MiniCram Humber Real Estate Exam Course 4

MiniCram® Real Estate Exam Study Notes

Course 4 – Commercial Real Estate Transactions

Updated 2023

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First Published: January 2021

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TABLE OF CONTENTS
Copyright
Table of Contents
Introduction

SELF-STUDY NOTES

1. Introduction to Commercial Real Estate

2. Commercial Construction

3. Office and Retail Properties

4. Selling Office and Retail Properties

5. Selling Commercial Condominiums

6. Industrial Properties

7. Selling Industrial Properties

8. Showing Office, Retail, and Industrial Properties

9. Agreement for Office and Retail Properties

10. Agreement for Commercial Condominiums

11. Agreement for Industrial Properties

12. Leasing Office, Retail, and Industrial Properties

13. Commercial Lease Transactions

14. Development Land and Farms

15. Sale of a Business

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INTRODUCTION

Dear Reader,

Congratulations on purchasing our MiniCram® for Ontario Real Estate License Exam
preparation. The purpose of this book is to provide you with last minute review of important theory
and math concepts for the exam. MiniCram® has compiled this booklet so that you can focus on
key areas of study as well as prepare to overcome the most common mistakes that students make
on the actual test day.

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Table of Contents

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HUMBER COLLEGE
REAL ESTATE EXAMS

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1. INTRODUCTION TO COMMERCIAL REAL ESTATE

1.1 Commercial Real Estate

Commercial Real Estate Environment

• Commercial real estate transactions are more complex than residential due to the fact that
they are time consuming, need more information, and may involve high-profile projects
that involve complex negotiations.
• Transactions take longer to develop and require extensive research but also offer high
remuneration.
• The working environment is different than residential due to types of properties, specific
needs of buyers and sellers, building construction techniques, reliance on third-party
professionals, financial statements, etc. are some of the factors.
• Transactions also involve buying and selling businesses and commercial leasing, where
the negotiations may require specialized knowledge and skills.

• Education and Experience: Due to complexity of commercial transactions, working

experience and/or post-secondary education in related disciplines is an asset.

• Financial Literacy: Since commercial clients are business and investment savvy,
commercial brokerages usually seek those salespersons who have financial education or
background.

• Working Hours: Unlike residential real estate, commercial real estate, mostly occurs
during normal business or office hours.

Working with a Commercial Brokerage

• Brokerages may hire salespersons as ‘employees’ or as ‘independent contractors’, but
this difference is only for tax purposes.
• REBBA treats both employees and independent contractors as employees of the
brokerage.
• Employee: The contract of service exists, the employer controls and supervises the
work of the employee.
• Independent Contractor: The contract for service is created, and the duties and
responsibilities of each party are defined in the contract.
• The salesperson is responsible for his own taxation matters but has more control
over managing his real estate business.

• In a commercial real estate brokerage, a new salesperson is likely to start as a trainee or

an employee for gaining knowledge and experience.
• When looking for a brokerage, it is important to check their training programs, the
remuneration split, and expenses, such as desk fee, provision of working space, and any
special services that are unique to the brokerage.

Seller Representation Agreement – Commercial (OREA Form 520)

• The Seller Representation Agreement (Listing Agreement) establishes an agency
relationship between the seller and the brokerage.

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• It sets out terms and conditions, outlines services, and provides details of the property.

• Differences in Residential and Commercial Clauses: The wording of certain clauses in

commercial listing agreement is different than residential Listing agreement.

• Definitions and Interpretation: This clause is expanded to include an Option to

Purchase, exercising a First Right of Refusal, and sale or transfer of shares or
assets.
• Commission (Remuneration): This clause includes a provision that if the deposit is
forfeited, awarded, directed, or released by the seller, the listing brokerage would
retain 50% of that amount for services it has provided.
• Indemnification and Insurance: This clause includes liability, claim, loss, cost,
damage, or injury resulting from contamination or environmental problems. The
seller warrants that the property is insured against any claims or lawsuits resulting
from bodily injury or property damage to others.

Buyer Representation Agreement – Commercial (OREA Form 540)

• The Buyer Representation Agreement establishes an exclusive agency relationship
between the buyer and the brokerage for locating a suitable property for the buyer.
• It sets out duties and responsibilities of both parties and details remuneration
arrangements.

• Differences in Residential and Commercial Clauses: The wording of certain clauses in

commercial buyer representation agreement is different than residential buyer
representation agreement.

• Definitions and Interpretation: This clause is expanded to include an option to

purchase, and sale or transfer of shares or assets.
• Services Provided by the Brokerage: This clause relates to specific services
provided to the buyer and has space for other services.
• Responsibilities of the Buyer: This clause details specific duties of the buyer to the
brokerage during the term of the agreement.

Terms of the Agreement

• REBBA requires that every representation agreement must be reduced to writing, signed
by the salesperson, and presented to the party (seller or buyer) for signing.
• The agreement must include the date of commencement and a definite date of expiry.
• If the agreement is for more than 6 months, the party’s written consent and initials must be
obtained.
• Copies of signed agreements must be delivered immediately to the party.

Offers and Negotiations

• Since commercial transactions are complex, salespersons should advice their clients to
obtain expert advice from third-party professionals.
• These include accountants, lawyers, land planners, environmental engineers, lenders,
architects, tax specialists, appraisers, structural engineers, etc.

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• Additional Complexities: It is important for salespersons to stay up to date on trends and

upcoming changes, such as need for landfill or a plan for a new road.
• Larger brokerages may have a team of several professionals within the brokerage
while smaller brokerages usually hire third-party professionals.
• Transactions may take longer than usual to close due to the time taken for
completing due diligence.
• Some brokerages keep listings internal due to client confidentiality issues and others
use Confidentiality Agreements to protect their clients.
• Commercial properties may be owned by corporations, partnerships, or a Real
Estate Investment Trusts (REIT).

Due Diligence
• Scope of Analysis: There is no standard clause for due diligence because client needs
vary, and clauses are customized depending on the type of property.
• The ultimate goal is to have full knowledge of relevant facts and a team of
accounting, legal, and other professionals may be involved to assist the buyer.

• Time Period: Commercial agreements usually provide 30 days or more to the buyer to
satisfy conditions.
• The buyer is given wide-ranging access to documentation and information from the
seller and may terminate the agreement if the facts discovered do not meet buyer’s
expectations.

• Financial/Operational: Financial due diligence involves review of financial documents,

such as income/expense statements, balance sheets, rent rolls, bank statements, tax
bills/returns, employee records, and operating costs.

• Legal: Legal analysis of the property involves review of property title, major assets,
existing mortgages, surveys, licenses, permits, contracts, and zoning compliance.

• Structural: Commercial building inspections include visual inspection, review of relevant

documents, identification of physical deficiencies, photographs, and a detailed summary.
• The report covers items such as building envelope, structural design, mechanical
systems, electrical systems, interior finishes, and life safety systems.
• The inspection may reveal certain material defects and deferred maintenance.

• Environmental: An Environmental Site Assessment (ESA) report may be required to

assess the overall environmental condition of the property because hazards and
contaminants pose a significant risk.

1.2 REBBA and Commercial Tenancies Act

Disclosure Requirements
• Most Errors and Omissions claims originate from inaccurate or incomplete information.
• Litigation occurs when buyers discover material defects that were not disclosed to them.
• REBBA requires that salespersons protect their clients by identifying and disclosing
material facts and providing competent and conscientious service.

