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Guide to Doing Business in Canada: Real estate & urban development

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October 13, 2017

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Real estate & urban development

Real estate is a broad category that covers buying, selling, developing, leasing and financing across a wide range of sectors — from mining, forestry, and oil and gas to light-to­-heavy industrial, commercial, residential, recreational, retail, office, condominiums, subdivisions, urban development, brownfields and mixed-use developments. As a result, Canada attracts a range of business and individual investors from far and wide seeking to invest in the country’s varied real estate assets.


  1. Foreign investment
  2. Investment vehicles
  3. Acquisitions
  4. Due diligence
  5. Land-use planning and development 
  6. Leasing
  7. Financing
  8. Environmental concerns
  9. Environmental risk assessment
  10. Real estate broker and mortgage brokers legislation

1. Foreign investment

Understanding the prin­cipal issues involved in acquiring, developing, leasing and/or financing property in Canada is critical for foreign investors looking to properly assess the risks and rewards associated with any proposed investment.

The provinces have primary responsibility for property law in Canada. In all provinces except Québec property law has developed through the English common law process. In Québec, property law is governed by the Civil Code of Québec, which is derived from the Napole­onic Code

Interests in land are generally held directly in fee sim­ple or by leases as leasehold interests. Condominium or strata title ownership is also common throughout Canada. All provinces maintain a registry of public land titles whereby interests in land are registered and may be verified. Canada has highly sophisticated land registration systems in place in each province to deal with the ownership of real property.

2. Investment vehicles

There are several legal structures through which to invest­ in Canadian real estate, including:

  • Personal ownership
  • A corporation (either federally or provincially incorporated)
  • General partnership
  • Limited partnership
  • Co-ownership (often referred to as a “joint venture”)
  • Trust
  • Real estate investment trust
  • Or any combination of the above

The choice of an appropriate invest­ment structure will be influenced by several factors, including liability issues and business considerations, as well as the rules and regulations governing each foreign investor’s home country. Tax planning requirements are another important consideration, and foreign investors would be wise to seek tax planning advice before purchasing real property in Canada in order to minimize tax consequences and maximize benefits.

3. Acquisitions and dispositions

a. Acquisitions

To acquire commercial real estate in Canada, parties often begin with a letter of intent followed by a binding agreement of purchase and sale.

Notwith­standing what the parties call their document, any such agreement should contain all necessary business terms for the transaction, including the description of the land, purchase price, deposit(s), closing date, title and/or due diligence periods, repre­sentations and warranties, and any other special terms and conditions that the parties agree to. It is always advisable to have a lawyer review any preliminary deal document, such as an offer or agree­ment of purchase and sale, before it is signed.

When purchasing, it is important to seek advice with respect to the various federal, provincial and municipal taxes that may be exigible in connection with a particular transaction, such as land transfer tax, withholding tax for foreign investors, har­monized and provincial sales tax, capital gains tax, foreign buyer taxes, and many others. It is important to have local professionals involved in your real estate transactions.

b. Dispositions

Whether you are buying or selling, it is always impor­tant to put all of the critical business terms in the letter of intent or agreement of purchase and sale. Certain Canadian cities have established real estate boards that provide standard form agreements of purchase and sale, as well as other precedent agreements.

While using these types of standard form agreements is appropriate for most purposes, for more sophisticated acquisitions and dispositions it is wise to consider longer form agreements. These forms address many more issues, including the allocation of the purchase price among the real property, building and chattels (if any), conditions precedent for either or both of the buyer and the seller, GST/HST exemption status of the real estate or the buyer, scope of representations and warranties, scope and limitations on due diligence and deliveries.

4. Due diligence

Once the agreement of purchase and sale is signed, it is generally the responsibility of the purchaser (usually through its legal counsel) to conduct due diligence concerning the property being acquired. This includes acquiring the title to the real estate and any personal property assets as part of the agreement of purchase and sale, and performing other due diligence activities with respect to any number of the following:

  • Off-title enquiries
  • Adjoining lands searches
  • Environmental investigations
  • Heritage designations
  • Sur­vey and lease reviews
  • Road access
  • Zoning compliance
  • Utilities
  • Conserva­tion authority
  • Registered and unregistered easements
  • Municipal agreements
  • Airport zoning bylaws

In addition, when purchasing a building or structure, it is also prudent to con­duct structural, mechanical, electrical and plumbing investigations.

