenders who participate in syndicate
lending as well. Syndicate lending has increased since
the real estate dip in the early 1990s. Whether through
a syndicate or directly, foreign lenders may be subject
to certain withholding and other forms of taxes on the
interest paid to them, and it is advisable to consult
with a tax lawyer.
9. Environmental Concerns
Due to its richness in natural resources, Canada is
sophisticated and advanced in its environmental legis
lation. All levels of government have enacted detailed
statutes, laws, regulations, bylaws, guidelines and rec
ommendations concerning the protection of the envi
ronment. These laws attribute liability for environmental
damage to the owner of land and to polluters of the
environment. Tenants often mistakenly assume that
since they do not own a property, then they are not lia
ble, but in some provinces and jurisdictions, merely
being in occupation, management or control of real
property may attribute liability.
85 | doing business in Canada
A property owner has certain duties and obligations
relating to the discharge of contaminants and hazard
ous materials into the environment from its property.
Note that liabilities associated with improper waste-
management practices can be inherited by subsequent
owners of a property.
10. Environmental Risk Assessment
A purchaser should assess the environmental risks
associated with a property being purchased. In Can
ada, government officials do not “certify” that a prop
erty is free from such risks. A property’s environmental
status can be ascertained by inspecting applicable
company and public records. In many cases, a pur
chaser will want to do an “environmental audit” of the
property, which may include conducting scientific test
ing and a technical analysis. Lending institutions often
require such an audit before advancing funds.
The conducting, delivery and review of environmental
audits can be a complex area. Where environmental
investigations are concerned, it is important to ensure
that any consultants retained are approved by the
recipient of the report, such as a lender or municipality;
otherwise, the investigation may not be acceptable and
will need to be conducted again.
11. Development Controls
Property development is provincially regulated, primarily
at the municipal level. Municipalities typically control
land use and the density of development through offi
cial plans and zoning bylaws. Many municipalities
impose development charges on new developments
within their jurisdiction. Certain provinces restrict and
regulate the ability of an owner to subdivide property.
Construction of new projects is also subject to provin
cial and municipal legislation. In addition to regulating
the maintenance of existing structures, building codes
set specific standards for construction. Before con
struction commences, most municipalities require the
property developer to obtain building permits, pay any
applicable fees and receive all the necessary regula
tory approvals.
12. Real Estate Broker and Mortgage

Brokers Legislation
Generally, a person who wishes to sell or acquire real
estate seeks the assistance of a real estate broker.
Real estate brokers are subject to specific regulations
in Canada. Each province has legislation that is
designed to protect consumers and instil confidence in
the buying and selling of real estate. The provinces
have various types of governing bodies that regulate
the purchase and sale of real estate, the conduct of
real estate agents and minimum standards for duty of
care to the public when engaged in real estate
As with real estate brokers, mortgage brokers, lenders
and administrators are subject to specific regulations
in Canada as governed by various pieces of provincial
legislation. In Ontario, the
Mortgage Brokerages, Lend
ers and Administrators Act, 2006
went into full effect in
2008. The Act requires all mortgage brokerages,
administrators, brokers and agents to obtain a licence
to do business in Ontario. Similar legislation exists or
is under consideration in most other provinces.
doing business in Canada | 86

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