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• Seller Protection: Taking adequate time to fully investigate the property, fully discussing
their obligation to disclose, asking questions instead of making assumptions, and
immediately resolving issues as and when they arise.

• Buyer Protection: Advising them to fully investigate material facts, including appropriate
conditions in the agreement, and encouraging them to seek third-party expert advice.

REBBA and Salesperson Activities

• Record Keeping: Brokerages are required to maintain all original records related to
commercial transactions at a location specified by the Registrar of RECO.

• Recommending Third-Party Advice: Salespersons should encourage their clients to obtain

services of third-party professionals when they do not have sufficient knowledge, skills,
judgment, or competence in any matter.

• Working with Assistants: Brokerages must ensure that trading activities are performed by
registered salespersons and unregistered assistants or staff is only for support functions.

Commercial Tenancies Act

• The Commercial Tenancies Act outlines the rights and obligations of the landlords and
tenants in a commercial tenancy.
• A commercial tenancy involves lease of a property, which is principally used for carrying
out any business activity.
• This Act does not provide for any standard, government issued lease.
• The precise wording of a signed lease takes precedence over the Act on matters such the
rents, operating costs, and leasehold improvements.

• Landlord’s Rights and Obligations: Landlord must notify the tenant in writing regarding any
breaches of lease and allow time to the tenant to comply.
• If the tenant fails, the landlord has the right to terminate the tenancy.

• Tenant’s Rights and Obligations: Tenants must fulfil their obligations specified in the lease
and pay rent on due dates.
• Tenants cannot stop rental payment if the landlord does not fulfill lease obligations.

• Disputes: Any party may approach a Small Claims Court (for damage up to $35,000) or
the Superior Court of Justice for resolving their tenancy related disputes.

1.3 Building Code, Planning Act, and Zoning Bylaws

Ontario Building Code

• This regulation, under the Building Code Act, sets out minimum standards for building
design, provisions for safety, fire protection, and structural sufficiency.
• The Ministry of Municipal Affairs and Housing enforces the Act and amends it every 5
years to reflect changes in technology and public safety issues.

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• Building Code Regulations: The Act addresses specific uses, occupancy requirements,
acceptable fire and safety standards, means of exit, accessibility, service facilities, and
acoustic separation.
• Structural loads, foundations, and design requirements for structural materials as
well as wind, water, and vapour protection.
• Heating, ventilation, and air-conditioning systems.
• Plumbing for water supply, drainage, and non-potable water systems.

• Building Permits: No person can construct or demolish a building unless a building permit
is obtained from the local municipality.
• Permit is not issued if the proposed construction activity is not in compliance with
the Ontario Building Code.

• Building Permit Process:

• Application: The application is submitted to the local Building Department along with
plans, survey, and application fee.
• Review: Application is reviewed for conformation to zoning bylaws, HVAC,
plumbing, and architectural/structural requirements.
• Permit: The permit (legal permission to start construction) and approved plans must
be posted on the construction site.
• Inspections: Requests for inspections must be made within 24 hours before work
proceeds to the next stage as given in permit. Failure may result in work stoppage
order.

Municipal Planning
• The provincial Planning Act is the statutory framework that regulates orderly division,
development, and permitted use of land.
• Provincial Policy Statements relate to management of efficient and cost-effective
development, land use patterns, protection of environment, and public health.
• Municipalities are authorized to prepare, implement, and revise Official Plans for long-rage
development and zoning bylaws to set building structural standards and their use.

• Upper Tier (Regional) Municipality: Responsible for preparation, adoption, and revision of
the Official Plan (long-range), and division and development of land.

• Lower Tier (Township) Municipality: Responsible for preparation, adoption, and revision of
the Official Plan (long-range) and various zoning bylaws.

Impact of Planning Act Commercial Development

• Zoning Bylaws: Zoning bylaws set out permitted uses, building structural standards, such
as minimum setbacks and coverage, and other regulations related to signage, noise
control, and parking.
• They regulate the type of construction, minimum elevation of door and windows,
loading or parking, and minimum density provisions.
• Other regulations include placement of signs and their size, flood control provisions,
construction of fences, and energy conservation programs.
• Municipal officials have the authority to enter private lands to inspect the discharge
of waste into municipal sewage system.

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• Non-Conforming Use and Zoning Amendment: Bylaws provide for flexibility and
owners/buyer may seek a Minor Variance if their proposed use does not generally
conform to current zoning.
• Owners may also apply for a zoning amendment if the proposed use aligns with the
Official Plan.
• An owner may also apply for approval of continuation of a Non-Conforming Use
when the current use existed before passage of the current zoning bylaw.
• However, the non-conforming use must be continuous, and any interruption would
make the use as non-compliant or non-conforming.
• Salespersons must be aware of zoning bylaws and advice their buyer clients to
contact local municipality before making an application.

• Site Plan Control: This is imposed at the time of planning and development to influence
the building design and site amenities.
• The developer is usually required to provide amenities over and above the zoning
requirements and include items such as landscaping, traffic flow, trash collection,
tree plantation, etc.
• Approved plans of a commercial developer require the developer to enter into a Site
Plan Control Agreement.
• This is to ensure that the proposed work is in accordance with the approved plans
and satisfaction of any conditions set out by the municipality.

1.4 Commercial Investment Properties

Office Building Classifications

• Class A: These are premium buildings in prestige locations with high-tech systems and
high-quality finishes.
• They are typically occupied by banks, international corporations, and large legal
firms.

• Class A+: This landmark property is located in highly desirable sub-market, is designed by
some recognized architect, and features high-end furnishings.
• These buildings have higher rent, and 80% or more space is occupied by
institutional investors.

• Class B: These buildings are found in good locations, have average building materials and
construction, they are well maintained, and have adequate internal systems.

• Class C: These buildings are found in less desirable locations, may need renovations, and
may not have modern technology systems in place.
• The advantage is that they offer low rents and are affordable in comparison to Class
A or Class B buildings.

Retail Properties
• Some retail property types include big box stores, power centres, shopping centres,
lifestyle centres, downtown shopping malls, outlet malls, and main street retail.

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• Retail stores also include a diverse mixture of neighbourhood stores, chain, discount,
independent, luxury, and departmental stores.
• Analysts track a variety of dynamic business aspects including change in demographics,
economic trends, merchandising methods, retail site selection, target markets, distribution
methods, and shopper preferences.
• Retailers often face tough competition from online distribution centres, which forces
retailers to make design improvements and greater customer service standards in order to
retain customers.

Industrial Properties
• Industrial market includes vacant land and buildings used for manufacturing (production),
storage (warehousing), and distribution of commercial goods and services.
• Salespersons must be aware of terminology used for industrial processes, such as
fabrication, production, packaging, warehousing, and distribution.

• Investor vs. User: Investors need large and long-term and credit-worthy tenants while
Users are inclined more towards high capital costs for their manufacturing needs.

Multi-Residential Properties
• Multi-residential real estate refers to any residential structure that has more than one
dwelling unit.
• Smaller residential buildings such as duplexes, triplexes, fourplexes, etc. are excluded.
• This market is mainly driven by supply and demand, which is a complex interplay of
economics, demographics, and target market preferences.
• The Residential Tenancies Act regulations also influence the multi-residential market.

