Real Property Chapter 19 PDF

Exported for Abraham Thomas Zachariah on Fri, 06 Dec 2024 15:57:45 GMT Chapter 19: Real Property OBJECTIVES After studying this chapter, you should have an understanding of the sources of real property law what constitutes real property the types of interests in privately owned pro...

Exported for Abraham Thomas Zachariah on Fri, 06 Dec 2024 15:57:45 GMT Chapter 19: Real Property OBJECTIVES After studying this chapter, you should have an understanding of the sources of real property law what constitutes real property the types of interests in privately owned property and how ownership of real property can be divided [A] the systems used in Canada to document ownership and other interests in real property the risks associated with purchasing and selling land and how they are managed in a purchase transaction the rights and duties of landlords and tenants Business Law in Practice Ashley Bishop has operated a furniture store in Halifax, Nova Scotia, for a number of years. The store has been successful to the point where it has outgrown its current leased space. Ashley has recently discovered a newer strip mall for sale in what she considers to be an ideal location for her store. The strip mall was developed on land that was previously occupied by a gas station and grocery store. A business colleague, Andrew Doncaster, is interested in joining Ashley in the strip-mall venture. They will incorporate Alpha ­Developments Ltd (Alpha) to purchase and operate the mall. Half of the space is currently occupied by a number of businesses leasing space from the current owner. The plan is for Ashley’s store to occupy most of the vacant space and to find new tenants for the balance of the vacant space. The listing price for the mall is $2 ­million. Ashley and Andrew can raise $800 000 and plan to borrow the remainder. Before she and Andrew proceed further, Ashley wants to know how she can escape from her lease with her current landlord. She also wants to understand the implications of buying the mall, obtaining the necessary financing, and dealing with current and future tenants. 1. What are the legal issues for Ashley in the planned purchase of the mall? 2. What are the risks in borrowing 60 percent of the purchase price of the mall? 3. What does Ashley need to know about the rights and obligations of her current lease and leases for the mall? Sources of Real Property Law The legal concept of real property refers to land or real estate, including interests such as mineral rights and leases. The rules governing real property have deep historical roots and have constitutional, statutory, and common law features. For example, section 109 of the Constitution Act, 1867, vests in the provinces all public lands and resources subject to “any Interest other than that of the Province in the same” and sections 92 and 92A give the provinces law-making power relevant to the use of land within the province. As a result, provincial statutes determine the system of registering title to land and regulate the use and development, including resource development within the provinces. Real property is also impacted by various statutes such as those designed to protect the environment or restrict the uses to which land is put, such as land planning and zoning laws. Finally, the common law also impacts real property rights in Canada, particularly where interests in real property are the subject of contracts, such as purchase agreements and leases. Private Ownership of Real Property When people have private ownership of real property, they own a defined piece of land that includes not only the surface of the land but also everything above and below it—expressed in law as “the earth beneath and the air above.” In practice, however, these broad ownership rights are limited by legal rules facilitating air travel above the surface and mining and oil drilling below the surface, to name a few examples. The term real estate also includes structures on the land, such as fences and buildings, as well as anything attached to those structures. Items so attached are known as fixtures and include heating ducts, lights, and plumbing. Types of Interests in Land The highest and most comprehensive level of ownership of land possible under our system of law is known as a fee simple , which is the closest to absolute ownership and has the least restrictions on the owner, who can sell it or bestow it in a will, for example. Other forms of ownership are also possible: a life estate exists only for the duration of the holder’s life and then reverts to the original owner or is passed on to someone else. A condominium is a type of shared ownership that consists of full ownership in a unit of a property (such as a suite within an apartment building) and also shared ownership of common property (such as the lobby, furnace, pool, and hallways) within the property and specialized legislation exists in each province to ensure the proper and fair management of the property by its owners. Mineral rights—such as rights to oil, gas, coal, and other minerals—are another type of estate in real property and may be owned separately from ownership of the surface. An owner of mineral rights normally has the right to mine, use, or otherwise exploit all of the minerals below the surface of the land. Quiz Question 19.1 Mark as: None Review What type of land ownership confers the most comprehensive level of ownership possible? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a life estate b fee simple c joint tenancy d full estate Show Submitted Answer Show Correct Answer Check My Answer Division of Ownership One piece of land can be owned by several people at once. For instance, rather than incorporating a new entity to buy the mall, Ashley and Andrew could choose to buy the mall themselves and share ownership. As co-owners they would each have an undivided interest in the entire building. Each owns a portion of the whole, but their respective shares cannot be singled out or identified in any distinct way. Though Ashley and Andrew are the owners of the real estate, they are called tenants in this context. In the time leading up to purchase, Ashley and Andrew can negotiate either tenancy in common or joint tenancy. If they choose to be tenants in common, they each have a distinct interest in the land, and if one of the tenants in common dies, that tenant’s interest in the real estate forms part of their personal estate and goes to their heirs. Tenants in common can deal with their own interest in any way they see fit and without having to consult the other co-owner. The parties can, of course, enter into a contract whereby they agree not to deal with their respective interests freely but to offer the other a right of first refusal, for example. A tenancy in common is often how co-owners in a business relationship will hold real property and equal ownership is not required. A joint tenancy is also a form of undivided co-ownership but is distinguished by the right of survivorship. Should one of the joint tenants die, their undivided interest goes directly and automatically to the other joint tenant. Many domestic couples own property as joint tenants because of this right of survivorship. The heirs of the deceased co-owner would have no claim on the land co-owned with the other. A joint tenant who unilaterally transfers their own interest during their lifetime will sever the tenancy and convert the joint tenancy to a tenancy in common. Both forms of co-ownership require co-operation among the owners in order to use or sell the property. Whether held in joint tenancy or tenancy in common, at common law, co-owned property is subject to the doctrine of “unity of possession,” meaning that co-owners have equal rights to the use and enjoyment of the property, and dealings with the land require the consent of all and are binding on all. Co-owners may also partition the property by agreement or in the absence of agreement, by seeking court-ordered partition. Quiz Question 19.2 Mark as: None Review What is the distinction between a tenancy in common and a joint tenancy? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. In a tenancy in common, owners do not have the right to use and enjoy the other owner’s interest in the property, a whereas in a joint tenancy, each owner may use and enjoy the other’s interest in the property. Upon the death of a tenant in common, that person’s interest passes to their heirs, whereas the death of a joint b tenant results in their undivided interest passing to the surviving joint tenant. A tenancy in common is commonly used in domestic relationships, whereas a joint tenancy is more commonly c used in business relationships. A tenancy in common is a legal interest recognized under the common law system, and a joint tenancy is the type d of legal interest in property owned by spouses. Show Submitted Answer Show Correct Answer Check My Answer Registration of Interests in Land Each province has a registration system in place to enable anyone contemplating the acquisition of an interest in land to investigate the state of its ownership, and to determine whether the land is subject to certain interests such as easements or mortgages, for example. Because the provinces have constitutional jurisdiction over property rights, the systems of registration vary from province to province, though historically there were only two general types: the land titles system and the registry system. With the exception of Newfoundland and Labrador, Prince Edward Island, and Québec, all provinces and territories in Canada either use the land titles system or are in the process of converting from a registry system to a land titles system. A Registry System The registry system provides the facilities for recording documents and maintaining the registrations. The public has access to the records and can examine or search the records to evaluate the state of ownership of a particular piece of land. This process is known as “searching the title” or investigating the “chain of title.” Whenever a property is transferred or mortgaged, for example, a lawyer (or title searcher) must search for and examine the historical documents in order to confirm the ownership of the land, its location, and whether there are any claims against it. This must be done to assure the purchaser (or other interested party such as a bank) that the seller owns the land in question and that there are no conflicting claims to all or part of the land. If the investigation reveals that title is not “clear,” then the parties will try to correct this situation. For example, if Alpha has negotiated to purchase the strip mall but a search reveals that there is an unregistered title document (known as a deed) in the chain, it may be possible to register the missing deed and perfect the registered record —that is, cure the defect in the current owner’s registration. If the defect cannot be cured, Alpha may still decide to proceed with the deal but extract a price concession from the vendor. For example, if the search reveals a small encroachment on the property by an adjoining owner, Alpha may decide to proceed with the transaction at a reduced purchase price. If the defect is fundamental, the deal may collapse. The administrators of a registry system take no responsibility for the validity of the documents that are filed and express no