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PURCHASING A COMMERCIAL/INDUSTRIAL CONDOMINIUM
UNIT
...SPECIAL CONCERNS AND CONSIDERATIONS
written by: HARRY HERSKOWITZThe following is a synopsis of the above noted article by Harry Herskowitz. For a copy of the complete article please contact Richard Hoffman
THE ABSENCE
OF STATUTORY SAFEGUARDS Many of the remedial and protective provisions of The Condominium Act R.S.O. 1990, as amended (the "Act"), and The Ontario New Home Warranties Plan Act R.S.O. 1990, as amended (the "Warranties Act"), do not provide the purchaser of a commercial unit with any protection or relief whatsoever, on the presumption that purchasers of commercial premises are more sophisticated and knowledgeable about acquiring properties and have a better bargaining position in the marketplace to independently negotiate contractual protections and remedies directly from the vendor. It is therefore critical for the purchaser of a commercial unit and his or her solicitor to be aware of those statutory protections which are not available, so that same can be specifically addressed by inserting the appropriate remedial clauses in the agreement of purchase and sale.
1. The Inapplicability of The Warranties Act The statutory safeguards,
namely: The purchaser should minimize the deposits payable to the vendor, or attempt to deposit monies to the vendor's solicitor in trust, pending final closing or delivery to the purchaser of satisfactory security, such as a letter of credit issued by the vendor's bank. The purchaser should procure express contractual warranties from the vendor with respect to construction deficiencies pertaining to his or her unit and common elements that parallel the vendor's liability to a residential purchaser for construction deficiencies. The purchaser should insert clauses in the offer which specifically outline the standard (and extent) of construction completion expected from the vendor, so that the purchaser is not obliged to take possession of the unit (and commence paying occupancy fees) before the unit is sufficiently completed to the stage where the purchaser can finish and fixture installations and commence business operations. The purchaser should negotiate provisions in the agreement of purchase and sale which oblige the vendor to provide a minimum notice period before any extension of the possession date can occur, as well as an outside date beyond which the possession date (and the requisite completion of the unit) cannot be extended, and on which the purchaser will be either entitled to possession of the unit, or the return of his or her deposit monies. Since the proposed builders' rating system will not apply to non-residential construction, the purchaser of a commercial unit should seek "word of mouth" opinions, and make on-site inspections of other comparable projects developed by the vendor, in order to properly evaluate the vendor's condominium expertise and quality of construction.
2. No Statutorily-Implied Covenants Under The Condominium Act In contrast to the residential condominium context, there is no legal obligation on the part of the vendor to expedite the registration process in respect of a commercial condominium, nor to sell all other commercial units in the project, nor to complete the purchase and sale transaction as expeditiously as possible and convey title of the commercial unit to the purchaser. The purchaser of a commercial unit should therefore insert covenants in his or her offer to purchase which oblige the vendor to warrant the foregoing.
3. The Ability To Terminate The Transaction For Failure To Register In the context of commercial condominiums, the purchaser is customarily responsible for connecting his unit to the building's servicing and utility outlets, and is generally obliged to construct all desired internal partitions and install his or her own fixtures and finishes. Accordingly, the existence of a clause which allows the vendor to unilaterally terminate the transaction for failure to register the condominium within a specified time, places the commercial condominium purchaser at great risk, particularly if he or she wishes to make substantial improvements to his or her unit prior to occupancy. Accordingly, the purchaser should strive to delete any such termination clauses from the agreement of purchase and sale, or obligate the vendor to fully reimburse the purchaser for the aggregate cost of all improvements made to his or her unit prior to such termination.
4. No Limit Or Ceiling On Occupancy Charges There are no statutory limits on the allowable monthly occupancy charges for a purchaser of a commercial unit who takes possession before a registrable transfer of title to the commercial unit is delivered. The purchaser of a commercial unit should therefore carefully scrutinize the pertinent provisions of the agreement of purchase and sale which relate to the calculation and payment of the occupancy fee, and should ensure that it corresponds, on a monthly, basis to the vendor's actual monthly carrying costs in respect of the unit, until registration of the condominium.
5. Duties of the Proposed Vendor During Escrow Pursuant to the Act, a vendor has various duties to a purchaser of a residential unit who occupies same prior to the delivery of a transfer of title. For example, the vendor must repair and maintain the proposed unit and common elements of the condominium and provide services to the unit owner in the same manner as the future condominium corporation would be obliged. Since the foregoing statutory provision is inapplicable to purchasers of commercial condominiums, such purchasers should address service and repair issues by appropriate covenants in the agreement of purchase and sale.
