Troisième conférence annuelle sur les prêts institutionnels (Webinaire en anglais)

Matthijs: Good morning and thank you for joining our Third Annual Cross-Institutional Lending Conference. I am Matthijs van Gallen, and I'm a banking and financing lawyer at Gowling WLG, and I specialize in mid-market lending transactions. As many of you may know, Gowling is one of the largest national firms in Canada with 8 offices across our country, as well as many international offices as well. Today you're going to be meeting only a couple of our over 700 legal professionals across Canada. What I find really sets Gowling WLG apart, particularly in the lending space, is our ability to complete very large sophisticated lending transactions but also our specialist team focuses on the mid-market, or streamlined transactions. Very few national firms have the ability to service the breadth of transactions like Gowling WLG. Often bankers have to choose between costly big firms or small firms that may not be able to address the complexities as they arise, even on small delas. Sometimes complexities come up that you don't expect and it's good to have a large firm with a lot of legal talent and insight and thought leadership to back you up when that takes place. At Gowlings we're able, and very proud of our ability, to bridge this gap through effective staffing, the application of automation technology and process refinement that delivers the quality that bankers expect from national firms at a competitive speed and price. On top of this competitive advantage, Gowling WLG is proud to provide opportunities for our banking clients to be able to access both thought leadership and practical insights that empower our clients with the knowledge to be able to better engage with their managers and with their clients. Whether this is your first time attending, or you're a returning guest, we hope that you learn something new today and then maybe you also walk away with some connections formed during the networking portion of our event. Before I introduce our first speaker I'd like to note that for the duration of the presentation we're going to be in the stage mode, which is this view that you see right now, which means your microphones and cameras will not be active and if you want to engage in the presentation, or ask questions, you can do so in the Q&A and chat functions on the right side of your screen. We encourage you to ask questions throughout the presentation but some of our presenters will address them at the end of the presentation and some will address on an ongoing basis throughout their presentation. So feel free to ask any questions as they arise.

Now, we move off to our first presentation which is covering US/Canada cross-border lending. Which I see more and more of these issues and questions arising so we're very pleased to have  a partner from Phillips Lytle joining us today. He's based in Buffalo, New York, and he focuses his practice on banking and finance and has a very similar practice to my own. He concentrates on secure lending transactions and commercial real estate transactions, asset based financing and small business lending. But more specifically, Jeff is one of the partners of US lawyers that I've trusted over the last 6, 7 years when there are US components in my transactions, or I just have to refer my clients to him because it's only a US based transaction. So with that I'm really pleased that Jeff is going to join us today and why don't we first just start off with a very overview question which is, what have you been seeing when it comes to US/Canada cross-border lending, recently?

Jeff: Yeah, it's a great question, Matthijs, and thanks again for allowing me this opportunity and thanks to everybody for allowing me to present today during this presentation. I would say recently, in terms of trends, probably within the last 4 or 5 years I've seen a shift from Canadian lenders only being concerned with maybe accounts receivable or cashflow operations in the US to more concrete tentacle in the US where there's hard assets here. Whether there's machinery or equipment or maybe a manufacturing facility here. So I would say within the past couple of years I've seen more volume of, not only just a general security agreement here in the United States, whether it's New York or somewhere else, another state, but a more emphasis on perhaps going after land waivers or warehousing waivers because the overall collateral here in the United States, it's tangible and it's integral to the overall collateral pool. So that's certainly a shift I've seen maybe in the last 4 or 5 years and I suspect it's probably reactionary to the Canadian borrower's tendencies. How are they treating their cross-border transactions? Whether it's their Canadian parent entity or US subsidiary. Maybe there's been a shift that they're just focusing some more operations here in the United States, probably because it's been cheaper, especially recently. So that's probably the first trend I've seen maybe in the past 3, 4, 5 years.

Another one is certainly intellectual property, especially within the past couple of years. IP has taken a greater role in the overall cross-border deals. It used to kind of be an afterthought where we would have a general security agreement which would cover general intangibles. So in the US you're protected by UCC Financing Statement. It may be the Canadian banks were aware that they might have a trademark or a patent filed with the US Patent and Trademark Office but they weren't really concerned about it. They were perfectly fine just relying on a general security agreement and UCC Financing Statement and we'll get into some of this more in depth when we go through the presentation summary. I would say recently there's been more emphasis, for whatever reason, again it's probably just based on the nature of the Canadian borrowers and their activities in the United States, but the patents and trademarks have become more valuable in some of these cross-border deals, where we're taking the extra step and we're having maybe a patent security agreement, and filing a notice of security interest with US PTO. So that's certainly something I've seen maybe in the past couple of years where IP has become more of a strategic part of the collateral pool here in the United States.

I would say briefly, and this is kind of along that again we'll talk about later too, there has been more of a acceptability for the Canadian banks to go after real estate here in the US. Traditionally that's kind of been maybe the last resort. If there's a collateral shortfall Canadian lenders typically wanted to stay away from real estate in the United States because it's so different with our title insurance requirements, and our survey requirements, and even in New York State we've got mortgage tax too. We can talk about this more in depth as well. I would say maybe, just recently within the past 18 months or so, for whatever reason, I've seen more mortgage loans come about in the context of a cross-border deal. Probably because comparatively speaking our real estate here in Western New York, maybe even Upstate New York and rural parts of New England, it's so much cheaper comparatively speaking to what some of the Canadian borrowers are dealing with in your part of North America. So for these folks up there that's got a US subsidiary it's probably cheaper just to buy the manufacturing facility here outside of Buffalo or Rochester or Albany. So I've seen that come about more and more in the past couple of years. Interest rates in the US, like Canada, historically low. I think a lot of cross-border borrowers and debtors wanted to take advantage of the interest rate market and very low, comparatively speaking, commercial real estate prices in the US.

Maybe the last trend, Matthijs, really quickly and again we'll talk about this, is a greater emphasis on legal opinions. Whether that's an opinion from someone like me, as lender's US counsel, or a combination of my opinion with your Canadian borrower's US counsel's opinion. I think folks have started to realize the importance of having appropriate legal opinions, whether it's a combination of a couple different law firms giving them, but like with all of these trends when the tentacle in the US has become more and more important, the collateral here is more valuable. There's a greater nexus of the transaction here. I've seen a greater emphasis and a greater willingness of the Canadian banks wanting to pursue the proper legal opinions.

Matthijs: Yeah, for sure, there's a couple key things there that I've seen as well and you and I have worked on a couple, which is as you mentioned it's the cashflow where you want to at least take the accounts and solidify that because they might have a US company there. Also inventory in warehouses across the United States and intellectual property and those are things we're going to be chatting about a little bit later. For everyone's benefit, actually Jeff put together some speaking notes, and instead of having a PowerPoint presentation we thought it would be helpful to actually put that in the chat. So you guys can keep notes along the way and highlight things in our notes that we're using for today's presentation and we also thought it would be very helpful as a takeaway after this presentation for you to be reminded of some of the points that we've been discussing. I hope everyone can see the link that I've put into the chat that you can download onto your computer as we go. Why don't we just start off right from the top which is when someone has assets in the United States. We get this asked all the time and they say, we need to file a UCC filing. What does that look like? Where do they file? Sometimes it's a Canadian entity, sometimes it's a US entity. Can you provide us with some guidance as to how does a bank get comfortable that they filed in the right place?

Jeff: Absolutely and that is probably the first primary question that comes about is, where is the debtor from? Are we talking about a Canadian entity that has some assets located in the United States? That's kind of option number one. Option number two is, is it a US foreign entity? Most cases it's a US subsidiary of a Canadian parent entity and that US entity is formed in New York or Delaware or Florida. So I think we'll kind of talk about each option independently of one another because typically you're in one or the other world. So for option one, if it's a Canadian entity, all the local rules say you look back to the home jurisdictions perfection rules. So the most basic case is an Ontario corporation. You look back to the PPSA, you're perfected by filing up there. So arguably nothing's needed in the United States. You do not perfect down here even if there are assets located here. Now that's not what we recommend, as a cross-border law firm, whether we're on the lender deal or borrower deal. We recommend at a minimum, as an abundance of caution, you'd file in the District of Columbia. So when you have a foreign entity that has assets in the United States, you're first level out of an abundance caution filing, is in DC. If you want to get some due diligence you might get a UCC search in District of Columbia just to see if there's any other lender out there that may have a perfected security interest in that collateral in the United States. Again that does not perfect against that collateral here. The Canadian banks are perfected by the PPSA filing up in Canada, but at a minimum we always recommend it's the best practice to file in District of Columbia and keep in mind, this always comes up in these cross-border deals, whether it's the Canadian bankers or the Canadian debtors, is how much is it going to cost? If it's not legally necessary, we understand it's a good idea, how much does it cost? In most States it's minimal. New York it's $20.00 to file. You electronically file UCC Financing Statement. In Delaware it's $40.00 to file. The one caveat I have there is in some very small handful of States, I think Tennessee is one of them, they impose almost like a mortgage tax or a filing tax, and you have to have an approximate valuation of the assets you're trying to file against, and they tax at some percentage. So it's not always a really slam dunk easy question, that it's a $20.00 filing in DC. Maybe $150.00 for UCC search. You might as well just get it. Complete the first level of the abundance of caution filing and pay a couple of hundred dollars to get it done. In some States there may be a cost analysis to that. So that's kind of the first level.

Matthijs: I'd like to focus on one point that you made which I think is really important for people to takeaway. Whenever you're doing lending transactions there's the idea of what is enforceable to get your security. The other point is, what is good to let other people know that you're out there because if you're enforceable, that's great. But you never want to be in a situation where you have to unwind a transaction and that sometimes drives some of these filings in the District of Columbia. It's like you're registering it to do your best to make people know that you're out there so that you don't get in a situation that's litigious. It might not be the thing you rely on but it's a thing that stops you from getting into a bad situation. I think that's a really important point for people to make.

Jeff: Absolutely. I think the UCCs overall purpose is very similar to the PPSA where it's a notice, statutory lobby of law, where they're putting people on notice especially with these cross-border deals with the DC filings. That kind of gets me into the second level of what we recommend, again, it's sometimes not very cost prohibitive, is you sometimes will file a UCC Financing Statement wherever your Canadian debtor has assets located. So it could be an Ontario corporation and it's got leased locations in New York, California, Florida. You file in DC, and maybe if the Canadian bankers want to do it, you would file in New York, California and Florida. Again, maybe it's only another $80.00 in filing fees. Back to your point, Matthijs, it's a notice provision where if someone knows that this Canadian corporation has operations outside of Los Angeles, and they're searching the UCC Financing Statements in California, they're going to see maybe BMO or HSBC Bank Canada, some Canadian bank, might have a lien on these assets. We've got to do a little bit more due diligence. So that kind of wraps up option number one. It's the easier of the two when the component in the US stems from a Canadian corporation then, arguably, nothing is really needed to perfect in the United States but best practice is, at a minimum, probably filing in the District of Columbia and then even perhaps filing in each State where assets are located.

Matthijs: For sure. Onto the US entities. What if it's incorporated in the United States?

Jeff: It is also pretty easy. I mean, basically you're dealing with just a State wherever the US subsidiary is formed. So if you have a New York corporation or a New York limited liability company, your due diligence, your certificate of good standing, your UCC judgment, bankruptcy searches, you're going to be confined within New York. You don't need to go elsewhere even if there are assets located in Connecticut or Delaware of Florida. You're perfected by UCC Financing Statement in New York State. So it's enforceable there, back to your initial point about the primary focus is it's good to be enforceable against those assets, and two, obviously you put everybody on notice in the proper jurisdiction, where it's a New York company, you have the UCC Financing Statement in New York State.

Matthijs: Another question that often comes up is when we get the UCC Finance, we send them to the bank, we always have these questions. When does it expire? It's not entirely clear when you look at the searches or the UCC filing as to when these registrations expire. Can you speak to that?

Jeff: That's an excellent question and you're right. It does come up a lot and it's 5 years from the date of filing. So whenever you have a UCC Financing Statement, typically right on it you'll get, if you filed electronically, the Secretary of State, whichever jurisdiction you're in, will have like a stamp on it saying the date it was filed and the filing number on it. It is 5 years to the day of that filing is when that UCC Financing Statement will lapse. So that's another critical thing that we like to point out on these cross-border deals is when you get within the 6 month window, to that last date, is when you can file a continuation statement. Again, for another $20.00 in New York State, you just file a continuation statement. It kicks it down the road another 5 years. So that 6 month window leading into that lapse state is when you would file a continuation statement. It's an excellent question because that comes up all the time where sometimes if I'm directly engaged by the Canadian banker they'll say, I don't see the expiration date on it. I always have to remember to tell them it's 5 years. When we're engaged to give an opinion in those circumstances, we can talk about that, we put their rate in our legal opinion too as a reminder you've got 5 years and if you want us to continue it, reach back out to us in that 6 month window.

Matthijs: Before we move off of this section I'm just going to address a couple of questions that are in the chat, which I think we've touched on briefly but let's touch on them one more time, which is in the United States, to clarify, you file where it's incorporated, not where the assets are.

Jeff: Correct.

Matthijs: So that answers one question. That is different than necessarily Ontario, which is you where you want to file in the place of incorporation for intangible assets, and the place of location for tangible assets. So in the United States you don't have to worry about where they're located. You just go into the place of incorporation and you file there and then you're good. But to emphasize that point, some people still want to file in all the other jurisdictions, just out of an abundance of caution to other creditors when they're coming to the table, have a better chance of seeing they are there so they don't walk into a difficult situation and a fight. Then the importance of filing in the District of Columbia, which Jeff mentioned. It's just to let people know that seems to be where everyone's filing for international entities. So you file in a jurisdiction in the United States just to increase the chances of people being aware and flagging the fact that more due diligence is needed. Does that summarize it, Jeff?

Jeff: That is absolutely correct. One other thing I'll just mention, it's in the summary too on the UCC Financing Statements and this comes up a lot too because it's kind of a unique scenario where, again getting back to the notice component of this thing, of a UCC Financing Statement, the address of the debtor always comes up and I would say 9 out of 10 times when you're dealing with these cross-border deals, there really isn't a physical US location here. Even if there is, say the do have a manufacturing facility here, in their minds their address, their US address, is their service of process address they've listed in their filing. The Certificate of Incorporation, you have to list a service of process address in Delaware or New York. That's not the address you would list on the UCC Financing Statement because it's not a true address or location of your US debtor or your Canadian debtor. If there's no physical US operation you would revert back up to the parent company's address in Canada. So that's something we do see as well. It's not a fatal flaw but it's something that we do see that it's not best practice to list that designated registered agents address on the UCC Financing Statement. If there's nothing else here in the US, we'll list the Canadian address on it.

