Ontario Commercial Real Estate Transactions: Due Diligence, Title, and Closing

The Agreement of Purchase and Sale

Commercial APSs are typically negotiated documents rather than standard OREA forms (which are used for residential transactions). Commercial APSs are drafted by the parties' lawyers and address:

• Property description: Legal description from title, PIN, and municipal address. For complex properties, the APS may describe the property by reference to a plan of subdivision, a condominium description, or a survey.
• Purchase price and deposit: Commercial deposits are typically larger (often 5-10% of purchase price) and more carefully structured for forfeiture and return conditions.
• Due diligence period: Commercial deals almost always include an express due diligence period (often 30-90 days) during which the purchaser can investigate the property and terminate without penalty if not satisfied. The due diligence conditions may be conditions precedent (APS voidable if not waived by date) or conditions subsequent.
• Representations and warranties: Sellers typically make more limited representations in commercial deals (caveat emptor principles apply more strongly) but still represent environmental status, no orders/notices, zoning compliance, GST/HST status, and outstanding work orders.
• Adjustments: Realty taxes (accrued to closing), rents (if investment property), operating costs, utility deposits.
• HST: Commercial real property sales are generally taxable for HST purposes (unlike residential sales). The APS must specify whether the price is plus HST or HST-included, and which party bears HST. The Buyer can often self-assess under ETA s.228(4) to avoid the Seller collecting HST at closing.

Due Diligence

Commercial due diligence covers physical, legal, financial, and regulatory aspects of the property:

Title Due Diligence

• Title search: Search the title in Teraview (POLARIS system) for the full parcel register, instruments registered against title (mortgages, liens, easements, restrictions, caveats, notices), and any pending registrations. Examine the chain of title back at least 40 years (s.113 Registry Act; Land Titles system provides Absolute Title guarantee).
• Construction liens: Search for construction liens (claim for lien registrations) within 90 days of closing — liens may be preserved within 60 days of the last supply but registration may lag. Sellers should provide statutory declarations from contractors regarding outstanding work.
• Survey: Obtain an updated survey (ALTA/NSPS or Ontario Land Survey) to confirm lot boundaries, building setbacks, encroachments, and easements. Commercial lenders typically require a current survey.
• Zoning: Confirm current zoning by-law classification, permitted uses, parking requirements, setback requirements, and development restrictions. Obtain a zoning compliance certificate from the municipality.

Environmental Due Diligence

Environmental investigation is critical for commercial properties:

• Phase I Environmental Site Assessment (ESA): A desktop review of historical uses, aerial photographs, regulatory records, and site reconnaissance to identify Actual or Potential Environmental Concerns (APECs). Phase I is standard for virtually all commercial transactions.
• Phase II ESA: Intrusive sampling (soil, groundwater, soil vapour) to confirm or deny the presence of contamination. Required where Phase I identifies APECs. Results compared to Ministry of Environment, Conservation and Parks (MECP) Table 2 Site Condition Standards.
• Record of Site Condition (RSC): Required before a sensitivity- increasing change of use (e.g., industrial to residential). The RSC is filed on the Environmental Site Registry. A Certificate of Property Use (CPU) may bind future owners.
• O.Reg. 153/04: Governs Phase I/II standards and RSC requirements for Ontario.

Tenancy Due Diligence

For investment properties with tenants:

• Review all leases, amendments, assignments, and subleases
• Estoppel certificates from all tenants confirming lease terms, rent paid to date, no landlord defaults, no claims or offsets
• Subordination, non-disturbance, and attornment (SNDA) agreements with tenants to protect the lender and ensure tenants attorn to a new owner
• Verify rent roll — actual vs contracted rents, any rent abatements, and lease expiry dates
• CAM (common area maintenance) charge reconciliations for multi-tenant buildings

Title Insurance in Commercial Transactions

Title insurance from providers like FCT (First Canadian Title) or Stewart Title is used in most commercial transactions to protect against:

• Title defects not disclosed by a search (gaps in the chain of title, forged instruments)
• Enforceability of registered encumbrances
• Zoning non-compliance (existing buildings may be grandfathered)
• Survey defects and encroachments
• Work orders, building permits, and by-law violations unknown at closing
• Fraud (identity theft in title dealings has become more common)

Commercial title insurance does not eliminate the need for due diligence but provides a backstop for undiscoverable risks. Premiums are one-time and based on the insured value. Commercial lenders typically require lender-side title insurance; purchasers should also obtain owner's title insurance.