• Market Analysis:
• Economy: Rising income levels dictate potential price points for various types such
as studio, one, two, and three-bedroom apartments.
• Demographics: In-migration, out-migration, and overall population growth also help
in analysis.
• Preferences: Proximity to schools, transportation, and nearby retail services, as well
as amenities in the building also attracts people.
• Competition: Analysis of existing competition, as well as new buildings currently
approved or under construction.

Farm Properties
• The term agriculture refers to the production of goods through farming, which is defined
as-
• The production of field-grown crops, cultivated and uncultivated, and horticultural
crops.
• The raising of livestock, poultry, and fur-bearing animals.
• Production of eggs, milk, honey, maple syrup, tobacco, fibre, wood from wood lots
and fodder crops; and
• The production or raising of any other prescribed thing or animal.
• Farm properties may range from a small few acres farm to a larger farm spanning
hundreds of acres.

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• Farms are classified as small farms, farm co-ops, viable farms, and recreational farms.

• Valuation: Valuation of farm properties depends on location, land, buildings, and other
assets.
• Value is also impacted by factors such as proximity to large urban areas, rural
amenities, and type, age, and condition of farm structures and farming equipment.
• Farm marketing boards, farm quotas, and production contracts can also impact
value.

Recreational, Hospitality, and Institutional Properties

• Recreational: This category includes a large array of properties such as wilderness
camps, bed and breakfast (B & B) accommodations, ski chalets, trailer parks, marinas,
campgrounds and larger hotels, motels, and lounges.
• Boating and water sport activities are a major attraction for these properties.

• Hospitality: These properties serve the vacationing public and include large resorts, hotels
and motels, boutique hotels, lodges, and resorts.

• Institutional: Banks, schools, universities, hospitals, insurance companies, religious or

charitable organizations, municipal, and/or other government buildings.

Vacant Land
• This segment is focused on development activities involving planning, application, and
development processes, which are regulated under the provincial Planning Act.

• Brownfields Land: These properties are abandoned, contaminated, or under-utilized,

which need cleanup and revitalization.
• The Ontario Brownfields Statute Law Amendment Act facilities development of such
properties by providing certain incentives such as providing financial assistance and
limiting future environmental liability, potential legal, and financial risk.

• Greenfield Land: Greenfield land refers to undeveloped land within an urban or rural area
used for agriculture or landscape design and to evolve naturally.

Mixed-Use (Commercial-Residential-Retail)
• Single Master Plan: Mixed-use developments involve three or more standalone, profit
making uses such as retail, office, residential, entertainment, etc.

• Live-Work Properties: This concept appeals to professionals in creative and tech

industries who can use the space as a workplace and as living accommodation.

• Complex Design: Proper planning and integration of diverse uses is critical for mixed-use
developments and may include even big box stores.

Commercial Ownership Options

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• Sole Proprietorship: Sole Proprietorship is a business undertaking owned and managed

by a single person, who is responsible for all debts, is entitled to profits but is also liable
for all losses.
• The benefit is that the business operation can be started immediately with little
paperwork, start-up costs are low, and tax advantages also exist.
• Disadvantages include limited capital investment that results in low borrowing
power, unlimited liability in case of bankruptcy, and right of creditors to seize
personal assets in the event of default.
• There is no separation between personal income and business income.
• Sole proprietorship lacks continuity because after the death of the person, the
business would be dissolved.

• Partnership: A Partnership involves two or more individuals or entities who undertake a

business operation for the purpose of making a profit.
• Each partner is personally responsible to report the profits or losses for taxation
purposes.
• A Partnership Agreement is signed and is governed under the Common Law.
• Partnership is personal in nature and all partners are jointly and severally liable for
the actions of one another.

• Limited Partnership: A Limited Partnership limits a partner’s liability to the amount invested
and profits shared.
• There must be at least two partners - one General Partner and one Limited Partner.
• The General Partner operates the business and has unlimited liability.
• The Limited Partner is a passive investor whose liability is limited to the investment.

• Corporation: A Corporation is a legal entity established after registration of an Article of

Incorporation under the Corporations Act.
• Ownership of a corporation is by way of shares and these shares can be sold or
transferred.
• It provides a legal separation between the business operation and its owners (Share
Holders).
• Corporations may be merged into a single corporation and a single corporation may
be split to create subsidiary corporations.
• The liability of shareholders is restricted to the value of shares held as given in the
Article of Incorporation.
• Debts of the corporation are distinct from the shareholders unless an agreement is
signed for personal guarantee or liability.

• Trust Ownership: In a Trust relationship the Trustor or Settlor gives property or assets to
the Trustee by means of an agreement.
• The Trustee manages the property or assets for the benefit of a Beneficiary.
• Family trusts may defer tax liability by transferring trust assets from one generation
to another.

• Joint Venture: Involves a real estate project started by a group of investors in order to
share profits or losses.

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• Each member is assigned a proportionate share of the assets/liabilities based on the

investment and each member can calculate income individually for tax purposes.
• No investor can individually control the project and the life of the Joint Venture is
limited to the project life.
• An undivided interest exists in the project, which means that no specific part or unit
is assigned to any investor.
• Canada Revenue Agency has not given any formal tax status to Joint Ventures and
a formal Business Number is not assigned.

Investment in Commercial Properties

• Advantages: The investor gets an opportunity to grow capital and additional equity can be
built up by reducing the mortgage debt over a period of time.
• The rate of return is higher as compared to other investments and the property can
be divided to create additional estates.
• Investment properties offer higher than usual personal control on investment and tax
sheltering helps in reducing tax liability.
• The investment has physical presence in the form of land and building as opposed
to just commercial documents as in case of stocks.
• Use of Leverage can help limit the investment required and the property can be
refinanced after certain period to recover initial investment.

• Disadvantages: A large capital investment is required as opposed to residential properties.

• Lack of Liquidity is a major problem as it takes time to sell the property and recover
investment.
• The expenses incurred in administration and management of property may be high.
• Changes in government legislation related to environment may increase ownership
costs.
• Real estate remuneration (commission) and legal expenses during the sale may be
significant.

1.5 Third-Party Professionals

Role of Third-Party Professionals

• Lawyers: Lawyers review the Agreement of Purchase and Sale, mortgage documents,
property title, transfer documents, and commercial leases.
• Buyer’s Lawyer: Ensures that there are no claims on the property, arranges Title
Insurance, ensures that all legal and financial obligations are met, and exchanges
documents and keys with the seller’s lawyer.
• Seller’s Lawyer: Assists the seller with negotiation of terms and conditions, prepares
deed of the property, ensures that financial and legal obligations are me, and
exchanges legal documents and keys with the buyer’s lawyer.

• Accountant: Accountants perform calculations, analyze financial documents, and issues

related to income tax, capital cost allowance, capital gains tax, property tax, and interest.

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• Environmental Engineer: They perform Environmental Site Assessments, environmental

remediation, and advise the clients on federal, provincial, and municipal regulations and
policies.

• Planning Consultants: They offer expert advice on planning and development matters
related to new development or change the use of existing property.

• Property Managers: These professionals typically manage multi-residential, retail, multi-

unit industrial, and office properties on behalf of owners.

• Appraisers: Provide professional market valuation of the property based on property

conditions and current market trends.