Matthijs: Just to change a little bit. So going back. So now we've chatted about registrations but one of the things a lot of bankers ask is, I have a US entity. Does my document need to be governed by US law, and if it has to be governed by US law, which State should it be governed by?

Jeff: Yeah, great question. The answer is it doesn't have to be but it's certainly much better to have a US governed law for purposes of enforceability. I would say 98% of the time, even if New York isn't the location of the cross-border interaction, New York is picked as the governing law. Most times the Canadian borrowers, if they have US counsel, that US counsel will have at least maybe an office in New York, or licenced attorneys in New York, to be able to give you the proper opinions. But I would say maybe the 98% of the time New York is picked as the governing law. It doesn't have to be. It can be Connecticut law, if US subsidiary is formed in Connecticut, and the assets are located there. I think when you get into governing law considerations you have to think about, what does the Canadian parent and it's US subsidiaries have as US counsel? Can they give us an opinion of counsel that the New York governing law instruments are enforceable? If they can't, can Phillips Lytle? Can Jeff Monaco give it to us? The answer to that is, of course, yes. But I think there's a little bit of room for maneuvering when you get to governing law but certainly having New York, or US, is definitely better than having Canada because it's going to be easier to go through the courts and enforce against that collateral.

Matthijs: So why don't we speak about some of the scenarios that you've put out there. One of the things I see regularly is, there's a Canadian company, it sells a lot to the United States, and for tax reasons they've set up a US entity. That money is going to be flowing through and sometimes it'll be pooling in that US entity. So, in that situation, what do you see? How do bankers get security?

Jeff: There's no actual physical location here. There's no tangible machinery and equipment or anything in the United States. In those circumstances we would still file a general security agreement. Again, just as an abundance of caution you would cover things like general intangibles in case they maybe one day did have IP. It would cover machinery and equipment in case they expand operations to the United States, but more importantly for your scenario, it would cover accounts and accounts receivable. So it would capture the cashflow and the operations flowing through US subsidiary upstream to the Canadian parent. So that's a circumstance, Matthijs, you and I have come across many times, especially recently where you've got your job security agreement, you've got your UCC Financing Statement but for accounts, unless you're in possession of those accounts, you're the depository financial institution in the United States, the way you put that is having a DACA, or a deposit account control agreement, in place with the bank that has the deposits. So that's kind of another step in the analysis and security in the US where you would go above and beyond a GSA and UCC. You'd have to go to the depository institution and get a deposit account control agreement in place, where that bank acknowledges the Canadian bank security interest in that deposit account, and agrees to act in accordance with the certain set of rules. We'll continue to do business with our depository customer, unless and until you Canadian bank tell us, don't listen to these people anymore. They can't withdraw funds. There's been an account default on a facility letter in Ontario and we're basically on a blockage notice and now we're going to respond to you, Canadian bank. You're in the driver's seat with respect to these accounts because it's your collateral and there's been a default. So that's a whole other analysis and I don't know if you want me to go into more detail about that now.

Matthijs: That's good but I think it's important that people know that they're not always easy to get. Right?

Jeff: Correct. There's certain things and we can talk about this towards the end of the presentation too, where some of the larger US banks won't even offer that service for their depository customers unless there's certain thresholds met. It could be they must have a rolling 12 month average of 5 million dollars in those accounts. So lots of times, if it's not a big enough depository customer for the big banks in the US, they might not even entertain this situation because there's some risk to that bank. The deposit account control agreements say, we've got maybe anywhere from a 2 day window to a 5 day window of when we can still act with our customer. After that we've got to act to the Canadian bank. So there is some risk there to the US depository institution. They don't even want to take on that risk and perform that service unless maybe their customer is big enough. So we run into this situation where we've had to make it a post-closing condition and the US debtor, or the Canadian debtor, had to switch financial institutions because who they had their deposit accounts with just wouldn't play ball. They said, no we don't do this for this type of customer at the bank. We're sorry but we don't offer it. So certainly something to be aware of. It impacts timing. It's a little unusual and I would say even if you're in a circumstance where the US bank does entertain deposit account control agreements, or DACAs, they always require use of their own form. So it's not something Phillips Lytle will be drafting on behalf of the Canadian bank or it's not something the Canadian borrower's US counsel will draft. It's usually, I would say 98% of the times, it's the US depository institution that's going to require employment of their own form. Again, it's a risky situation. They don't like to do it. If they're going to do it, they're going to use their own form. So it's certainly something to be aware of when you're setting up these deals and you're identifying the collateral in the United States.

Matthijs: I think the next most common one is where you have a Canadian entity that is mostly intellectual property based, in terms of the value of the company, and it's decided to start moving to the United States and they've started registering their intellectual property in the United States. So how are you seeing that issue addressed?

Jeff: Certainly. That was one of the ones I talked about in the trends component at the very beginning. In the US, if the IP is not overly integral to the collateral pool, you are perfected with a general security agreement because it will cover general intangibles which covers intellectual property, and your UCC Financing Statement and the collateral description either will say, all assets or it will include the typical three or four line description of all assets which will include general intangible. So, at its base layer, you are perfected against general intangibles with the GSA and UCC Financing Statement, but best practice, what we recommend in the United States, is if that IP, whether it's trademarks or patents or a combination of both, if they are important to the bank and the bank wants to go after them and eliminate any risk that maybe somebody gets in the way, we recommend taking an additional step and filing with the US Patent and Trademark Office. So it's not necessary but it's best practice so we recommend it when the IP is important to the overall collateral pool. It's not really that expensive. It's an extra security agreement. We'll draft a specifically tailored patent or trademark security agreement. There's a notice of security interest which is like a one page quick little summary, almost like a UCC Financing Statement, that gets electronically filed with US PTO office and that filing is only, I think for patents it's $50.00, flat fee, and then maybe $5.00 for every patent after it. So, again, it's not overly cost prohibitive. So our recommendation on these cross-border deals is always to complete the belt and suspenders approach, if the IP's important, go above and beyond a general security agreement and UCC, and complete your US PTO patent.

Matthijs: There's a question here that says, if you have just a Canadian GSA do you need to have US GSA as well to perfect against the intellectual property or can you rely on the Canadian GSA, with a UCC filing?

Jeff: Yeah, you do not. If it's a Canadian entity, and there's a GSA which covers general intangibles, then we can rely on that. What you don't want to do, is you have to upload something to the US PTO office, so sometimes if it's like in the facility letter and there's other proprietary or confidential information in there, we wouldn't take that entire document and upload it to the US PTO to put everybody on notice that this Canadian bank's got this security interest in this patent or this trademark. Sometimes we would come in after the fact and have an ancillary document signed just to summarize that security, list the patents or trademarks on a schedule, we'd have that filed with US PTO. So best case scenario, something like that is available, that's signed up, that we could just upload and perfect at the US PTO level. But more often than that we usually have to add at least a very simple document or two, just to have something to upload that doesn't have financial covenants in it or pricing or fees on it. Overall the answer to the question is, no. If it's a Canadian entity that's got US PTO filings, we can file, so long as there's a proper security interest up in Canada.

Matthijs: I think it goes back to theme as well. The more important the asset, it's preferred to have the security document closer to the assets. So the more important the US security is, if you ask a lawyer they'll probably say, yeah you might not need it but we probably prefer to get the US GSA or the US filings. Right?

Jeff: Yes, absolutely.

Matthijs: Because these things are not only just done to perfect, they're also done out of an abundance of caution to notify.

Jeff: That's always the question even in domestic transactions where our US banks have the same analysis of, maybe we're kind of close. The IP is not driving this overall credit but it's certainly a sizeable component of it. What's the risk here if we only rely on a GSA and a UCC Financing Statement? The risk is say your borrower tries to sell that IP, obviously it's an event of default under your facilities letter, your credit agreement, but if there's a bonafide third purchaser out there, then good faith only relies on US PTO search, and purchases those trademarks or patents, and you've got a nasty situation on your hands where you're going to have to go to the courts and figure it out. So that's obviously time sensitive. It's going to cost money and it could have been avoided by maybe spending another 500 hours with another agreement or two and a couple of filings, you could have put that third party purchaser on notice that we've got a security interest in these trademarks or these patents, and save yourself a lot of heartache.

Matthijs: Now let's shift again and imagine you have a Canadian manufacturing company. Or it might have US locations but the main thing is inventory where they'll ship, store it in warehouse, or they'll have a manufacturing location that they lease out. No real estate assets, just personal property assets in the United States. How do you address that situation?

Jeff: That's probably the most common of these cross-border transactions. Certainly there, depending on the nature of the relationship between the US debtor, and whether it's a landlord or whether it's a warehouseman, lots of times we would recommend pursuing a landlord waiver or a warehouseman waiver, because if those assets here, that inventory in the US, is important you want to be able to enforce against it and enforce quickly. You don't necessarily need a landlord waiver or a warehouseman waiver. You can go to the courts and still get recourse against your collateral but it's going to take time. So in event of default and liquidation event you want to be able to move quickly as a bank. So we always recommend pursuing those landlord waivers or warehouseman waivers up front. It can be a time consuming endeavour especially when you're dealing with the national landlords. The big shopping mall plazas. They don't want to negotiate. It's take my form or nothing at all. So sometimes they're made post-closing but certainly they can be very, very important and one thing to clarify there is, for the Canadian bankers you've got to understand whether or not your customer is a tenant, under a lease, or has a relationship with the warehouseman. So warehouseman in the United States have almost a super priority lien on the goods they're storing in the warehouse in the event that they're not paid for the storage services. So that's something statutory that's different for warehouseman compared to landlords because they're automatically protected by the UCC. So they don't get everything that's in their warehouse but they have a super priority lien to be able to sell some things to offset losses if the US debtor is not paying its warehouseman fees.

Matthijs: Hmhmm.

Jeff: So that's a why a warehouseman waiver, in that circumstance, is very important because they will waive that statutory lien and acknowledge that the Canadian bank's first position, or the senior lender, and they will waive their lien with respect to the banks. So warehouseman waivers are very important and it's important to know when you're dealing with a warehouse as opposed to a landlord/tenant relationship.

Matthijs: I think for most of our guests are familiar with purchase money security interest and insurance and those are commented in our speaking notes. It's very similar to what's required in Canada. If you're doing a purchase money security interest, you have to put as much detail in as possible to define the asset to make sure you get your priority. With insurance you make sure there's sufficient insurance the lenders put in as loss payable, in regards to the property insurance, and then additional insured in regards to the liability. That's a fair summary?

Jeff: Correct. One other difference there with respect to the insurance and I haven't seen this as often lately. Maybe going back 5, 6 years ago there was always, I forget the name of the instrument, I think each cross-border call it something different, maybe a collateral transfer of insurance. Collateral documents signed up among the parties where the debtor acknowledged that these are policies, these are our coverages, we are collaterally signing to the bank in connection with this transaction. That's not necessary in the US. We have ACORD insurance forms. They're just kind of one page certificates summarizing the coverages, the named insured, the amounts and on those certificates is where we have the bank properly named. In the US those separate collateral documents aren't necessary. Sometimes we'll do them on these cross-border deals but it's perfectly normal, it's customary here, to just rely on the insurance certificates from the carrier, so long as it's got the proper information on there and the bank's named properly.

    Looks like we got a question.

Matthijs: The question came up and I was thinking about moving or addressing it. So I will just read the question. What about when the moving assets, if you have Canadian GSA but assets going back and forth through the US, do you need to register UCC wherever the assets could be located?

Jeff: Yeah. That kind of goes back to the earlier discussion about if it's a Canadian entity and you're perfected up there with a PPSA filing, the answer is no. You don't need to file any UCCs here even if the goods are coming back and forth. Going to New York, going to Massachusetts, going wherever, the answer is no. You don't need to worry about perfecting here and filing a UCC because you're perfected up in Canada. Best case scenario, when it's a caution you'd file in DC. Again, that's your first level of notice. You're putting everybody else in the US on notice that you've got a perfected security interest up in Canada on these US assets. Then, if you wanted to as a second layer of protection, you could file in New York, if that's where the assets are coming down. Or you could file in Massachusetts. So again, the answer is no, you don't need to do that but it is a good idea and typical here that at a minimum you'd probably have a DC filing and you may have filings wherever the assets are going.

Matthijs: So you and I are ... in real estate quite regularly and it always surprises me how many different considerations there are depending on the State. So you can speak kind of how to take security in real estate assets?

Jeff: Sure, absolutely. I think it's the most different component of collateral compared to Canadian. I think maybe conceptually the components are the same. But from a timing perspective and cost perspective, it's a much higher ... than the US when talking about real estate. I'll focus in New York just for my first example. We have something called mortgage tax here. New York has it. Florida has a similar thing. A couple of other States throughout the US have it. It's not normal but New York certainly has it, where in Erie County for example, where I am in Buffalo, it's 1% of a lien amount. So if you've got let's say a 50 million dollar revolving credit facility, under the facilities letter, even if the property is worth 50 million dollar which will never happen, say the property is only worth 5 million, you're still going to have a 1% tax that's paid at the time you go record that mortgage to Erie Country Court. So it's considerable cost when you go to record a mortgage, depending on what your lien value on it imposed on the real estate. So that's something that's very unique to the US and specifically to New York. So when the Canadian bankers and the borrowers are setting up their transactions and thinking about how can we make this work? What type of collateral do we have? Oh geez, we own our manufacturing facility outside of Buffalo. It's worth 3 and a half million dollars, why don't we put a mortgage on that? We don't have a lien on it. Right off the bat there's $35,000.00 mortgage tax that's due when you go to record that mortgage. So it's certainly something that factors in right off the bat.

Matthijs: Is the mortgage tax like a replacement of title insurance or do you need to get mortgage tax plus title insurance?

