Welcome to the National Real Estate Newsletter

Welcome to the National Real Estate newsletter, updating you on the latest issues affecting real estate and the property development market. In this issue, we discuss (i) Looking Beyond Title - Fraudulent Mortgages; (ii) Specific Performance for Vendors in Real Estate Transactions; (iii) Is it Time to Sublet? (iv) The New Harmonized Sales Tax-Will it Affect Your Real Estate Operations? (v) Review of significant deals and transactions that our various offices have been involved in.

Looking Beyond Title – Fraudulent Mortages

By: Scott Wilson

The British Columbia Court of Appeal recently heard two appeals involving fraudulent mortgages. The decisions in Gill v. Bucholtz, 2009 BCCA 137, and Oehlerking Estate v. John Doe, [2009] B.C.J. No. 668, were released jointly on April 6, 2009, and the precedent set by these decisions will require lenders to review, and possibly revise, their due diligence and lending practices.

The land title system in British Columbia is modeled on the principles of the "Torrens" registration system. Under the Torrens system, only the person registered on title is able to transfer or otherwise deal with the land. An integral component of the Torrens system is indefeasible title which, with several exceptions, is conclusive evidence at law and in equity that the registered owner has a right, good against the world, to the land. Registered titles are assured and there is no need for extensive due diligence regarding the validity of title. Backing the land title system is the Assurance Fund which provides compensation in the event that an individual loses title to their land as a result of error or fraud. The two recent Court of Appeal decisions considered whether a registered charge on title, such as a mortgage, offers the same "indefeasibility" as that of the registered owner.

The Court of Appeal held that lenders in British Columbia can no longer rely on the register when granting a mortgage to a registered owner. A mortgage taken from a fraudster is a void instrument which does not give the lender any interest in the land. Such mortgages will be cancelled from title and the lenders will be responsible for the cost of the frauds.

In Gill v. Bucholtz, Mr. Gill was the registered owner of a property. The property was fraudulently transferred from a fraudster to an accomplice who then granted a mortgage to Mr. and Mrs. Bucholtz and later granted a second mortgage to a numbered corporation. Both mortgagees, unaware of any fraud, advanced the money on the security of a mortgage granted by the registered owner.

In Oehlerking Estate v. John Doe, Mr. Oehlerking, the registered owner of the land, died in January 2006. In March of that year a "John Doe" and a female accomplice, Sarah Mullen, posed as Mr. Oehlerking and his niece. John Doe forged a transfer of the property to Ms. Mullen and shortly thereafter, Ms. Mullen applied for a mortgage on the property and acquired a loan from the defendant mortgage lender.

In both decisions, the mortgages were declared null and void as against the rightful registered owners to the lands. Despite their reliance on the registered title and the registration of the mortgages on title, the lenders did not acquire any interest in the land because they were granted by a person who had no interest to give. The true owner of the land was entitled to recover title and to have the mortgages removed. As opposed to paying the lenders out of the Assurance Fund, the Court decided that the cost of mortgage fraud is best borne by the lender and not the public (as funders of the Assurance Fund). Essentially, a registered charge, such as a mortgage, does not obtain the same quality of indefeasibility as that which is given to a registered owner.

What does this mean for lenders in British Columbia?

Lenders in British Columbia who rely on mortgage security will not be protected by the registration of such mortgage in the event of fraud. The fact that a person is on title as the registered owner is not sufficient proof for the lender. Mortgages granted by a fraudulent registered owner will be found null and void and cancelled as encumbrances against the innocent land owner's title.

To protect themselves from fraud (and the costs which lenders will be forced to bear), lenders must look beyond title and conduct a higher level of due diligence to satisfy themselves that the owner of the property is in fact the true owner. While there is no fail-safe method of due diligence, lenders should consider:

reviewing due diligence practices;
reviewing the circumstances (and documents) of the borrower's acquisition of title
reviewing their "know your client" practices;
title insurance; and
working with the borrower's lawyer to confirm information

The Court's decision to place the burden of mortgage fraud on the lenders was in part based upon the policies adopted by the Legislature of British Columbia. Perhaps this decision will be later addressed by the government or the courts, but until that time, lenders must do what they can to protect themselves.

Specific Performance for Vendors in Real Estate Transactions

By: Mark Heck

The availability of specific performance in real estate transactions has been the subject of significant consideration in both the academic texts and jurisprudence. While such considerations have generally focused on the availability of specific performance to a purchaser and the resulting discussions of "uniqueness", the availability of specific performance to a vendor is becoming more relevant in the current economic climate. This article will deal with the availability of specific performance to a vendor, the basic requirements that must be met in order to entitle a vendor to such relief, and the general characteristics of the relief if granted.