opinion on the state of the title of a particular piece of property. Lawyers retained by the buyer of property are responsible for the search and the evaluation of the results. If title problems emerge later, those who searched the title bear the potential liability. A Land Titles System The administrators in a land titles system assume a much more active role than in a registry system in that they evaluate each document presented for registration and maintain a record of the documents relating to each piece of property. They are also responsible for the accuracy of the information they provide, and they maintain an insurance fund to compensate those who suffer loss because of their errors. Transactions in a land titles system are less time consuming and costly because a person wishing to know the state of the title to a piece of land need only consult the certificate of title and is not ordinarily required to do a historical search. The certificate contains a legal description of the property and identifies the nature of and owners of the various interests in the land. Because the certificate itself is authoritative proof of title, there is less potential for competing claims. This enhanced certainty and reliability has caused several provinces that used the registry system—such as Ontario, New Brunswick, and Nova Scotia—to move toward the land titles system. The sequence of registration is crucial to both systems. If there are conflicting claims to the same piece of land, the person who registered their interest first has priority, regardless of which transaction was completed first. So long as the one who registers first is not engaged in fraud, has no knowledge of the earlier transaction, and has paid valuable consideration for the land in question, that person’s interest in and claim to the land is fully protected. The party who registers second has no claim to the land but may have actions against those who assisted in the failed transaction or who made representations concerning the status of title. Quiz Question 19.3 Mark as: None Review Which statement best describes the registry system for land registration? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. A person wishing to know the state of the title to a piece of land need only consult the certificate of title and is not a ordinarily required to do a historical search. b The registry system provides greater certainty and reliability than the land titles system. The registry system enables an investigation of the “chain of title” and maintains an insurance fund to c compensate those who suffer loss because of registry errors. The registry system provides the facilities for recording documents and the maintenance of the registrations, but d the administrators take no responsibility for the validity of the documents that are filed. Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 19.4 Mark as: None Review Which of the following is NOT an advantage of land titles systems over registry systems? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The sequence of registration is irrelevant.  b Transactions are less time consuming. c Transactions are less costly. d There is greater reliability and certainty. Show Submitted Answer Show Correct Answer Check My Answer Purchasing Land Buying land is a buyer-beware situation, expressed in law as caveat emptor. The risks when purchasing land are significant and require careful management, and it is up to the buyer to investigate and evaluate the property in both financial and legal terms. A potential purchaser’s investigation of a property will begin with a search and evaluation of interests filed against the property at the land registry or land titles system. This title search will allow the prospective purchaser to confirm the ownership of the property and will also put the purchaser on notice of certain legal interests others have registered against the property, such as whether the land is subject to a mortgage or a long- term lease agreement. Normally, the rights associated with registered interests are prioritized in the order they were registered, and the administrators of the land titles system accept responsibility for inaccuracies in recording interests in land. The rights of a new purchaser will normally be subject to any previously registered interests against the title. In registry systems, lawyers have responsibility for evaluating the reliability of the title of the property their clients are buying. Lawyers search the title and give an opinion on its validity to clients, with this search normally going back 40 years to ensure clear title. Lawyers have professional liability insurance to cover negligence in providing this advice on title to property, and the cost of this insurance is reflected in the fees charged to clients in property transactions. Purchasers may also find there are limitations on their ownership resulting from contracts made by prior landowners that continue to be binding on subsequent owners. For example, a prior landowner may have done the following: They may have granted a lease that may not appear on title but which may have to be honoured by the new owner. They may have granted an adjoining landowner the right to use a portion of the land for a particular purpose. For instance, a landowner may give a neighbour the right to drive across their land to access their  own, or give a cell phone company the right to erect a tower. In law, this is known as an easement , and the new owner may be obliged to continue this arrangement. They may have granted an oil, gas, or mineral lease to occupy a portion of the land, access that portion, and remove materials. They may have made the land subject to a restrictive covenant —a legally enforceable restriction or prohibition. For example, titles within a housing development may contain covenants that prohibit or restrict certain activities (such as cutting trees or erecting storage sheds) for the purpose of preserving the character of the development and thereby enhancing its value. Foreign purchasers may also be subject to special legislation that impacts or limits purchases of property. For example, several provinces severely limit purchases by foreigners of agricultural land, and some provinces now impose considerable taxes on purchases by non-citizen/non-residents of properties, particularly in urban areas. As of January 2023, purchases of residential property by foreigners are subject to a two-year ban pursuant to the Prohibition on the Purchase of Residential Property by Non-Canadians Act, SC 2022, c 10, s 235. The ban prohibits purchases by non-Canadian, non-permanent residents and non-Canadian-controlled corporations, and imposes a fine of up to $10 000 on persons or entities that contravene the ban or assist others to circumvent the ban. Legislation limiting foreign purchasers is discussed further in Business and Legislation. INTERNATIONAL PERSPECTIVE 19.1 Foreign Ownership of Land in Canada Foreign land ownership policies vary greatly from country to country. Some countries, such as Japan, Switzerland, Mexico, and the United Kingdom, place few, if any, restrictions on foreign land ownership, while others, such as China, France, Argentina, and New Zealand have stringent policies that restrict foreign ownership, particularly of farmland, and impose additional fees on foreign investors. Historically, there have been few restrictions on the foreign ownership of Canadian real property, other than piecemeal legislation in various provinces limiting foreign ownership of agricultural land. Such restrictions have been justified on the basis of ensuring food security and food self-reliance, as well as ensuring the lands are available and affordable for Canadian farmers. In the prairie provinces, foreign ownership of farmland is particularly restricted. Presently, Alberta, Manitoba, Saskatchewan, and Québec limit foreign ownership of agricultural lands as follows: Alberta prohibits foreign ownership of agricultural lands exceeding 20 acres (with exceptions for particular commercial ventures).  Saskatchewan limits foreign ownership of tracts exceeding 10 acres or 320 acres if owned by a partially foreign-owned corporation if controlled by a Saskatchewan resident. Manitoba prohibits foreign ownership of agricultural lands exceeding 40 acres. Québec requires foreigners to seek permission before purchasing more than 4 hectares of agricultural land (approx. 10 acres). In contrast, several provinces place no restrictions on foreign ownership of agricultural lands, including Ontario, British Columbia, Newfoundland & Labrador, Nova Scotia, and New Brunswick. Video 19.1 is a CP24 News segment from April 2022 interviews CTV’s Joyce Napier in Ottawa about the new rules announced in April 2022. Video Please visit the textbook on a web or mobile device to view video content. New Restrictions on Foreign Ownership of Residential Property Until recently, no such restrictions have applied with respect to foreign ownership of residential property, although several jurisdictions have imposed special taxes in an effort to curb foreign property speculation and the use of residential properties as a place to “park” wealth while leaving the property itself unoccupied. However, this is changing, with new federal legislation enacted in response to skyrocketing real estate prices and housing shortages. Targeting new foreign ownership and foreign-owned, unoccupied residential property, the federal government has enacted two pieces of legislation, both effective January 1, 2023. The Prohibition on the Purchase of Residential Property by Non-Canadians Act, SC 2022, c 10, s 235, imposes a two-year ban on the purchase of residential property by non-Canadians, which include purchases by non-citizens, non-permanent residents, foreign corporations, and non-Canadian-controlled corporations that are not listed on a Canadian stock exchange. The Act provides for a number of exceptions, including residential purchases by refugees, spouses, or common law partners of Canadian citizens and permanent residents, and purchases by foreign states for diplomatic purposes. Breach of the new legislation does not affect the validity of the sale, but will instead result in fines of up to $10 000 for participants in the transaction and the possible court-ordered sale of the property, with the non- Canadian receiving no more than the amount paid for the property, and possibly less. The second piece of federal legislation is the Underused Housing Tax Act, SC 2022, c 5, s 10, which imposes a 1 percent annual tax levy (based on the assessed value or most recent sale price) on unoccupied, foreign-owned, residential property. The legislation and its accompanying regulations provide for what qualifies as occupancy and also exempts a property that is declared to be the primary residence of the owner. Critical Analysis Question 19.5 Review Do the new federal rules pose any risks to unwary sellers and realtors of residential property, and, if so, how can these risks be managed? Your Answer No answer submitted Sources: Real Estate Institute of British Columbia, “Non-resident Ownership of Agricultural Property: A Review of Policies from Around the World” (Vancouver: REIBC, 2019), online: www.reibc.org/research.html www.unbc.ca/cdi; Ian Speigel, “Does the Underused Housing Tax Apply to You? The Answer May Surprise You”, Gardiner Roberts LLP (11 November 2022), online: Mondaq https://www.mondaq.com/canada/property- taxes/1249426/does-the-underused-housing-tax-apply-to-you-the-answer-may-surprise-you; Jane C Helmstadter, Alixe Cameron, Mark V Lewis, Kiera Stel & Okey Ejibe, “Canada’s Ban on Foreign Home Buyers Soon in Effect: Update and What’s Next”, Bennett Jones LLP (2 November 2022), online: Mondaq https://www.mondaq.com/canada/real-estate/1246344/canada39s-ban-on-foreign-home-buyers-soon-in-effect- update-and-what39s-next; Ontario, Ministry of Finance, Ontario Continues to Crack Down on Foreign Real-Estate Speculation (Ontario: Minister of Finance, 24 October 2022), online: https://news.ontario.ca/en/release/1002421/ontario-continues-to-crack-down-on-foreign-real-estate- speculation. Quiz  Question 19.6 Mark as: None Review Which of the following is an accurate statement regarding the risks borne by the purchaser in a real estate transaction? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. The seller of real estate property has a duty to disclose any problems with the property that might influence the a purchaser’s decision to purchase. b Purchasers in land titles jurisdictions do not receive any benefit from purchasing title insurance. Purchasers of real estate may be obliged to honour certain contracts made by the previous owner(s), such as c leases and easement agreements. Purchasers are only liable for defects in the property that were previously recorded on the title at land title d registry (in a land titles jurisdiction) or filed at the registry (in a registry jurisdiction). Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 19.7 Mark as: None Review What is the distinction between an easement and a restrictive covenant? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. An easement allows a non-owner the right to use property for a particular purpose, and a restrictive covenant a restricts the owner’s use of the land. An easement requires the owner to develop the property according to municipal guidelines, and a restrictive b covenant requires an owner not to interfere with a neighbour’s use of the land. c An easement is normally permanent, and a restrictive covenant is normally temporary. An easement makes ownership subject to the repayment of an outstanding obligation, and a restrictive covenant d allows tenants to occupy land for a specified period of time.  Show Submitted Answer Show Correct Answer Check My Answer Obligations of Sellers As outlined earlier, the principle of caveat emptor (“let the buyer beware”) applies generally to real estate purchases, meaning that it is the responsibility of the purchaser to discover defects in the property. However, the seller must not mislead the purchaser, must be honest when answering questions about the condition of the property, and has a positive duty to disclose known significant latent defects (defects that are not discoverable by a reasonable inspection), especially if the defects cause the property to be dangerous or uninhabitable. Misrepresentations of sellers may consist of oral or written false statements, but may also take the form of active attempts to hide defects in the property being sold. To be successful in such a claim, a purchaser must establish that the seller knew of the latent defect and concealed the latent defect or acted with reckless disregard for the truth. For example, in a residential sale, a misrepresentation would arise if the seller refinished the basement and in the process, covered a large crack in the foundation, or if the seller failed to disclose that the property has a history of sewer blockages. An important development in residential real estate transactions is the use of a property condition disclosure statement, which requires the seller to provide detailed information on many aspects of the property. This statement can be incorporated into the agreement of purchase and sale and thereby eliminate much of the uncertainty surrounding potential defects. However, there remains some obligation of the buyer to verify the statements made. Some problems do not render a property unfit for habitation or dangerous, but are nonetheless important to the purchaser. In such situations (and absent fraud), caveat emptor will apply, and it will be important for the purchaser to exercise due diligence. For example, environmental contamination is a caveat emptor situation as the legislation in most provinces provides that an owner can be issued a remediation order even if the contamination was caused by a prior owner. For this reason, purchasers should investigate how the property was used in the past to ensure that there are no lingering or hidden environmental hazards. Sellers who are aware of contamination may have a duty to inform potential buyers. In commercial transactions, it is becoming standard to include robust environmental clauses into a purchase agreement and often there will be significant due diligence conditions, allowing the purchaser to complete testing or obtain environmental reports. The purchaser may also seek express warranties from the seller; for example, that there are no known hazardous substances on the property. In the commercial context, other factors such as revenue potential, uses permitted by zoning regulations, permission to subdivide, and adequacy of water supply may be material to the purchaser’s decision to buy and may require careful investigation and seeking of appropriate contractual assurances from the seller. Managing Risk It is critical to conduct a search of the relevant land registration system before purchasing, but there may be many other risks associated with the purchase of the property, including restrictions impacting the use of the property that will not be disclosed by land title or registry searches, and which will require careful investigation by the prospective purchaser. Some of these potential concerns include the following: Municipal governments may have claims for unpaid taxes that can be enforceable against the property even after it is sold to a new owner, and therefore appropriate searches should be conducted of municipal records. Municipal governments control land use through planning schemes and zoning regulations. As a result, it necessary to ensure that the property can be used in the manner intended by the purchaser. For example, if an area of a town is zoned for residential use, it is normally not available for commercial development. Family law may designate property as matrimonial—to be shared by both spouses—despite ownership registered in the name of one spouse. Both spouses must agree to the disposition of such property. Environmental regulations that affect the use of land by limiting or prohibiting the discharge of harmful substances and may even require owners to clean up environmental contamination caused by previous owners. In some jurisdictions, squatters may have rights if their occupation continues for a lengthy period of time, typically 10 years in most jurisdictions. Bankruptcy legislation and personal property legislation may result in claims against the property or fixtures. The unexpected issues described here can have considerable financial consequence for the purchaser. Fortunately, with careful investigation and the help of appropriate professionals, many of these risks can minimized. Here are some important steps a purchaser can take to help mitigate these risks: Hire a real estate agent and lawyer to assist with the purchase. Ask specific questions about the property, such as about the condition of structural and mechanical features, past water seepage, and notices from local or municipal authorities. If the seller answers such questions, they must be answered honestly. Incorporate into the contract assurances about the structure or any features of the property that are of importance to the purchaser (for example, adequacy of water supply or the condition of features of the property, such as the septic system). Investigate potential issues with the physical condition of the property such as by hiring an environmental auditor to investigate for potential contamination, and a building inspector to investigate the structural integrity of the building and its compliance with building code. Hire a surveyor to determine the physical boundaries of the property and to determine if buildings and structures on the property are in compliance with local setback requirements (refer to the discussion under “Verification of Boundaries” later in this chapter).  Hire an appraiser to assess the value of the property. Make the offer to purchase conditional on such things as a successful rezoning application, a satisfactory building inspection, or environmental audit of the property. Examine the property for the presence of tenants and seeking assurance from the seller that all leases have been disclosed. Investigate the property for potential insurability issues (for example, an insurer may expect proximity to a firehall). Mortgage lenders will also be reluctant to provide financing for a property that cannot be insured; refer to Terms of the Mortgage below. Examine the property for the presence of squatters. Title insurance is also an important risk management tool in real estate transactions. Title insurance is a type of coverage for buyers and lenders that covers title-related issues (such as fraudulent transfers and mortgages, liens, boundary encroachments, issues related to government regulation, zoning problems, survey defects, unpaid property tax, and registration issues) but does not protect an insured from known defects with the property. The use of title insurance diverts some of the responsibility, work, and related fees from lawyers and provides compensation if a problem is discovered later. However, when clients choose to use title insurance along with a lawyer, part of the lawyer’s duty is to explain the impact and limitations of the title insurance policy. Ashley and Andrew have already identified the property that Alpha will buy, but Alpha should have its legal advisor involved from the outset to identify, among other matters, the contractual significance of communication and documents used by Alpha and the current owner. Because the property was formerly occupied by a gas station, Alpha will want to ensure that there is neither leaked fuel in the ground nor abandoned underground tanks that might leak, and will want to ensure that its agreement to purchase the property is conditional upon a satisfactory environmental investigation. The technical nature of a real estate transaction makes the use of professionals a practical necessity and careful investigation of the property will greatly mitigate Alpha’s risk. Quiz Question 19.8 Mark as: None Review Which term refers to the concept of “buyer beware”? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a res judicata b caveat emptor  c volenti d the sophisticated buyer rule Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 19.9 Mark as: None Review The Jardins are selling their home because they are concerned about the condition of the aging sewer line leading to their house. Last year, during a heavy rainfall, the sewer line backed up and their basement becoming flooded with raw sewage. They hired a professional clean-up company to remove the damaged walls and flooring and then completely renovated the basement, replacing the damaged walls and carpeting. Which statement best describes the Jardins’ obligations toward potential buyers of the home? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a They have no obligations to disclose anything to potential buyers. b They do not have to disclose the crack unless they are asked about the condition of the foundation. c They have a positive duty to disclose the hidden defect. d They have an ethical duty but not a legal duty to disclose the defect. Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 19.10 Mark as: None Review Domino Industries is considering purchasing a property that was previously a gas station, which it plans to convert into a retro-style diner. Which of the following best describes the responsibilities of the parties in the sale of the property? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. The seller of the property is required by law to ensure an environmental audit of the property is completed before a the sale.  As part of its due diligence, Domino should obtain an environmental audit and seek contractual assurances from b the seller that the land is not contaminated. The seller of the property is required to ensure any environmental contamination of the property is remediated c before proceeding with a sale. If it discovers the land is contaminated after the sale, the seller will be legally responsible for any expenses d Domino incurs for the clean-up. Show Submitted Answer Show Correct Answer Check My Answer Financing the Purchase of Real Estate Real estate is very expensive and, unless the purchaser has considerable financial resources, it will usually be necessary to borrow funds in order to facilitate the purchase of the property. In order to ensure it is not obligated to purchase the property without having the funds to do so, Alpha may make the offer to purchase conditional upon securing financing for the purchase. Alpha will then approach potential lenders—typically banks or other financial institutions, but possibly private lenders—and, assuming a good working relationship with the lender and the purchaser is creditworthy, a mortgage contract will be negotiated between the purchaser and lender that will establish such matters as the rate of interest and a repayment schedule. If the purchaser is unable to find a willing lender, then provided they has made good-faith efforts, they can terminate the agreement with the vendor because the condition of being able to secure financing has not been fulfilled. A mortgage transaction has two aspects. First, a mortgage is a contract for the extension of credit and is a debt owed by the purchaser to its bank. The borrower is known as the mortgagor , and the lender is known as the mortgagee. The lender advances the principal sum to the borrower, who promises to repay the principal plus interest over the specified period. Secondly, the lender will take a security interest in the property itself. To attain this security protection, the bank must register the mortgage document, thereby giving notice to all subsequent creditors of the purchaser—as well as anyone considering purchasing the property from purchaser— that the bank has first claim against the land. Registration gives the bank secured status, which will protect its claim against the land even if the borrower becomes bankrupt. If the purchaser is a corporate borrower, the lender may also require additional security such as personal guarantees, an assignment of rents, or a general security agreement. Any claims already registered against the land have priority over the new mortgage and will affect the bank’s decision to grant the loan. The bank’s mortgage does not forbid the purchaser from attempting to borrow more money in the future using this land as security, but those subsequent lenders will be aware that the already registered mortgage forms a prior claim. Each subsequent mortgage against the same land involves significantly greater risk for its lender. Under the land titles system, registration of the mortgage creates a legal charge on the land. The registered mortgage amounts to a claim—or lien—on the land until repayment is complete. In provinces under the registry system, in contrast, the mortgage actually transfers ownership of the land to the lender for the duration of the lending period. The bank becomes the legal owner, but the purchaser remains the equitable owner and has the right to have legal ownership restored to it upon repayment. This means that the purchaser has the equity of ­redemption —the right to have legal ownership restored to it upon repayment. Quiz Question 19.11 Mark as: None Review Which statement best describes mortgages in provinces using the registry system for land registration? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The mortgage usually transfers actual ownership of the land to the lender for the duration of the lending period. b A mortgage cannot be registered if there are already existing registrations against the property. c Registration of the mortgage will create a legal charge on the property, which will appear on the certificate of title. d A mortgage will prohibit subsequent borrowing using the land as security. Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 19.12 Mark as: None Review What is the legal effect of a financing condition in an offer? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a There is no contract until the vender provides the seller with financing.  b The transaction will not proceed unless the buyer’s lender grants a mortgage. c The lender must approve the price, deposit, and method of payment. d The lender will be given control of the money needed to complete the deal. Show Submitted Answer Show Correct Answer Check My Answer Terms of the Mortgage The focus of the mortgage is on preserving the value of the land in question. This protection is achieved by preventing the borrower from doing anything with the land that would lower its value, and by giving the lender maximum flexibility in dealing with the borrower. For example, if the mortgagor does not adequately insure the property, the mortgagee (the bank) has the right to secure proper insurance and hold the borrower responsible for the cost. Because the risk of fraud has become a major concern, lenders have developed practices to verify the identity of borrowers and to ensure that the necessary documentation is authentic. Provincial law societies also have regulations to guide lawyers in new client identification and verification. A lender will not grant a loan unless it is confident of the borrower’s ability to repay. As a precaution, however, the amount of the loan is likely to be less than the current value of the land, for two reasons. First, the mortgage is a long-term arrangement, so the bank will consider that market conditions might diminish the value of the security. Second, if the borrower defaults and the bank must use the security to recover its money, it is unlikely that the land will produce its full market value in a quick sale. A serious drop in the market could result in negative equity for the owner—that is, the amount owed on the mortgage could be more than the value of the property. This traditional approach was significantly altered (mainly in the United States) with the growth of subprime mortgages, which were granted to consumer borrowers with limited ability to pay and on the assumption of a continually rising real estate market. Borrowers were often enticed with low interest rates at the beginning of the mortgage term. As property values declined, the default rate became alarming, which contributed to widespread disaster in the financial sector. In an effort to prevent a similar situation from occurring in Canada, the government introduced a series of changes designed to tighten Canada’s mortgage regulations. These changes include increasing minimum down payments, shortening allowable amortization periods, tightening rules for home equity financed lines of credit, and requiring purchasers to pass a financial stress test. Quiz Question 19.13 Mark as: None Review  From a lender’s perspective, which of the following is the focus of a mortgage? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a preserving the value of the land in question b scheduling payments c controlling use of the land d the personal guarantee of the borrower Show Submitted Answer Show Correct Answer Check My Answer Video 19.2, from CBC’s Marketplace, shows their investigative work with mortgage fraud. Video Please visit the textbook on a web or mobile device to view video content. The mortgage document is normally prepared by the lender. Though each bank has its own standard form of mortgage, all of them include the following as basic terms: amount of the loan (known as the principal) interest rate date of renegotiation of the interest rate period of repayment over which the loan is amortized schedule of payments provision for payment of property taxes provision for full insurance coverage on the property, with the proceeds to be paid directly to the lender  borrower’s obligation to keep the property in a good state of repair and refrain from any activity that would decrease its value complete legal description of the land provision for early repayment (possibly with penalty) acceleration clause, which provides that on default of payment by the borrower, the whole amount of the loan becomes due remedies of the lender on default discharge (release) of the mortgage at the end of the term when the full loan is repaid Of particular interest are the clauses dealing with taxes and insurance. The bank needs to be sure the taxes are paid because the appropriate municipal or provincial authorities have the right to sell the property to recover any unpaid taxes levied against the property. The land would then be owned by the purchaser at the tax sale and would not be available to the bank. The bank’s interest in insurance is twofold. First, the bank needs full coverage on the property so that if a fire occurs, the proceeds from the insurance will essentially replace the portion of the security destroyed by the fire. Second, the bank needs direct access to those insurance proceeds, and therefore the mortgage will contain a term assigning the insurance proceeds to the lender. Life of a Mortgage If the mortgage transaction proceeds as intended by both the borrower and the lender, the borrower will repay the loan as the mortgage requires, and the lender’s claim or charge against the land will cease. However, since a mortgage is a long-term arrangement, many events can occur that result in some change to the liability, such as the following: The borrower may choose to pay off the mortgage before it is due. The mortgagee will likely anticipate this possibility in the mortgage document and require the payment of a “penalty” or extra charge. The borrower may need to renegotiate the mortgage for further financing. If the value of the land is well above the amount of the outstanding loan, the land could be used as security for an additional amount. The borrower may decide to sell all of the land. This requires that the borrower pay out the mortgage fully or negotiate with the buyer to take over or “assume” the mortgage if the terms are attractive. For example, if the borrower’s mortgage has a lower interest rate than the current market rate, the lower rate could be used as a selling