• Land Use Consultants: They prepare planning applications for consent, minor variance,
re-zoning, official plan amendment, and site plans.
• They can also represent their clients before the Local Planning Appeal Tribunal
(LPAT).

• Mortgage Brokers and Lenders: These professionals arrange the necessary mortgage
financing for the buyer.

• Architects and Engineers: They prepare designs, and their proposals include feasibility
studies, and site reports, which may be used to support various development applications.

• Insurance Brokers: Insurance brokers help in arranging adequate insurance coverage for
all pertinent issues related to a commercial property.
• Typical coverage includes items such as physical damage, business interruptions,
mechanical breakdown, environmental liability, cost of construction, fire safety, and
outdoor property.

1.6 Commercial Financing

Commercial Lending Practices

• Leverage Ratio: It is a financial measurement to calculate how much capital comes in form
of debt (loans).
• This ratio is also used to assess the ability of a company to meet its financial
obligations.

• Loan-to-Value Ratio (LTV): As their first line of risk defense, the LTV ratio varies from
lender to lender.
• Institutional lenders are restricted by law to a maximum of 80% of the appraised
value or sale price unless the mortgage is insured under a default insurance
program.

• Debt Service Coverage Ratio: Calculated by dividing the Net Operating Income (NOI) by
Debt Service (mortgage principal and interest payments).
• Lenders typically require a debt service coverage ratio of 1.2 or higher.

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• Safety Margin: Serves as a financial cushion for the lender based on Net Operating
Income.

• Risk and Capitalization Rate: Capitalization is calculated as the ratio between the Net
Operating Income and the value (or original capital cost) of a commercial property.
• Lenders try to reduce their investment risk by increasing the capitalization rate.

Commercial Financing
• Letter of Commitment: This is a conditional loan approval letter that sets out terms, such
as the interest rate, time period of commitment, etc. under which a mortgage loan will be
granted to a borrower.
• The letter sets conditions such as requirement of fire insurance, survey, processing
costs, and other special conditions.

• Letter of Credit: Issued by the lender on behalf of a customer authorizing a person to

withdraw a specific amount based on prearranged terms and conditions.

• Letter of Guarantee: Used in development projects involving a municipality. It assures

existence of financing for completing a public project.

• Letter of Intent: A written, general understanding of the lender and borrower setting out
various provisions, covenants, and terms that leads to a detailed commercial loan
agreement.

Types of Commercial Loans

• Bridge Loan: An interim form of financing. Bridging may occur when a buyer is committed
to completing the purchase of a property on a specific date but will not have sufficient
funds until a later time (i.e., his current property has not closed yet).

• Development Loan: Given for servicing and improving land up to the point of building
construction.
• This loan generally is not amortized over a specific period of time and takes a form
of collateral loan with interest only payments.

• Gap Loan: This interim financing provides funding between construction advances and the
placement of permanent financing.

• Interim Financing: A short-term or temporary financing used to address immediate needs

of the developer until a permanent loan is arranged.

• Line of Credit: A highly flexible interim financing, based on past performance or personal
or corporate strength, and higher than normal interest rate.

• Standby Loan: It is a pre-construction loan commitment for the purpose of preliminary

financing with the expectation of a permanent, long-term mortgage.
• The developer gets additional time to secure a more favourable loan for the project.

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• Wraparound Mortgage: A new mortgage that wraps around existing mortgages. The Wrap
mortgagee collects payments from the mortgagor and makes payments to the original
mortgagees.
• The wrap mortgage sits in subsequent priority (lowest priority) to other mortgages.

• Blanket Mortgage: A single mortgage loan covering two or more properties.

• No property can be sold without consent of the lender and the mortgagee can take
legal action against any of the properties if default occurs.

• Participation Financing: The lender directly participates in the profits (Income

Participation) or has ownership share (Equity Participation) in the financed venture.

Financing Fees and Penalties

• Mortgage brokers may charge 1% to 2% of loan amount as a service charge for arranging
a loan.
• Appraisers may charge extra fees for dealing with lawyers in additional to the cost of
appraisal report.
• Mortgage discharge is obtained by registering a Discharge of Charge/Mortgage on title
and there may be penalties for early discharge such as three months’ interest or a fixed
amount.
• Mortgage documents include a provision for late payments or non-payment of mortgage
as per schedule set out in the mortgage document.

1.7 Taxation Issues for Commercial Ownership

Tax Concepts
• Capital Gain: Profit or gain realized from the sale of Capital property (including real
property), a percentage of which must be added to taxable income.
• The taxpayer is responsible for reporting the gain as regular income or as capital
gain.
• If challenged by Canada Revenue Agency, the responsibility of proof is on the
taxpayer.
• The Tax Court of Canada hears appeals in this regard and investigates the conduct
of the taxpayer before, during, and after the taxation period.

Capital Gain = Sale Price – Adjusted Cost Base – Cost of Sale

Taxable Capital Gain = Capital Gain X 50%

Example: A commercial building was purchased for $540,000 approximately 18 years ago.
The buyers spent $150,000 on its renovations. The adjusted cost base was established at
$870,000. The building was sold last year for $1,260,000. The cost of sale was $54,000
which included legal expenses and real estate remuneration. What was the amount of
Capital Gain and Taxable Capital Gain?

Capital Gain = 1,260,000 – 870,000 – 54,000 = $336,000

Taxable Capital Gain = 336,000 X 50% = $168,000

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• Capital Cost Allowance (CCA): The Income Tax Act provides for Capital Cost Allowance
(CCA) on income producing property.
• This generally reduces payable taxes on operations cash flow as well as sale
proceeds cash flow.
• Capital Cost of a property is what the buyer pays for the property.
• CCA is not a cash flow item but rather a matter of taxation and tax-deductible
expenses.
• The amount of depreciation permitted depends on the class of assets, as defined by
Canada Revenue Agency.

• Declining Balance Method: The capital cost of depreciable property declines by a set CCA
rate every year and the balance declines.
• Half Year or 50% Rule: One half of cost is permitted during the first year of purchase.

• Straight Line Method: The useful life of depreciable assets is estimated and the annual
CCA taken represents a pro-rated amount based on the estimate.
• The calculation of CCA for leasehold improvements paid by tenant uses the straight-
line method.

• CCA Classes: Capital Cost Allowance (CCA) is the maximum rate that the taxpayer can
claim for depreciation for a specific class of asset determined by Canada Revenue
Agency.
• Most buildings qualify for 4% CCA on a Declining Balance basis and the rate for
office furniture and equipment is typically 20%.

• Adjusted Cost Base: The cost of acquisition of a capital property and subsequent capital
improvements.

• Soft Costs: These are the costs incurred during construction and generally include
consultation, project management, financing, legal and connection charges.

• Recapture of CCA: This occurs if the sale price of the property exceeds the original
acquisition price and the value of improvements has been maintained or increased since
acquisition.
• All or a portion of the CCA claimed must be added to form part of profit for that sale.
• Terminal Loss occurs when depreciable assets have no value remaining at the time
of sale.

Tax Complexities
• HST: Tax applies to most real estate transactions unless a specific exemption exists. Most
commercial sales and leases are taxable.
• Charitable and non-profit organizations, hospitals and educational institutions are
exempted from HST.
• Most residential resales and residential rentals are also exempted.
• The seller is responsible to remit taxes on sale and the tax must be collected from the
buyer at the time of sale.
• The seller typically submits tax payment to CRA with his/her own HST return and the
buyer may claim an Input Tax Credit.