Jeff: Both. Yeah, it's really a money grab and the percentage varies. So I would say in Upstate New York it's anywhere from 1% to 1.5% of the lien amount. But when you get to Downstate, certainly in Westchester Counties, it's much bigger and it's tiered. So if you're talking about a New York City property, which happens a lot sometimes in these cross-border deals, the mortgage tax can be huge. It can be something very significant. But on top of that, to get back to your question, you absolutely need title insurance. It would be so unusual in the US. In 10 years of practice I've maybe seen it a handful of times and it was only when the real estate was purely an abundance of caution. It was not vital to the collateral pool. But you always have title insurance which, one, will take time. You've got to engage a title insurance company here to search the records and go back 4 years and, two, it's costly. Again, it's formulaic based on the lien amount but it can be anywhere from $1,000.00 to, for a valuable piece of property if you're talking about 4 or 5 million dollar lien, it can be $10, $15,000.00. That's on top of mortgage tax. So certainly there's a cost factor with that and there's a timing consideration because it will take, if I had a new deal starting right now and I engaged Chicago Title Insurance Company here to get me title commitment, it could take 3 or 4 weeks just to get the opening commitment for our review. Certainly something to think about and kind of a component of the title insurance are surveys. In the US surveys are very, very important because without an accurate, updated survey the title insurance will have a big hole in it. So again, customary in the US, you have title insurance with a current survey and if you're a Canadian debtor or a US subsidiary, it doesn't have a survey or it's been 10 years since their last one, they need to get a new one, it could be another 4 or 5 or 6 weeks. So something to really think about when you're evaluating whether to take commercial real estate. I see a great question here. To avoid mortgage tax can you assume the mortgage of a prior lender? The answer to that is yes. That is something's that quite regular here but you only assume the current outstanding principal balance. That's the only part that you can save mortgage tax on. So say I have a mortgage on my commercial real estate and it's coming on maturity. It's 4 years and 6 months and I'm looking to switch banks. My initial loan was 5 million. I've paid it down to 1 million. I only saved the mortgage tax on that 1 million dollar balance. If I go and re-fi and take out new money, you're taxed on that new money. So certainly assignments of mortgage are very unique to New York, because of mortgage tax, but they happen all the time. It's kind of another little niche market, but that can get kind of very complex, but it's a very common thing so long as the chain of the mortgage doesn't have any gaps in it. That you can trace the continuity up until the new lender, we routinely accept existing mortgages by assignment. I would say almost every lender in the United States, if you ask them to assign the mortgage and to accept the mortgage, the answer is yes, for the benefit of the borrower to save on mortgage tax. So it's a great question, but it's still something that comes up quite often, is the burden of paying mortgage tax.

Matthijs: You also mentioned that sometimes you need a notary even.

Jeff: Correct.

Matthijs: It's not the case in Ontario. It is in Quebec.

Jeff: Right, and that can change too. So certainly in Erie County, because of our proximity to the border, our County Clerk is much more familiar with these complex cross-border transactions where they will accept a Canadian notary for filing here. But if you get into some rural counties, or like out in Vermont or different States, they may be less familiar with the cross-border notarization requirement. But to get that mortgage, or assignment of leases and rents recorded, you need to satisfy your local County Clerk, whichever State you're in, whichever jurisdiction you're in, to get them to accept it, to record it. Otherwise you don't have title insurance. You don't have perfected lien and we can't authorize closing. So maybe a week or two leading into our closing is when I will broach that subject with the US debtor's counsel to say, where are your signers? I know we're dealing with Canadian parent entities, where are the folks who are going to sign these documents? If they're in Canada, let's jump on the phone with the title insurance agent down in Tennessee or here in Erie County. Let's figure out what's going to be required from a notarization perspective to get this thing recorded so that we can close and fund, because until we're all set and we're insured from a title insurance perspective, we as outside counsel, we can't authorize the bank to fund.

Matthijs: Another one you and I have been working on regularly is share pledges or membership interests. Can you just explain what that, first of all, is it shares or is it membership interests? Can you explain to that us because that's a relatively not known concept in Ontario. Then also, why would you get a pledge when you've got all this other security already?

Jeff: Sure. I guess I'll answer the why question first. The answer is to just streamline the control. So if there's a event of default and the bank wants to enforce, having the control of the corporation, the stock certificates of the corporation or the LLC membership interest, if it's a limited liability company, that streamlines your control and enforcement. You literally can just step into the shoes of your debtor and you're running that company. You are the sole shareholder. You are the sole member of that LLC. So to answer the why question, it's purely to increase your control over your debtor in the unfortunate circumstances of event of default. Two, just to streamline things. You're the decision maker now. You're the sole shareholder. You're the sole member. So I think it's two prong. It's control and streamline in time. Now the difference is, as I think I just kind of hit on, is if you're dealing with a corporation you've got shares of stock. You've got stock certificates. If they're represented by physical, tangible certificates then you would perfect by taking possession of those. So the debtor would submit them to closing in escrow. They would accompany them by executed blank stock power, basically saying the bank now is the owner of this 100 shares of my stock and in the event of default the bank is perfected. They've got control of that physical stock certificates and they've got the blank and executes that power. So they become the sole shareholder in the event of default. If it's not certificated, not well represented by a stock certificate, you would perfect by filing a UCC. You would specifically reference your list debtor, this individual or this entity is pledging 100% of the shares of stock in this corporation's collateral. So that's how you'd perfect if there's no physical certificate represented. Similarly for limited liability companies, it's pretty rare to actually have certificates. Sometimes people will do it if it's like a closely held LLC. It's two sisters or father/son, maybe they'd represent it with some certificates. Typically it's not so, again, you would file a UCC Financing Statement specific to Jeff Monaco pledges 100% of the limited liability company interest in XYZ LLC. So that's kind of the difference between certificates and LLC membership interest on how you perfect in the US on each.

Matthijs: When we were preparing this presentation you told me about kind of a unique situation where you have a Canadian company that's owned by a US company, and if you were to pledge the shares of the Canadian company, it can have some big implications. I just want to chat through this. It might not come up all the time but it kind of speaks to the importance of getting US legal counsel so that they're aware of some of these things.

Jeff: Definitely. This is kind of coming at it from the inverse position where you've got a direct US borrower and maybe there's a collateral shortfall and the bank wants to take a pledge of shares of the Canadian company. Well, the IRS, the Internal Revenue Service, will say if you pledge more than 66 and 2/3% of that Canadian entity, it will deem it as a pass through entity for income tax purposes. Any income on the Canadian side will be attributed to the US side. So when you see that inverse scenario where it's a US entity pledging shares of foreign subsidiaries as collateral, there's always a limitation, and usually it's 65% just to stay well under the IRS limitation. So those are called CFCs, controlled foreign corporations. That certainly can become a huge issue and that's really where folks in my corporate department get pulled into some of those deals when, again, on the borrower side and not so much on the lender side. But certainly for the Canadian bankers at the presentation, it's something to be aware of if you find yourselves kind of in an inverse scenario where the nexus of the transaction's in the US, and we're reaching up there to take collateral from a foreign subsidiary up there.

Matthijs: There's one question that came in saying, what about the shares of a public company with many, many shareholders? How do you take control of those shares? ... it's an interest in it?

Jeff: That's very less common. My only experience with that is actually on the borrower's side where my firm represents a couple of publicly traded companies. It always comes up where we push back heavily on those types of restrictions because it's impossible. I will say most of the time, if it's a publicly traded company like that, or even a large closely held corporation with hundreds or maybe thousands of shareholders, typically they're not represented by physical stock certificates. They're uncertificated. Kind of just tracked on a ledger or in the corporate book. In that case, again, you'd file a UCC specific to those interests. If they're represented by physical shares, I suppose you'd have to try and gather up as many as you can to have control, again, because you're perfected in the US by control. It just doesn't happen that much when you're talking with large publicly traded companies or even larger closely held corporations with hundreds or thousands of shareholders. Typically what you would have is maybe a primary set of 4 or 5, maybe 10 shareholders that hold a majority of the shares. Maybe 51% as the magic threshold and you would be satisfied with that threshold because then that gives you the control you're looking at. You're the majority shareholder and, maybe in accordance with the bylaws, you're in the driver seat. So it can get really kind of layered in that analysis but that is typically less common than the normal court ordered deal and there's a pledge of shares where you're dealing with maybe 5, 10 folks or entities that own the shares of stock, or the membership interest in an LLC.

Matthijs: As you said, one of the key drivers to get a share pledge is getting control of the company, and in that situation where you have a public company with so many shareholders that may not be there. That incentive to go down the path of share pledge or issue a control agreement or similar document. It just might not be there.

Jeff: It might not be there and it might not be allowed pursuant to the bylaws, if it's a corporation, or the operating agreement if it's an LCC. There may be restrictions on pledge of shares like that. That's common. You wouldn't be able to do that. You've got SCC filings. It's just not a practical mechanism to try and improve the bank's collateral pool.

Matthijs: So ... very important to a bank security, definitely get legal advice on that point, as it would be a custom analysis. There was a question up that I missed because we moved onto another section. Someone had asked about DACAs and if there's some sort of universal DACA form in the United States or if there's a preferred form for banks? What does that look like? Is it always going to be custom? Is there something that most lawyers accept in the United States?

Jeff: Yeah, the answer to the question is no. There's not like a universal form like a UCC Financing Statement. They all kind of look alike. But I would say they all sort of say the same thing where the depository bank agrees to acknowledge that another bank has a security interest in the deposit account and will agree to act in accordance with written instructions. I would say the one thing that always at the center of all of those negotiations, and again, there's very limited negotiation because if the depository institution will allow DACA it's pretty much here's our form, take it or leave it. But the one thing you can push on a little bit is the time frame for how long they have to act upon receipt of written notice there's been an event of default. I typically see anything from 2 to 5 business days. If I'm the secured party, and I'm coming at a DACA from the perspective of, I'm the secured party, I want to be able to go after those accounts, I want to limit that timeframe. I want the depository bank to have to listen to me within 2 days, not 5 days. I don't want to give my debtor the ability to have a longer period of time to go there, or to pick up the phone, or go onto their electronic platform and transfer funds to another account. I want to limit that timeframe as much as possible. I've seen some depository institutions, some smaller ones, maybe accept 1 business day. That's very, very unusual. Typically it's anywhere from 2 to 5 business days because if you think about it from the depository institution's perspective, they've got to have a grace period where they have to be able to continue to act to the benefit of their customer before they act for the benefit of the secured party. So if there's one spot you can typically push back on, it's those timeframes in there.

Matthijs: So we just have 5 minutes left in this presentation. So I have two more questions. If anyone else has questions that they want to have answered, happy to entertain one or two, if we have time. Somebody will hit every transaction, and we dealt with since the pandemic in Ontario, is can you close on electronic signatures? Can you close on PBS wet signatures? What's the rule on signing documents?

Jeff: Great question. If it's a deal that involves real estate, and you've got a mortgage, you've got an assignment of leases and rents that needs to get recorded, you're going to have wet signatures. There's just no way around it because there's going to be a County Clerk somewhere, whether you're filing electronically or you're filing in person, and in some States you actually have to physically go or send a fax, to the County Clerk's office for recording, they're going to require wet signatures. So if you're dealing with real estate, you're stuck. If you're dealing with personal property, GSAs, IP sharing equipment, I would say especially within the past 2 years, electronic signatures are acceptable so long as ultimately you end up getting wet signatures. So we can close on PDFs. We can close off on electronic signatures and it really comes down to the bank requirements. I always defer to my banking clients and say, especially in the past 2 years this has become pretty prevalent, depending on what your eternal team tells you, it is acceptable I would say 9 out of 10 times, it usually is fine. I do say, after the fact, from debtor's US counsel, I want to end up with the ultimate original signature pages. So it's just something that I will track on a post-closing basis and some people some reminder emails. Hey, even though we closed this, this deal is done, I haven't received your ... yet, can you make sure you follow up with your client and I get the original signature pages.

Matthijs: Two more questions. One is, discharge of liens. Should people expect that on closing, instantaneously? How long does it take and is there is special process?

Jeff: No. If it's real estate, when you get title insurance involved, you can kind of take comfort in knowing that the title company will chase that down. It is not customary to have like a discharge of mortgage, or a termination of assignment of leases and rents, right there at the closing table because the exiting bank hasn't received its funds yet. So I would say in those types of situations, when there's a title agent involved, title insurance, you usually get the final title policy in about 2 or 3 weeks and in that timeframe they will have received the discharge of mortgage and the termination instruments and then recorded them. For business personal property with UCCs, again because they don't need to be signed, a termination statement, I like to try and get those or get a handle on those up front so that they're ready and in the payoff letter from the bank that's being paid off, they'll be an authorization usually to the borrower and its designees, which would be either their counsel or bank counsel, to terminate them upon confirmation they got their payoff proceeds. So with UCCs it's a little easier because termination statements don't need to be filed so I like to try and get ahead of those and have those available at the closing.

Matthijs: How expensive is it to search real estate just to give a lender a quick understanding of what's out there?

Jeff: Just to search without title insurance to get like, they call it last owner searches, so like I own the real estate and I bought it 5 years ago, it might go back to when I took the Deed 5 years ago and search up to date, probably in Erie County, anywhere from $300.00 to $500.00 to kind of give you a quick snapshot of the property, who owns it, the existing liens on it and the tax status, which is typically all we would need if we weren't pursuing it as like a main part of collateral. Title insurance is obviously much more expensive. It would include that kind of preliminary step. Title insurance obviously would go back 40 years and search the records but you would have that built into a full blown title insurance policy. If you just want to evaluate a piece of property in the US, figure out who owns it, what's the lien status, what's the tax status, anywhere from $250.00 to maybe $500.00, something like that.

Matthijs: So there is a question here about taxes. I encourage you to chat with Jeff during the networking portion or send him a quick note. On that point as well, Jeff and I have spoken about it's important to consider taxes. You can't just assume your buying a piece of land and it's treated the same. So whenever you're going to the United States you should consider getting a US attorney. There's 15 second left so I just want to thank Jeff for his time, putting together this presentation and the speaking notes, which I think will be very useful to everybody. I encourage everyone to reach out to Jeff as questions arise. He's a resource that I've trusted and he's also a resource that I've entrusted my clients with. His contact information is contained inside the speaking notes which I encourage you to download and feel free to reach out to him whenever you're encountering US issues. I know he's happy to answer questions before transactions, just like I am, and also happy to help people with transactions as they're alive. So thank you so much, Jeff, for your time.