5. Land-use planning and development 

In Canada, provincial and municipal land-use planning legislation, bylaws and regulations control the manner in which real estate is developed. Although land-use planning is the responsibility of the provincial government and is supervised at the provincial level, significant planning functions have been delegated to regional and municipal governments. Land use is controlled through instruments such as the official plan, a long-range general plan for a region or municipality, and zoning bylaws, which regulate the permit­ted uses for each parcel of land within the municipality along with a range of other matters (such as parking requirements and the type, size, height, and location of buildings and struc­tures).

For purchasers of land, both the official plan and particular zoning bylaws are crucial. Most municipali­ties require that site plans be approved before the con­struction of any new development begins. Site plans set out the details of a development — including the location of buildings and related facilities, such as landscaping, services, driveways and parking spaces. Most munici­palities require that developers enter into an agree­ment ensuring construction and ongoing maintenance in accordance with the site plans.

Land-use planning legislation not only affects the sub­division and transfer of land, but it also often applies to long-term leases and rights that are given over, or in connection, with land. In Ontario, for example, any subdivision of land requires the consent of the local commit­tee of adjustment or subdivision control committee, pursuant to the Planning Act (Ontario). This require­ment also applies to mortgages, as well as the granting of any other interest in land (such as a lease), for 21 years or more (inclusive of renewals) where the mortgage or interest is granted over only part of a landholding. The failure to obtain such consent when otherwise required will result in the failure of the deed, mortgage or lease to create any interest in the real property. Although there are a number of exemptions to the consent requirement, most contracts for the pur­chase of real property in Ontario are made subject to any required consent, and the cost and responsibility for obtaining such consent is usually allocated to the vendor.

The construction of new projects is also subject to provincial and municipal legislation. In addition to regulating the maintenance of existing structures, building codes set specific standards for the construction of buildings. Before construction commences, most municipalities require building permits, payment of any applicable fees and confirmation that the property developer has obtained all necessary regulatory approvals.

6. Leasing

Leasing is a complex area and it is crucial to find legal professionals who are familiar with specialized leases for unique sectors such as technology, renewable energy, hotel and accommodation, logistics and transportation, etc.  There are several ways to lease property in Canada.

a. Ground leases

Property may be leased as well as purchased. One form of leasing arrangement is a long-term ground lease, in which a tenant leases vacant land and devel­ops it. Once the development is complete, the ground tenant sublets space to retail, office or industrial ten­ants (depending on the type of development). Ground leasehold interests may be bought and sold in a man­ner similar to fee simple property interests.

b. Commercial, industrial and retail leasing

In Canada, most commercial office and retail space, as well as much of the standard industrial space, is available only through a commercial lease. Most commercial lease transactions start with an offer or agreement to lease. Unlike in the United States, an offer or agreement to lease is typically a binding agreement that contains the business terms agreed upon by the parties, includ­ing the space, term, rent and any tenant inducements.

Most commercial leases in Canada are typically on a net/net rental basis, which requires tenants to pay, in addition to basic rent, a proportionate share of the realty taxes, insurance, utilities and other maintenance charges commercial buildings typically incur. In a retail lease, a tenant may also be required to pay rent based on a percentage of its annual gross sales.

c. Residential leasing

Residential leases are regulated by provincial legisla­tion. In some cases, the applicable provincial legislation will override the terms of the lease agreement, regardless of the intention of the parties. In some provinces, for instance, even a landlord’s ability to increase residential rent is limited by provincial regulation.

7. Financing

a. Sources of financing

Most real estate financing is arranged through institu­tional lenders such as banks, credit unions, caisses populaires, insurance companies, trust companies and pension funds. However, there are also a number of non-institutional and private lenders that lend money in the Canadian financial market. As is the case in other countries, credit terms will vary from lender to lender and will depend on the nature of the transaction and the risks involved.