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• Non-Resident Sellers: Non-resident sellers must remit the Capital Gains Tax on sale within
10 days of closing.
• The seller may remit the tax in advance, get a certificate from the Minister of Revenue,
and deliver it to buyer.
• The seller may give credit to the buyer for the tax amount because the buyer ultimately
becomes responsible if the seller fails to pay.

• Mixed-Use Buildings: A Mixed-Use property (hybrid building) that contains both residential
and commercial uses is viewed as taxable for commercial purposes but exempt for
residential purposes.

----------- MiniCram® -----------

Table of Contents

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2. COMMERCIAL CONSTRUCTION

2.1 Construction Practices - I

Construction Techniques
• Office Properties: Office buildings must comply with the Ontario Building Code, which
specifies standards for structural strength, fire resistance, acoustic separation, adequate
means of egress, sanitary conditions, and materials that prevent heat loss, water intrusion,
and moisture.
• Construction materials vary according to the building size, location, age, zoning
restrictions, and occupants’ needs.
• Design features include wood, concrete, block, steel, glass, and asphalt roofing.

• Retail Properties: Retail building designs mostly focus on flexibility, visual appearance,
cost effectiveness, energy efficiency, and should provide for a range of alternate uses.
• Construction materials include load bearing masonry walls, concrete tilt-up panels,
steel, and prefabricated modular steel as well as concrete blocks and poured
concrete.

• Industrial Properties: Industrial buildings are mostly designed according to business needs
and include general purpose, special purpose, and single-purpose buildings.
• They are typically built with concrete block, poured concrete, steel, or a combination,
but steel construction dominates industrial structures.

• Other Commercial Properties: Buildings with unique construction designs and methods
include multi-residential, multi-use, and farm properties, which are designed to meet the
needs of a particular community or lifestyle.
• Construction designs include use of concrete, steel, and wood framing while
complying with the standards set out in the Ontario Building Code.
• Farm buildings that store fertilizers, manure, etc. must also comply with the National
Farm Building Code.

Methods and Materials

• Load Bearing Masonry Walls: These are used in small buildings and are preferred due to
their thermal mass and energy efficiency.
• Vertical and lateral load strength is increased by combining masonry walls and
poured concrete.

• Wood Framing: Wood framing is cost-effective for smaller buildings up to 6 storeys.

• Larger buildings may use combination of concrete walls and wood framing for
effectively separating units.

• Pre-Cast and Concrete Tilt-Up: In concrete tilt-up structure, building walls are made on the
job site in large slabs and lifted into place.
• In pre-cast method, the concrete slabs are built off-site and then brought to the job
site.

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• Insulated Concrete Form (ICF): ICF structures have thermal mass and high insulation
values, which reduce energy costs due to two layers of thermal insulation on concrete.
• The thermal insulation acts as permanent interior and exterior layer for walls, floors,
and roofs.

• Steel Structures: Steel structures are popular due to their flexibility, design creativity, and
time saving in construction.
• Since steel can bend or lose strength under extreme heat it must meet stringent
requirements for fire protection using additional fire-resistant materials.

• Prefabricated Modular Steel: Modular steel structures are built in a factory, transported to
the job site, and assembled to make up the entire structure.
• They can be constructed with wood framing, cold-formed steel, hot rolled steel,
concrete, or a combination, and are transported to job site for assembly.
• Benefits include quick assembly, no weather delays, prevention of theft on site,
fewer contractors, and their ability to relocate, and flexibility for future expansion.

Knowledge of Structural Components

• Salespersons should have general understanding of construction methods but are not
required to be experts and should refer their clients to third-party professionals.
• HVAC Technology: HVAC units, which produce heat, provide ventilation, and air
conditioning in a building, and are important for occupants’ health, safety, and
comfort.
• Sprinklers: To prevent damage in the event of fire and protect the occupants.
• Floor Loads: The amount of weight that the floor can safely hold.
• Racking and Storage: These items are typically used in warehousing structures.
• Clear/Ceiling Height: Ceiling height, clear height, and bay dimensions determine the
available space that the buyer or owner can use.
• Shipping/Receiving Technologies: The method with which goods are transported in
and out of the warehouse.
• Building Materials: Various building materials can complement the design
characteristics of a commercial building and influence the property value.
• Aesthetic Finishes: They can be pointed out to the buyers as selling features.

• Factors That Impact Construction: Salespersons should be able to provide information on

current market trends in commercial construction to their sellers and buyers.
• Some of these factors include economic considerations, availability of space,
vacancy rates, availability of land, favourable municipal zoning, and cost of
resources such as land, labour, and capital.

Third-Party Professionals
• Third-party professionals such as contractors, appraisers, architects, mechanical
engineers, electrical engineers, structural engineers, and civil engineers can play a huge
role in providing advice to owners and buyers.
• When the buyer’s offer is conditional, these professionals can help with zoning, application
process, and subsequent municipal approvals.

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• After zoning compliance is confirmed, the buyer gets their help in preparing site plan for
approval, and when the plan is approved, the contractors install services such as gas and
hydro lines, water and sewer lines, etc.
• Subsequently, the building construction work starts according to approved building permit
and required inspections are performed.
• Third-party professionals also help the buyer in preparing necessary reports, such as
HVAV and related equipment, roofing, and environmental conditions, etc.

2.2 Construction Practices - II

Regulatory Considerations
• Ontario Building Code: The Ontario Building Code requirements ensure that the
structural strength and integrity of commercial buildings is not compromised.
• The Code applies in conjunction with the Electrical Safety Code, the Fire Code,
Occupational Health and Safety Code, the regulations of the Technical Standards
and Safety Authority (TSSA), and requirements under the Accessibility for Ontarians
with Disabilities Act.

• Zoning and Official Plans: Official Plans and zoning bylaws set out detailed requirements
for division, development, and use of land.
• The town is divided in different zones that have different requirements, and if the
developer’s plan does not comply with these requirements, approval is not granted.

• Minimum Distance Requirements: Minimum distance requirements vary with location

and zoning bylaws, which may prevent a commercial building near a municipal structure
or a major highway.
• These requirements are for safety, reducing traffic, and limiting high-odour industrial
plants in certain areas.

Site Plan Control

• Site Plan Control requires that new developments align with municipal official plans,
zoning bylaws, and provincial policies under the Planning Act.
• Salespersons must ensure that agreements include a condition requiring notification
from municipality that the proposed project complies with the Site Plan Control
requirements.
• The development plan submitted for approval must include overall site design, exterior
design, roof structure, floor plan, exterior lighting, existing site conditions, signage
location, and traffic control.
• Additionally, the plans must have provisions for garbage collection, storage facilities,
loading areas, and size and layout of the parking lot.

Additional Regulations
• Ministry of Transportation: These regulations are in addition to municipal zoning bylaws
and relate to commercial construction or renovation activities near provincial highways.

• Conservation Authority: Regulations enforce restrictions in addition to the municipal

zoning bylaws to preserve watercourses, wetlands, shorelines, valley lands, and wildlife.

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• Additional requirements are related to flooding, erosion, loss of greenspace and

prevention of water, air quality, and archaeological resources.

• Accessibility: The Accessibility for Ontarians with Disabilities Act sets out accessibility
requirements for commercial buildings.
• Commercial construction designs must provide for barrier-free path of travel for
people with disabilities.