Richard: Good afternoon, everyone, and welcome back to our Third Annual Cross-Institutional Lending conference. My name is Richard Dusome and I'll be your host for this session. I'm a senior counsel at Gowling WLG. I've practiced for over 30 years in our lending group, currently working out of our Hamilton office. My practice consists primarily of secured transactions, financing opinions and third party or inter-creditor arrangements. If you are just joining us now, please note that we are in what we call stage mode. Which means that your camera and your mic will not be operational at this point. That will happen later during our networking session. I encourage you to participate, however, in today's session by asking questions of our presenters and putting those questions in our Q&A feature. We will turn to those at the end of the speaking portion and answer as many questions as we can. Our topic for this session is financing share and asset purchase transactions. I am joined today by Sacha Babic, a partner of our corporate group, in the Hamilton office and by Travis Evens, senior associate in our corporate group, also in the Hamilton office. Sacha acts for private sector clients of all sizes with an emphasis on mergers and acquisitions, corporate organization and restructuring, private equity financing and commercial agreement reviews. He also acts for a number of public and quasi-public institutions, including universities and school boards, advising those clients on matters involving both traditional corporate commercial issues and unique sector specific issues. Travis is a senior associate, working primarily in the firm's corporate and commercial practice group, advising on all manner of corporate transactions, including share and asset purchase transactions. Travis also routinely assists with bi-lateral and syndicated commercial financing transactions. Some of you will have already been involved in financing and share or asset acquisition, either by one of your existing customers looking to expand its operations or by new customers seeking to get a fast start into a new business. Others will soon come across one of these transactions as your career progresses. Purchase agreements can be a few pages or hundreds of pages and may be between arms length entities or affiliated entities. Sacha and Travis are going to guide us through some of the key aspects of share and asset purchase transactions lenders need to understand prior to financing an acquisition transaction. This will be an open session to maximize the opportunity to ask questions. Sacha and Travis are going to first briefly review, at a high level, some important differences between share purchase and asset purchase transactions and examine some of the standard due diligence lenders will want to conduct. Then we'll open things up for questions about things you've already encountered coming across your desk and trends we are seeing. So without further ado I'll turn it over to Sacha and Travis.

Sacha: Thank you, Richard. Good afternoon, everybody, and thank you for joining us today. As Richard mentioned, this presentation is really going to focus on the two most common mechanisms used to structure M&A transactions of private businesses in Canada, mainly share purchase transactions and asset purchase transactions. Most of what we present today is probably not going to be new information to most of you and sometimes it is helpful, however, to look at a topic like this from a first principles perspective and just review the basics. We have purposely planned to keep our presentation to kind of less than maybe 35, 40 minutes to allow time for Q&A. The one thing I do also have to note, we will be touching on some tax related matters today but we are not tax lawyers. While we certainly have working knowledge of the tax implications of these types of transactions and we can speak to them generally, when engaged on transactions we rely on our tax group and our client's accounting advisors. So apologies in advance if we are unable to answer any complex tax questions that you may have, however, we are happy to receive the questions and follow up with you at a later date. I also do apologize in advance for the inclusion of some cheesy and sometimes obscure song quotes in our slide show. I will say if anybody can name all five of them, and first person to email Matthijs with all five song titles, he will send you a Gowling t-shirt at some point in time. So let's do that. So next slide.

Jumping into it, really what is the difference between an asset purchase and a share purchase, and I think to put it in the simplest terms possible, an asset deal is a purchaser buying a business while a share deal is a purchaser buying a corporation that owns a business. Next slide.

In a share purchase transaction, the buyer purchases the issued and outstanding shares of a target corporation from its shareholders. Just for simplicity sake we're going to look at transactions focused on 100% acquisitions. We're not really going to delve into issues where a seller remains involved in the business, in the corporation. It is important to appreciate that the purchase price payable is not determinative of the complexity of the deal so you should never fall to the trap of thinking, the purchase price is $100,000.00 so this purchase agreement and all the closing documents need to be kept simple. It's never that easy and, as Richard said, there can be two page deals. There could be hundred page deals. The complexity is not tied to the actual purchase price subscribed to the shares. A key component for any share deal is the scope of the reps and warranties that are obtained by a purchaser from a seller. Because the purchaser inherits all the company's liability along with its asset, it mitigates risk related to unknown or unforeseeably liability through the reps, warranties and corresponding indemnities that are customarily included in the agreements. While deep dive into the reps and warranties is beyond the scope of this presentation, Travis will touch on this a bit more later, but a very high level there are two key categories to consider. First, a purchase requires representations and warranties related to the shares themselves. To put it simply, you will need to ensure that you have proper reps and warranties that ensure that titles to the shares is being conveyed without encumbrances. Second, the purchaser is going to require reps and warranties related to the corporation and its business. These are far more wholesome so from the purchaser's perspective the reps and warranties need to be detailed, fulsome and ambiguous so as to ensure that in the event of a misrepresentation it has proper recourse against the seller. From a seller's perspective, on the other hand, the reps and warranties are also a mechanism by which a seller is able to provide full disclosure regarding the business and in turn is generally leave from any liability related thereto, to the extent it has been disclosed to the purchaser, and not otherwise assumed by the seller as part of the deal. Next slide.

As asset deal, on the other hand, involves the negotiated purchase of the assets and in most cases assumption of certain liabilities of a company without actually acquiring the entity that owns them. So a key component of an asset purchase agreement is identifying what the purchased assets are, what the assumed liabilities are and what the excluded liabilities are. With purchased assets you need to ensure, at high level, that the purchaser is acquiring all of the assets that are necessary to actually run the business. These commonly include things like inventory, whether it's finished goods or raw material, prepaid expenses, machinery and equipment, leased equipment and vehicles, leased premises and leasehold improvements, contracts related to the business, including customer contracts, supplier contracts and further like agreements, business records, including customer lists and information, proprietary technology and IP and goodwill including the business name. Depending on the nature of the business, purchased assets might also include items such as licence or distribution rights relating to a business granted by a third party, or even regulatory licences if they're required by any governmental or regulatory authority. The purchased assets also may or may not include cash and bank balances and accounts receivable but, even if excluded, mechanisms are usually going to be included in the agreement whereby the cash balances are stripped prior to closing, and whereby the buyer is going to undertake for some period, following closing, to help collect the outstanding accounts receivable for the period prior to closing. Finally, if the transaction involves real property it certainly needs to be addressed, however, I'd say more often than not real property is owned by separate holding companies and involves a contemporaneous purchase and sale by separate agreement and won't necessarily be included within the asset purchase agreement itself, or the share agreement, frankly. But it will close contemporaneously and there are usually cross-default provisions and ties between the agreements. The description of assets in an asset purchase agreement is going to be unique to each deal, but as noted earlier, the main goal is to ensure that you have not failed to identify any material assets that are necessary to actually operate the business. With regard to assumed liabilities, these tend to be limited for asset deals, but customarily include things like trade accounts payable and accrued liabilities to trade creditors, incurred in the ordinary course, and liabilities and obligations of the vendor accruing on or after the closing date under assumed contracts. While the agreement will normally stipulate that only assumed liabilities are being assumed by the purchaser, out of an abundance of caution it is customary to also express the identified various excluded liabilities, on a non-exhaustive basis, which normally include liabilities such as indebtedness of the vendor, other than as expressly assumed, warranty or product return claims for a period prior to closing, taxes payable by the vendor for the period prior to closing and then any amounts payable to employees while under the employ of the vendor. Noting that last point is fairly complicated and is probably worthy of a presentation on its own. Next slide.

So you'll often have parties ask you, which type of deal is better? Frankly, it's a matter of perspective based on the specific circumstances of the transaction. The choice of form to be used in any given, and since there's a threshold issue, that is determined through the negotiation between a buyer and seller and typically involves significant input from the parties tax advisors. There are advantages and disadvantages for the buyer and seller in each type of transaction, and frankly, they're often conflicting. As you can imagine, this greatly impacts the purchase price as part of the negotiation. From a buyer's perspective, they tend to prefer asset sales for two main reasons. One, generally they are more favourable from a tax perspective, primarily due to the fact that you're acquiring capital assets with depreciable capital costs. From a liability perspective you are only assuming the liabilities you know of and have expressly agreed to assume, in contrast to a share purchase where you are acquiring all of the assets and liabilities of the target corporation. So while a buyer can mitigate risk in share deals by obtaining proper reps, warranties and indemnities and perhaps rep and warranty insurance, which I think Travis will touch on later. indemnities are only as strong as the financial circumstances of the indemnifier and often have limited survival periods attached to them. General asset deals simply offer a greater degree of certainty to the purchaser, and by extension the lender, by minimizing assumption or risk in first instance as opposed to having to pursue an indemnity claim on the reactive basis in order to be made whole, in respect of losses attributable to a misrepresentation by a seller.

Seller's, on the other hand, are generally going to be prefer share transactions for a number of reasons. First, selling shares frees the seller of any liabilities that have been disclosed in the purchase agreement and on the balance sheet of the business, as well as contingent liabilities which remain with the corporation after the sale. From a tax perspective, the sale of shares generally give rise to capital gains, half of which are then taxed, resulting in an effective tax of one half the rate applicable to ordinary income. Also, on this point, for qualifying small business corporations, shareholders will have likely positioned themselves to take advantage of the lifetime capital gains exemption in Canada, which currently sits at $919,630.00 per individual, and this is indexed annually. So if you can imagine a generational family owned business with two parents, two adult children and two spouses, if structured properly, that could mean nearly $3,000,000.00 in potentially tax exempt capital gains for that specific family. So you could appreciate why structuring the deal is an important aspect of it. As a brief aside, this isn't planning that you can do at the last minute. If you're in a seller, in order to properly structure yourself to ensure your eligible for this, you need to look at least 2 years in advance because there are some rules in place there that require the structure to be in place for 2 years prior to being able to rely on the exemption. The tax implications of a sale of assets, on the other hand, are going to depend on the tax position of the corporation prior to the sale. Allocation of the purchase price and then the assets being sold and how and when the proceeds of the sale are paid out by the corporation to its shareholders. In allocating the purchase price the buyer will prefer to allocate as much as the purchase price as possible to inventory, or depreciable property, in order to minimize future taxable income. The seller, on the other hand, is going to want to ensure that the allocation of the purchase price minimizes recapture on any capital cost allowance previously deducted on depreciable property or realization of income on the sale of inventory. So in deciding upon a structure the parties also need to consider that asset transactions are generally more complex than a share transaction since they require the parties to obtain a larger number of consents and transfers, to transfer from a larger number of diverse assets, however, on the share side additional due diligence required for a share transaction, which Travis will touch on shortly, may impose longer pre-acquisition timeframes. Next slide.

With all that said, I think from a lender's perspective, regardless of whether a borrower is acquiring shares or assets, the key issues to address are generally the same. In order to structure financing for a transaction you just want to ensure that following closing that the lender has the appropriate security over the assets of the business, which necessitates a clear understanding of the post-closing corporate and asset ownership structure. Two, they want to ensure that appropriate guarantees and postponements have been obtained from all necessary parties based on the post-closing structure of the business, and three, that the purchaser has prudently structured the transaction to ensure it has proper recourse against, not just the vendor, but the vendor's beneficial owners so as to ensure that there are persons and assets to pursue in the event of a material breach or default in relation to the transaction. So, thank you. I'll now hand things over to Travis, who's going to be taking you through due diligence closing processes for customary share and asset purchase transactions.

Travis: Thanks, Sacha. So, as Richard said, my name is Travis Evens. I'm an associate with Gowling and I work out of our Hamilton office. I work primarily with corporate transactions, both share and asset transactions, and also commercial lending. Whereas Sacha spoke to financing acquisitions generally, I'll be speaking to some of the finer points of the transaction relating to due diligence in closing. I understand the majority of the participants in this conference are bankers or involved with lenders of some kind. So as bankers you won't be as intimately involved in the due diligence and closing process but understanding how a purchase transaction works, as between the seller and the buyer from start to finish, is important to understand. Your counsel will work with your borrower/the purchaser's counsel, particularly with respect to due diligence, and understanding that process can help you better understand your counsel's advice and allow you to make more informed decisions based on that advice.

With respect to due diligence, as Sacha discussed, in a share purchase transaction the buyer is purchasing all or the majority of the issued and outstanding shares of the target company from its shareholders, the sellers. An asset sale involves a negotiated purchase of specified assets and in many cases the assumption of certain specified liabilities, without actually acquiring the entity that owns them. So the due diligence involved in each transaction will differ but fundamentally the process is the same in each case. Now high level due diligence is the process undertaken by the buyer to familiarize itself with the business and assets of the seller or the target. The scope of the due diligence certainly varies depending on the nature of the business acquired, of course. The industry in which that business operates and a bunch of other legal and business considerations. In addition, the nature of the due diligence is dictated by the structure of the acquisition, as Sacha mentioned. Asset transactions are generally more complex than share transactions. They require the parties to obtain a large number of consents and to transfer a larger number of <audio cuts out>. The share transactions generally require more due diligence since the buyer is purchasing a company and all of its operations, all of its assets, all of its liabilities. So in a share transaction, the legal due diligence typically involves a number of things. First and foremost, a review of the corporate records of the target corporation. A review of any contract or agreement to which that <corporation> is a party, if it's a large and complex business, and there's a ton of contracts there might be a threshold placed on that in terms of what the buyer's counsel is looking at. They'll skip over more trivial documents. You'll also run public searches in connection with the corporate status of the target company, encumbrances registered against it and litigation. We'll talk about that in a bit more detail in a minute. You'll review the target company's intellectual property and the importance of that will obviously depend on how material the IP is to the buyer. You'll review certain government records relating to the target company. Some of those can only be accessed with the target company's written consent; tax records, employment records, environmental records and so forth. Then there's any number of other diligence matters that would be dictated by the nature of the target company's business. The corporate records, in particular, should be reviewed to verify the number and type of issued shares of the target company to compare those, of course, against what the buyer thinks it's buying in terms of the outstanding share capital of the target. So a review of those records, in particular the board of directors minutes, can also provide valuable insight into the target company's business. It may help uncover potential liabilities that could be addressed prior to closing of the acquisition.