The Canadian banking system is widely considered the safest and most efficient in the world, ranking as the world’s soundest banking system for the past three years according to reports by the World Economic Forum. The banking and lending industry in Canada is highly regulated, with a number of federal stat­utes governing it, such as the Bank Act, Trust and Loan Companies Act, Credit Unions and Caisses Populaires Act, 1994, and the Insurance Companies Act. The strength of Canada’s banking regulatory regime was especially lauded in the most recent debt crisis.

b. Interest rates

Interest rates on real estate financings can be either fixed for a specified period of time, or variable, based on a “prime rate” determined by the lending institution on a periodic basis. The prime rate is based on a rate announced by the Bank of Canada from time to time. A borrower may consider borrowing in other currencies and has a choice of interest rate pricing, including applicable Government of Canada Bond Rates, the London Interbank Offered Rate (LIBOR) and bankers’ acceptances. Certain fees, such as commitment and processing fees, are normally charged by lenders. Typi­cally, it will be the borrower’s responsibility to pay for all of the lender’s legal and other costs in arranging prop­erty financing. The Interest Act of Canada dictates, among other things, how interest rates are to be pre­sented to the public to ensure fairness and transparency.

c. Primary and collateral security

Lenders, whether they are financial institutions or third-party arm’s-length lenders, usually take both primary and collateral security in real property and related assets to secure the loan. Typical primary security includes a mortgage or charge, a debenture containing a fixed charge on real property or — in some cases where more than one lender is involved — a trust deed securing mortgage bonds or debentures (and including a specific charge over real property). Collateral security often includes general and/or specific assignments of leases and rents, general security agreements, assignments of contracts and insurance policies, and personal guarantees.

d. Foreign lenders

Because many foreign lenders in Canada are subsidiar­ies of the world’s major banks, they typically participate by way of syndicated loans, which are often arranged by major Canadian lending institutions. However, there are also Canadian lenders who participate in syndicate lending as well. There has been a great deal more syndicate lending since the real estate dip in the early 1990s. Whether lending through a syndicate or directly, foreign lenders may be subject to certain withholding and other taxes on the interest paid to them.

8. Environmental concerns

Canada’s environmental legislation is both sophisticated and advanced due to the country’s abundant natural resources. All levels of government have enacted detailed statutes, laws, regulations, bylaws, guidelines and recommendations concerning the pro­tection of the environment. These laws attribute liability for environmental damage to both property owners and polluters of the environment. Tenants often make the mistake of assuming that, since they do not own a property, they are not liable; however, in some provinces and jurisdictions, merely being in occupation, management or control of real property may attribute liability.

A property owner has certain duties and obligations relating to the discharge of contaminants and hazardous materials into the environment from its property. They must also note that liabilities associated with improper waste management practices can be inherited by subsequent owners of a property.

9. Environmental risk assessment

Purchasers should assess the environmental risks associated with the purchase of a property. In Canada, government officials do not “certify” that a prop­erty is free from such risks. Rather, purchasers can ascertain a property’s environmental status by inspecting applicable company and public records. In many cases, a purchaser will want to do an “environmental audit,” which may include conducting scientific testing and a technical analysis of the property. Lending insti­tutions often require such an audit before advancing any funds.

The conducting, delivery and review of environmental audits can be a complex area. One should ensure that the consultants retained to do the environmental investigations are approved by the recipient of the report (e.g. the lender or municipality); otherwise, the investigation may not be accept­ed and will have to be conducted again.

10. Real estate broker and mortgage broker legislation

Generally, a person who wishes to dispose of or acquire real estate will seek the assistance of a real estate broker. Real estate brokers are subject to spe­cific regulations in Canada. Each province has legisla­tion that regulates the trade in real estate, which is designed to better protect consumers and instil confidence in the buying and selling of real estate. Provinces have various types of governing bod­ies that regulate the purchase and sale of real estate, the conduct of real estate agents and the minimum standards for duty of care to the public when engaged in the purchase and sale of real estate.

Mortgage brokers, lenders and administrators are also subject to specific regulations in Canada. These regulations are governed by various pieces of provincial legislation. In Ontario, the Mortgage Brokerages, Lenders and Administrators Act, 2006 went into full effect in 2008. The Act requires all mortgage brokerages, administrators, brokers and agents to obtain a licence to do business in Ontario. Similar leg­islation either exists or is under consideration in most of the other provinces.

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