Environmental Site Assessments (ESA)

• Phase 1: This phase involves visit to the property for visual evidence of possible
contamination.
• A review of documents, aerial photographs, title search, information from the
ministry, and municipality are conducted.
• It determines if reasons exist to believe that a property may have some form of
contamination.
• In case of a lease, the report is called a ‘Baseline Report’ before a tenant occupies
the building.

• Phase 2: This phase involves collecting samples of soil and water (by on-site drilling),
which are sent to a laboratory for analysis.
• The tests determine the extent of contamination and suggest a remediation plan.
• The purpose is to have a conclusive evidence whether a property is contaminated,
and if some remedial action is required.

• Phase 3: The environmental clean-up report is a confirmation for contamination removal,

treatment, and current status of the site.
• This phase determines the best alternatives available, costs, and strategy for
remediation and environmental risk assessment.
• Unsuccessful remediation may result in a Site-Specific Risk Assessment, which
specifies the type of development that can be done on the site.

Safety Issues
• Fire: The Ontario Fire Code requires continuous and unobstructed entry and exit from
the building to a public way and fire protection systems (sprinklers and fire pumps) to
protect the building and its occupants.
• Fire detection systems such as heat detectors and smoke alarms allow sufficient
time to the occupants to safely exit the building in case of emergency.

• Life Safety Systems: These systems include emergency lighting, exit signs, access
control device, fire suppression, and monitoring systems.
• The type of life safety system depends on the type of building, its size and specific
use of the structure.
• Alarm systems include smoke alarms, fire alarms, and voice communication.
• Emergency systems include communication systems, generator, emergency
lighting, and ventilation.
• Fire, water, and air systems include auxiliary power, sprinkler systems, fire hoses
and extinguishers, firewalls, and air circulation systems.

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• Security Systems: Not a legal requirement, but owners should install closed circuit TV
(CCTV) cameras with intruder alarms.

LEED Design
• Leadership in Energy and Environmental Design (LEED) provides standards for eco-
friendly, healthy, cost-effective, and highly efficient green buildings.
• LEED certified buildings are rated on a point basis and provide a number of benefits to
the owner or buyer, which should be included in listing information.
• Benefits include better chances of obtaining favourable financing, attractive to more
tenants, energy cost savings, good reputation, and a healthy working environment for
occupants.

Identification of Red Flags

• Salespersons must ensure that their clients are aware of potential warning signs or red
flags that the team of third-party professionals may have identified.
• Environmental: A previous owner may have been using oil tanks or other chemicals
resulting in contamination.
• Energy Efficiency: A building’s value is decreased if it does not meet current energy
saving standards for HVAC, lighting, or plumbing systems.
• Health: A Sick Building Syndrome in a commercial building may cause serious
health issues such as headaches, respiratory problems, and stress.

2.3 Office Buildings – Types and Zoning

Classification of Office Buildings

• Class A+: These landmark buildings are located in highly desirable market, in high-end
prime locations, and are designed by recognized architects.
• They are equipped with state-of-the-art technologies, features high-end furnishings,
command higher rents, and are occupied by premier tenants such as insurance
companies and foreign investors.

• Class A: These are premium buildings in prestigious locations with high-tech systems and
high-quality finishes.
• They are typically occupied by banks, international corporations, and large legal
firms.

• Class B: These buildings are found in good locations, have average building materials and
construction, they are well maintained, and have adequate internal systems.

• Class C: These buildings are found in less desirable locations, may need renovations,
they may not have modern technology systems in place.
• They are usually 20 years or older, lack advanced technologies, but the advantage
is that they offer low rents and are affordable in comparison to Class A or Class B
buildings.

• Office Condominiums: The office size is typically between 750 to 1,500 square feet and
the owner does not have to worry about management and maintenance.

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• These buildings offer amenities such as meeting rooms, on-site parking,

boardrooms, centralized reception, video surveillance, washrooms, entry systems,
fibre optic lines, IT support, and telephone systems.

Impact of Zoning Restrictions on Office Buildings

• Zoning bylaws for office buildings enforce unique restrictions such as building height,
Floor Area Ratio (FAR), maximum lot coverage, etc.
• Additional restrictions may be imposed by the development agreement with the
municipality or by the seller as a part of overall design strategy.

• Zoning Setbacks: Minimum distance of the building from the front, rear, and side yard
boundaries, and from the road or highway.
• ‘Building Envelop’ refers to the invisible rectangle within which the building must be
located.

• Daylighting: Corner lots require daylighting and additional setbacks in order to achieve the
required ‘sight-line’ for unobstructed view of the neighbourhood.

• Lot Coverage: This is the maximum area of the lot, given as a percentage, on which the
building structure can be constructed.

• Overall Building Size and Height: Zoning provisions dictate the Floor Area Ratio (FAR),
setbacks, gross lot coverage, and lot coverage for building development.
• FAR, maximum buildable area, and maximum height are important considerations
for design decisions.

• Building Height: This is the height between grade and elevation of the highest building
point and is based on number of floors.
• Height restrictions impact designs, especially when greater setback is imposed by
zoning bylaws.

• Height Restriction Exceptions: Structures and installations excluded from height

restrictions include antennae, flagpoles, satellite dishes, and equipment that operate
electrical, mechanical, ventilation, and other utility systems.

• Required Reports: Various reports from third-party professionals may be required for
approval of office development and construction plan.
• Some examples of these reports include HVAC reports, roof reports, environmental
reports, etc.

• Shadow Impact Studies: To ensure that the location or height of the proposed office
building will not cast a shadow over building facades, private and public outdoor
amenities, open spaces, and/or public parks.

• Parking: Bylaws will define the size of both regular and accessible onsite parking space,
expressed as number of spaces per 1,000 square feet of floor area.
• For example, a building with total floor area of 84,000 square feet would require a
total of 84 parking spaces, with each space having a specified square footage.

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• Greenspace Allocation: Most municipal zoning bylaws require the developers to devote
certain percentage of lot area for greenspace.

2.4 Office Buildings – Design and Construction

Small Office Building Construction

• Wood Framing: Small commercial buildings (108 sq. ft. to 6,460 sq. ft.) may use
economical wooden framing while meeting standards for loads and fire separation
between units.
• Drywall materials provide the necessary fire safety ratings.

• Floor Heights: Floor height is directly impacted by zoning bylaws, and this impacts costs
which increase when floor-to-floor height increases.
• Floor height is measured from top of unfinished floor surface to the top of unfinished
surface of the next floor.
• The space above the ceiling is known as ‘headspace’, which is used for HVAC,
plumbing, ductwork, fire protection, lighting, and mechanical systems.

• Curtain Walls: These are self-supporting, continuous exterior cladding systems, which are
typically made of composite panels inserted in aluminum or stainless-steel framing.
• Energy efficiency technology in these walls increases comfort for occupants and
saves heating and cooling costs.
• High-performance glass with special coatings minimizes glare, reflect long-wave
radiation, allow sunlight during winter, and block outward heat flow.

• Exterior Finishes: Material for exterior finishes includes wood, vinyl, aluminum, and
stucco.
• Concrete buildings are usually painted, or a plastic wall coating is applied for
durability.