General Availability of Specific Performance

Specific performance is not simply a legal right afforded under a contract for the purchase and sale of land. It is also an equitable consequence of the principle that parties to a contract are bound in conscience to execute the contracts to which they agree to be bound. Since specific performance contemplates the execution of a contract, the following elements of the contract become relevant: mutuality of obligations, certainty, completeness, conscionability, and the ability of a court to enforce a decree. In the hands of a vendor, specific performance equates to an action for the payment of the purchase price.

Typically, specific performance applies only to executory contracts - contracts which contemplate further acts by the parties before the contract is concluded. This makes contracts for the sale of land particularly suitable for such a remedy. However, specific performance has also applied as a general rule to these contracts because land was considered to have a peculiar value to purchasers and damages alone would not provide an adequate remedy. In 1996, the Supreme Court of Canada reversed this general rule when it ruled in Semelhago v. Paramadevan that specific performance should not be granted as a matter of course unless there is evidence to establish that the property is unique to the extent that a substitute would not be readily available. The fact that Semelago dealt with an action for specific performance by a purchaser may limit its application to specific performance sought by purchasers. However, if an action for the recovery of the purchase price is an equitable proceeding for specific performance governed by the same equitable principles, one could argue that the requirement of uniqueness of consideration should apply equally to both vendors and purchasers. It would seem that for now at least, this argument has not been considered to any great extent.

Requirements for a Vendor's Action for Specific Performance

Unless the parties have an express agreement to the contrary, a vendor cannot hold both the land and the purchase monies. Therefore, the vendor must have conveyed the property to the purchaser. However, simply providing possession of the property to the purchaser is insufficient.

There has been some uncertainty in the case law as how this requirement is applied to an executory contract for the purchase and sale of land where the covenants to pay and convey are dependent though separate. One line of cases states that even if the vendor has tendered a conveyance, it cannot maintain an action for specific performance because success in such an action would leave the vendor with both title and the purchase monies. However, there is also substantial authority that states that action for specific performance can be maintained if the vendor keeps the tender open by placing the conveyance in court to ensure that the conveyance is delivered contemporaneously with the purchase monies.

A vendor seeking specific performance must also show that, as of the date specified for closing under the agreement, it has performed, or was ready, willing and able to perform, all the essential acts required by the agreement. It has been stated that all this requires is for the vendor to show that it has good title to the lands or is at least in a position to deliver title as required under the agreement. However, it is very important to ensure that there are no defects in the title to be delivered as a defendant purchaser can use such defects to its advantage. Significant defects can be raised as a defense against an action for specific performance while minor defects can entitle a defendant purchaser to a reduction in the purchase price.

Establishing that one is ready, willing and able to perform the contract is usually accomplished by a properly drafted statement of claim with full and clear detail supported by a copy of title in jurisdictions where land is registered under a title registration system. The Rules of Court in some jurisdictions require that a plaintiff file with the court a duplicate certificate of title or other such documents establishing his ability to convey title in accordance with the agreement.

While this seems contrary to the usual rule that a general allegation of all conditions precedent is implied in every pleading, the duty of a vendor to be ready willing and able to complete goes to the root of an action for specific performance. Therefore, such ability must be expressly pleaded. The only time the failure of vendor to plead such ability is excused is if the vendor has lost such ability through the fault of the purchaser.

Specific Performance With Consequential Relief

All too often, defaulting purchasers are insolvent and a successful action for specific performance can be a hollow victory where the purchaser is unable to procure the purchase monies. As such, an action for specific performance often includes a request that if the purchaser fails to comply with the order directing him to complete the purchase, the contract is then cancelled and the vendor is then free to pursue the defaulting purchaser for costs incurred in enforcing the agreement.

However, it should be noted that such relief is not available where by statute or under the contract, the vendor's remedy is restricted to the land. In these cases, the court will, notwithstanding objections from the vendor, order that the land be sold under a judicial sale with the proceeds going to the vendor. Where a purchaser cannot be found under a judicial sale, a court will often allow the vendor to bid on the property and recover any deficiency from the defaulting purchaser.

When an order for specific performance is granted, the purchaser will be given a period of time in which to complete the contract. This length of this period – known as the redemption period – will vary from case to case. While the primary determining factor is what is reasonable under the circumstances, a court may also take into account factors such as the prospect or ability of the purchaser to pay.

