The prospect of buying commercial real estate can be both exciting and daunting. This is especially true in Toronto. Despite recent challenges, which include interest rate changes and shifting market dynamics, the city is widely viewed as a hotspot for long-term investment. If you’re considering entering the commercial real estate game, you already know it’s a significant undertaking that can raise complex legal issues. Your trepidation is not unfounded. However, understanding the fundamental building blocks of a commercial real estate transaction will empower you to navigate the system with knowledge, confidence, and a greater sense of ease.
You must conduct due diligence when buying commercial real estate, be it an office building, hotel, or retail property. Due diligence is critical to the success of the purchase. In the following blog, we will delve into three key components of the due diligence process—zoning, environmental assessments, and title searches—and provide examples of recent cases in Ontario that have dealt with each element.
What is Due Diligence?
But first, what exactly is due diligence?
When two parties agree on the purchase and sale of any property, they solidify the deal in a signed legal contract. Such contracts are often highly detailed and include a broad range of clauses that cover the price, the terms of the sale, tax issues, insurance requirements, etc.
Generally, there will also be a due diligence clause, which allocates a specific period of time for the buyer to perform due diligence. During the due diligence phase of the transaction, the buyer (via their trusted commercial real estate lawyer) will thoroughly research the property. The goal of this extensive investigation is to identify any potential risks and liabilities that could affect the property in the future. Due diligence allows the buyer to stave off any unanticipated surprises.
What are Some Key Elements of Due Diligence?
Due diligence in commercial real estate is not a minor undertaking; it involves a significant amount of research on the part of the buyer. The precise amount and type of research required will depend on the property’s unique features.
Nonetheless, certain elements are common to the majority of due diligence clauses. These include a review of:
- zoning bylaws,
- environmental assessments,
- and title searches.
1. Zoning Review
Reviewing municipal zoning bylaws and regulations is a crucial step in due diligence. Zoning bylaws effectively govern land use and development. They deal with building heights, parking, and other important factors.
The buyer must confirm that the property’s zoning is consistent with the intended use for the property. This might entail reading through municipal zoning bylaws, site plans, etc.
Court Enforces Municipal Zoning Bylaws
In the recent case of Temagami (Municipality) v. Temagami Barge Limited, the Ontario Court of Appeal upheld an injunction restricting commercial activities on a property located on Lake Temagami in northeastern Ontario. The appellants—a barge company—were barred from engaging in specific commercial activities (expanding sewage waste disposal and increasing propane dispensary service) on their lakeside property. In its decision, the court highlighted the public interest in enforcing municipal zoning bylaws.
This case underscores the benefits of ensuring a property complies with all zoning requirements. Proper due diligence on the buyer’s part might have helped the parties avoid litigation.
2. Environmental Site Assessments
Assessing any environmental risks associated with a property can also serve as a preventative measure against future problems.
As part of their due diligence, buyers should conduct Environmental Site Assessments (ESAs). ESAs might involve an analysis of the property’s surrounding environment, including the soil and groundwater underneath. The results of ESAs will enable the buyer to determine whether the property is subject to contamination or other environmental issues.
Environmental Contamination
The Superior Court of Justice recently heard a case revolving around environmental contamination on a Toronto property.
In 2018, the plaintiffs purchased the property from the defendant. They later argued that the defendants had caused environmental contamination in the property through industrial activities such as chemical and paint manufacturing and storage of hazardous materials.
The defendant argued that the plaintiffs were aware of the contamination when they purchased the property. However, the court held that the plaintiffs’ knowledge of the environmental contamination (which would have been discovered during due diligence) did not invalidate their claims against the property’s previous owners. The defendant was still considered liable.
3. Title Searches
A third element of due diligence is searching title. Title refers to the legal ownership of a property. By searching title, a buyer can confirm ownership rights and identify any encumbrances or title defects that may affect the property in the future.
A title search might reveal, for example, that the seller was not legally authorized to sell the property or that liens or mortgages are registered on the title.
Open Building Permit Creates Title Defect
The Ontario Court of Appeal recently dealt with title defect in EPRF Holdings Limited v. Fergus Bloor Inc. The buyer sought to terminate its agreement with the seller upon discovering an open building permit on the property. The court determined that the open permit did create a title defect, which impacted the buyer’s intended use of the property and justified terminating the agreement.
This case illustrates the absolute necessity of a comprehensive title search in the due diligence phase of a transaction.
Understanding the Importance of Due Diligence
As the adage goes, an ounce of prevention is worth a pound of cure. This is absolutely true of due diligence in commercial real estate. Thorough due diligence, in which the buyer reviews zoning bylaws, assesses environmental risks, and searches title, will help safeguard against any complications that might arise in the future.
With a clear understanding of the basic tenets of due diligence, you can approach your next transaction with confidence that you’re making informed decisions.
Baker & Company Provides Trusted Advice on Commercial Real Estate Matters in Toronto
At Baker & Company, our experienced real estate lawyers firmly believe in the importance of conducting comprehensive due diligence. We regularly advise our corporate clients on all manner of real estate matters, including commercial real estate transactions and property disputes. We help our clients with their business needs, ranging from small family businesses to large corporate enterprises. Our trusted lawyers will take the time to explain the law that applies to your situation and advise you of your options in order to obtain the best possible outcome.
To speak with a member of our team regarding your real estate concerns, call us at 416-777-0100 or contact us online to schedule an initial consultation.
