Introduction
Similar to many industries, the COVID-19 pandemic has changed the landscape of the Canadian commercial real estate market. Players in this space such as landlords, developers and property managers have been forced to adapt in the face of uncertainty and continually changing rules and policies. Office and retail spaces experienced difficulties due to work-from-home orders, while e-commerce drove the rise of industrial real estate. Canada’s commercial real estate sector remained resilient throughout the pandemic and has in fact generated increased investments as the economy continues to rebound.
The effects of this revival are seen not only in the increasing numbers of real estate transactions and property development projects, but also in how transactions are undertaken from start to finish. As Canada continues to emerge from pandemic restrictions, the players in commercial real estate transactions must be mindful of how the game is now played from both business and legal perspectives. This article is intended to provide practical considerations to commercial real estate transactions in light of the changed landscape.
Land Titles and Registrations
Commercial real estate transactions require access to the provincial land titles offices. Title to real property must be reviewed to determine the course of action to be taken. For example, in order for purchasers to take comfort in the real property they are acquiring, certain registrations must be discharged from title and/or certain conditions to closing may require the registration of a plan of subdivision or other instruments.
The pandemic has unfortunately caused significant delays in land titles registry systems in most jurisdictions across Canada due to shortage of staff and varied modes of operation. By way of example, registrations require 4-6 weeks to process in British Columbia and Ontario, and upwards of 12 weeks in Alberta. Such procedural delays must be accounted for in each step of the transaction as will be further explained below.
The Purchase and Sale Agreement: Pre-Closing
Tip: Commence due diligence as early as possible.
As mentioned, the current Canadian commercial real estate climate is one of a sellers’ market. Delays in land title registry systems evidently compete in timing against the interest of vendors and purchasers to close transactions quickly. While vendors have little interest in offering extensive due diligence periods under the purchase and sale agreement (the “PSA”), purchasers on the other hand must ensure they have sufficient time to conduct a thorough due diligence on the real property of interest. In typical transactions, purchasers’ due diligence not only includes obtaining information regarding title to the real property (i.e., title searches) but may also include obtaining information related to the purchaser’s intended use or development of the real property and/or environmental concerns (i.e., off-title searches).
Purchasers face the issue of shortened due diligence periods notwithstanding major delays in obtaining off-title due diligence information and also in performing on-title amendments that may be required prior to a closing. To satisfy purchaser’s conditions regarding due diligence under the PSA, purchasers and their lawyers should commence due diligence as soon as possible, irrespective of whether the PSA remains to be negotiated and/or signed. Purchasers must also be mindful that certain due diligence information can only be obtained from government bodies with consent of the vendor. As such, obtaining the vendor’s consent may add to the lead time for due diligence.
Tip: Negotiate safeguards in representations and warranties to account for delays in obtaining due diligence results.
Although most PSAs give purchasers a 90-day due diligence period, the reality of timing delays in obtaining requisite searches to satisfy due diligence conditions proves that 90 days may no longer be enough. As a result, purchasers may need to waive conditions despite outstanding due diligence information. In such instances, the purchaser must then rely on the representations and warranties of the vendor under the PSA for any legal recourse.
This situation emphasizes the importance for the purchaser’s lawyer to negotiate and incorporate sufficient safeguards in the representations and warranties of the vendor of the PSA. By way of example, if there are potential concerns with obtaining results for certain environmental searches in time to waive conditions, it would be sensible to obtain a representation or warranty from the vendor that the property has no environmental concerns to address the said timing issue (at least in part).
Depending on the relationship between the vendor and purchaser, it may be in the interest of the purchaser to request an extension of the due diligence period if needed. Notwithstanding this, it is in the best interest of the purchaser to commence due diligence as early as possible.
The Purchase and Sale Agreement: Closing
The process of closing commercial real estate transactions has been significantly altered by the ongoing public health crisis. Two aspects of the closing process have been more notably affected: (1) the use of title insurance, and (2) electronic execution of documents.
Tip: Close transactions on title insurance to insure over issues that cannot be rectified in time for closing.
Due to the COVID-19 related delays at land title registries, lawyers have relied more heavily on obtaining title insurance to insure over issues that cannot be rectified in time for closing. In provinces like Alberta where the delay is significant, closing on title insurance has become a necessity. Whether full owner and/or lender policies are obtained depends upon the nature of the transaction; however, gap coverage at a minimum is highly recommended, if not necessary.
Title insurers may also insure for certain off-title matters provided that same is discussed with the title insurer prior to the policy being issued. Considering the increased reliance on title insurance, lawyers should explain to clients the nature and purpose of utilizing title insurance for closing purposes, especially in the context of pandemic-related delays. Further, it may be good practice to negotiate title insurance costs as a shared expense between vendors and purchasers. While purchaser benefits from the insurance policy, vendors too benefit from the immediate release of funds on closing notwithstanding the transfer of title to the purchaser’s name.
Tip: Suggest electronic execution of closing documents to ease the closing process.
The other aspect of the closing process that was significantly altered by the pandemic is the execution of closing documents. The social-distancing measures of the pandemic prevented the traditional process of lawyers meeting with their clients to execute documents. In most jurisdictions, governing bodies including law societies have issued orders/regulations to allow lawyers to use technology to execute and/or communicate with clients in response to such measures.
