Buying or selling a multi-residential property is a commercial transaction and requires many more considerations than a typical house transaction. It also requires a different set of considerations than most other types of commercial real estate transactions, primarily because tenants’ homes and the Residential Tenancies Act are involved, and many costs that can be passed on to a commercial tenant cannot be passed on to a residential tenant.
The Ontario Real Estate Association produces many standardized forms including an agreement of purchase and sale (APS). The standard body of text in the APS should not be modified. All non-standard clauses should be placed in a Schedule A. The APS has a standard clause that establishes that Schedule A clauses take precedence over standard body clauses.
Here are some topics of clauses that buyers and sellers may want to ensure are in an APS.
Require the seller to immediately provide, if available:
- Existing survey
- Zoning and permitted uses
- Environmental assessment
- All due diligence documents in the seller’s possession
The seller should provide the following within a few business days:
- Summary of all expenses and backup documentation (e.g. invoices, statements)
- Contracts to be assumed
- Chattels list
- Insert the rent roll into the APS and have the seller warrant its accuracy
- Tenant confirmation (Estoppels) letters: each tenant confirms in writing the contractual understanding that each tenant believes it has with the landlord (seller) in respect of the rental unit and services provided between the tenant and the landlord.
Due diligence documents should be given, including: rental increase applications; capital improvements completed by the seller during its ownership and related warranties; contracts; property tax assessments; leases; offers to lease; tenancy agreements; true executed copies of existing mortgages to be assumed by the buyer; engineering plans; floor plans with dimensions; soils; hydro-geological and other tests; service layouts; audits; and reviews.
Condition on financing
This is arguably the single most important clause, as failure to secure financing is the number one reason commercial contracts fail to close.
Unlike residential mortgages, commercial financing never is done in a few days. Participants should allow at least 20 business days, or you could find yourself asking for, or granting, extensions that could re-open negotiations.
Condition on environmental assessment
The Canada Mortgage and Housing Corporation (CMHC) and most lenders require a ‘phase one’ environmental assessment for commercial transactions, including multi-residential properties comprising five or more units.
The results of a phase one can be filled with surprises. For example, it might be discovered that the property was the site for a laundromat or garbage dump long ago. Participants should at least leave 10 business days for the assessment.
Don’t let the clock start ticking on the buyer’s conditions until the seller has met all of their conditions. The conditions should be scheduled in logical succession, too. There is no point in paying for an environmental assessment if the financing isn’t in place first.
As a buyer, get your own building inspection done
The appraisals, assessments and inspections conducted by the lender, CMHC and others serve their needs. The best interests of the buyer may not be served. Things they ought to know may not necessarily matter to the lender.
Buyers should allow time for this and not spend the money until they are certain that all other conditions are met first. Buyers should be certain that their chosen appraiser and environmental assessment specialist are on the lender’s approved list before they award the work.
They should also ensure the buyer or seller does not need to rely on anyone else’s permission in order to close.
Meanwhile, the seller should:
- Turn over the property in a reasonably clean and vacant condition.
- Send a notice to all tenants advising them of the new owner and requiring all future rents to be paid as the buyer directs.
- Warrant that they have complied with all legislation while it owned the property.
- Allow the buyer and their agents access to the property from time to time to conduct its due diligence.
- Allow the buyer to inspect the property one last time at least one week prior to closing.
- Not renegotiate any rental or lease agreements after the APS becomes unconditional.
There should be no disputes outstanding between the seller and tenants or suppliers. Also, any pending rent review applications should be completed by the seller at their expense.
In addition, chattels and fixtures should be in good working order and free from liens and encumbrances. Outstanding work orders and letters of non-compliance should all be resolved or actions agreed to between the parties before closing.
The buyer should be certain that they obtain a fire retrofit letter from the local fire department. They should also obtain the seller’s warranty (not just representation) that there is no water damage, environmental effects (hazardous substances) or pests in the property, in addition to ensuring that the sewage system and furnace are all in good working order.
Additional information that should be a known is whether:
- The lands are free and clear of any local improvement charges.
- The property is not designated, or planned to be designated, a heritage property.
- That the building is in compliance with the zoned use, or written confirmation that the building is “legal non-confirming.”
Finally, if setting up a new company to hold the property’s title, an assignment clause should be inserted to transfer title from the buyer to the seller upon closing.
Many factors can affect what additional clauses may be required. It is not possible to anticipate all the vagaries and variances of the multitude of influences that affect what clauses should go into an APS, but the above list is a good starting point.
Chris Seepe is a commercial real estate broker and broker of record at Aztech Realty in Toronto, specializing in income-generating and multi-residential investment properties, retail plazas, science and technology-related specialty uses (laboratories, data centres, call centres) and tenants’ mandates. He can be reached at cseepe@aztechrealty.com.