Specific performance has typically been viewed as a purchaser's remedy. However, there is no fundamental legal principle prevent vendors from using it as well. While vendors have usually opted to retain deposits and seek additional damages from defaulting purchasers, specific performance may become a more relevant remedy in the current economic climate where willing purchasers are in short supply.

Is It Time To Sublet?

By: Jonathan Ryder

Walk out of your office into the hallway and take a peek into the office next door. Is there anybody there? Are you using the office beside you as an extended filing cabinet? Are your summer interns making plans to turn the office down the hall into a brewery? If so, it may be time to consider subleasing a portion of your premises.

Subleasing all or a portion of your unused premises provides both foreseen benefits such as decreased overhead and unforeseen benefits such as the centralization of your staff which can lead to increased camaraderie and further cost efficiencies (imagine two photocopiers instead of four).

Properly evaluating your organization's unique circumstances will ensure your business maximizes profits in the short term while preparing for the inevitable upturn in the economy. A proper evaluation of whether a sublease is appropriate for your organization begins with the following:

1. Conduct a review of your commercial lease

Standard lease terms will require the consent of your landlord in order to sublet or assign all or a portion of your leasehold premises, which your landlord may not unreasonably withhold. The factors which may give rise to your landlord withholding consent will be many but most often arise when your sublessee's creditworthiness is in question or its use of the premises is either in competition with other tenants or unusual.
In the event your landlord is able to unreasonably withhold consent for a sublet or assignment, your redress may be limited but your approach should remain identical.
Ensure your lease does not provide for adverse financial consequences in the event of a sublease or assignment. While not likely given today's depressed economic climate, should you obtain a rental rate over and above that provided for in your head lease, your landlord may be entitled to the excess rental income.
Make certain that your lease does not allow your landlord to take space back in the event you request their consent for sublet or assignment. While it is unlikely your landlord is interested in adding to their leasable inventory, this type of take-back clause is common.

2. Communicate with your Landlord

Your lease agreement will require you to provide your landlord with proper notice of any sublet or assignment. Communicating your intention to seek a sublessee ensures your landlord is forewarned of your intention to sublet and provides a glimpse into the willingness of your landlord to cooperate.
An open line of communication with your landlord facilitates not only cooperation in the event that you find a sublessee, it is also a valuable source of potential sublessees for your premises.

3. Commence your Search

In addition to traditional methods of sourcing sublessees such as real estate brokers (who will charge commission), be sure to communicate with your suppliers, clients and neighbouring tenants to determine whether they may be interested in a portion of your premises. Remember, the economic crunch has affected the majority of your stakeholders and closer proximity to these businesses may lead to increased business or cost savings in the future.
While subleasing space can increase profitability in the short term, an improper sublease can lead to negative unforeseen issues which can deter the future growth and profitability of your business. Proper planning and legal strategy can ensure you do not face the following common issues:
- Growth may be hampered in the long-term if the subleased premises are not available for your use when the economy rebounds. Conducting proper due diligence on your sublessee will ensure that a short-term gain does not turn into a drain on your financial and human resources (ensuring their financial viability can prevent future enforcement issues, an evaluation of their intended use will ensure their use is permitted under your current lease).
- Ensure security issues are addressed in terms of both physical barriers and protection of your intellectual property if only part of the premises are subleased.
Recognize that along with a depressed economy comes depressed lease rates – be prepared to accept a fraction of your current lease rate. Remember, savings on operating costs can be significant as well.

4. Contact your Landlord

Once you have found a suitable subtenant, seek approval from your landlord using the method set out in your lease agreement. Notice requirements vary from lease to lease – ensure your landlord has been provided with adequate notice so as to prevent any unexpected delays.
Work with your landlord to answer any questions and alleviate any concerns they may have.

5. Communicate with your legal professional

Properly drafted legal agreements take into account not only those issues which are at the forefront of your negotiations (rental rates, term, use of the premises), but also those issues which may arise in unforeseen circumstances.

The New Harmonized Sales Tax – Will It Affect Your Real Estate Operations?

By: Tammy Evans and Michelle Oliel

The answer is, overwhelmingly, YES. The Ontario Government announced in its March 26, 2009 budget its intention to combine Ontario's existing retail sales tax (PST) with the federal Goods and Services Tax regime to create a federally administered harmonized sales tax of 13%. Ontario will be joining Nova Scotia, New Brunswick and Newfoundland & Labrador which harmonized their sales tax regimes in 1997. Under the new tax system, commercial supplies in Ontario of real property, new home purchases, new construction of residential single family homes and condominium units, real estate commissions, property maintenance and management costs, landscaping, engineering and architectural services, and trade contracts, to name just a few, will be subject to the new harmonized sales tax (HST).