Large Office Building Construction

• Effect of Floor Height: Large office buildings have more than 6,460 sq. ft. area and more
than 3 storeys.
• More floors result in more leasable space as well as more costly construction.
• Developers try to maximize the total square footage while adhering to zoning
requirements.
• Number of floors can be increased using steel beam construction combined with
concrete floors or by using concrete floor plates to maximize floor to ceiling space.

• Building Core: The central component of the building which has provisions such as toilets,
elevators, janitor’s room, closets, utilities, mechanical facilities, and stairs.
• Center-Core designs are used for multiple-tenant building and attracts companies
who prefer outside windows for management executives while internal areas are
used by staff.
• Side-Core designs are off-centre and suited for single tenant where most staff have
similar functions.

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• Floor Plates: The total square footage of each floor in a multi-level office building.
• Floor Plate design depends on zoning setback requirements, needs of the tenant,
leasing depth, particularly the distance from either the center core or corridor.

• Curtain Walls: Designed to cover multiple floors, while allowing for building movement,
and expansion.
• They help in energy cost savings by providing heating and cooling insulation for the
building interior.

• Exterior Finishes: Most common materials include curtain walls, poured concrete walls,
painted or dyed concrete walls, concrete with plastic coating, and stucco.

• Measurement Standards (BOMA): Floor measurements are done according to the

standards of Building Owners and Managers Association (BOMA).
• BOMA sets out guidelines for accurate and consistent floor-by-floor measurement
methods to arrive at gross floor area, rentable area, and usable area.

2.5 Retail Buildings – Types and Zoning

Characteristics of Shopping Centres

• Super Regional Shopping Centre: These complexes have more than 800,000 sq. ft. of
leasable area and are typically enclosed, multi-level structures with inward facing stores
and common corridors.
• There may be multiple anchor stores to draw traffic and they need larger population
bases.

• Regional Shopping Centre: These centres have 400,000 to 800,000 sq. ft. of leasable
space and are typically enclosed malls near highways.
• There are two or more anchor tenants (crowd pullers).

• Community Shopping Centre: These are usually L-shaped or U-shaped, have 125,000 to
400,000 sq. ft. of leasable space, and located near main arterial roads or at town centers.
• These shopping centres have 15-40 stores and one or two anchor tenants to attract
customers.

• Neighbourhood Shopping Centre: These are small retail centres having 30,000 to 125,000
sq. ft. of leasing space, and generally have convenience stores, grocery store, laundry,
pizza, small restaurant, dollar store, etc.
• A supermarket is generally the only anchor tenant, which fronts towards the street.

Types of Retail Buildings

• Freestanding Single-Use: These buildings have only one tenant, provide greater vehicular
traffic, and visual separation from other retailers.
• Gas stations, banks, restaurants, etc. prefer single use buildings for greater
vehicular exposure and separate identity.

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• Main Street Retail: They have a blend of old and new by creating a tenant mix of
boutiques, convenience stores, travel agents, coffee shops, offices, fruits and vegetables,
and other businesses.
• These developments include planting strips and landscaping, and the stores front
directly on sidewalks having front, parallel, or angle parking lots.

• Downtown Shopping Mall: These malls help the city planners in increasing city core
shopping by reinventing downtown retail facilities and revitalizing open shopping areas.
• For example, the Eaton Centre in downtown Toronto spans multiple blocks.

• Outlet Mall: These malls have brand-name retailers and factory outlets, and typically
attached to some warehouse to sell returned or surplus goods at a low price.
• These malls are usually located outside large urban areas in order to reduce costs
but are still closer to major highways.

• Big Box Stores: These stores range between 100,000 sq. ft. to 130,000 sq. ft., look like
warehouses with minimum interior finishes, and offer large variety of goods at discounted
prices.
• They buy inexpensive large industrial lands and get it rezoned for development of a
store that sells everything.

• Power and Regional Shopping Centre: These shopping centres have 350,000 sq. ft. to
650,000 sq. ft. of retail space and contain several big box stores at one place.
• Category Dominants or Category Killers are those stores which sell a specific
product.

• Lifestyle Centre: Smaller than Regional Shopping Centers but provide an open-air, village
like shopping for upscale consumers with reduced maintenance expenses.
• Instead of enclosed corridors and food courts, these centres contain tree-lined
streets, boutique merchandisers, coffee shops, patios, and entertainment facilities.

Retail Zoning and Restrictions

• Distance Separation: Municipal retail zoning determines the location of retail
developments in downtown districts, areas surrounding the downtown core, main street,
and arterial roads.
• Retail structures must meet the minimum separation requirements from residential
zones, based on size and usage of the structure.

• General Retail Planning Policies: Developers face complex planning requirements for new
developments, expansions, renovations, and redeveloping existing sites.
• City planners must ensure that municipal zoning bylaws are in compliance with
Smart Growth Policy when granting permissions to developers.

• Current Trends: Mixed-use projects promote social, recreational, retail, office, and
residential activities.
• The priority for planners is to revitalize existing sites while keeping minimum
separations from existing uses.

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Retail Restrictions
• Setbacks: The minimum distance from the property line to the building wall for rear, side,
and front yards.
• It is also the minimum distance a building can be located from street, adjacent
property, and protected areas, such as rivers.

• Greenbelt Zones: The Greenbelt Act requires minimum setbacks so that retail structures
are kept away from environmentally sensitive and agricultural land.

• Landscape Buffers: Used to separate retail stores from residential or other uses to reduce
the impact of noise, traffic vibrations, overhead lighting, etc.
• They usually include parklands, boulevards adjacent to roads, hills, and fences.

• Signage: Retail property owners must be advised that the municipal sign bylaws determine
the size, location, and height of signs when they are located near entrance of a mall, facing
the public road.
• While landlords are responsible for compliance with sign bylaws in a mall, tenants are
responsible for the costs of installation and maintenance of their signs.

• Access and Egress: Every retail development must have direct access and egress
provisions from any point of the retail site to a public way (street or road).

2.6 Retail Buildings – Design and Construction

Design Considerations
• ICF Structures: These structures are built using polystyrene forms that are assembled
according to the shape of exterior walls.
• These permanent components of the structures have thermal mass and high
insulation values that reduce energy costs.

• Steel Structures: Small buildings use lightweight steel, which can be assembled quickly on
site.
• Steel is more cost effective but can bend easily and lose its strength when exposed
to extreme heat and high temperatures.
• Because of this reason, steel buildings require additional fire-retardant materials
such as gypsum board, wraps, or blankets.

• Wood Structures: Wood structures are used for buildings with 6 storeys or less, they are
less expensive but prone to fire risks.

Masonry Walls
• Durability: Masonry walls use non-combustible materials, are fire-resistant, and increase
the load bearing capacity of the building.

• Termites: Since these walls are not made of wood, they are termite free, and prevent rotting,
mould, and fungus.

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• Sound Proofing: Masonry walls have better sound proofing qualities to block external noise.

• Easy Maintenance: Masonry walls have longer life, require less maintenance, and offer
greater resale value.

• Energy Efficiency: Masonry walls can store more energy when they are combined with
proper thermal mass insulation, which lowers utility costs.

• Disadvantages: A crystalline substance called ‘efflorescence’ can form on bricks due to

extreme moisture, resulting in water penetration and deterioration of block joints.

Concrete Tilt-up vs. Cast in Place

• Tilt-Up Wall Panels: Large wall panels that are poured on site and raised into position by
crane.
• They are cost effective as compared to masonry or steel but involve forming and
erection costs and weather-related delays.