point. This “assumption” requires the agreement of the bank and likely entails a significant risk for the seller. When a mortgage is assumed, the original borrower remains liable for payment in the event the new buyer defaults under the terms of the mortgage. Mortgagee’s Remedies Occasionally a borrower is unable to fulfill its ­payment obligations under a mortgage. This is the situation that the bank most fears and that the mortgage is primarily designed to address in terms of remedies. A lender may give the borrower some leeway in payment, especially if the bank is hopeful that the borrower’s financial situation may recover. If this fails, the bank will proceed to exercise its legal remedies pursuant to the mortgage and applicable legislation. The rights of the lender and the procedures to be followed vary from province to province, but all involve a combination of four remedies: suing the borrower, taking possession of the land, selling the land or having it sold, and foreclosure. Foreclosure refers to the lender’s right to terminate the borrower’s interest in the property to allow the lender to realize the value of the land by selling it directly pursuant to a power of sale or through a court-supervised sale. In some jurisdictions, the bank’s recourse will be restricted to the land and the bank will not be able to pursue the borrower directly unless it is a high ratio mortgage. Most provinces permit the lender to proceed against the borrower for the shortfall—known as the deficiency —between the outstanding amount and the proceeds from sale of the property. At any point before the foreclosure process is complete, ownership of the land can be regained if the borrower is able to repay the loan (assuming of course that another source of financing becomes available). If the borrower cannot repay the loan, they lose the land and may be left owing a substantial debt. If there is more than one mortgage registered against the land, the remedies of the various mortgagees are more complicated. Each mortgagee’s rights and remedies are determined in strict order of registration of the mortgages with mortgagees beyond the first less likely to recover than those that registered ahead of them. Quiz Question 19.14 Mark as: None Review Before the Ontario real estate market took a serious downturn, Prime Lenders Inc had entered into a high ratio mortgage agreement with Juha Dally. Dally ceased making mortgage payments six months ago, and Prime now wants to commence foreclosure proceedings, but it appears that the proceeds of the sale will not be sufficient to pay the outstanding debt. Which of the following statements describes Prime’s legal position? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Prime cannot sue Dally for the shortfall if it elects to proceed with foreclosure. b Prime cannot sell the property if Dally is still using it as her primary residence. c Prime cannot sell the property if it will result in a shortfall. d Prime can likely sue Dally for the shortfall between the outstanding mortgage and proceeds from the sale.  Show Submitted Answer Show Correct Answer Check My Answer Stages of a Sale of Land Transaction There are three stages in the transaction that will result in the transfer of land: the agreement of purchase and sale, the investigation, and the closing. Agreement of Purchase and Sale and Investigation Of prime importance is the agreement of purchase and sale between purchaser and the seller. Though the content of this agreement is entirely as negotiated between the parties, normal elements would include provision for the purchaser to conduct a full investigation of the property and the opportunity to bring matters of concern to the seller. As discussed earlier, with the seller’s agreement, this agreement can also be made conditional, for example, “subject to a satisfactory engineer’s report” or “subject to financing.” If the purchaser makes good-faith efforts to secure financing but is unable to find a willing lender, it can terminate the agreement with the vendor because the condition of being able to secure financing has not been fulfilled. As discussed previously, the prospective purchaser will want to conduct a search of the relevant land registration system before purchasing, and investigate other risks associated with the purchase of the property including restrictions impacting the use of the property that will not be disclosed by this search. In a commercial real estate transaction, it may be worthwhile to carry out some due diligence processes before entering into negotiations, such as confirming whether the property is subject to encumbrances such as restrictive covenants or leases that might be onerous for the purchaser or difficult to discharge, and confirming zoning and development agreements relating to the property. Alpha’s agreement with the seller must contain all requirements or terms of importance to Alpha, such as those listed next. As with any contract, once this one is signed, it is difficult to change without the agreement of both parties. An important legal requirement that affects this contract is that it must be in writing and signed by the parties. This eliminates attempts to incorporate into the agreement items that may have been discussed but on which no formal agreement has been reached. The contents of the agreement of purchase and sale depend on the nature of the property and the value of the transaction. The basic terms are these: the precise names of the parties precise identification and description of the property, including reference to the registered title and sufficient detail so as to leave no doubt as to location, size, and boundaries the purchase price, deposit, and method of payment  a statement of any conditions on which the agreement depends (such as financing, building inspection, zoning approval, or environmental inspection) a list and description of exactly what is included in the price (e.g., equipment, fixtures) the date for closing and a list of what each party must deliver on that date a statement of who is responsible for what during the period between signing and closing any warranties made by the seller relating to such matters as supply of water or soil contamination that continue after the closing, or any other matters of importance to the purchaser Normally, Alpha would submit an offer to buy, and the seller would accept it or respond to it with a counteroffer, which Alpha would then accept or vary, and so on until they both agreed unconditionally on all the terms. Only then would a contract exist. Once the terms of the agreement of purchase and sale have been agreed upon, the purchaser will proceed to carry out any remaining investigations stipulated in the agreement. While some investigations may have been carried out before or during negotiations, remaining steps and investigations at this stage typically include the following: Verification of boundaries. Alpha will retain a surveyor to confirm that the boundaries described in the registered title fit the physical boundaries of the land. For example, if the title provides for 1000 metres of road frontage but the surveyor finds only 800 metres, there is a problem to be addressed. The survey will also reveal the location of any buildings or other improvements in relation to the boundaries of the property and whether the property complies with local bylaws stipulating setbacks from the property boundary. Physical examination. Alpha must confirm that the property is in the state it is expecting according to the agreement. Alpha must confirm the space occupied by the tenants currently in the mall. Environmental audits/site assessments and building inspections. Alpha will have likely made their agreement to purchase the property subject to a satisfactory building inspection and environmental audit or assessment. Alpha will now conduct those assessments to satisfy itself of the condition of the property. Conditions and other steps. If the agreement of purchase and sale provided for other conditions on the purchase, the parties will take the steps to satisfy those conditions. For example, if the purchaser made the purchase subject to the seller successfully obtaining rezoning of the land or termination of a lease, the seller will carry out appropriate steps to satisfy those conditions. If the purchaser imposed a condition that the sale was subject to obtaining financing on reasonable terms, then the purchaser will be legally obligated to make its best efforts to obtain financing. Taxes. The purchaser must be sure that the municipal property taxes and any other local charges related to the property are paid up to date. If they are not, they will be deducted from the total due to the seller at closing. Any problems revealed by the various searches and investigations will be addressed according to the terms of the agreement. They will be fixed, or they will result in the renegotiation or termination of the agreement. The Closing The closing occurs after investigations are complete and all price adjustments have been made. At this point, final payment is made and a formal transfer of ownership occurs. If any difficulties found during the various searches can be remedied and Alpha is able to get its mortgage, the closing will proceed after the price is adjusted for such items as prepaid or unpaid taxes (added or subtracted from the price) or rent already received from tenants (deducted). Alpha will then make the final payment, and the seller will deliver the title document along with keys and other means of access to the property. It is likely that the agreement included a “state of repair” clause that required the seller to ensure the property remained in the same condition on possession day as it was at the time of the agreement. Alpha will then immediately register its title at the local registry office to ensure that no competing claims intervene to disrupt its ownership. If electronic registration is available, this risk is eliminated. At the moment of closing, Alpha becomes responsible for the property. Alpha must therefore arrange for insurance coverage and utilities to be transferred at that time as well. Figure 19.1 summarizes the stages of a real estate transaction.  Figure 19.1 Summary of a Real Estate Transaction Long Text Description Incomplete Transactions A deal may fall through for a number of reasons, some of which the agreement will anticipate. For example, if there is a title problem that cannot be fixed or the purchaser is unable to arrange financing pursuant to a conditional agreement, the purchaser normally has the right to bow out of the deal. In other situations, the purchaser or the seller may find a better deal and simply refuse to complete the transaction as required by the agreement. Refusal to complete for a reason not contemplated by the agreement is a breach of contract and entitles the party not in breach to a remedy. If the purchaser backs out, for example, the seller can keep the purchaser’s deposit. To claim further damages, the seller must try to mitigate by finding a replacement buyer. In such circumstances, the seller may experience costs in finding a new buyer and may end up selling the property for less than the defaulting purchaser had agreed to pay. In such circumstances, the seller is entitled to recover any additional costs and the difference between these two prices from the defaulting purchaser by way of damages for breach of contract. If the seller refuses to complete, the purchaser is entitled to the extra expense in acquiring a similar property. Historically, the purchaser could claim for specific performance—a special remedy in which the seller is forced to complete the transaction. However, in recent years the courts have been more reluctant to order specific performance unless a purchaser shows that the property is unique and that an alternative property will not meet its needs. Quiz Question 19.15 Mark as: None Review What three stages are common to most real estate transactions in order to facilitate the transfer of land from the vendor to the buyer? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a agreement of purchase and sale, title insurance, and closing b selection of realtor, property search, and agreement of sale c agreement of purchase and sale, investigations, and closing d conditional agreement, signing of mortgage, and transfer of title Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 19.16 Mark as: None Review Which of the following would normally be associated with the closing stage of a real estate sale? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a confirmation of the boundaries of the land  b search for hidden environmental hazards c verification that bylaws permit the desired use of the property d registering the title documents Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 19.17 Mark as: None Review Martina is purchasing a home in Winnipeg. The closing date is October 1. Each year’s real property taxes are payable in June for taxes owed up to December 31. The amount of the taxes paid by the vendor for the entire year is $2400. In the circumstances of this transaction, which statement most accurately describes an adjustment on taxes? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The seller will receive approximately $600 in adjustment from the purchaser. b The purchaser will receive approximately $800 in adjustment from the vendor. c The seller will receive approximately $1200 in adjustment from the purchaser. d The purchaser will receive approximately $1800 in adjustment from the vendor. Show Submitted Answer Show Correct Answer Check My Answer The Real Estate Lease The Landlord–Tenant Relationship Ashley is currently in a landlord–tenant relationship because she is leasing her store space. Ashley is the tenant. The owner of the building that she occupies is the landlord. Since Alpha is intending to buy a partially leased mall, it will become an owner and landlord and will enter into further leases for the space not needed for Ashley’s store. A lease is a contract between a landlord and a tenant and is also an interest in land. It records the rights and obligations of both parties. Leases are of two general types: commercial and residential. The two types are significantly different in terms of the ability of the parties to negotiate their own terms, the rights and obligations in the lease, remedies, and enforcement mechanisms. Residential leases are heavily regulated by provincial legislation that does the following: It prescribes the form and content of the lease. It limits the amount of security deposits that can be required of residential tenants. It defines the rights and obligations of the landlord and tenant, including the tenant’s security of tenure. It requires the landlord to maintain the premises. It provides remedies for breach of the terms of the lease. It provides procedures for resolving disputes. Commercial leases are relatively unregulated. The terms are negotiated solely by the landlord and tenant who are free to agree on the format and content of the lease. If Alpha were the owner of an apartment complex and a commercial mall, the apartment lease would be under the residential regime and the mall lease governed by commercial rules. The discussion that follows is geared mainly to commercial situations. A lease is a means of dividing ownership of property for a time. Its key feature is the idea of exclusive possession , which means the tenant has a high level of control over and responsibility for the premises during the term of the lease. This concept of exclusive possession is doubly important because, first, it is the main factor in deciding whether a lease has been created to begin with, and second, it is the major consequence of the creation of a lease. For example, a five-year lease means that the tenant has the right to occupy and control the property for the full five years and cannot be legally evicted from the land unless the lease is violated by that tenant in a major way. This right continues even if the land is sold to another owner. If Alpha, as landlord, enters into a long-term lease with a tenant and later wrongfully terminates that lease, Alpha is in breach of contract and must pay damages to the tenant. Alpha may also be subject to an order for specific performance or an injunction preventing the eviction of the tenant. An offer to lease or an agreement to lease becomes enforceable only if it contains all the key terms (identification of the parties, the premises to be occupied, the term, the rent, and the intent to grant exclusive possession to the tenant) and has been accepted by the other party. Quiz Question 19.18 Mark as: None Review  What is the main factor in deciding whether a lease has been created? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a the Residential Tenancy Act or Commercial Tenancy Act b the contract between the landlord and tenant c the parties’ ability to negotiate their own terms d the legal concept of exclusive possession Show Submitted Answer Show Correct Answer Check My Answer Terms of the Lease The complexity of the lease depends on the value, nature, and size of the property. A lease for an office tower is lengthy and complicated because there are many issues to address and a great deal is at stake. Conversely, a lease of a garage to store surplus equipment could be quite simple. These are some basic terms in every commercial lease: identification of the parties description of the premises permitted alteration of the space by the tenant and what happens to the alteration when the lease ends ownership of improvements to the space calculation of rent (e.g., based on the amount of space and/or a percentage of gross sales) responsibility for repairs and maintenance to the leased space and any common areas responsibility for utilities and property taxes security and damage deposits permitted uses of the space by the tenant tenant’s hours of operation limits on the landlord’s ability to lease other space to the tenant’s competitors time period of the lease (generally three to five years) provisions for renegotiation, renewal, or termination provisions for assignment and subletting remedies for either party if the other fails to comply with the lease  what happens in case of events such as fire or flood that damage the leased property and adjacent property owned by the landlord or others protection of the landlord in the event of the tenant’s bankruptcy dispute resolution process Figure 19.2 What are some key negotiation points for the tenants leasing space in shopping malls? [D] Rights and Obligations The rights and obligations contained in a commercial lease are formally known as covenants and consist largely of whatever the parties negotiate in the lease. Commercial leases vary significantly and must be reviewed closely in order to understand the rights and obligations of the parties. However, some covenants arise from the tenant’s exclusive possession and corresponding responsibility: The tenant is responsible for repairs unless the lease imposes some obligation on the landlord. The tenant is entitled to exclusive and quiet possession of the premises for the full term. In return, the tenant must pay rent and observe the terms of the lease. The tenant cannot withhold rent, even if the landlord fails to meet a requirement in the lease, although some breaches may be so fundamental to the lease that their breach may release the tenant from its obligations. However, the tenant’s usual remedy is to claim compensation from the landlord while continuing to pay rent. The tenant cannot terminate the lease and move out unless the landlord’s breach of the lease has made the premises uninhabitable for normal purposes. Ordinarily, the tenant can assign the lease or sublet the property to another tenant. Assigning the lease transfers full rights (and the related obligations) for the remainder of the term. A sublease, in contrast, is an  arrangement whereby the tenant permits someone else to occupy the leased premises for part of the time remaining in the lease. The original tenant remains fully liable under the lease but has rights against the subtenant—should the subtenant fail to pay the sub-rent, for example. It is common for the lease to require the landlord’s consent for both of these arrangements. Such leases normally also provide that the landlord’s consent may not be unreasonably withheld. The landlord’s basic obligations are to refrain from interfering with the tenant’s use or enjoyment of the property and to provide any benefits or services promised in the lease. The landlord’s goal is that the tenant pay rent, use the premises for acceptable purposes, and cause no damage to the property. The major risk for landlords is that the tenants may get into financial difficulties. Thus, remedies for landlords focus on collecting unpaid rent and evicting tenants for defaulting on payment or for other serious breaches. Unlike the usual contract situation, a commercial landlord has no obligation to mitigate damages if the tenant abandons the premises. Commercial landlords also have the remedy of distress : if a landlord follows proper procedures, they can seize the property of the tenant located in the leased premises, sell the property, and apply the proceeds to the unpaid rent. However, the landlord should be aware that electing to distrain for unpaid rent may have the effect of affirming the lease and the landlord may not be able to terminate the lease for the same breach—and may have to wait for a further default in order to terminate the lease. Quiz Question 19.19 Mark as: None Review Which statement best describes the rights or obligations of a commercial landlord when a tenant abandons the premises? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. Unlike the usual residential lease situation, a commercial landlord has an obligation to seek a new tenant for the a property. Unlike the usual contract situation, a commercial landlord has no obligation to mitigate damages if the tenant b abandons the premises. Where a commercial tenant abandons the property, the landlord is required to sublet the property as the deemed c agent of the tenant. Where a commercial tenant abandons the property, the landlord is required to give notice of intent to sue for d damages for breach of contract. Show Submitted Answer Show Correct Answer Check My Answer BUSINESS APPLICATION OF THE LAW 19.1 Retail Leases in a Changing Marketplace Unpredictability in the retail sector has made drafting long-term leases more challenging as landlords and tenants attempt to devise terms that will accommodate future changes in shopping behaviour. According to Natalka Falcomer, whose law firm represents mostly tenants, “What we’re seeing for the first time is a real flip in the power between the landlord and the retail tenant.” There are several reasons for this flip. For one, growth in ecommerce is increasingly impacting commercial leasing in the retail sector. According to a poll conducted by Angus Reid, 37 percent of Canadians shop online at least once a month and 75 percent spend up to $200 per month shopping online. This trend is expected to increase, with 65 percent indicating they expect to increase their online shopping in the future and roughly one in five Canadians polled indicating they expect to be making the majority of their non-food purchases on the internet in the next year or two. This trend complicates commercial leasing in the retail sector where many leases are structured around a “turnover” or “percentage-rent” model in which the retailer pays a fixed rent plus a portion of its gross sales made in the leased premises. Historically, the traditional turnover model has offered advantages to both the landlord and tenant by allowing them to share risk: the tenant pays lower rent if, for example, renovations or the loss of an anchor tenant in a mall cause a reduction in sales, and the landlord benefits when the tenant’s business is successful. While this model has worked well in the past, the task of devising lease terms is becoming increasingly complicated as retailers move to models that combine in-store sales with internet sales. Some retailers, such as Apple, are shifting the retail model even more significantly by using a retail setting to promote and market their product, but with many of their sales occurring online. Assuming most of these online sales are shipped from an off-site warehouse or distribution centre, how should this be factored in when rent is negotiated, particularly when there is a co-dependency between online orders and the presence of a bricks and mortar outlet? Increasingly, retail leases must be negotiated and drafted very carefully with the specific retailer’s business model in mind, and using clear wording that accounts for existing or foresees future online sales and provides a fair method for monitoring and capturing such sales when calculating rents. Another concern is that in recent years, smaller retailers in shopping malls have been impacted negatively by the insolvency or departure of larger anchor tenants such as occurred with the demise of Sears and the departure of Target from the Canadian market (Figure 19.3). One consequence of this is that tenants are increasingly seeking co-tenancy agreements that allow retail tenants to get out of their lease or pay lower rents if another tenant leaves or “goes dark” by continuing to pay rent but ceasing operations. Figure 19.3 How are smaller retailers in malls impacted by the departure of larger, anchor tenants? [E] Changes in the sector are also impacting the length of term in the typical retail lease. While landlords usually prefer long-term leases that provide certainty of cash flow and add to the overall market value of a property, instability in the brick and mortar retail sector is leading more retailers to seek shorter terms and increased flexibility. Critical Analysis Question 19.20 Review  How can the language of a long-term lease provide for future developments in the retail sector? Sources: Marg Bruineman, “Commercial Leases”, Canadian Lawyer (14 April 2017), online: Your Answer http://www.canadianlawyermag.com/article/commercial-leases-3588/; Marg Bruineman, “Making Online Sales Count”, Canadian No answer Lawyer (June 2016), online: http://digital.canadianlawyermag.com/i/683766-june-2016/4. submitted Termination of the Lease Normally, the lease runs its natural course and ends when the agreed period for the tenant’s occupation expires. There are two types of leases in terms of time. One identifies the exact duration of the lease. If Ashley’s lease of her current space was for a fixed term of five years, which is about to expire, the lease will automatically end on the specified date. Neither party is required to give any notice or obligated to negotiate a renewal or extension. Therefore, the landlord should realize that Ashley is free to move, and she should realize that she has no right to stay beyond the specified date. If Ashley’s current lease is not near its end, she will need to negotiate an early termination. The other type is known as a periodic tenancy and automatically renews itself unless one party gives the required notice before the current term expires. For example, if Ashley has a lease from year to year, that lease will automatically be renewed for another full year unless either Ashley or the landlord gives sufficient notice (likely about three months). To avoid uncertainty, the parties should deal with termination in detail in the lease so that there is no doubt about the length, renewals, or the need for notice to terminate. As an interest in land, a lease is, in theory, not affected by the sale of the property by the landlord. The tenant is entitled to stay until the end of the lease, with the new owner as landlord. However, long-term leases must be registered in some provinces, and in any event should be registered to give those who are investigating title clear notice of their existence. When Alpha buys the mall, it will inherit the existing leases for the duration of their remaining term. When deciding how much space to use for Ashley’s store and therefore how much extra space to lease to new tenants, Alpha must be aware of the rigidity of long-term leases. Alpha could consider finding tenants who are prepared to enter a short-term tenancy or a periodic tenancy from month to month. This would permit Alpha to regain full possession of the premises if the need arose. The disadvantage is that this may make the property less attractive to tenants unless their needs are short-term ones as well. CASE 19.1 Braebury Development Corporation v Gap (Canada) Inc, 2021 ONSC 6210 THE BUSINESS CONTEXT: In response to the global COVID-19 pandemic, government-invoked health measures included orders for the closure of non-essential businesses. The resulting revenue losses made it difficult for many businesses to pay their rent. These circumstances placed new focus on the wording of force majeure clauses typically contained in commercial leases, and to consideration of the seldom-invoked doctrine of frustration. Figure 19.4 Why does the wording of a force majeure clause require close examination when negotiating a lease? [F] FACTUAL BACKGROUND: Gap had operated a retail clothing store at a location in downtown Kingston for a number of years. In March 2020, in response to the COVID-19 pandemic, the Government of Ontario declared a provincial state of emergency and ordered all non-essential businesses to close to limit the spread of COVID-19. Gap was required to shut down its store located at the leased premises and was unable to reopen until the shutdown restrictions were lifted in May 2020. Gap did not pay rent for April or May 2020, and only made partial rent payments from June 2020 to September 2020. In September, Gap unilaterally closed the store and vacated the premises. The landlord brought an action seeking rent arrears totalling $208 211. Gap maintained that the lease was frustrated due to the public health restrictions that made it no longer reasonable or commercially feasible to continue operations. The landlord argued that the situation fell squarely within the force majeure clause and that as a result, the tenant was not excused from paying rent. THE LEGAL QUESTION: Was the force majeure clause triggered by the pandemic and resulting government measures? If so, was Gap required to pay rent? Was Gap relieved of it obligations under the lease by the doctrine of frustration? RESOLUTION: The trial judge held that when interpreting the force majeure clause, the lease should be read as a whole, and its words should be given their ordinary and grammatical meaning. The force majeure clause included in the lease provided: … In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of … restrictive governmental laws or regulations, riots, insurrection, war, military or usurped power, sabotage, unusually severe weather, fire or other casualty or other reason … of a like nature beyond the reasonable control of the party delayed in performing work or doing acts required under the terms of this Lease (herein called “force majeure”), the performance of such act shall be excused for the period of the delay and the period for the performance of any such act  shall be extended for a period equivalent to the period of the delay. The provisions of the preceding sentence however shall not excuse Tenant from the prompt and timely payment of the Rent …. [emphasis added] Gap argued that the clause did not apply because the clause did not refer to public health measures, pandemics or epidemics, or health emergencies. This was rejected by the court, which found that the pandemic itself was not the triggering event, but, rather, it was the government’s restrictive laws or regulations. As a result, the force majeure clause was triggered and Gap was not relieved of its obligation to pay rent. Gap also argued that the lease was frustrated. According to the court, the doctrine of frustration required the supervening event to affect the purpose, effect, and consequences of the contract and not merely increase the burden of fulfilling the contract. While Gap had argued that the purpose for entering the lease was to operate the premises as a retail store, the court noted the contract expressly provided that “[the] Tenant shall have no obligation to operate any business nor conduct any use in the premises.” Accordingly, “[g]iven that Gap was not required to operate its retail store under the lease, its inability to do so cannot be said to have radically altered the lease’s terms, turning it into something completely different than what was intended by the parties entering the lease. By contrast, if Gap had been required under the lease to operate the premises as a retail store, its inability to do so by a supervening event may have risen to the level of radical change required to engage the doctrine of frustration.” The court also noted that to frustrate a contract, the supervening event must be a permanent, as opposed to a temporary setback. Critical Analysis Question 19.21 Review The wording of the lease made it difficult for Gap to claim the contract was frustrated by government-mandated closures. Was the force majeure clause in the lease overly one-sided in favour of the landlord? Your Answer No answer submitted Risk Management The major risk relating to real property is the complexity of the law. Business people entering a transaction to buy, lease, or mortgage land needs to obtain competent legal advice to guide them through the complications and ensure that their interests are adequately protected. Real property is largely a buyer-beware proposition, in that those involved are expected to do their own thorough investigations before committing to a real estate transaction. Risk reduction is crucial. Key commitments relate to contracts for the purchase or sale of land, the lease, or the mortgage. The language is complex, and it is crucial for those involved to understand the language in some detail as well as the broader implications of the transactions. A buyer of land must ensure that the agreement contains all terms of importance. A landlord and tenant need to understand the degree of control that the lease provides for the tenant. One who signs a mortgage should understand the far-reaching rights enjoyed by the lender in the event of default. In many situations, the bargaining power of the business person may be limited by financial need, the challenges of dealing with large institutions, or the fluctuations of the market. The ability to avoid, reduce, or transfer risk may be limited. What cannot be bargained can at least be understood with the help of expert advice. Business Law in Practice Revisited 1. What are the legal issues for Ashley in the planned purchase of the mall? The major legal challenge in the purchase of the mall is the need to ensure that the agreement of purchase and sale is negotiated with legal assistance so that it provides adequate protection for Alpha, Ashley, and Andrew. They must realize that they have full responsibility to verify all aspects of the property, such as the title, zoning, and environmental condition, before proceeding to finalize the purchase. 