It is common practice across Canada for realtors to utilize a standard form of purchase and sale contract for commercial real estate (a "Standard Form Contract") prepared by the relevant provincial real estate association. Standard Form Contracts are helpful resources that provide a good roadmap for papering the agreed upon terms of a purchase and sale transaction. Recognizing that commercial conveyances are complex by nature and have nuances peculiar to each individual transaction, most Standard Form Contracts contain schedules or permit the inclusion of schedules to provide the ability to insert tailored additional provisions or amend default Standard Form Contract provisions.
In this article we explore the landscape of Standard Form Contracts in Ontario, British Columbia and Alberta and examine some commonly encountered circumstances which, if applicable to a transaction, the parties may wish to address by incorporating additional schedules into the Standard Form Contract.
The Standard Form Contract landscape
Standard Form Contracts contain the basic provisions of a purchase and sale agreement that are required to carry out a transaction. The basic terms and the form of document used for the Standard Form Contracts vary according to jurisdiction:
(a) Ontario : The Standard Form Contract (the "OREA Commercial APS") in Ontario has been developed by the Ontario Real Estate Association ("OREA");
(b) British Columbia: The Standard Form Contract in British Columbia ("BCREA Commercial APS") has been developed jointly by the British Columbia Real Estate Association ("BCREA") and Canadian Bar Association (BC Branch); and
(c) Alberta: The Standard Form Contract in Alberta (the "AREA Commercial APS") has been developed by the Alberta Real Estate Association ("AREA").
Each of these Standard Form Contracts has been purposefully designed to accommodate the inclusion of supplementary provisions by the addition of schedules. OREA publishes a set of additional provisions for that specific purpose and frequently updates OREA commercial APS .
Consideration beyond the standard terms
1. Business days
All commercial property contracts contain key dates – the deposit payment date(s), completion date, adjustment date, possession date, etc. What happens if such dates fall on a non-business day (i.e. weekends or holidays)? If the contract is silent on this matter, the answer is that a dispute may arise.
Ontario, British Columbia and Alberta:
None of the Ontario OREA commercial APS , the BCREA commercial APS or the AREA commercial APS contains a term to move key dates which fall on a non-business day to a business day. In order to avoid disputes and provide the parties with certainty as to what happens if that occurs, a clause should be added into a schedule to the Standard Form Contract confirming that any dates that do not fall on a business day are automatically deemed to extend to the first business day following such date.
2. Due diligence documents and confidentiality
Certain due diligence documents, such as leases, rent rolls, and maintenance documents, must often be exchanged with the purchaser for review during a due diligence period. If the vendor is providing due diligence documents, it is important to consider if these documents should remain confidential.
There is no provision in the OREA commercial APS that requires the purchaser to ensure all information provided to it by the vendor remains confidential or to return or destroy such documents if it elects not to proceed with the transaction. As such, if documents of a sensitive or private nature are expected to be exchanged, then a confidentiality clause should be included to ensure the purchaser and its agents do not disclose the information contained in the due diligence documents. The confidentiality clause should also obligate the purchaser to return all due diligence items or, if such items are copies or stored digitally, destroy them if the transaction is terminated or not completed.
British Columbia and Alberta:
The BCREA commercial APS and AREA commercial APS both include a confidentiality clause obligating the purchaser not to disclose any information obtained in relation to the contract to any third party other than such persons to whom disclosure may reasonably be required. However, the two provinces diverge with respect to the return of documents. In British Columbia, the BCREA Commercial APS contains no provision that obligates the purchaser to return or destroy all due diligence items if the transaction is terminated or not completed. Conversely, in Alberta there is a provision in the AREA Commercial APS that obligates the purchaser to immediately return all "Disclosure Documents," as that term is defined in the AREA Commercial APS, if the transaction is terminated or not completed.
3. Inspections and risks
The vendor and the purchaser to any commercial real estate transaction should discuss and document whether inspections will be allowed on the property and what the scope of such inspections will be.
Ontario and British Columbia:
Neither the OREA commercial APS nor the BCREA commercial APS provides a right to inspect. Accordingly, if the purchaser wishes to ensure inspections are permitted then a right to inspect should be added to the Standard Form Contract. From the vendor's perspective, where inspection is permitted it is advisable to obtain from the purchaser proof of liability insurance, a waiver of liability for any injury sustained while inspecting the property and an indemnity for any damage the purchaser causes while inspecting the property. A vendor may also wish to specify whether any invasive tests (such as sampling for environmental testing) are permitted and give careful consideration if the agreement should specifically prohibit inspections by certain authorities which could result in the issuance of work orders or deficiency notices (such as the fire department or a building inspector) will be permitted.
