Top Ten Tips For Buying Real Estate In Ontario (Canada)

By John Moher, Houser Henry & Syron LLP

1. FIND THE RIGHT PROPERTY FOR YOU AND YOUR BUSINESS

Use a licensed Ontario realtor with knowledge of the type of property you are purchasing and the area in which the property is located. A realtor specializing in residential real estate will not likely bring the required expertise to bear on the purchase of a commercial or industrial property. An experienced Ontario real estate lawyer may be able to provide you with referrals for qualified realtors.

A properly crafted Agreement of Purchase and Sale is the heart of any real estate transaction. It is therefore important to retain a lawyer licensed to practice law in Ontario with commercial real estate experience to assist with the preparation and negotiation of the Agreement of Purchase and Sale.

It is also important to engage a tax professional with knowledge of cross border tax issues to ensure the transaction is structured in a tax efficient manner.

Your Ontario lawyer will ensure that The Agreement of Purchase and Sale contains standard covenants, representations and warranties on the part of the vendor to protect your interests as a purchaser.

Ideally, the Agreement of Purchase and Sale should contain a very broad due diligence condition. The due diligence period should give you sufficient time to investigate the property and to secure various reports from qualified consultants.

The Agreement of Purchase and Sale should require delivery of specified due diligence materials within a stated time period. Examples include tax bills, a survey, insurance invoices, material contracts, existing environmental reports, existing building condition reports, work orders and deficiency notices among other materials. You and your due diligence team of professionals should carefully review the due diligence materials to ensure that you are satisfied with such materials before waiving your due diligence condition.

It is also advisable to insert a provision in the Agreement of Purchase and Sale requiring the vendor to secure reliance/transmittal letters from the authors of reports relating to the property so that you can rely on these reports.

The due diligence condition should be drafted such that waiver of the condition requires you to take the proactive step of waiving the condition. You want to avoid a situation where you fail to diarize the conditional date and the condition is drafted in such a fashion that the transaction automatically firms up if you do not proactively send a notice of non-fulfillment of the due diligence condition.

Lenders usually require that you deliver a satisfactory Building Condition Report as a pre-condition to advancing funds. It is advisable to secure such a report regardless of whether a lender will require one in order to avoid unexpected surprises post-closing. For example, you don't want to find out two weeks after closing that the roof is at the end of its useful life and needs to be replaced at a significant and unbudgeted cost.

Conduct an appraisal to ensure that you are paying the right price for the property. A satisfactory appraisal report is often required by lenders as a pre-condition to advancing funds. You should ensure that the appraisal is addressed to you as purchaser and your lender.

Ontario has some onerous environmental laws and regulations in place. You should therefore obtain a Phase 1 Environmental Report to ensure there is no history of the property being contaminated. Secure a Phase 2 Environmental Report if recommended by the Phase 1 Environmental Report. A Phase 2 Environmental Report involves digging boreholes at various locations on the property and testing the soil removed from the boreholes for contamination.

Work with a mortgage broker to secure the best financing possible. Consider the term, interest rate, commitment and other fees, funding conditions and prepayment privileges in making your financing decision.

Your Ontario lawyer may also be able to introduce you to various financial institutions.

The Agreement of Purchase and Sale should be conditional on you obtaining satisfactory financing. This can be included in the due diligence condition.

Your lender will likely retain its own lawyer to process the loan. Ask your lender to secure quotes from several law firms as you will be responsible for the lender's legal costs.

You will need to secure property and liability insurance before closing. Your lender will need to be noted on the property coverage policy as a "loss payee". It is important to ensure that you obtain the appropriate type and amount of insurance.

 

Engage an experienced insurance broker to assist with identifying the type and amount of insurance based on the type and proposed use of the property. Your insurance consultant may be asked to coordinate with the lender's insurance consultant to ensure that your insurance policy meets the lender's requirements.

1. The Province of Ontario and the City of Toronto (if the property is located in the City of Toronto) each levy a tax on the transfer of land. There are different rates for commercial properties and residential properties. These taxes are usually the most significant closing cost.

The amount of land transfer tax is calculated using a formula. For example, a commercial property valued at $3,500,000.00 in the City of Toronto would attract a total of $101,200.00 on account of the Toronto and Ontario land transfer taxes.

If you were to purchase a property valued at $3,500,000.00 outside of Toronto in Ontario, the land transfer tax would be $50,975.00. The higher the purchase price, the more you will pay on account of land transfer tax.

You will need to pay legal costs associated with the purchase. Fees vary significantly from law firm to law firm in Ontario, as does the quality of services provided.

You will also need to provide the balance of your down payment. This amount will depend on the net advance from your lender.

Title insurance is secured by your lawyer prior to closing the transaction. There is a one-time premium to be paid on closing and the policy remains in force for as long as you own the property.

The premium charged varies depending on which title insurance provider you use, the purchase price and the amount of your mortgage. Ask your Ontario lawyer to contact several title insurance companies with a view to obtaining the best premium amount and coverage possible.

Title insurance provides an indemnity against loss or damage for many title risks set out in the policy. Some examples include losses that arise from survey issues, zoning and permitted use violations, work orders and certain liens. It is important to review a title insurance policy with your lawyer prior to closing to understand what is covered and what is not covered by the policy.

Your lender will likely require that a lender policy of title insurance be obtained prior to closing. It is not usually a significant expense to add lender coverage to the policy when the owner policy is ordered.

An Ontario lawyer has an obligation to verify the identity of his or her clients. This verification requirement extends to verifying the existence of corporations and other legal entities as well as verifying the identities of individuals authorized to give instructions to your Ontario lawyer on behalf of a corporation or other legal entity.

You will either need to physically attend in Ontario to see your lawyer or visit a person in your jurisdiction who is qualified to verify your identity and witness your signature on behalf of your Ontario lawyer in accordance with the requirements of the Law Society of Upper Canada, Ontario's regulatory body governing lawyers and paralegals.

It can take time to coordinate identity verification if you will not be physically present in Ontario to sign closing documents. It is therefore prudent to turn your mind to whether you will attend in Ontario to sign documents as early as possible in the purchase process.

After completing your due diligence with a team of professionals and arranging financing (if applicable) you will need to sign closing documents and arrange for closing funds to be delivered to your Ontario lawyer. This can be done by way of wire transfer or by delivering a bank draft payable to the lawyer's law firm in trust.

On closing, your lawyer coordinates with the lender's lawyer to have funds advanced. Closing documents are exchanged by the purchaser's lawyer and the vendor's lawyer. After the lawyers are satisfied with the closing deliveries, the Transfer/Deed is released by the vendor's lawyer for electronic registration by the purchaser's lawyer. Your Ontario lawyer will only be in a position to release keys to you after the Transfer/Deed has been registered electronically.

It is common for companies entering the Ontario market for the first time to lease rather than purchase real estate.

For a discussion on leasing in Ontario, please refer to Houser Henry & Syron LLP's Legal Spotlight: Doing Business in Ontario, which can be found on our website.

In light of the complexity of most commercial leases and the fact that most sophisticated commercial leases are drafted in a manner which is "landlord friendly", it is wise to involve an Ontario real estate lawyer and have a lease reviewed before a Lease or an Offer to Lease is executed.