There are many considerations to make when purchasing commercial real estate, whether the intended use is for development or simply to keep using the property as-is. While price and location often dominate the conversation, numerous legal issues can affect the viability of a commercial real estate deal in BC.
In this article, we explore some of the early-stage aspects of legal due diligence in a commercial real estate deal in BC, and a basic idea of what it means when a lawyer mentions “due diligence” in context of purchasing commercial real estate in BC.
Land Title Searches
A land title office search can identify essential information such as who the registered owners are, what encumbrances are registered against title, and the legal description of the lands. It is essential for a prospective buyer of commercial real estate to know who the vendor is to ensure they are dealing with the correct party.
Encumbrances on title can vary widely. Some common non-financial encumbrances that can affect property use are easements, statutory rights of way, building schemes, phased development agreements and restrictive covenants. Notably, a title search only shows the existence of the encumbrance and who registered it, not the details of the encumbrance itself. Details about the encumbrance can only be found by separately searching for and obtaining the encumbrance. Fortunately, many non-financial encumbrances are filed with land titles and can usually be obtained quickly and for nominal cost.
It is common for expired encumbrances to remain on title. Often the only way to determine if an encumbrance has expired is by obtaining the underlying document from land titles and reviewing it.
Sometimes it may be desirable to search neighboring properties, as restrictions on adjacent properties may impede future expansion, if that is contemplated. In other cases, purchasers of commercial real estate may require encroachment agreements with neighboring owners, for example, for underpinning or other encroachments.
Zoning and/or ability to rezone a prospective property can make or break a commercial real estate deal and should be identified as early as possible. It is common for the purchaser to make these investigations themselves, or hire a consultant to do so. A lawyer may be required if issues are encountered during investigations. As well, municipal bylaws may impact development and future use or proposed use of a target property, and should be reviewed early on in the process.
Provincial and Federal Searches and Environmental Searches
There are a wide variety of provincial and federal searches that can be relevant to a commercial real estate deal. Some of the most common searches are those related to the environment, including environmental searches through the Ministry of Environment (provincially in BC) and Environment Canada (federally). Depending on the results of an initial environmental search, it may be prudent to hire an environmental consultant to determine whether further environmental investigations are necessary.
Other searches include those to determine whether lands are in the agricultural land reserve, or whether the target lands have historical or archeological significance.
Since commercial property is usually leased, a purchaser should have full knowledge of the status of any leases of the property. Copies of all leases should be reviewed, giving particular attention to clauses like lease term, renewal terms, termination clauses, landlord covenants, rent, and restrictions on assignment and/or subletting.
It will usually be prudent for a purchaser to obtain estoppel certificates from some or all of the tenants in a commercial building as a condition of completing the sale. An estoppel certificate can confirm things from the tenant like: the current rent, the lease term, that all rent has been paid, and that there are no disputes under the lease.
Plans and Surveys
It is important to review a copy of the plan of the property, which can be obtained from the land title office. The plan shows the location and approximate dimensions of the property, and should be reviewed early on. Since plans filed at the land title office are not guaranteed to be accurate, a prudent purchaser will consider ordering a survey of the property to verify the location of things like improvements, easements and rights of way on the property.
The scope of legal due diligence relevant to a commercial real estate deal is much broader than the basic steps discussed in this article. However, this article should provide a basic understanding of some of the early stage due diligence steps a prudent purchaser may take. As always, it is advisable to speak with a professional before entering into a contract to purchase or sell commercial real estate. A legal professional can help you determine a due diligence plan that works for you.
Schedule a consultation with a lawyer at Taylor & Taylor Law.