The AREA commercial APS contains a specific section addressing the right of the purchaser to inspect the property. It contains parameters for inspections and also mandates that the purchaser indemnifies the vendor for any damages.
4. Environmental matters
Environmental matters are extremely important in commercial real property transactions. Environmental issues affecting a property may impact on the usability of a site or result in costly remediation obligations. As a result, the parties to a transaction should carefully consider these issues in the context of the Standard Form Contract.
Ontario and British Columbia:
The OREA commercial APS does not address environmental issues, save and except confirming that the building located on the property does not contain urea formaldehyde and noting that any information provided by a brokerage is not environmental advice and recommending that the parties obtain independent professional advice prior to signing the OREA Commercial APS. Similarly, the BCREA commercial APS contains no environmental representations or warranties (noting, however, that the Environmental Management Act (British Columbia) places a positive obligation on the vendor in many circumstances to provide prospective purchasers with a site disclosure if the vendor should or reasonably ought to know that the property may have been used for specified industrial or commercial uses). As such, in both provinces the purchaser and vendor should discuss and document their agreement to include appropriate representations, warranties and indemnities regarding environmental matters.
The AREA commercial APS includes a general provision which requires that the vendor disclose all Material Latent Defects (defined as a defect in the property that is not discoverable through a reasonable inspection and that will affect the use or value of the property). It also contains representations and warranties which provide that the vendor will disclose any notices received with respect to environmental conditions or problems and also that the vendor represents and warrants that the property is in compliance with all applicable environmental laws.
The rights of assignment for a contract can be very important to both purchaser and vendor and should be carefully considered by the parties.
Ontario and Alberta:
Neither the OREA commercial APS nor the AREA commercial APS contains a clause prohibiting assignment or restricting it to a nominee or affiliate of the purchaser without the consent of the vendor, thereby permitting assignment without the vendor's consent. Further, neither contains a clause entitling the vendor to any profit resulting from assignment by the purchaser or any subsequent assignee. The vendor should carefully assess these matters and consider adding a clause into a schedule to the Standard Form Contract to address.
The BCREA commercial APS takes the opposite approach and prohibits any assignment without the vendor's written consent. Furthermore, the BCREA Commercial APS stipulates that the vendor is entitled to any profits resulting from assignment. The purchaser should give careful consideration to these restrictions and, if desired, negotiate to eliminate or amend them (for example, to allow for assignment to the purchasers' nominees or related entities).
6. Closing documents
Closing documents are required for all commercial property contracts. The specific documents that are required depends on the particulars and requirements of each individual transaction. It is accordingly very important for the parties to give careful consideration to the closing documents.
Ontario and British Columbia:
Neither the OREA commercial APS nor the BCREA commercial APS enumerates closing documents. This can result in disputes between counsel as to what closing documents are required. As an example in Ontario, a declaration of possession is typically not provided unless specified in the contract. However, some lawyers may insist that a declaration of possession is required as a customary closing document, particularly because title insurers may require this declaration in order to issue certain title insurance coverage. To avoid these types of disputes, parties should consider setting out the legal documents that are required to close. As a further step, the parties can attach agreed upon forms as exhibits to the Standard Form Contract. Listing out the required documents in the contract assists in setting expectations and reduces negotiations on these documents immediately prior to closing.
The AREA commercial APS contains a list of necessary closing documents. Notwithstanding that a list is included, parties should carefully review the list to determine if any items should be removed from the list and if any others should be added for the specific transaction. A current issue with respect to the AREA Commercial APS has arisen as a result of significant registration delays at the Alberta Land Titles Office. Currently, documents submitted for registration will not be registered for approximately three months. However, the AREA commercial APS generally requires registration to be complete for a closing to be completed. Unless and until this registration delay is remedied, parties will likely want to consider modifying the closing procedures of the AREA Commercial APS to provide for the parties to obtain a title insurance policy, including "gap" coverage which will permit closing to occur prior to registration being complete.
The foregoing considerations represent a few items parties commonly address by the inclusion of additional clauses in schedules to Standard Form Contracts. It is not a comprehensive list and there are other items that may require consideration and incorporation according to the specific nuances of the transaction. Where Standard Form Contracts are used, we recommend that both purchaser and vendor consult a lawyer to discuss the specifics of the property and the proposed transaction to determine what additional or amended provisions, if any, may be required in order to help ensure that the complexities of the transaction are fully addressed.
Should you have any specific questions about this article or would like to discuss it further, you can contact one of the authors or a member of our Real Estate Group.