News & Views
Key Due Diligence Items When Purchasing Commercial Real Estate
Written by Stephanie Furlan and Leslie A. Fluxgold
Due diligence is a vital form of risk management. It allows a prospective buyer to audit the property’s affairs before purchasing, in order to mitigate future liability. To complete a proper assessment, it is recommended that a sufficient time frame be allowed. The following are key due diligence items that should be considered before closing any real estate transaction:
1. Environmental Site Assessment
It is recommended that an environmental site assessment (“ESA”) be conducted according to the customs of the Canadian Standards Association. If a lender is involved, an ESA is usually a condition of funding. ESAs help to identify any contamination issues with the land, which may be costly to remedy. Two phases of assessment may be involved.
A Phase I ESA consists of a surface-level assessment that identifies any potential contamination risks by exploring past and present land uses. It consists of a non-intrusive site inspection of the property and surrounding lands, records review, as well as interviews with the site owner or other persons with knowledge of the property. A report will document potential issues with the land, if any. A Phase I ESA will identify if further investigation is required.
A Phase II ESA is generally conducted after the Phase I ESA outlines the scope of investigation required. A Phase II ESA is also recommended if a property housed any industrial activity in the past, due to the increased risk associated with hazardous waste displacement. It usually involves a sampling of the land, including soil and groundwater. It is helpful in determining whether any conditions on the site are causing adverse effects that may warrant further action on behalf of the buyer. A Phase II ESA also consists of reviewing the report provided in the Phase I ESA and compiling a final report for review.
If contamination or other hazardous materials are discovered during a Phase I ESA, a Phase II ESA may become critical before a transaction can close.
2. Building Condition Report
In addition to assessing the land, any existing buildings on the land should be inspected for compliance with industrial standards. Building condition assessments assist in the valuation of property by evaluating whether existing systems are working adequately. Similar to environmental assessments, they may be required by the lender. Full awareness of the building’s condition is especially helpful in determining the scope of work if renovations are expected.
The final report will disclose if any repairs or other construction must be completed for the building to conform to industry standards. Reports will typically assess the following: site and grounds, building exterior and interior, mechanical and structural systems, fire code, and regulatory compliance.
3. Zoning and Land Use
Zoning governs the use and division of land and clearly impacts land development. Local zoning by-laws provide a description of the permissible density on a parcel of land as well as its allowable uses. Further, they place restrictions on the height of the proposed improvements, the location of structures and utilities, lot sizes and dimensions, and parking requirements.
Buyers must ensure that the intended use of the land, and the buildings thereon, comply with current zoning by-laws. Relevant documentation, surveys, and permits should be compiled and reviewed during a due diligence period.
Most commercial transactions require financing, and there are a few valuable points worth noting. First, an initial budget should be created with an accountant to determine affordability of a transaction and the availability of financing to assist in the acquisition. Oftentimes there are unforeseen challenges that arise during a transaction, so buyers should ensure that they plan an allowance into their budget for the purchase.
Before waiving a due diligence provision with the vendor, it is essential that the buyer involve its lender. The lender generally requires that certain conditions be met before it confirms the availability of funding and these are sometimes overlooked. These often include the specific environmental, zoning or building condition assessments as mentioned above. The terms of financing should be outlined in a loan commitment, as opposed to a term sheet or lending proposal. A loan commitment is a legally binding commitment on the part of the lender to lend for the purposes of assisting in the acquisition of the particular property and sets out the terms of the loan and security requirements.
If you would like to learn more about any of these issues or others associated with a commercial real estate transaction, please contact Leslie A. FLuxgold at email@example.com or 905-763-3770 x210 to discuss the matter in further detail.
* Environmental Site Assessments. Ontario Real Estate Law Guide (2018).
*Zoning and Land Use By-Laws. Ontario Real Estate Law Guide (2018).
*The material provided in this only. It is not intended to provide legal advice or opinions of any kind.
About the Author:
Stephanie Furlan is our summer student, assisting with all areas of practice.
Leslie A. Fluxgold is a respected advisor to the business community, with a focus on commercial real estate and commercial lending. Les has the expertise and hands-on experience to guide clients through complicated real estate matters and commercial loan transactions.
To Litigate or Not to Litigate: What is a Judgment Worth?