6. No Disclosure Statement and No Statutory Right of Rescission In the residential condominium context, an agreement of purchase and sale with respect to a proposed residential unit is not binding on the purchaser, until the vendor has delivered a copy of the current disclosure statement and all material amendments thereto. In addition, the Act gives a residential purchaser the unilateral right to rescind the agreement within 10 days after receiving the disclosure statement or, in the event that there has been a material amendment thereto, within 10 days of receiving the such amendment. Where a disclosure statement contains a material statement or information that is false, deceptive or misleading or, fails to contain a material statement or information then, the purchaser who has relied on same is entitled to claim damages against the proposed vendor for any loss sustained as a result of such reliance. In light of the fact that none of the foregoing statutory provisions and safeguards are applicable in the context of commercial condominiums, the purchaser of a commercial unit must therefore insist on receiving and reviewing a copy of the proposed declaration, by-laws and rules of the condominium, together with a detailed budget statement before entering into an agreement of purchase and sale. The purchaser should strongly consider inserting a contractual right of rescission in the agreement which would entitle the purchaser to unilaterally terminate the transaction in the event that any material amendment is made to the ultimate design and layout of his or her unit, or to the final condominium documents and budget statement.
7. No Statutory Liability Imposed On The Vendor For Budgetary Shortfalls The vendor of a residential condominium is obliged to reimburse the condominium corporation for any deficiency between the total actual amount incurred for common expenses (for the twelve month period following the registration of the condominium), and the total of the proposed amounts for common expenses set out in the budget statement delivered pursuant to s. 52(7) of the Act. Because this statutory liability of the vendor for budgetary shortfalls is inapplicable in the context of commercial condominiums, the purchaser of a commercial condominium should be wary of "low-ball" budgets which are sometimes utilized by vendors to entice prospective purchasers to the project, and should endeavor to require the vendor to be contractually responsible for budgetary shortfalls.
8. No Trust Imposed With Respect to Deposit Monies Pursuant to the Act, all money received from a purchaser of a proposed residential unit before the registration of the declaration must be held in trust by the vendor in a separate trust account. In the realm of commercial condominiums, the absence of this statutory trust, combined with the inapplicability of deposit insurance under The Warranties Act, exposes the commercial unit purchaser to the risk of the contract being breached by the vendor, and the deposit monies being absconded, or seized by the vendor's secured creditors. Accordingly, the purchaser should minimize the deposits payable to the vendor, or attempt to make all deposit monies payable to the vendor's solicitor in trust pending the final closing, or the delivery to the purchaser of satisfactory security therefor.
9. No Interest On Deposit Monies The Act provides that where an agreement of purchase and sale for a proposed residential unit is terminated, under circumstances entitling the purchaser to the return of any monies paid under the agreement, then the proposed vendor is obliged to pay interest on such monies, at the prescribed rate. In addition, where a purchaser of a proposed residential unit takes possession of the unit before a registrable transfer of title is delivered to said purchaser, then the vendor is obliged to pay interest, at the prescribed rate, on all monies received from the purchaser on account of the purchase price, until the date that a registrable transfer of title to the unit is delivered to him or her. The foregoing statutory obligations are not applicable with respect to commercial condominiums and therefore, the purchaser of a commercial unit will have to negotiate a specific clause if he or she wishes to receive interest in respect of his or her deposit monies.
10. No Restrictions On The Vendor Leasing Other Units In the commercial condominium context, the vendor's ability to lease unsold commercial units is totally unrestricted, both before and after the registration of the condominium. The purchaser of a commercial unit should be aware that a condominium occupied by tenants (as opposed to owner-occupants) may reduce the ultimate resale value of his or her unit and, should therefore consider restricting the vendor's ability to lease unsold units by means of appropriate provisions in the agreement of purchase and sale.
SPECIFIC ISSUES TO CONSIDER
1. The Size Of The Unit Generally, the purchase price of a commercial unit is predicated on a certain quoted dollar value per square foot, multiplied by the total number of square feet comprised within the unit. The purchaser should accordingly insist that the final size or gross floor area of the unit, as actually constructed when registered as a condominium, be certified by a duly qualified surveyor, and that the ultimate purchase price be automatically adjusted to reflect any variance from the original size of the unit, as depicted on the vendor's initial plans.
2. The Boundaries Of The Unit The purchaser of a commercial unit should make specific inquiries from the vendor as to the anticipated state of construction of the unit boundaries at the time of registration. In the event that responsibility for the installation of the demising walls is to be left to the unit owner, or shared amongst adjacent unit owners, then the purchaser will have to take that future cost of construction into consideration, when negotiating the final purchase price of the unit with the vendor. To allow the purchaser the greatest flexibility in subsequently servicing, finishing, altering and refurbishing his unit, the boundaries of the unit should be as extensive as possible, with the vertical limits in such circumstances generally constituting the underside of the concrete ceiling or the steel-web-joists (with rights to affix or hook into same), and the upper surface of the concrete floor slab, while the horizontal limits would generally comprise the centre line of the concrete walls or other permanent structures dividing the units. The exact location and extent of the unit's boundaries can be critical, particularly if the purchaser's improvements to the unit are substantial and intended to be made without having to procure the requisite consent(s) contemplated under the Act. Having to procure the consent of other unit owners may ultimately result in the purchaser suffering tremendous inconvenience in the form of delays and increased costs.
