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Legal tips for the novice real-estate investor

Legal tips for the novice real-estate investor

In Greater Montreal, housing starts rose 35 per cent, year over year, in August on the strength of new condo construction.
 

In Greater Montreal, housing starts rose 35 per cent, year over year, in August on the strength of new condo construction.

Photograph by: Allen McInnis , Montreal Gazette

Planning the purchase of commercial real estate is an important milestone for any starting investor. To set off on the right foot, it is imperative that you take the time to fully investigate your potential investment, no matter how eager you are to close a deal or how pressuring the seller may be.

From a legal perspective, the purpose is to uncover – prior to making the purchase final – any damaging secrets and other hidden liabilities that may lower the value of the property or that are so onerous it may be best advised to steer clear from purchasing.

Here are five standard aspects that should be considered every time:

TITLE

You want to make sure that the seller holds title to the property, or in other words, that the seller is truly the owner of the property. This can be covered either by purchasing title insurance or by having a title search carried out. Key points verified in a title search are the confirmation of the registered owner; the presence of any servitudes on the land (certain rights associated to the land, such as rights of passage in favour of adjacent properties); and the existence of any rights of third parties on the property (i.e. hypothecs, notices of lease, options to purchase, rights of first refusal, etc.) that need to be paid off or cancelled prior to the sale.

OFF-TITLE SEARCHES

These are searches that aim to discover if the property is compliant with regard to municipal by-laws and other regulations. They also shed light on the payments to be made, if any, to suppliers and governmental authorities concerning the property (e.g. municipal and school taxes or utility bills). They can be as broad as you like and will need to be adapted depending on the type of property you wish to buy. For example, enquiries regarding the payment of utility bills are irrelevant when purchasing vacant land for development purposes. If the property is not compliant or if bills have not been paid, you will want to have the seller remedy this prior to the sale or request a credit on the purchase price.

ZONING

Another important factor to consider if you are planning to purchase real estate for development or redevelopment purposes is zoning and permitted land uses. You will want to know about any municipal regulations, environmental requirements and servitudes of use or non-construction that may prevent the fulfillment of your project.

EXPERT REPORTS

The expert reports that you will usually see in the documentation for commercial real estate transactions are the property condition assessment report (condition of the structure and physical components of the building), the appraisal report (valuation of the building) and the environmental report (assessment of compliance to current environmental norms and standards). Obtaining the documents may cause considerable delays in the conclusion of the sale, so usually the seller provides a Phase I Environmental Report and other recent reports to speed up the process and attract potential purchasers. You should be particularly attentive to the environmental aspect, as Quebec law establishes strict assessment, decontamination, rehabilitation and mitigation requirements.

CURRENT TENANTS

If you are planning to buy income property, the leases relating to the building should be reviewed by a professional to check for term, possibility of termination by the tenant, security deposits, exclusivity clauses and other rights that you should be aware of prior to purchasing. Be especially watchful for options to purchase. You don’t want to buy a property and then be obligated to sell to a tenant. Also, you may want to request estoppel certificates from tenants to verify that the current owner is not in default under the leases.

Of course, many other considerations come into play when investigating a potential real estate investment. You will want to have the benefit of as much time as you need to do your homework and have an exit strategy in case a deal breaker is discovered. A well-drafted offer to purchase will give you that valuable safety net.

As for the breadth of your due diligence, this will depend on monetary resources and the specifics of each property and situation – considerations which your legal counsel will help you assess to make an informed decision on which precautions to take and which searches to perform.

Vivianne Lapointe is a commercial real estate lawyer with the Montreal office of Blake, Cassels & Graydon LLP. She can be reached at vivianne.lapointe@blakes.com.



Read more: http://www.montrealgazette.com/homes/Legal+tips+novice+real+estate+investor/7343495/story.html#ixzz28QxIaa2B