Written by Liliana Ferreira
The primary concern of any plaintiff deciding whether or not to engage in expensive and lengthy litigation is the likelihood of recovery. Very often a plaintiff will be ‘right’ in law and entitled to a judgment, but what is that judgment actually worth? Is it simply a worthless piece of paper, or is it a piece of paper that will get the plaintiff paid? Is it even worth the cost of obtaining the judgment?
Like any good business decision, a cost benefit analysis should be conducted before litigation is started. In conducting this analysis, there are a few points to keep in mind. Firstly, it is rare that a successful party will recover all, or even substantially all, of the legal costs incurred. Clients are often surprised to learn that even if they are fully successful at trial, they will not be entitled to recover all of their legal costs. Secondly, a judgment does not guarantee recovery. In order for a creditor to recover payment, there must be assets to seize, garnish or otherwise collect.
So, what steps can a creditor take to protect their interests? The best offence is a good defence. Before entering into a transaction that may eventually lead to litigation, a few inquiries into assets owned by the potential debtor, some of which can be conducted before a contract is entered into, may assist in improving a creditor’s likelihood of recovery in the eventuality of litigation.
Real property is often the easiest asset to locate, and may provide the best avenue for recovery. A creditor can conduct a relatively simple province wide search to determine not only whether the debtor is the registered owner of property, but also information pertaining to the mortgage(s) registered on title and particulars respecting same (ie. the original mortgage amount and payment terms). This information can assist in determining whether there is any equity in the property owned by the debtor, and the ease with which a sale of the property can occur.
Additionally, although not common, a creditor can obtain an authorization and direction permitting the creditor to obtain financial information directly from a financial institution or a mortgagee. Such an authorization and direction may address PIPEDA concerns that often result in a motion being required before information can be disclosed to creditors. When authorizations or security are being obtained from a debtor, a creditor would be wise to obtain consents or authorizations from the debtor’s spouse to protect against future challenges once litigation commences.
A creditor can also determine whether the debtor has a history of exposure to litigation by conducting a search of court records. Such a search will disclose whether a creditor is or has been involved in litigation, regardless of whether or not a judgment has been obtained. Where a judgment has been obtained against the debtor, a creditor can conduct an execution search to determine whether there are any writs registered against the debtor. This is helpful information as execution creditors (creditors that have registered writs) will share in the proceeds recovered from any sale/refinance of a property owned by the debtor or any funds recovered by the Sheriff via garnishment on a pro-rata basis.
While much of this information may be obtainable by conducting a skip trace or a judgment debtor examination, having this information available before starting lengthy and costly litigation enables a creditor to assess the likelihood of recovery. While the outcome of litigation is never certain, the likelihood of recovery can be slightly more predictable if the appropriate inquiries are made early on.
Once a creditor has embarked on litigation and obtained a judgment, a creditor needs to be aware that not all assets are created equal, and there may be certain impediments to recovery that a creditor should be aware of. For example, while bank accounts can be garnished, in order to garnish such accounts, a creditor will need to know the location of the branch where the accounts are located. Wages can also be garnished, however, there are limits to the amounts that can be garnished, and certain income (ie. government assistance), cannot be garnished at all. Further, while a creditor can force the sale of a property via a Sheriff’s sale following the issuance of a writ of seizure and sale, there may be issues that frustrate the sale and ultimate recovery, such as joint ownership, spousal and possessory issues, or priority claims and liens.
In order to assist in determining if and when the debtor has recoverable assets, a creditor can conduct an examination in aid of execution, otherwise known as a judgment-debtor examination. During this examination, assuming that a debtor both attends and is truthful, a debtor will disclose particulars of their assets, such as the location of their banking branch, and this information can be used to enforce a judgment.
Therefore, before embarking on the litigation journey, it is advisable to consider and assess whether the judgment that may be obtained at the end of the journey will be collectible or whether the judgment will merely serve as a document confirming the conclusion of the litigation journey.
If you would like additional information, please feel free to contact Liliana Ferreira at firstname.lastname@example.org or at 905 763 3770 x 242
*Personal Information Protection and Electronic Documents Act, S.C. 2000, c.5
*The material provided in this article is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.
About the Author:
Liliana Ferreira's practice encompasses commercial and estate litigation. She advises individual and corporate clients on a range of legal issues such as employment and contract disputes, construction matters and debt recovery claims.
Her unique expertise allows her to take a balanced approach to litigation with a sharp focus on advocacy and dispute resolution while assisting her clients in making informed business decisions.