Land Transfer Tax

Ontario Land Transfer Tax (LTT) applies to all transfers of land, including commercial property, at the following rates (Land Transfer Tax Act, RSO 1990, c L.6):

• 0.5% on the first $55,000
• 1.0% on $55,001 to $250,000
• 1.5% on $250,001 to $400,000
• 2.0% on amounts over $400,000

Toronto Municipal Land Transfer Tax (MLTT): The City of Toronto imposes a separate municipal LTT on Toronto properties at approximately the same rates, effectively doubling LTT in Toronto. Commercial properties in Toronto therefore pay approximately 4% LTT on amounts over $400,000.

Calculating LTT on commercial transactions: The taxable amount is the value of consideration — not just the purchase price. It includes assumed mortgages, partnership interests, and other consideration. Where a sale occurs as part of a business acquisition (purchasing the shares rather than the assets), no LTT is payable.

Exemptions: Transfers between spouses, certain corporate reorganizations (s.3(6) LTT Act — same beneficial ownership), and registered charities may qualify for LTT exemptions.

HST on Commercial Real Property

The Excise Tax Act (ETA) imposes HST on commercial real property transactions (13% in Ontario — 5% GST + 8% Ontario portion):

• General rule: Sale of commercial real property by a GST/HST registrant is taxable unless an exemption applies.
• Taxable sale of commercial property: If both parties are GST/HST registrants, the parties can jointly elect under ETA s.167 to treat the sale as a supply of assets in a going concern, exempt from HST — common in income property transactions where all assets (building + leases + goodwill) are being transferred.
• Self-assessment by purchaser (s.228(4)): A GST/HST registered purchaser can self-assess and remit the HST directly rather than having the seller collect it at closing. This preserves closing funds.
• New residential property and HST: The sale of new residential condominiums or housing by a builder is subject to HST (with a partial new housing rebate for purchasers). This is a distinct regime from commercial property.
• Residual input tax credits (ITCs): Purchasers using the property commercially can claim ITCs for HST paid, provided they are GST/HST registrants and the property is used in commercial activities.

Closing the Commercial Transaction

Commercial closings in Ontario typically proceed on Teraview (electronic registration and funds transfer):

• Requisitions: The purchaser's lawyer delivers requisitions on title (requests to clear encumbrances, provide discharges, address defects) within the requisition deadline in the APS. Failure to requisition in time may result in waiver of certain title objections.
• Closing documents: Transfer of Land (Form 1), Charge/Mortgage (if lender financing), Direction re Title, Statement of Adjustments, HST declaration or election, statutory declarations, vendor take-back documents (if applicable), lease assignments, SNDA agreements.
• Title insurance and Teraview: Most commercial closings use Teraview for electronic registration. Title insurance is typically committed in advance, with the policy issued on registration.
• Real estate law obligation: Under LSO By-Law 9, funds received in trust for a commercial real estate closing must be held in trust until conditions are met — the transfer is registered, the proceeds are released to the vendor, and any discharges are registered.

Summary

Ontario commercial real estate transactions require careful APS drafting, thorough due diligence (title, environmental, tenancy, zoning), and attention to the HST and LTT implications that can significantly affect transaction economics. The commercial lawyer's role is to identify and manage risks throughout the transaction cycle — from APS negotiation through due diligence and closing.

Atticus helps Ontario real estate lawyers manage the complexity of commercial transactions — tracking due diligence deadlines, closing dates, and multiple file milestones — with LSO By-Law 9 compliant trust accounting for closing funds.