While this new regime will not take effect until July 1, 2010, and we have not yet been provided with implementation and transition details, it is important to understand how the HST will affect your future and potentially your pre-July 1, 2010 arrangements. The real estate sector will be particularly affected by the HST - accounting changes, amendments to existing agreements of purchase and sale, condominium budgets, construction contracts and various other development related documentation will be required.

New Housing Rebate Applicability

Although we do not yet have the technical details of the announced new housing rebate program, it is anticipated that the application of the HST to new homes will be at least partially offset by application of a new housing rebate, provided that the purchase price fits within the proposed limits and otherwise qualifies under the new rebate system.

For qualifying purchases, a rebate of 75% of the provincial component of the HST is anticipated to be available for new homes or condominium units purchased at a price of $400,000 or less, resulting in an effective Ontario tax of 2%. The rebate is reduced as the price of the new home increases for homes above $400,000 resulting in a $0 rebate for a sale price of a new home for a $100,000 increase in price to $500,000, resulting in an effective Ontario tax rate leap at that price point to 8%.

Construction/Renovation Contracts and Budgets

The new regime will have an important impact on construction and renovation contracts and budgeting, which could result in a significant increase in construction costs that is not anticipated at the time of budgeting, and in particular for those projects that straddle the effective date or have been tendered prior to the effective date of the HST without taking into consideration the impact of the HST in the tender and contract administration process.

Condominium Budgets and Operating Expenses

Of particular importance to condominium developers, condominium boards and their property managers, is the impact of the HST on developer's pre-registration disclosure budgets contained in the Disclosure Statements as well as potential budget overruns due to the added provincial component in first year operations post-registration. Developers should consider addressing this issue prior to implementation of the new regime. Similarly, condominium boards and their property management will want to ensure these costs are covered in any proposed budgets that straddle the HST implementation date. The transition rules may provide further guidance in this respect.

Transitional Rules

Although Ontario has yet to set out the specific details for implementation of the new HST regime, including, and of great importance for projects currently underway, any transition rules for pre-existing contracts and sales, the transition rules may follow the Atlantic Provinces transition model.

In that event, the provincial component of the HST may not apply to an agreement of purchase and sale of a new home or condominium unit that was signed prior to the "announcement date". The "announcement date" is typically the date on which the government announces how the new regime will be implemented in Ontario. This date is expected to be in late summer 2009, and we will be paying particular attention to these transition rules for new home sales, construction projects and contracts that pre-date the effective date of the new program.

We anticipate further details to come once the Province has concluded a comprehensive HST agreement with the federal government which is expected by September 10, 2009. Further policy and administrative details are expected by March 31, 2010.

Recent Transactions From Our National Real Estate Group

Despite the global credit crunch and the downturn in the real estate market, Fraser Milner Casgrain's National Real Estate Group continues to be involved in a number of significant transactions, including the following:

Vancouver

Acting for Millennium Southeast False Creek Properties Ltd. and its related companies with respect to the acquisition, financing and development of the Millennium Water Community which is to be made available as the Athletes Village for the 2010 Olympic and Paralympic Games. This downtown waterfront community will consist of a mixture of 1,100 market, rental and non market housing units together with amenity facilities and commercial and retail premises. FMC's role in this $1 billion LEED Gold development includes advising on all aspects of the development, financing, subdivision, airspace plan and marketing matters as well as providing ongoing advice on compliance with regulatory and all other development issues.
Currently providing ongoing restructuring and insolvency advice to financially distressed real estate developers generally in the context of receiverships, foreclosures and restructuring and in the context of the Companies' Creditors Arrangement Act and bankruptcy legislation. Such advice includes providing the developer of a multi-parcel, mixed-use high-rise tower with strategic corporate restructuring, insolvency, refinancing and regulatory compliance advice.
Acted for Greystone Managed Investments Inc. on behalf of certain pension funds and Hospitals of Ontario Pension Plan in entering into and completing a co-ownership and development arrangement with a local Vancouver developer to permit the acquisition, development, subdivision and construction of a multi storey, mixed use high-rise residential / commercial / retail property in Vancouver known as Cross Roads.
Acting for Polygon Klahanie Development Ltd., one of the Polygon Group of companies in connection with a master planned community project known as "Klahanie" located in Port Moody, British Columbia. The Klahanie Project includes approximately 1,100 residential units located in seven separate multi-phased projects consisting of apartment-style townhouse and servicing high-rise homes, shared infrastructure, both separately owned and shared amenity facilities and parkades and commercial buildings. FMC has provided advice in connection with all zoning, servicing subdivision development, financing, construction, marketing and sales matters for both the overall Klahanie community and each of the individual developments.
Acted for ISL Health (Victoria) General Partnership in connection with a 500 bed in patient care facility being constructed as part of the Royal Pacific Hospital campus in Victoria, British Columbia. ISL Health will design, build, finance and maintain (DBFM / P3) the new hospital over a period of 30 years. FMC advised on all aspects of the transaction for ISL Health including: bidding / procurement; project documentation; project and partnership structure; financing; and all consortium arrangements including the design / build, hard FM, soft FM and interface agreements.
Currently representing the Vancouver Organizing Committee for the 2010 Olympic and Paralympic Games in connection with a number of the venues for the 2010 Olympic and Paralympic Games including the Whistler Building Centre, (bobsled, luge and skeleton), Whistler Olympic Park (Nordic), Whistler Creekside (alpine) and Cypress Bowl (snowboarding and freestyle) as well as providing advice on a variety of other leasing and real estate matters.