Although electronic execution of documents has generally eased this process, lawyers should be mindful of certain documents which still require original handwritten signatures – these generally include financing documents and those required to be filed at land title registries. As electronic execution of documents has become the norm, lawyers should ensure that same is undertaken in accordance with the applicable legislation on electronic documents. It is safe to say that the electronic execution of closing documents is here to stay.
The Purchase and Sale Agreement: Post-Closing
Tip: Diarize to follow up on the status of registrations at land title registries post-closing.
The delay in preceding stages of the commercial real estate transaction unsurprisingly creates various post-closing obligations on the parties. Since registrations are not immediately processed on closing, lawyers must diarize to follow up on their status post-closing. If issues arise at this stage, lawyers must then promptly rectify such issues to ensure the registrations do not lose their priority in the registration queue. Timelines for discharges, including lender discharges as required, are also extended given current circumstances. It is important for practitioners to diarize and follow up on receipt of discharges and registration of discharges to meet undertaking provided and serve client interest.
Development Projects and Construction
- Construction and Permit Delays
Tip: Account for construction and development permit delays in project timelines.
In light of the COVID-19 pandemic, many development projects experienced delays caused by:
- supply chain delays for construction materials;
- labour shortages;
- temporary closures of construction sites due to COVID-19 lockdowns; and
- extended timelines for government departments and agencies processing applications including development permits and rezoning applications.
As these complications continue to impact development projects, it is recommended that developers account for delays in construction and in obtaining requisite permits and applications when establishing project timelines.
Tip: Make permit and associated applications as early as possible.
- Force Majeure Provisions in Construction Contracts
Tip: Review construction contracts for force majeure provisions.
It is important for developers to be aware that a force majeure provision in a construction contract may excuse a contractor from completing its obligations under that contract in the case of an unanticipated event (such as the COVID-19 pandemic) which is beyond the control of the parties. Generally speaking, a party seeking to rely on a force majeure provision in light of COVID-19 must first determine whether the pandemic falls within the scope of that provision. A force majeure provision may list a pandemic, epidemic, or public health emergency as constituting such an event.
In summary, it is recommended that developers review their construction contracts to determine whether a force majeure provision accounts for the COVID-19 pandemic and could therefore excuse a contractor from completing its obligations under such contract.
Commercial Leasing: Health Emergency Provisions and Force Majeure
Tip: Understand powers granted by health emergency provisions in commercial leases.
Many landlords have relied upon health emergency provisions in their commercial leases to protect their building tenants and customers from the risk of COVID-19. Health emergency provisions authorize a landlord to impose new protocols in the operation of a building in the event of a situation in which tenants or visitors to the property may be exposed to imminent danger from a disease, virus, or any other physical or biological agent that may be detrimental to human health.
For risk mitigation purposes, it is recommended that landlords ensure that a health emergency provision is included in their commercial leases and that such provision authorizes a landlord to take such steps as may be necessary for the protection of its building tenants and customers. By way of example, a health emergency provision may allow a landlord to reduce hours of access to the building by employees or customers and to impose stricter cleaning protocols.
Health emergency provisions may also allow a tenant to take steps themselves in these scenarios by authorizing it to cease its business activities or to reduce its hours of operation for health and safety purposes. As such, it is recommended that landlords also give careful consideration to the rights that their tenants may be granted under a health emergency provision.
Tip: Ensure Force Majeure Clauses cover pandemics and forced shutdowns.
Force majeure clauses are required to be examined and revised due to COVID-19. Landlords should ensure and confirm their force majeure clauses cover pandemics and forced shutdowns. Further, landlords should confirm that these clauses specify that a tenant is not released from the payment of rent and any amounts due to the landlord due to a force majeure event or circumstance.
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Ruben Sekhon is a partner in the Real Estate group of Dentons’ Calgary office. She has a broad commercial real estate and corporate law practice with an emphasis on leasing, financing, development, acquisitions, dispositions, and condominiums. Her ample leasing experience includes office, industrial, land and retail leases. Having worked in-house with businesses in commercial real estate development and rental, she has extensive experience in industrial and suburban office development and leasing. Ruben also advises on a wide range of corporate matters including asset and share purchase and sale transactions, corporate reorganizations and commercial contracts.
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Bonnie Anderson is a partner in the Real Estate group of Dentons’ Calgary office. She has a unique background in architecture, urban planning, economics and law. From complex mixed-use developments to single- family residences, she provides advice on a full range of municipal matters from Development permit applications and appeals to registering documents and subdivision plans.
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Devin Matthews is an associate in the Commercial Real Estate group at Dentons. Based in the Calgary office, Devin has a broad real estate practice which covers commercial lending, commercial real estate, business acquisitions, and other general corporate matters.
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Joanne Lui is an associate in Dentons’ Commercial Real Estate group. Based in the Calgary office, her practice involves all aspects of commercial real estate including acquisitions and dispositions, commercial development, financing, and leasing. Based in Calgary, Joanne also advises on a wide range of general corporate commercial matters, including asset and share purchase and sale transactions, corporate reorganizations, and corporate governance.