3. Servicing The Unit And The Metering Of Utilities With regards to the consumption of utilities, commercial condominiums are generally designed and serviced in either of two ways: (1) with each unit in the project having separate and independent meters, or (2) with one set of bulk meters installed to monitor the entire project together with a system of check meters appurtenant to each unit that enable the condominium corporation to separately measure and monitor each unit's consumption of utility services and, accordingly determine each unit's proportionate share of the bulk utility bill. The separate metering system is preferable in terms of obviating the time and expense required to properly monitor and administer the payment of all utility services consumed on a unit-by-unit basis. Where bulk-metering is employed, the commercial condominium unit purchaser will want to ensure that delinquent owners pay their fair share of the bulk utility bill. To that end, the declaration should provide that in the event that any owner fails to pay his proportionate share of the bulk utility bill on or before the due date for payment, the condominium corporation shall be entitled to charge interest at a specified rate against such owner, and to maintain and enforce a lien against such defaulting owner's commercial unit.
4. Fixturing Finishes And Refurbishing The Unit In an overwhelming majority of commercial condominiums, the responsibility for installing all requisite fixtures and finishing installations (wall and floor coverings, light fixtures, special refrigeration, air conditioning systems etc.) lies with the unit owner. Accordingly, the estimated cost of all labour, materials and equipment needed to complete such requisite work must be taken into account when negotiating the final purchase price for the unit.
5. The Allocation Of Maintenance and Repair Obligations The purchaser should carefully examine the condominium's declaration to determine whether it treats unit owners in an equitable fashion by requiring that owners whose use of certain amenities and facilities is extensive or excessive (compared to that of other owners) be made to pay the cost of maintaining and repairing such amenities and facilities in a way that reflects their predominant use of them.
6. The Allocation of Common Expenses And Common Interests While the Act provides that the declaration must contain a statement of the proportions (expressed in percentages) in which the unit owners are required to contribute towards the common expenses, the Act sets out no guideline as to how the percentage contributions towards common expenses are to be derived at, nor is there any requirement that such percentages have a direct correlation with the actual cost of maintaining and repairing the common element areas of the condominium. It is therefore critical that the commercial unit purchaser ensure that the percentage allocation of common expenses to his unit accurately reflects, as equitably as possible, his proportionate share of the common facilities and services he or she will be utilizing
7. Special Insurance Considerations While the Act obliges the condominium corporation to obtain and maintain insurance (on its own behalf, and on behalf of the unit owners) with respect to the units and common element areas, covering loss against major perils up to the replacement cost thereof, such mandatory insurance coverage excludes all improvements and betterments made or acquired by an owner with respect to his unit. In light of the fact that the acquisition of a commercial unit often entails the expenditure of substantial sums of money to fixture and finish the unit, it is absolutely imperative that the purchaser procure his or her own insurance coverage to adequately protect himself or herself against loss or damage to the improvements and installations that he or she makes to the unit. The unit owner should also consider obtaining a contingent insurance endorsement to his or her condominium unit policy in the event that the condominium corporation's master policy is inadequate to cover the his loss (or in the event the master policy has expired). Finally, the prudent unit owner should maintain his or her own public liability insurance coverage to protect himself or herself in the event of any loss or damage occasioned to persons or property as a result of his or her own negligence, or the negligence of those for whom he or she may be vicariously liable at law.
8. Restrictions On the Use Of The Unit In order to be assured that one’s intended use of the proposed unit will be lawfully permitted, the purchaser must have regard not only to the relevant zoning by-laws of the local municipality which are applicable to the project, but also to any relevant provisions of the declaration which might restrict or regulate those uses which would otherwise be allowed under the applicable zoning by-laws.
9. Rights Of First Refusal To accommodate the future expansion plans of unit owners, it is not uncommon to find declarations of commercial condominiums which contain provisions restricting the sale and/or leasing of units, and their appurtenant common interests. Such restrictions often take the form of a right of first refusal giving adjacent unit owners an opportunity to expand their existing commercial operations before a third party offer/lease is accepted. Accordingly, the purchaser who wishes to make contingency expansion should insist that the vendor provide him or her with a right of first refusal.
10. Questions that the Purchaser should ask the Vendor The author suggests a number of questions that the commercial unit purchaser should ask the vendor before he or she contractually commits himself or herself to complete the transaction. 4810 Dufferin St., Suite D, Toronto, Ontario M3H 5S8 |
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This paper examines,
from the purchaser's perspective, some of the special concerns
and key considerations involving the acquisition of a commercial
or industrial condominium unit ("commercial unit”)
under the condominium legislation in force as at September, 1998.