Calgary

Acted for EnCana Corporation on the sale and leaseback to Centre Street Trust of "The Bow", a 2 million square foot office building in Calgary's downtown financial district being constructed by Centre Street Trust for EnCana's head office. This $1.3 billion transaction was the largest single real estate transaction and the largest sale/leaseback transaction in Canada at the time it was completed. Members of the FMC real estate and municipal planning departments in the Toronto and Calgary offices, together with construction and financial services lawyers in Calgary, have been involved in all aspects of "The Bow" transaction, starting with the initial land assembly and, most recently, the $425 million, 42 month construction facility put in place on April 23, 2009 by Centre Street Trust from a syndicate of lenders led by RBC Capital Markets and TD Securities as arrangers and including, in addition to the Royal Bank of Canada and The Toronto-Dominion Bank, The Bank of Nova Scotia, Bank of Montreal, Alberta Treasury Branches and Canadian Western Bank.
Acted for Investors Real Property Fund in its purchase from Remington Development Corporation of the Bell Canada building in Calgary.
Acted for Ace Equities Inc., a Section 149 (ITA) real estate corporation owned by two other major Canadian Pension Funds, as purchasers, of The ATCO Centre, for the aggregate sale price of $110 million. The ATCO Centre is a Class A, 20-storey, 285,461 square foot office tower located in downtown Edmonton.
Acted for a Section 149 real estate corporation owned by a group of national Pension Funds in the $35 million refinancing of a regional shopping centre in Calgary, Alberta.

Toronto

Acting for Bay-Yorkville Developments Ltd. with respect to various aspects relating to the construction, financing and development of a five star Hotel and Condominium Private Residences located in Toronto's Yorkville area. The complex is under construction and will feature a new five star Hotel and approximately 200 private condominium residences in two high-rise towers.
Acting for McDonalds Restaurants of Canada Ltd. on various acquisitions and sales of property over the last year.
Acted for Ontario Realty Corporation with respect to the settlement of an Ontario Municipal Board appeal allowing for a significant residential re-development of lands near Lake Ontario in the Town of Whitby.
Acted for Metrus Developments in obtaining municipals approvals for a major residential development in the Town of Oakville.
Acting for the Ontario Realty Corporation with respect to agreements among the Province, Durham Region, City of Pickering and a number of major developers which will facilitate the development of the new Seaton community which is planned to accommodate 70,000 new residents and 35,000 new jobs.
Acting for a number of developers in obtaining approvals for major residential buildings ranging in height from 35 to 48 storeys in the area just west of the downtown core known as the East Precinct of the King/Spadina Planning Area.
Acted for South Kitchener Holdings, ULC in connection with the sale of approximately 45 acres in downtown Kitchener, Ontario to the City of Kitchener for a works and maintenance facility.

Ottawa

Acted for CMHC (Canada Mortgage and Housing Corporation) in the acquisition of two retail mall properties and related assets located in Richmond Hill, Ontario, from ING Real Estate.

Montréal

Acted for I.G. Investment Management Ltd. as trustee for Investors Real Property Fund and to 6552463 Canada Inc. with respect to the acquisition of the shopping centre commonly known as "Les Galeries Chagnon" in the City of Lévis, Province of Québec for a purchase price of $80.5 million.
Represented a large real estate pension fund in the sale and leaseback of a warehouse facility in Lachine, Québec for a consideration of $41.5 million.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Canada: Focus On Real Estate - June, 2009