So legal due diligence in an asset transaction is generally the same, although it's of course focused on matters that are related to the assets or liabilities that are actually being acquired or assumed. Then non-legal due diligence will be conducted by the buyer itself and by their other advisors, accounting and tax and so forth, financial and operational, administrative and tax and accounting matters and those are all undertaken in the context of any kind of acquisition.

I wanted to talk a little bit, specifically, about the difference between real property due diligence and personal property due diligence. From the buyer's perspective there's, of course, many different aspects of their diligence process relating to the acquisition of real property; the condition of the assets, suitability for their ongoing operation and so on, and that will factor into their decision to complete the acquisition, or not. From a legal perspective, and from the banker's perspective, the main consideration is ensuring the property is being purchased free and clear of any liens or other encumbrances. Due diligence relating to real property, when I say that I mean land and buildings and real estate, it's a bit more nuance than due diligence relating to personal property. With real property the buyer's counsel will need to look at title and not only identify, of course, whether there's any mortgages or other liens that need to be discharged, whether there's any other registrations that just give rise to concern; easements or notice of leases, restrictions on how the property can be used or how it can be developed in the future. It's also important for the buyer's counsel to conduct environmental due diligence to ensure that liability for any environmental clean-up is not assumed by the buyer in connection with the acquisition. Environmental liability typically flows with ownership rather than staying with the party that caused the environmental issue. So mortgages and liens can be addressed through conditions in a purchase agreement requiring a seller to discharge those. Environmental risk is typically mitigated through representations and warranties in the purchase agreement and the indemnities related to breach of those reps and warranties. If the buyer has particular concerns, or if the nature of the business as it's conducted makes it likely that there would be environmental issues, the buyer may conduct environmental assessments prior to closing and seek specific indemnities for those issues that are uncovered, or a reduction in the purchase price that's commensurate with the environmental risk that was identified.

With respect to personal property, the buyer's counsel and your counsel will conduct searches under the Personal Property Security Act registry. It differs a little bit in each Province but across the board it functions as a notice system to other secured creditors of a creditors security interest over a particular asset. So if other security interests are identified, the seller will typically be required to discharge them, or at least obtain a letter from the secured party confirming that they do not claim an interest in the assets that are being acquired. PPSA searches are not only relevant to asset purchases but they're relevant to share purchases as well. I'm sure you all know security interest can extend to intangible assets such as shares. So to the extent the PPSA search reveals in all assets registration or some kind of registration that's ambiguous and you can't tie it to a particular asset, it is common practice for a buyer's lawyer to insist upon a letter from the secured party confirming that they don't claim an interest in the shares being purchased.

So I'll talk a little bit about representations and warranties, in particular. Sacha had touched on these generally. So reps and warranties are one of the main components of the purchase agreement. They're the equivalent of kicking the tires and checking for rust on a used car you might want to buy. The reps and warranties, the seller is making a number of factual statements about the assets being purchased during the context of ... about the business itself. In the context of an asset sale, the reps and warranties will obviously be limited to the specific assets or liabilities being assumed. So for that reason they can be less extensive then the reps and warranties in connection with a share sale. For a share sale the buyer needs the seller to make representations and warranties about the business being purchased. Those are often in pretty agonizing detail and, as you can imagine, the subject of a good deal of negotiation because outside of the physical inspection, or assessment of hard assets, it's really the only way for the buyer to understand what they're buying when they're buying a business ... concern. So those reps in a share sale typically cover a number of things; share capitalization, tax matters, employees, real estate, personal property, contracts, suppliers and customers and, of course, the content of the reps and warranties will depend on the nature of the business. You won't need reps and warranties on real estate if it doesn't own any real estate, for example. Just generally speaking, the reps and warranties are tied directly to the indemnity provisions. The indemnity provisions are often negotiated to include a number of specific issues that have been identified in the due diligence process, but the seller will always be required to indemnify the buyer for a breach of the reps and warranties, subject to negotiation about the extent of that liability and limitations on the length of that liability. That's reps and warranties.

We'll talk about how disclosures work. So attached to the purchase agreement, there'll be a number of schedules tied to individual representations and warranties. So those schedules are typically referred to as the disclosure schedule, or disclosure letter, and that's where the seller has the opportunity to disclose ... and to provide information relating to the assets to the company being purchased and they would serve to qualify the various reps and warranties being provided. For example, the purchase agreement might say that, except as set out in Schedule XYZ the company does not own any real property. In this schedule would be where the real property would be listed. So for example, in those schedules the seller will be required to disclose the outstanding share capital so you can compare that against what the buyer thinks they're buying. Significant contracts with third parties, from your perspective contracts with other lenders, security agreements, agreements where the target company has agreed to guarantee the obligations of another entity, list of employees, liens on assets if the seller proposes not to discharge prior to closing, pay attention to those, consents required under contracts or permits that would need to obtained prior to closing, bank accounts maintained by the target, permits required to operate the business and then sometimes a list of real estate or material personal property assets. So you should pay particular attention to these schedules and you should ensure your counsel reviews them and identifies any matters of concern. So for example, the buyer and seller may agree that a particular lien on an asset will be assumed by the buyer. Maybe that's acceptable to the buyer but probably not acceptable to the lender. If there are a number of consents required from third parties or regulators before the sale, the bank will want to pay attention to those and obtain confirmation that they've been satisfied, and in particular not waived by the buyer, as is their right under the purchase agreement. Make sure those are satisfied before the acquisition facility is advanced. While most share sales are completed on a debt free basis, the buyer might agree to assume certain debts of the target company, or even assume credit facilities maintained by the target company if it makes sense for them, because obviously of concern to a lender advancing the acquisition funds and taking security over the target's assets.

It's becoming increasingly common, although I wouldn't say it's common place for the buyer to obtain representation and warranty insurance, and that would cover breaches of reps and warranties in the purchase agreement. It's a fairly new product that's being offered by insurers in the last 10 years or so but it is becoming fairly popular. From a buyer's perspective, rep and warranty insurance is attractive since the buyer only has to make a claim under the policy if a loss is suffered, rather than chasing the seller to fulfill its indemnity obligations and, as Sacha mentioned, an indemnity is only as good as the financial condition of the party providing it. So from a seller's perspective, having the insurance in place significantly reduces the seller's liability exposure under the purchase agreement, if there is a breach. It also has this indirect effect of allowing sellers to accept more robust reps and warranties under the agreement because there's less liability exposure if something turns out to be false. From a lender's perspective, just be aware that rep and warranty insurance, the process of it, can be time consuming and could result in closing delays. In most cases the insurer will want to retain their own counsel. That counsel will conduct their own in depth due diligence of the target company, along with the buyer's counsel, they'll work in conjunction so that the insurer can actually underwrite the risk. So with rep and warranty insurance, from your perspective, a couple of things. Stay apprised of the issues identified by the insurer's counsel. Ask the question, obviously, if insurance is being obtained. The actual policy is typically delivered near the end of the transaction, once the insurer's counsel has completed their due diligence. So make sure you have enough time to review the policy with your counsel and identify problematic gaps in coverage, if there's any, and consider whether the bank wants to obtain an assignment of the policy. For example, if the bank is already taking an assignment of the purchase agreement as collateral security, the insurance policy is also critical to the transaction. Another just quick point about insurance. Of course, ensure your borrower has arranged for appropriate insurance coverage for the assets of the business being acquired, particularly if the bank is obtaining security over the assets being purchased.

I've thrown a lot of information about due diligence at you so just from your perspective, again, you're not going to be involved intimately with due diligence and the closing process but just a few things to keep in mind, to takeaway, anyway. Number one, don't rely exclusively on the representations and warranties in the purchase agreement. Instruct your counsel to perform their own due diligence whenever possible and, at a minimum, searches of public registries to identify means and other issues. Review the reps and warranties in the purchase agreement but, again, don't rely on them exclusively. Review the disclosure schedules in the purchase agreement and have your counsel identify anything that should be of concern to you. Then identify and communicate the conditions that the bank wants to impose on the closing on the purchase transaction, if any. So for example, discharges of any liens, comfort letters that need to provided, consents from third parties or regulators, and if you require an assignment of the purchase agreement, of course make that a condition of closing. So next slide, please.

We'll talk a little bit about closing matters now. The closing process is fairly similar, whether the acquisition is of specific assets or shares. At its most basic level, the parties will prepare and exchange a number of documents in order to effectively convey the assets or shares and authorize the transaction from a corporate perspective. There's going to be a bit more paper for an asset transaction because, like we said, there's specific conveyances that might be needed, depending on how diverse the assets are that are being purchased. So from your perspective, as bankers, the primary concern is identifying conditions for closing that are of concern to the bank, such as consents and discharges, and ensuring those conditions are met and not waived by the parties. Keep in mind that the bank is not a party to the purchase agreement and has only indirect interest in its terms and outcome. So the bank needs to impose certain terms, where necessary, as conditions to the acquisition financing. Those conditions should be included in the purchase agreement between the buyer and seller ,and ideally should be included directly in your credit agreement, to the extent that your processes allows for that type of detail in your credit documents. Best practice is also for your counsel to obtain a certification from the borrower confirming that all of the identified conditions, to the closing and the acquisition, have been met and, again in particular, that they haven't been waived by the buyer or the seller and that all required discharges have been obtained.

Just quickly on some common pre-imposed closing, let's call them re-organizations or steps that are taken, and the security considerations that you'll want to take into account. So the buyer will often incorporate a new corporation to purchase and hold the assets, and either amalgamate that purchase or corporation with an existing company in its group, where in the context of a share sale with the target company that it's buying. So they may amalgamate, they may not. Those decisions are often driven by tax and accounting considerations but are also often undertaken to ensure liability under the purchase agreement, and any potential liabilities relating to the assets that are being purchased, are not rolled into an existing operating company. From your perspective, your main consideration should be ensuring you have obtained adequate security, both pre and post-closing, and pre-imposed amalgamation. Consider a couple of things. Any security required from the purchasing corporation, so that new corporation that's being purchased, are incorporated rather, to complete the purchase. Keeping in mind that the only asset of that company is likely to be the purchase agreement itself until the closing takes place. Number tow, ensure the bank has sufficient security, both pre and post-closing and pre and post-amalgamation, if that's applicable. So in the context of a share sale, the bank should consider whether it requires security from the target company, pre-closing. By that I'm talking about the company that is yet to be acquired by your customer. Whether any <audio cuts out> post-closing and taken from the amalgamated entity, if that's applicable. If an amalgamation takes place, keep in mind that though the predecessor corporations do not technically cease to exist, they do continue as an amalgamated corporation from which the bank should also obtain security, if that's required by your credit group. That's it for me. I've thrown a bunch of information at you very quickly, kind of intentional. Please, if you have any questions, we left some at the end of this for people to ask questions so feel free.

Richard: Okay. Thanks very much, Travis and Sacha. That's very helpful. I do see that there is one question that we have already but I do encourage everyone to post some additional questions that they might have, otherwise there's a real chance that Sacha might do a full rendition of one of those songs that he's listed in his slides, and that might be the Spice Girls tune so I don't know if we're up for that. The first question is, in an asset purchase can the buyer continue using the seller's company name? If yes, what are the implications?

Sacha: That's a really good question. The simple answer is yes, although we want to make appropriate provisions for it. The real question is, I guess, if the company's name is part of the brand and the goodwill the obviously the buyer will want to keep using it. What we'll often see is the buyer will acquire the right and instead of modifying its own corporate name it'll register the business name and operate under that name, however, at the same time we always want to make adequate provisions for that seller to ensure that it undertakes to change its corporate name. So you'll often have an undertaking in closing where a seller will file articles of amendment to change the corporate name, often to a numbered company, just to cease using that brand going forward. But the buyer will definitely want to acquire it if it's part of the brand and the goodwill associated with the business. That's the traditional mechanism for doing it an asset deal.

Richard: Okay, great. I think our next question is, if an amalgamation of a borrower occurs after closing, is there something that the lender should do to research or re-perfect security? Travis, that kind of ties to what you were speaking of. I don't know if you want to just speak to that.

Travis: Yeah, sure. So just make sure you're understanding what is contemplated pre or post-closing in terms of incorporating new entities or amalgamating existing ones. So, yeah. Consider that post-closing you'll have a new entity you're dealing with that is potentially your borrower, or the guarantor or something, so just consider whether you require taking all the same security from that amalgamated entity as the purchasing company.

Sacha: Maybe it's just important to add also, that the amalgamated entity, it's not relieved of any obligations or liability from its predecessor corp. Those run with the new entity but to the extent the names have changed, and in terms of ensuring your security documents and your registrations have the new corporate name in order to provide notice to the world of your security, it is prudent to take those additional steps. But by virtue of amalgamating it is not relieving of itself of its obligations to the lender. So I think that's an important point just to keep in mind.

Richard: One other item that's involved there is that we often will take something called an amalgamation confirmation of security agreement, which serves to basically list all of the security that was granted by the pre-amalgamation entities, and then have the new amalgamated entity confirm its obligations under all of those documents, and that often comes up with the credit agreement because in many cases the credit agreement is done far in advance of the closing of the transaction and that credit agreement might, if it's formed in a letter format, might be addressed to the borrower as it existed at that time and then subsequently been amalgamated. Having that amalgamation confirmation of security agreement just helps to pull together everything in one package that we can point to as being evidence of the continuing obligations of the amalgamated corporation, as the continuing borrower under the credit agreement.

In terms of other questions, I guess that's the only ones we have in the box right now.

Sacha: I'm seeing a bunch, Richard.

Richard: Are they coming up? Okay. Sorry I didn't see them. Oh, okay, sorry. We've got, can we speak to the information you need to provide a quote on the cost of a share purchase transaction or asset purchase transaction? How accurate can the quote be at the outset?