2. What are the risks in borrowing 60 percent of the purchase price of the mall? Ashley and Andrew need to appreciate the significance of signing a mortgage on behalf of Alpha for such a significant portion of the purchase price of the mall. They must be justifiably confident that the location and revenue from the mall will be ample to meet the mortgage payments. If Alpha defaults and they are unable to renegotiate more favourable terms, Alpha will lose ownership and possession of the mall. The lender may also require personal guarantees from Ashley and Andrew. If they agree to this condition, Ashley’s and Andrew’s personal assets will be exposed. 3. What does Ashley need to know about the rights and obligations of her current lease and leases for the mall? Ashley needs to understand the need to negotiate with her landlord for termination of her current lease. She and Andrew must understand that as purchasers of the mall through Alpha, they are obliged to honour the leases with the current tenants. They also need to appreciate the nature of the commitment to additional tenants for the space that will not be used for Ashley’s store. Mall leases are complicated arrangements, so they need legal advice in drafting and negotiating. Chapter Summary Real property is permanent and immovable, and the total quantity is fixed. The focus of the law is on the land itself rather than the buildings or fixtures attached to it. Ownership is called the fee simple and includes everything on, above, and below the land, subject to a wide variety of limits on use. The owner of land can transfer and divide ownership in a number of ways. Registration of any interest in land is required to preserve priority over other claimants. There are two systems of registration in Canada—registry and land titles—although all provinces are moving toward an electronic land titles system. The most common ways to acquire real property are to purchase the fee simple through a real estate transaction or to become a tenant through a lease. Buying land involves considerable risk, which can be managed through investigation of all aspects of the land. A mortgage is security for a loan that emphasizes the preservation of the value of the property. A mortgage gives the lender the right to sell the land or have it sold if the loan is not repaid. The landlord transfers to the tenant the right of exclusive possession of the land for the term of the lease. In return, the landlord is entitled to rent and has the right to regain possession at the end of the lease or earlier if the tenant defaults. The lease will end when a specified term expires or when one party gives the required notice to the other. The holder of the fee simple can dispose of their interest as they choose: lease the land temporarily, sell it, or give it away while they are alive or in their will upon death. Chapter Study Key Terms and Concepts closing The final stage of a real estate transaction when final documentation and payment are exchanged. condominium A form of shared ownership consisting of full ownership of a unit of a property and shared ownership of common areas within the property. deficiency The shortfall between the outstanding mortgage balance and the proceeds from sale of the land. distress The right of a commercial landlord to seize the tenant’s personal property for non-payment of rent. easement The right to use the land of another for a particular purpose only. equity of redemption The right to regain legal title to mortgaged land upon repayment of the debt. exclusive possession The tenant’s right to control land during the term of a lease. fee simple The legal interest in real property that is closest to full ownership. fixtures Tangible personal property that is attached to land, buildings, or other structures. foreclosure The mortgagee’s remedy to terminate the mortgagor’s interest in the land. joint tenancy Co-ownership whereby the survivor inherits the undivided interest of the deceased. landlord The owner of land who grants possession to the tenant. land titles system The system of land registration whereby the administrators guarantee the title to land. life estate A legal interest in real property that exists only for the duration of the holder's life and then reverts to the original owner or is passed on to someone else. mortgage A loan for real property that is secured by an interest in the property. mortgagee The party who lends the money and receives the signed mortgage as security for repayment. mortgagor The party who borrows the money and signs the mortgage promising to repay the loan. periodic tenancy A lease that is automatically renewed unless one party gives proper notice to terminate. registry system The system of land registration whereby the records are available to be examined and evaluated by interested parties. restrictive covenant A restriction on the use of land as specified in the title document. tenancy in common Co-ownership whereby each owner of an undivided interest can dispose of that interest. tenant The party in possession of land that is leased. title insurance Insurance that covers title-related issues such as fraudulent transfers and mortgages, liens, boundary encroachments, issues related to government regulation, zoning problems, survey defects, and registration issues. title search Investigation of the registered ownership of land in a registry system. Questions for Review Refer to Notes section for question footnotes. Question 19.22 Review What are the unique features of land as a form of property? Your Answer No answer submitted Question 19.23 Review What is a fee simple? Your Answer No answer submitted Question 19.24 Review What is the meaning of the term caveat emptor in the context of a real estate purchase? Your Answer No answer submitted Question 19.25 Review How does a joint tenancy operate? Question 19.26 Your Answer Review No answer submitted How can ownership of land be divided by time? Your Answer No answer submitted Question 19.27 Review What is the purpose of registering title to land? Your Answer No answer submitted Question 19.28 Review What is a restrictive covenant relating to land? Your Answer No answer submitted Question 19.29 Review What are the benefits of an electronic registration system? Your Answer No answer submitted Question 19.30 Review What are the three stages in a transaction for the purchase and sale of land? Your Answer No answer submitted  Question 19.31 Review What should a buyer of land investigate? Your Answer No answer submitted Question 19.32 Review What is title insurance? Your Answer No answer submitted Question 19.33 Review What happens at the closing of a property transaction? Your Answer No answer submitted Question 19.34 Review What are the key features of a mortgage? Your Answer No answer submitted Question 19.35 Review What are a lender’s remedies if the borrower fails to make mortgage payments? Your Answer No answer submitted Question 19.36  Review What are the essential terms in a lease? Your Answer No answer submitted Question 19.37 Review What is the remedy of distress? Your Answer No answer submitted Question 19.38 Review What is a periodic tenancy? Your Answer No answer submitted Question 19.39 Review How can the owner of land dispose of their interest? Your Answer No answer submitted Questions for Critical Thinking Refer to Notes section for question footnotes. Question 19.40 Review In some jurisdictions, the law of adverse possession (sometimes known as “squatters’ rights”), can result in a long-time squatters on private land acquiring ownership rights if their occupation persists for a lengthy period of time (usually an occupation of 10 years). Should squatters’ rights be abolished, and, if so, why? Are there any valid reasons for continuing to recognize squatters’ Question 19.41 rights? Review Your Answer In most jurisdictions, a new owner of land can be legally responsible for cleaning up No answer submitted environmental contamination, even if it was caused by a previous property owner. What is the justification for this policy and is this a reasonable expectation? Your Answer No answer submitted Question 19.42 Review Real property law originated as a means of protecting rights or resolving disputes between conflicting individual rights to property. Increasingly, broader uses of land in the public interest are coming into conflict with individual owners’ rights. Some examples are wind turbines that produce noise; cell phone towers that are unsightly and may emit radiation; and oil or natural gas pipelines that entail environmental risks. What factors may help to resolve this friction between the public interest and individual ownership rights? Your Answer No answer submitted Question 19.43 Review In most cases, a lender has more expertise and experience in credit transactions than the borrower. Do the rules of contracts and mortgages allow the mortgagee (lender) too much protection at the expense of the mortgagor (borrower)? Should the lender bear some responsibility for a decision to lend that turns out to be a bad one? Does it matter that the mortgage is a high ratio or subprime mortgage and the borrower has been enticed and persuaded by the lender to borrow the money? Your Answer No answer submitted  Question 19.44 Review The format and content of residential leases is largely dictated by legislation, while commercial leases are entirely negotiated by the parties, resulting in lengthy and complex documents. The difference is largely based on the assumption that commercial tenants can take care of themselves while residential tenants are vulnerable to exploitation by landlords. Is this a valid assumption? Should there be more similarity in the processes that create the two types of leases? Your Answer No answer submitted Question 19.45 Review Transactions in a land titles system are less costly and time consuming because a person wishing to know the state of the title can consult the certificate of title and rely on its accuracy. Are there any exceptions to this general rule? Your Answer No answer submitted Question 19.46 Review The COVID-19 pandemic resulted in mandatory lockdowns and other health measures that created unexpected financial hardships for both commercial tenants and their landlords. Would it be appropriate to ha