Builder and Developer Series Part 1: The Land Deal
Whether you are a builder or developer looking to purchase vacant land, a tear-down, or a building slated for fit-up or renovation, one of your first steps is going to be making a land deal with the vendor (seller). While your lawyer is not normally involved in providing advice on the business terms of the arrangement (e.g. which property to purchase, whom to purchase from, the purchase price, the deposit, etc.) they play a key role in structuring your deal with the vendor by assisting you in negotiating and drafting the remaining terms of your agreement (the Agreement of Purchase and Sale or “APS”) while also properly setting out the business terms in writing.
Part 1 of the Builder and Developer Series will focus on a few of the additional legal terms in the APS and the value these terms bring to the table for the would-be builder or developer.
What Due Diligence Do I need?
The “buyer beware” (caveat emptor) rule is alive and well in Ontario and because of that, due diligence is a crucial part of a land deal.
In a land deal, this is usually accomplished by including terms in your APS that make the deal conditional on buyer satisfaction with various important items such as the following:
- Environmental and geo-technical condition of the land;
- A building condition assessment or home inspection;
- Land use planning matters such as a review of severance, plan of subdivision or condominium procedures (usually conducted by a planner);
- Obtaining and reviewing a survey; and
- Budgetary matters and a review of pertinent documents related to the property.
Usually, these matters are to be investigated and satisfied by the purchaser within a specific period of time from signing the APS short of which, the deal is terminated and the deposit returned. While this will incur further up-front costs for the purchaser, failing to conduct the appropriate due diligence can lead to a wide array of potentially costly consequences. Such consequences could be refusal by lenders to provide financing for the development, costly environmental remedial procedures, or lack of governmental planning approval for the development rendering the land unfit for the expected development, or worse, unsuitable for any development whatsoever.
Representations, Warranties and Closing Documents
Beyond the due diligence above, your real estate lawyer will be able to recommend appropriate assurances from the vendor usually in the form of representations, warranties, or covenants in the APS and/or the closing documents.
These assurances can offer further protection for a developer in several areas that may not be covered by a purchaser’s due diligence such as:
- Confirmation of important characteristics such as legal access to the land and adequate servicing;
- confirmation of disclosure of all pertinent documentation regarding the property such as leases or other agreements affecting the property and confirmation of their terms; and
- Confirmation of lack of claims related to the property such as lawsuits or expropriation proceedings.
These assurances are housed in the APS itself or in closing documents and are a useful tool to ensure that purchasers are further protected beyond what their due diligence can provide. In addition, the specific closing documents required can also be set out at this stage, avoiding costly disputes between lawyers at closing regarding what documents are applicable.
Harmonized Sales Tax (“HST”) is often an afterthought when a land deal is being arranged. Nevertheless, if not properly accounted for at the outset, a significant bill for HST from the Canada Revenue Agency (“CRA”) or a lawsuit from the vendor could be the result. For this reason, HST implications should be flushed-out in advance by capable tax accountants and the APS adjusted accordingly.
Consider a situation where a “used residential property” is being purchased. Although at first glance, HST would not appear to be applicable, if the vendor is using the property for commercial purposes (e.g., as a lodging or rooming house for employees) and claiming input tax credits in respect of the property, and the purchaser is HST-registered but fails to collect HST, they could end up footing a significant unexpected bill for HST from the CRA.
As another example, if purchasing a portfolio of properties (some commercial and some residential) and you wish to take ownership of some of these properties under different corporations or individuals than the “purchaser(s)” under the APS, it is imperative that for the HST-applicable properties, either the purchaser under the APS be HST-registered or the relevant parts of the APS be assigned and assumed to/by the future owners that are HST-registered. If not, the CRA could claim that the vendor should have collected and remitted HST on the transaction and a lawsuit by the vendor against the purchaser and/or related parties could be the result.
How we can help
These are just a few of the typical, pertinent items of consideration for a builder or developer looking to structure their land deal. If you are a builder or developer looking for assistance with structuring your land deal, please contact our Builders and Developers Team at Merovitz Potechin LLP. We would be pleased to assist you.
The content on this website is for information purposes only and is not legal advice, which cannot be given without knowing the facts of a specific situation. You should never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. The use of the website does not establish a solicitor and client relationship. If you would like to discuss your specific legal needs with us, please contact our office at 613-563-7544 and one of our lawyers will be happy to assist you.