Sacha: Fortunately, especially for our complicated deals, we have some internal tools that we can utilize. It's a pretty broad question. The answer is the information we would obtain. It varies whether or not you're acting for the buyer or seller. Often the purchaser's lawyer is going to take the pad on these agreements so if you're selling, you're going to be more in the reactive position, whereas if you're the buyer your lawyer is the one who's going to be taking the lead on drafting the documents. Really I think the most important we need to have at the outset is what kind of corporate structure are we dealing with? What's the nature of the business? And, most importantly, what kind of third parties are going to be involved in terms of getting consents and other information from. That is really what drives, I think, the transaction costs up is having to deal with third parties, getting consents, getting releases. Then to the extent, the other key aspect is, how much back and forth is there going to be between purchaser's and seller's counsel in order to conclude an agreement? Like I say, we've got some good internal processes for providing you with quotes. They are obviously going to be based on a number of assumptions, and they are going to have to account for the possibility of the transaction changing, but we can give you a fairly good understanding of what the fees will look like at the outset of either deal.

Richard: Okay, great. I think our next question is, can you speak in more detail about security considerations for the target, in terms of what might be required pre and post-acquisition?

Travis: I can probably answer that. It kind of depends what your credit requirements are in terms of this specific security you might need. Presumably from the target you'd be taking a general security agreement, effective on the closing date, and then if there's an amalgamation after that, from the amalco as well. If there's specific assets you require security over, IP or real estate, then be sure you're taking that from the target on the closing date and post-closing if there's some kind of amalgamation or reorg after that.

Richard: The one point I might add to that is just that when you're looking at taking any kind of security from the target before the acquisition is completed, you have to understand that the existing owners of the target are not going to allow that security to be granted, until basically the money for the acquisition is being funded. So whatever security that you take, the actual documents won't become effective until they can be signed by the new owners of the business or the assets, and that happens almost simultaneously with the funding. So it's pretty much a step transaction so that as soon as all the documents are in place, and they're going to become effective in a series of steps, and as soon as the funding is provided then all of the steps fall into effect like a domino, and you eventually have the security from the target that you need to have.

Our next question is, if a buyer purchases a company through an amalco and the bank funds to the amalco, is it reasonable for the buyer to hold off on amalgamation for a few weeks for tax purposes?

Sacha: Again, I said at the outset, we're not tax experts but from my understanding, I don't know what those tax reasons would be. The thing that strikes me and the concern I would have and would go to an accountant right away to ask is, the amalgamation is a post-closing event that occurs almost immediately after closing and I think the real benefit of that, as I understand it, is to avoid multiple deemed year ends. You're going to have a deemed year end on the change of control and I suspect your going to have another potential deemed year end upon the amalgamation taking place. So I think from a tax administrative perspective you wouldn't do it. But that being said, there's no reason why, from a corporate law perspective you need to amalgamate right away. But you're just going to want to ensure that, in terms of how the security is structured, that contemplates and is prepared for that through the process. The reason buyers use acquisition companies, especially on share deals and then follow with it an amalgamation with the target, is really driven by the desire to have the expenses incurred in relation to the financing. Whether it be at closing and the ongoing interest expenses, you want those to be in the hands of the operating company to ensure deductibility against revenue. So that's why. The lender is going to advance funds to the entity buying the target but the immediately following acquisition they amalgamate. As I mentioned earlier, obligations and liabilities run with the amalco, meaning that all those financing obligations are now in the hands of the amalco. But just to briefly return to the question, I'm not sure what the tax purposes would be. I suspect functionally you could do that but I think it generally makes more sense to do it contemporaneously in terms of one second after closing you file the articles of amalgamation and you get it amalgamated.

Richard: Okay. The next question is, Alex Ross noted in the earlier presentation, to ensure the security agreement captured a good rule associated with perfecting an interest in IP, are the lender's standard GSAs capturing goodwill assets created in a purchase and sale? In terms of that particular goodwill, every lender's GSAs a bit different, but one thing I think that's consistent in all of them is that it does usually say that it extends to all assets of every nature and kind and present and future. It's usually stated as broadly as possible and then it will list specific types of assets. The description of intellectual property may, individually, cover the goodwill in terms of its express terms. But if doesn't, then there's also the ability to look at that general granting of a security interest clause that would cover not just the IP but also the goodwill that was associated with it, as a general asset of the company.

Turn to our next question. In a share transaction as counsel for the lender, are there any unique considerations we should make when dealing with the assumption of warranty obligations if the GSA covers the product subject to warranty?

Sacha: If I'm understanding correctly we're talking about actually warranty claims that third parties may have who have purchased the product.

Travis: I interpret it to mean if financing a piece of equipment that has a warranty attached to it.

Sacha: Let's consider from both perspectives, I think. If we're talking about warranty claims tied to products that ... sold, it rests with the company or if it rests with the purchaser, that's just an additional liability, to be mindful in terms of the risk profile and potential third party claims against the assets. So you just want to make sure that from a lender's perspective that you have the security and you're going to have priority over any such claims over those assets. Travis, I don't know if you want to speak to it from your perspective.

Travis: Yeah, I know it's kind of an interesting question. So if you were financing the acquisition of, I'm thinking of maybe a multi-million dollar piece of mining equipment or something that's critical to the business and it has a warranty from the manufacturer, certainly you would want to ensure that product continues to work, from a lender's perspective, to generate revenue for the business. It's a pretty unique question. Maybe you might want something in your credit documents, a covenant requiring your borrower to pursue any remedies it has under the warranty, for example. You would want do to that anyway so it's probably not a huge concern but, yeah, that's an interesting question.

Sacha: I suspect the other question it considers is whether or not that product is owned or leased. Maybe, Richard, you could probably speak to this better than we can. But if we're talking about leased products in particular, I would assume there is language in any kind of assignment of leases, that's been taken as part of the security package, that would ensure that the lender has that benefit of any of these warranties.

Richard: Yeah, usually in any kind of assignment of leases the definition of leases would be broadly stated to basically cover any kind of assets that are linked to the leases themselves. So although every document is different, generally there would be coverage through that sort of avenue.

Our next question is, can you please clarify if two numbered companies be amalgamated as I believe this was an issue I faced leading into closing.

Sacha: I think it's similar to what we touched on earlier. If two numbered companies amalgamate, unless you're selecting a corporate name on the amalgamation, they'll be amalgamated under a new number, as a new numbered company. It's a new legal entity. It will have its own Ontario incorporation number, assuming it's Ontario. But much the same way, you want to ensure that any of the security that references the two amalgamating entities previously is covered through any of that post-closing documentation that Travis and Richard touched on earlier.

Richard: Okay. Next question is, are there any special considerations in terms of process or security when our borrower tells us that the transaction needs to be a sign and close?

Sacha: From a corporate law perspective, sign and closes are pretty standard. Richard, I don't know. I guess if it a credit agreement is signed there's going to be conditions tied to the transaction closing but I'm not sure if my perspective, this changes much, but maybe as a lending lawyer you might have some insights into that.

Richard: With that, it's really in many cases the credit agreement is signed up in advance, if it's prepared directly by the lender. In situations where it's prepared by counsel, it's normally another signing close situation. If it is prepared and signed in advance, then normally we would, as part of the closing documentation, there would be what we call a bring down certificate where any reps and warranties in any of the documents that were signed previously, are brought down to the actual day of closing. So there's no gap in terms of a time between certain events that may be problematic can occur. So everything gets brought down to the closing date and so there's gap in terms of the reps and warranties.

Okay, our next question is, in a share purchase agreement how long can a contract protecting the purchaser from all liabilities in the transaction stand?

Sacha: This is really getting into I guess survival periods and so you'll often have indemnification provisions that have corresponding survival periods tied to them. If you're the seller you want the survival period to be as short as possible. If you're the buyer you want them to go on in perpetuity. Where you're going to land is somewhere in between. What we'll often see is a basic survival period for, let's say anywhere from 2 to 3 years, for kind of the basic reps and warranties. However, you'll also then have subsequent carve outs. For example, if there's reps and warranties tied to taxes, those will usually survive for as long as a period as the CRA or any government authority can actually come after for that potential breach. Usually somewhere around 7 years, 8 years. Then if you're talking about a rep and warranty tied to actually title of shares, my perspective, that should just survive perpetually. You'll usually end up with some kind of mishmash of survival periods depending on the nature of the rep and warranty. I think the most important one, and usually takes the most bit of time to debate, is that basic rep and warranty. I know people often jump to 2 years because in Ontario at least we have standard kind of 2 year limitation period. I personally prefer to see at least 2 and a half up to 3 years, because I like to ensure that there is some period left available for discovery of potential claims and not just a 2 year basic limitation period on its own. That's a negotiating point that usually doesn't come up until the lawyers get involved but that's usually how you'd see it played out.

Richard: Okay. Our final question here is, can you discuss some circumstances for escrow agreements to be required and the standard timelines for release.

Travis: I can take this one. So you normally see holdbacks put into escrow on larger more complex transactions or where there's a decent chance of some liability arising post-closing, tax related or otherwise. Typically how it works is you would have two separate escrow amounts. One, is your working capital escrow amount set aside to satisfy any purchase price adjustments taking place post-closing. The other is set aside to satisfy any indemnity claims for breach of reps, tax liabilities or anything else that's in your indemnity provision. From a purchaser's perspective, you want those funds to be held back for as long as your survival period of the related reps and warranties and indemnities. Sometimes I see it being held for less time and that's just part of a negotiation. Maybe the purchaser is satisfied that, it's unlikely though, they'll make a claim after the first year kind of things so the funds can be released. The process for that, you'll have a separate escrow agreement between the parties. They can be complex or fairly simple in that they usually just provide for the escrow agent, acting as an intermediary, the parties need to give joint instructions to the escrow agent before they can release any funds. The mechanism by which the purchaser can make a claim, for example, would be set out in the share purchase agreement. The mechanism by which the working capital, or other purchase price adjustments will be completed, will be set out in your purchase agreement as well. Then once that's settled the parties will send joint instructions to the escrow agent to release whatever funds they've agreed can be released to the purchaser, or to the seller.

Richard: Okay. In terms of one other important item that comes up is in some cases when we do financings, we run into a borrower's counsel who have said that they haven't done any searches, they're just relying on the reps and warranties of the vendor, so that they don't want to deal with any third parties and they're content with that situation. Travis, what would you do as a lending lawyer to address that particular set of circumstances?

Travis: It kind of depends on the transaction value and complexity, I guess, but in almost all cases you would want to insist on the lender's counsel running their own searches. Their public registry searches, they're fairly cheap to complete, and through those searches you can identify liens and things that are really material to the lender. So the potential consequences of not running them are pretty significant, relative to the cost of completing those searches. Then you can do at least a basic level of due diligence by reviewing the purchase agreement and disclosure schedules. Relying entirely on the representations and warranties, you're sort of rolling the dice, because those reps and warranties could be untrue and then the purchaser has to go after the seller for a breach of contract or through the indemnity provisions of the agreement. That's time consuming, it's costly. The lender's counsel should be doing their own due diligence to the extent it's feasible.

Richard: Yes, and I think one other added element is, as lenders, as your lawyers, we need your support in I guess pushing back on borrowers who are looking to just rely on those reps and warranties and want to forego approaching third parties for consents and things like that. It's just a very risky situation to avoid dealing with third parties, and you have to be prepared to push back a bit on your borrowers when they ask you to do that, because it's in your best interest to do so.

I think we're running into the last minute of our presentation. I'd like to thank Sacha and Travis for all the insight that they've provided to us for this session. It's very helpful and I hope that everyone has been able to get a few takeaways from the discussion. Coming up in the next minute is our next session which is going to be financing real property acquisitions. So I'd like to invite Stephanie Harvey, a partner in our Hamilton office as well, who will be the host for that session to come up to the stage now. Thank you, everyone.

Stephanie: Thank you, Richard, and welcome everyone to the final presentation of the day, financing real property acquisitions. As Richard mentioned, my name is Stephanie Harvey and I'm a lending lawyer and I practice at the Gowling WLG Hamilton office. I will be moderating this presentation. For housekeeping, as with previous presentations, I encourage you to put the questions into the Q&A chat and I will be monitoring that throughout the presentation and interjecting, if applicable, or waiting until the end to pose those questions. A mortgage is central to a lender's security on a real estate acquisition financing but, so too, is an understanding of the real property purchase transaction. Our real estate lawyers walk us through key aspects of a real property acquisition that bankers should turn their mind to, in the context of a financing including review of a purchase agreement, title and off title due diligence, title insurance which is title opinions, and comment areas of negotiation. So without further ado, I'm pleased to introduce two of my colleagues, mentors and friends, Pamela Green and Mark Giavendoni. Both Pam and Mark are senior partners in the commercial real estate practice group with the Gowling WLG Hamilton office. Pamela's practice encompasses a comprehensive range of commercial real estate matters. She also sits on the firm's executive for the National Real Estate Industry Sector group, as a member of the firm's National Expropriation Law Municipal Law groups and heads up the Real Estate in Condominium sub-practice group. Mark is a dedicated strategic advisor in all aspects of real property transactions and a member of the firm's National Expropriation Law group and National Municipal Law group. From multi-million dollar infrastructure and private public partnerships to land conveyancing and transactional due diligence, Mark is equipped to act as a single source of real property advisor. Thank you to Mark and Pam for being with us this afternoon. If we can put up the first slide. First slide, please.

What Pamela and Mark would like to do today is look at a situation where a borrower might need your assistance with respect to the purchase of a commercial property and explore what you, as a banker/lender, should consider and how you can be of assistance to the purchaser borrower's perspective client. So let's move into the fact scenario which will underpin much of today's discussion. Your client is looking to purchase a commercial multi-tenanted building. The building itself is located in an older part of town. The purchaser is looking to add an addition to the last unit for a new lab facility tenant. This tenant will be the anchor tenant of the property which means that the largest payment stream of the property is not already contemplated there and the source of income is not yet in effect. On top of this, the use of the addition of a lab is not one that is yet contemplated at the property. So bearing all this in mind I'm going to turn matters over to Pam and Mark to take it away.

Pamela: Great. Thank you. So we setup this scenario because there are many, many different situations we could talk about but we wanted to use this to bring out some specific examples. So Mark and I are just going to go back and forth to talk about some of those and we're going to start with the next slide. One of the things we want to emphasize during the course of our discussion for the next hour, almost, is the importance of asking questions and knowing the purpose. The purpose of the loan could vary. The purpose of the loan could be hidden but all of it could lead to questions that need to be asked and answered. Different forms of due diligence. Different forms of documentation, and that sort of thing, so we're hoping to take you through some of those scenarios. So I'm going to start by turning it over to Mark. So, what is the true purpose of the loan and why does it matter?

Mark: Understanding the purpose behind the transaction is critical to understanding the type of loan that's necessary. It may be a straight forward loan, a conventional loan. It may actually change over the course of the transaction and the purpose. For example, if it's to construct something, that will be a very different loan than if it was to buy the property. Or maybe it's a loan that does all of those things over the course of a period of time. That will change a due diligence. That will change your security. So it's important to ask the questions so you can prepare and tailor the loan accordingly.

Pamela: Starting with priority, as one of the biggest reasons, in our little fact scenario we talked about there being a purchase of the property ... maybe construction or leasehold improvements to a separate unit at the end and so we were talking about at the end because we do want to say that the unit itself is going to be extended. So we are talking construction and leasehold improvements. So priority then becomes a key issue because priority, for the purchase loan where monies are advanced at one point, is governed by registration of the mortgage. However, any other type of loan that has advances made over the course of time, could be subject to priority issues and therefore it becomes very important to talk about what type of loan it is, and how it is secured and when it is that you are going to conduct searches to ensure that you are maintaining priority over every advance that is made. Mark.

Mark: I think that's exactly right, Pam, in that the issue of priority can shift over the course of the type of loan. If it's a construction loan there are multiple advances contemplated and priority could shift with subsequent advances. If it's a revolving loan versus a fixed term loan, the concept of priority can change as well when you can have intervening interests pop up in between there. It's a little bit sneaky but it does happen from time to time and it's important to be guarded about it. The easy way is to ask, what am I loaning against? What am I loaning for? That should then trigger a response in terms of verifying priority at critical times throughout the loans life cycle.

Pamela: What it could also mean is that intervening registrations need to be dealt with. If a second mortgage is registered then a first mortgagee making a subsequent advance will want to make sure that they maintain priority. That may require a priority agreement. That may entail the second mortgagee agreeing to either postpone, on title, or at least postpone contractually to the first mortgagee subsequent advances and those are things that we would only find out if we do those searches. So always important to conduct additional title searches. It may also be important to conduct other types of searches on subsequent advances and they are more for information purposes as opposed to priority. As an example, it would be good to know that realty taxes have been paid in full, prior to any subsequent advances because those of course take first priority. They don't need to be registered. They, as a right, take priority. The other thing might be to conduct execution searches, and again, it's just for information. Hopefully nothing has been going on with your borrower that you aren't already aware of but as a matter of prudence you may want to conduct an execution and make sure no writs have been registered against your borrower.

Mark: We might also, through the initial due diligence if we're looking at our fact scenario, understand that we're acquiring a property that may already have a couple of minor tenants in there. It's also important to consider that the tenants may have registered notice of their lease on title as well and, as a result of that, the lender may assess that we need to subordinate the provisions of that lease to the new loan security that's going to be registered. If we're reflecting that priority becomes an important issue in the loan transaction that we'd look to, not only postpone and subordinate other debt instruments, but also other interests like leases.

Pamela: Which leads to lease review. So one of the important pieces in due diligence, and whether it's done internally by a lender or externally by counsel, is to review the leases. If the borrower's income stream is the thing that you are securing against, and agreeing to provide a loan for, it's important to make sure that those leases are in fact legitimate. So one thing to make sure of is that there is a term that is still in progress. That it's not a term that's going to expire in 2 days time and it's not a term that could expire in 2 days because there is a termination right in favour of the tenant. So what we do is we review leases from the point of view of substantial provisions and what may affect the income stream in order to substantiate that income stream for the lender. We'll talk a little bit more about on title for the leases but let's talk for a second, Mark, about construction. In the nature of our little scenario, does have some construction. So we're not going to get into a lot of detail on construction financing because that could take up a whole session in and of itself but we do want to note somethings when it comes to construction contracts, and due diligence, and that is in the same vein as your lease review. You should be reviewing the contracts that your borrower is entering into. You should be taking a look at whether or not there is one general contract or several contracts. In which case you have an issue with when lien periods run. One of the great reasons to have one general contract, and everything flowing underneath it, is that the lien period will run upon publication of substantial performance for all of those entities at the same time as opposed to needing to find out when the lien period runs from each and every contract. Mark, any other thing on construction contracts without getting into too much detail?

Mark: Yeah, I think that, again, looking at the purpose of the funds and asking the questions of the borrower is important about the structure of the construction activity. Is it multiple contracts? What's the size and the value of the project? Does it require an entire site plan? Does it just require a building permit? Getting into that because part of your security may end up being that you want an assignment of those contract as well. So understanding the fulsome intention of the borrower to use these funds will help facilitate the proper security panel. In turn, if you had a collateral type mortgage security that was intended to protect for both the underlying acquisition advance funds and that it would subsequently convert to construction loan, you can have an umbrella mortgage security but that, again, doesn't remove the obligation to ensure that subsequent advances are held back. That the proper loan construction holdback amount is held back from each subsequent loan advance on a construction loan and making sure the security dovetails with the type of loan and the purpose behind it.

Pamela: So one last comment on this is to know what the experience of our borrower is and who it is that they are using. Very often we're asked the question of whether third party oversight is a good idea. That is most often driven by the magnitude of the loan but most certainly having a third party providing certificates of work, complete to date and payments made to date, are extremely beneficial and should always be at least considered. Next slide.

So now we wanted to go into a bit of the due diligence that we might be doing more on the legal side, and the reasons why as a lender you might also want to be concerned and may want to become involved, prior to your borrower entering into an agreement of purchase and sale. So we're going to start with heritage. One of our facts in our little scenario was that this is a building located in an older area of town. So, Mark, can you tell us a little bit about the difference between, let's start with the top 3 bullets. Being designated, being listed or being a property of interest to a particular municipality.

Mark: Right. The Ontario Heritage Act has a process whereby building structures, or locations in a municipality, can be flagged for having heritage or cultural value or being seen as properties of interest for that purpose. So the implications of that are far reaching and they're along a spectrum. A property could be considered of interest if it may have some historical, cultural or other significance to a community and that could be local, it can be territorial, it can be Provincial or national in scope, but usually it's the municipality will look for designating or noting if there's a property of interest. If there is a property of interest, because it has some of this value in it, they can list it in a municipal register that would essentially preserve a thought process, or an opportunity for the municipality to more fulsomely consider those attributes that give it that cultural value or heritage value. So if it were to be listed you couldn't demolish and, don't think necessarily just blow it up, but it could also mean to start taking things apart, sort of dismantling, anything along those lines. You can't do that. You would not be able to get a demolition permit for at least a 60 day period. That would give the municipality an opportunity to do a deeper dive and potentially consider designating the property. If a property is designated there's a little bit more fulsome process and a review. It's getting a little bit better to be a bit more open. But that process would then ultimately, if it were successful, to designate the property as having heritage value. Those attributes would be highlighted and then would be enshrined in a bylaw that would then, may or may not, include a restriction or an easement that would apply to the property. For example, if it was a very unique example of a certain period architecture, then the designation may say that those attributes that give rise to that architecture cannot be altered without a permit. Therefore there may be some implications.

Pamela: So, Mark, in our fact scenario the borrower is contemplating extending a unit at the end. Further to our fact scenario, on the other side of it, is a collage that has been painted over the years by the community. This is actually a really big issue in a lot of smaller communities. So we had wanted to extend the unit, or the borrower had rather, and they may not actually be able to do so. Or, they may be able to do so but there will be a cost to it. They would have to take down, brick by brick, and reinstate the wall on the end of the extension. So sometimes what it means is that the project that the borrower thought would cost $100.00 is now costing $110.00 in order to deal with the heritage issues attributed to a particular property. So, do you want to move onto zoning, Mark?

Mark: For sure.

Pamela: I'm going to set the stage for you a little bit here. In our fact scenario we specifically talked about a lab facility and a new tenant and the reason why we set those out is because the lab facility is not an existing use, and Mark will talk about whether an existing use is the end all and be all, and we were talking about it being a new tenant. That tenant is going to carry on a new type of use and that type of use doesn't currently exist anywhere else on the property. Mark.

Mark: It's important to understand what is actually permitted and what the existing use is of the property so that, one, you can verify that the existing use is still allowed and, more importantly, if there's a proposed use that that would also be allowed. If not, what steps can be taken to render it an acceptable use. Initially you can conduct searches of the zoning bylaw or you can write to the municipality and say, this property has this type of use already going on there. Is that permitted within the zoning bylaw? By the way, we also want to add this lab use as well and is that permitted within the existing zoning bylaw? The municipality will respond in multiple ways; yes, no, maybe so. It's understanding then if the answer is no to the proposed use that now you're into an investigation of what are the opportunities to make it an acceptable use. An acceptable proposed use can either take the form of minor variance and there's a test as to whether a variance from the zoning is minor or not, or it could be a full out rezoning application. That's a much more convoluted lengthy and costly process to ensure that your use can be utilized. It's also a public process, so if the owner's of the adjacent properties are less inclined to allow this new use within that zone, there could be some public objections as well. So understanding that is really helpful.

Pamela: So the issue there really is that you need to determine zoning long before closing and you need to be making sure that the borrower is looking into that prior to entering into an unconditional deal. So, Mark, let's talk a little bit about title and other things that we might look to or look for when we're reviewing the possible purchase under our fact scenario. So when we look at title, we're not just looking for whether or not the description of the lands is correct. We're looking for what else affects title. One of the things that we see very often are restrictive covenants. Restrictive covenants could be that the building has to be built with red brick. But restrictive covenants could also be that there shall be no more than one restaurant. It could be that there shall be no lab facilities which, of course, in our situation is really important. But those restrictive covenants do have to be reviewed. Who benefits from the restrictive covenants needs to be reviewed because you could get consent and if the restrictive covenants have been complied with to date, we'd also look at whether or not there is a way kick them out because they are not negative in nature. Restrictive covenants that are not negative in nature do not run with the land and restrictive covenants may have limited time periods. Again, we would look at whether or not we could delete restrictive covenants for that reason. CPUs, Mark, you want to talk about certificates of property use?

Mark: Yeah, certificate of property use is a tool and a mechanism under the Environmental Protection Act, predominately, where there has been some environmental activity or a process to start an environmental assessment or audit for the purposes of remediating the property. Ministry of Environment will issue certificates of property use to restrict the types of uses that can happen for a period of time while there's ongoing monitoring or remediation that could be involved on the lands. So understanding what a certificate of property use is, how far it extends and if it restricts the extend use is very important otherwise it could upset the existing environmental regime that's in place.

Pamela: It could mean, for example, that the borrower can't construct the addition that it wants to construct. So we're always going back to what is the really important part of this loan. The new lab tenant with its million dollar rental income stream. We have to look very carefully about what may affect that income stream, and the possibility that there is fly ash that is sitting under the concrete parking lot, which is subject to a do not disturb order under a certificate of property use then becomes really important. So development agreement.

Mark: I'm sorry, Pamela. Just to note also that the regime for the certificate of property use, and the environmental regime that could affect the property, it talks about types of use that are permitted and not permitted and those are completely independent of what the zoning is. So a zoning use is a municipally defined use but the environmental uses under a certificate of property use for the Environmental Protection Act are actually a little bit different. They mean different things. So when the environmental one says, commercial, that doesn't necessarily mean the same types of commercial that you might find under the zoning. So it's important to distill that as well if there's a certificate of property use in play.

Pamela: So development agreements. Very often we see some form, subdivision, development, financial agreements that are there because of either the subdivision that the property's located in or the property itself and we review those from the point of view of what may be outstanding. So we write the typical letter off to the local municipality and we ask the question. Now, the answer to the question very often is, it's been complied with to date and there are securities in place. When we see that type of answer we really want to know what is still outstanding or could be outstanding in the future. Again, a purchaser buying a property that's subject to a development agreement, really doesn't want to find out that there is a $100,000.00 exercise next month pursuant to covenants under that development agreement. So important to find that out. Mark, on development agreements, or any of those types of agreements, the municipality is going to look to the current owner. So regardless of whether the covenant originated 20 or 30 years ago, if there is a grading covenant that has been breached in between, the municipality is still going to come to the current owner for rectification. So other comments on development related agreements?

Mark: I think that's the important one is that you mentioned with the restrictive covenants that the positive ones don't run with the land. In a development agreement with the municipality they certainly do so it is a hot potato situation. Whoever is the owner at that time, the municipality is likely to go after. It's a key takeaway.

Pamela: Okay. Let's go onto the next slide, please. So we're going to talk about a couple of main terms in an agreement of purchase and sale but, as a lender it's also a good idea to review the terms of an APS, and if possible to have input in it before it is signed by the borrower. Couple of the reasons why. We'll start with environmental. Obviously as a lender you want to make sure that you are protected from any environmental liability. In the last seminar that we gave talked about some of that, and how a lender could be exposed, but what you really want to make sure is that you're borrower is not exposed to begin with. That's the same for basically all of the comments that we have been making is that, while a lender may be made whole it would be really good if the borrower didn't run into some of these issues, and therefore go belly up or not be able to properly service the loan. I think the phrase we were talking about, Mark, was we would really like your borrowers to be repeat customers and therefore we want to make sure that fully and complete due diligence is being done. So reps and warranties. I'll pass it over to you, Mark.

Mark: The environmental regime in Ontario, specifically, is pretty comprehensive and liability can seep in many different ways. Ensuring that there's proper representations and warranties in the agreement of purchase and sale, that not only protect the borrower, but then also could be utilized to assist the lender when the borrower is able to rely on the seller of the property for historical and environmental problems or issues. Particularly when lenders will have an environmental questionnaire, sometimes the borrower may not have all the information at that moment. Factoring the needs of the lender into the terms and the reps and the warranties that the borrower can get from the seller in the agreement of purchase and sale, will help the dovetail and make that hopefully a bit more of a seamless process and give the borrower some confidence in being able to make the attestations that are required in a lender's environmental audit or questionnaire.

Pamela: Moving on from that, Mark, we wanted to specifically point out approved list of engineers. A lot of lending institutions have an approved list and you really need to make sure that your borrower is aware of that list because the costs can be fairly significant if there is ... on approved engineer and the time that's lost, as well as the cost, could very well be quite detrimental. So approved list of engineers and what is it that the vendor is passing over. So most agreements of purchase and sale will require a vendor to deliver what they have. Sometimes it will have a covenant to not only deliver the reports that they have on hand but also to deliver a reliance letter. That would be the most ideal for borrowers and lenders is for the vendor to have that obligation and for lender and borrower to be able to rely upon existing reports. Existing reports are really only as good as the paper they are written on and when the inspections were done. So this holds true with not just environmental but also with respect to building condition reports. Mark, do you want to talk about, I'll call it the 18 month rule?

Mark: It's how stale is stale? What we're looking for is a means that the reliance letters are accurate. In an environmental context, specifically, relying on stale or older reports may be a problem because the environmental standards may have changed, and that has been the ongoing situation for the last couple of decades, is that the tables in the ministry guidelines and regulations keep shifting. So a Phase 1 that was done 5 years ago may not be actually be accurate any longer. The 18 month rule, while it's not a fixed legal rule, is a we can say a rule of thumb that would generally apply to when reports were originally commissioned and whether you actually want to rely on them as a lender.

Pamela: Okay. So how about let's talk about leases. I talked a little bit before about lease and rent roll review in making sure that the leases coincide with what the rent roll stipulates. Again, because in all likelihood lenders are given a rent roll but not necessarily the leases to begin with, so helping to substantiate those numbers is important. But beyond that when we're talking about an agreement of purchase and sale, one of the terms that should be included, at least from a purchaser's point of view, is that a estoppel certificates are received from the tenants. That's because you want to create a situation where a tenant cannot come back after closing to say, wait a second. I had a special deal with the landlord. The landlord was giving me the next 6 months free because I had a leak and I had to fix the leak myself. Or whatever nonsense or factual circumstance they may bring up. So what the estoppel certificate does is it prevents a tenant from saying something different after the fact. Again, part of substantiating what that rental income stream is, and making sure that any issues that exist are brought to the forefront. Just because an issue is brought up does not mean that it is the end of the world or the end of the transaction. It may just mean that there is a purchase price adjustment and undertaking to fix something or a realization by the purchaser that there not getting quite what they thought that they were getting. In any event it is important to get estoppel certificates from as many tenants as possible. Sometimes the agreement requires 100%. Sometimes it may just require a certain percentage, again, so that borrower can substantiate as much as the rental stream as possible, from a third party source other than the vendor who just wants to sell the property. Mark.

Mark: As the lender you are quite interested in that. You may actually make your case for the loan based on the perceived rental income. So understanding the status of the leases, through an estoppel certificate, may actually be a critical condition precedent for your loan. It's not something necessarily to be glossed over. Similarly, a review of the leases should identify that, one, the estoppel certificates are obligations of the tenants so that there's more or less an understanding that they will be provided for closing because their obligated. But also the interplay between existing tenants and you as the lender coming into the situation. So the subordination and non-disturbance provisions in the lease are important to look at as well because this will in turn impact whether the lender is able to enforce properly against the property and the tenancies. In many cases if there are provisions in the lease, they are to be subordinate to the incoming lender and, in many cases, that subordination is also tied to the provision of a non-disturbance agreement so that the lender will agree, if the tenant is not in default, to allow the tenant to stay in accordance with the provisions of the lease. But in exchange they are subordinate to the lender. That's important to consider as part of your due diligence.

Pamela: Absent that, Mark, if you look on title and you do not see a lease or notice of lease registered against it, that lease may still take priority. In our different title system regimes in Ontario, land titles versus registry, land titles conversion qualified in registry, leases that are 7 years or less would take priority to a mortgage. In land titles absolute, 3 years or less would take priority. So you do want to make sure that the leases are in the correct order that you would like them to be, and if you were loaning against something that is registered, then you may need to require postponements. That will depend upon the length of the lease. A 10 year lease that burdens the property for the next decade might be something to consider postponing. If it's not part of the lease, itself, you may have to have your borrower negotiate something outside of the lease. So a 10 year lease is probably a good substantial rental stream, but a 25 year lease would not necessarily be, and you would have to have a different discussion on that one. Is that good for that, Mark?

Mark: I think that's perfect. So let's go to the next slide.

Pamela: So next slide. Do you want to start, Mark?

Mark: I think it's important to have this discussion on title insurance because it seems to increasingly be perceived as a stop gap. Part of the important element is that it has a very specific role and function, but title insurance is not necessarily the same for the lender as it is for the borrower, who's going to be acquiring the property. Generally speaking, most title insurance products that are out there are more lender friendly because there's more coverage for more issues that could arise for lenders. But it may not actually provide coverage for the borrower or it may not be appropriate coverage for the borrower. It's important to understand the differences, and to canvas what due diligence is still something that should be pursued, even if title insurance was in the picture and which may be more appropriate to rely on the policy and coverage under the policy. The element here is the difference. Title insurance is an alternative to a lawyer's opinion on title and usually if that's the way that they're proceeding, the lawyer will review title and search title, adjoining properties, all the instruments on title and then a whole regime of searches off title. From taxes and heritage and zoning and environmental and files from the municipality and the Province. So it's a pretty comprehensive investigation to ensure that there's nothing else out there that's going to impact good title and marketable title and ensure that there's good quality of title that's being acquired. There's pros and cons that are associated with both. In many cases it's a matter of timing. Sometimes it's a matter of cost, because all those searches do require government fees for the inquiry, but in the end it's what are you getting coverage for. So, Pam, maybe you can take us through some of the pros and cons of full searches, or opinion, or title insurance as seen in some of these bulleted points that we've highlighted.

Pamela: I want to take us back to our fact scenario and just how important it is to be looking at what the borrower is doing with the property. In this scenario a lender may be just fine. They can get title insurance. We can close in a few days time without doing full searches. The lender in all likelihood will be made whole but the borrower here, in the one that we want to keep as a continuing customer coming back from time to time, they would be in a really bad situation if these searches had not been done. We know that the new tenant coming in with a new use really needed us to look at zoning, and if zoning did not permit it then perhaps the purchase price was too large, or perhaps this particular borrower/purchaser should have not waived conditions. So the not doing searches but having title insurance in place may not be sufficient for the borrower to get what the borrower thought that they were getting. In this case a lab tenant that would be the anchor tenant for this entire plaza. The full searches is really about a matter of knowing problems in advance. My opinion has always been you are much better to know it beforehand and to deal with it beforehand than after. Sometimes that's contractually because you can't go after the vendor once you've closed. More often, along the lines of what we've been talking about, it's about knowing what you're getting into and whether or not it is worth it. So knowing in advance that your construction costs are going to be 10 or 15% higher because of environmental issues, because of heritage issues and because of zoning issues where you require a minor variance, all of those things are factors that you want to know beforehand. Title insurance doesn't fix that problem. But let's look at what title insurance may fix. Lawyers making mistakes? Yup, technically. We'll just keep going from that one. Fraud. A new borrower is more likely to be one where fraud could occur. I see never on the chat. So knowing who the borrower is or the lawyer having dealt with a particular borrower and to ... for a number of years, those types of things help to prevent fraud from occurring but we can't see everything and we can't search everything in order to determine whether fraud is existing on a transaction so that is one situation where title insurance is very helpful. Title insurers have also started offering some new post-closing coverages. So two of them here are, where the borrower builds without a permit and therefore causes a decrease in the value of land, your lender policy is going to make you whole. Super priority liens, and again this is something lawyers just can't search on their own or at least on a timely enough basis for any transaction to occur. So those are a couple of situations that we thought that we would mention there. Title insurance does, however, allow a situation where a deal could close sooner. So if you have some base facts in your borrowing scenario where land is being bought. It's already tenanted. There aren't any renovations or construction related things that are going to occur in the short future, those base scenarios, they might mean that a quick and dirty title insurance, less than full searches, is something to pursue. The less than full searches, all title insurance policies do require some searches, so it depends upon the level of coverage and what the title insurer may require to go along with that policy. But there are some base searches that are always done. Mark, do you want to add to that?

Mark: Yup, and it's to ensure that they fit together as a puzzle. In many cases there may be some qualified limited opinion that is required from the lawyer. Indeed the title insurance policy itself is an opinion of the title insurer and to look at what the coverage options are so that they can actually integrate, not only just for the sake of getting the transaction closed faster but also to ensure, as we said at the outset, that the borrower has something that they can use, tangibly, to move forward with the acquisition or the future expansion in our fact scenario and they're not going to be caught off guard with a situation that's going to be a problem, or that title insurance can't cover as well.

Pamela: Mark, we didn't say it at the beginning but we actually sort of tried to time this out so that we had time for questions. So if people do have them, if you could now enter them in. Let me just make sure.

Stephanie: I was just going to say that there's one there now so if you guys are ready I can pose that. The question we have now is, should the due diligence searches be conducted right away, even if closing is 3 months away, or should it be sometime closer to the closing?

Pamela: As a general rule of thumb I look at the timing and when a client wants to spend their money. So if you have a conditional deal, and it's conditional for 30, 60 or 90 days, that really is what dictates when we start doing our searches. If you only have a 30 day conditional period you need to start your searches right away because otherwise you won't get them done in time. If it is a 60 or 90 day period, you might be able to delay that start, and save your client some costs because your client, and I'm talking about the borrower really here, a borrower might decide that they don't even want to go forward with the transaction within the first 30 days because they have been into the local municipality to ask about whether a lab use is okay, whether this expansion would be palatable. They might have had some preliminary discussions which already killed the deal. In which case we don't want to have spent their money yet. Mark, anything to add to that?

Mark: Yeah, just to keep in mind that the last 2 years have been pretty difficult in various industries so the timing in conducting a number of these searches has actually expanded exponentially. So it may have taken 3 weeks or 2 weeks to do a zoning search in the past and now it may take a month. So understanding what types of searches are going to be required for the due diligence period. Some can be started sooner rather than later but we don't want to be caught in a situation where you have to have a certain piece of due diligence but you know that it's going to take 40 days for that to actually manifest. Enough lead time is great.

Stephanie: The next question that we have here is, as a lender, since we have different title insurance coverage, should our counsel ask the borrower's lawyer about the due diligence searches and ask to see them or should we just rely on the title insurer?

Pamela: I think that's the theme of what we've been trying to say. I think you're better off knowing about the problems. You're better of knowing that your borrower is doing proper due diligence and not getting themselves into trouble before you've even advanced the loan. So there are certain searches where certainly what we do is we rely upon the borrower's counsel to conduct the searches and we just do a quick overview of them and then don't do separate searches. That way you're saving the duplication of expenses. But in my opinion, yes you could rely upon title insurance but I don't think that helps on a go forward basis. You're better off conducting, or at least reviewing, what has been conducted.

Mark: You want to know where the borrower has already been in pursuing their investigations of the property. They didn't just wake up and say, this is the property I'm going to buy. They probably already started some work. So to avoid the duplication, but to understand where they've already searched, and what types of inquiries they may have already unraveled. That dovetails into the title insurance coverage as well.

Stephanie: I don't see any other questions yet. So feel free to put them in. One question that I often get from my lending clients, having to do with leases not title is, when, if ever, it is appropriate to allow them to remain in priority without obtaining the postponement? There's often times where we'll get a lot of push back on it from the tenant, who's on title, so can one of you speak to that?

Mark: It's really factually dependent. I mean if you have a month to month tenancy it's not going to be much of a problem. If you have 3 years left in a tenancy and they've historically been in a good position and they may not be as material to the transaction or whatnot, then there's opportunities to consider what you can, from a lending perspective, what you can get in lieu of; subordination or postponement. But generally speaking that would really rear its head when it's time for enforcement. So you don't want to be caught off guard there.

Pamela: There is one subject I wanted to talk about, quickly. The difference between a general assignment of rents and a specific assignment of lease because I think this is often a mixed up concept. I am often asked to get a general assignment of rents and leases and a specific assignment of lease which is just a two party document between borrower and lender. But it talks about a specific lease. To me that is an extra piece of paper that is completely superfluous and not really useful. You need the tenant to be a party to a specific assignment of lease, to have it add anything more than the general assignment of rents and leases. If that's a requirement of our security list then you need to be careful about that. Sometimes that's one way to get to your tenant into a postponement by having that contained within the language of the specific assignment of lease.

Stephanie: Okay. Another question has come through. What are likely issues to note when the owner is a general contractor, handling multiple construction contracts, in a construction project being financed by a lender?

Pamela: So the owner is a general contractor. This is what we had started to get into a little bit. The issues really start with is does that owner have any experience? Being your own GC is not actually fun. It is a lot of work. So I just start there as an overall comment on not all borrowers should be general contractors. Then you get into the issues of when do your lien periods run, and maybe I'll let Mark speak a little bit more about that, because when you start to make payments and you've withheld your proper holdbacks, knowing when you can release those holdbacks now becomes contract specific. Again, that just leads to a lot more work that needs to be done and a lot more due diligence. Mark.

Mark: There's also some misinformation about when those holdbacks can be released in the context of individual sub-contracts or the project as a whole. If it's a larger project that has a payment certifier and it's being coordinated through a consulting engineer or an architect, that makes a difference as well. So it's important also to know if it's for a residential construction, or if it's non-residential construction because that may impact other ancillary issues as well, particularly for construction liens and other regulatory items like if it were a condominium for carry on. Those are very specific in terms of trying to ascertain those obligations and those are also lender obligation, as well, in terms of what the lender needs to be holding back from the those types of funding arrangements.

Stephanie: Okay. We're running to close to time here, so I don't see any further questions, so I wanted to thank Pam and Mark, again, for the very insightful presentation. I will just give some closing remarks and then we can move onto the network. So, thank you again to all of our guests for tuning into our Third Annual Cross-Institutional Lending Conference. We're so glad that you could join us today and we hope you learned something valuable. Later today you'll receive an email with a feedback survey. Please do take a moment to share your experience with us so that we can improve future events. Next we're going to cap off the conference with a 30 minute networking session so you can connect with our speakers, with your colleagues and with your peers from financial institutions and other lenders from across Canada. If you weren't able to join us for the lunchtime networking session here's what you can expect. We're going to move to conversation mode for some open networking, where you'll be able to move freely between conversations, much like you would at an in person networking event. You'll be moved over to the networking mode automatically so there's nothing that you need to navigate. Once you're there you'll see that floor plan and you can just click into various tables and, of course, move as you see fit. Thank you, again, for joining us today and we hope you can stick around and come chat with us at the networking event.