• Pre-Cast Wall Panels: These walls are made off-site, transported to site, and assembled on
site as per design.
• Due to a controlled environment used in casting, there are minimum delays due to
bad weather.

Modular Structures
• Easy to install, pre-built steel modules, which include all framing and a pre-poured floor.
• Their benefits include quick assembly, theft protection, few sub-contractors, and flexibility
to easily relocate or expand the structure.

2.7 Industrial Buildings – Types and Zoning

Classification of Industrial Buildings

• General Purpose: These most common buildings have facilities for different types of
uses and can be easily converted.
• Marketing and evaluation are easy due to wide scope of uses and availability of
comparable sales.

• Special Purpose: These buildings appeal to selected industries, such as buildings with
loading docks.
• These buildings have narrower applicability than General Purpose and require
reinforced floors for storage and heavy vehicle operations.

• Single Purpose: These buildings have little appeal, are expensive to convert, and are
difficult to market.
• Oil refineries or heavy industrial uses are in this category and appraisal is typically
challenging.

• Multi-Use: Generally, they are classified as General Purpose, but may attract multiple
occupants and/or tenants even if they are standalone structures.

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• For example, an industrial mall can involve a single or a group of buildings owned
individually or divided into units for separate occupancy.

Light and Heavy Industrial Uses

• Light Industrial Use: These industrial structures are used for manufacturing, fabrication,
assembling, processing, and packaging of various products.
• Other uses in this category include mechanical and electrical contractors, computer
and telecommunication equipment manufacturing, print shops, and laboratories.

• Heavy Industrial Use: These are more intense manufacturing/processing activities

involving production of metals, petroleum products, bricks/tiles/clay production, tanneries,
heavy equipment manufacturing, meat packaging, fuel oils, etc.
• These buildings require larger setbacks from surroundings and are usually located in
isolated areas to reduce their environmental effects.

Industrial Parks
• Industrial parks are planned to be located in those controlled zones that do not have
significant impact on adjacent residential or commercial businesses.
• Regulations are mainly related to noise, vibration, odours, toxic matter, radiation hazards,
fire/explosion hazards, and heat.

Zoning Restrictions
• Zoning By-laws and permitted uses vary by municipality and are grouped in terms of general
and heavy industrial uses.
• Zoning classification sets out requirements for specific uses, lot frontages, lot areas, and
minimum front, side, and rear yards.
• Most common restrictions for industrial activities relate to noise, noxious odours, waste
storage, and outside storage.
• There are restrictions on percentage of space for office and administrative staff and other
in-house professionals.
• Industrial buildings are usually grouped in planned areas to minimize their impact on
adjacent uses and are separated using buffer zones.

2.8 Industrial Buildings – Design and Construction

Design Considerations
• Free standing buildings typically include both a main industrial area and an office area.
• Industrial structures are usually made with concrete blocks, poured concrete, steel or their
combinations.
• Pre-Engineered Steel Buildings: These structures are manufactured at a factory, are
cost efficient, and preferred for single-storey small and medium sized industrial
buildings.
• Clear Span: Floor area that is clear of interference of columns and walls.
• Clear Height: The unobstructed distance from floor to the ceiling.
• Bay: The smallest division of unfinished floor area between columns and bearing
walls.

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• Bay Depth: The distance from the bearing wall to a row of columns or between
columns.

• Loading Docks: These are at truck level height designed for loading and off-loading of
materials.
• Common features include flexible shelters, enclosed canopies, dock pads, and
trailer/truck tethers to secure vehicles to the building.

• Floor Load Limitations: Floor load consists of two types –

• Live Load refers to of weight of people, equipment, and materials.
• Dead Load refers to the weight of the structural materials.

• Roof Systems: Flat or sloped roofs are commonly used with 4-inch rise over every 12 feet
run.
• Roof ‘decking’ rests between structural components (trusses/joists) and the
insulation/weatherproofing layers.
• Most industrial roofs are made with steel or concrete and include vapour barriers to
prevent penetration of moisture.

• HVAC Systems: These systems regulate even distribution of heating, cooling, and fresh
air throughout the building by exhausting out the contaminants using exhaust hoods,
canopies, or fans.
• Industrial HVAC systems consist of air handler, condensing unit, duct work, roof-top
HVAC, unit heater, etc.

Sprinkler Systems
• The term Sprinklered refers to a building that has a built-in sprinkler system that use
interconnected pipes, risers, mains, and sprinkler heads and uses water.
• Automatic systems are controlled by smoke alarms or heat sensitive detectors.
• Wet Pipe: Fitted with water under pressure, which is released when a plug melts at
high temperature.
• Dry Pipe: It has compressed air extending from sprinkler head to a dry pipe valve. It
releases water when the plug melts and air pressure drops.
• Pre-Action: This system contains air under pressure and water is released when a
heat activated device is operated by a valve.
• Deluge: This system uses large quantities of water for unusual fire hazards.
• Combined Dry Pipe and Pre-Action: Uses automatic sprinklers attached to a piping
system containing air that is under pressure and a heat sensitive trigger that sets off
an alarm.

Additional Considerations
• Mezzanine: An office or storage area created above the floor of an industrial building,
usually 12 feet high.

• Utility Supply: The quantity and cost of utility supplies to support the intended use of
building for industrial operations is an important design consideration.

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• Transportation Access: Supply of raw material and shipping of finished goods requires
that transportation channels, such as rail and air transport, or highway and truck access,
be investigated.

Industrial Cranes
• Bridge Crane: Operates on a system of horizontal rails and needs column free areas.
• Gantry Crane: A portable bridge crane operating on wheels and can be moved on floor or
outside.
• Jib Crane: Has an arm attached at an angle to a mast and can rotate 360 degrees.

2.9 Mixed-Use Commercial Buildings

Development Plans
• Single Master Plan: Mixed-use developments involve three or more standalone, profit
making uses such as retail, office, residential, entertainment, etc.
• Mixed-Use with Retail: These are primarily residential buildings that have residential
units on top, some corporate office in the middle floors, and retail stores on the
ground level.
• Mixed-Use with Hotel: Hotels are considered mixed-use if they have retail stores,
restaurants, bars, or offices on the ground floor.
• Mixed-Use with Residential: These are primarily retail/office buildings that have
residential units on top and retail stores or offices on the ground level.

• Complex Design: Proper planning and integration of diverse uses is critical for mixed-use
developments and may include even big box stores.

• Vertical Mixed-Use Buildings: Town Centre mixed-use designs include parks, pedestrian
walkways, benches, fountains, and public squares integrated into an urban landscape.

2.10 Parking Requirements

Commercial Parking
• Parking requirements are determined by size of the building, which impact the value of a
commercial property.
• Typical requirements include number of parking spaces, accessible parking spaces,
loading regulations, space dimensions, ramps, and access points.

• Office Buildings: May have surface parking or underground parking and these
requirements may be reduced or eliminated in downtown areas due to availability of street
parking.

• Retail Parking: Parking facilities include surface parking, underground parking, and
parking garages with pairs of interwoven one-way spiral tamps that directly connect to the
retail complex.

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• Industrial Parking: Employee parking is usually found in common area near the building
whereas loading areas are separately designated.

Parking Options and Considerations

• General Considerations: Include minimum depth and width, larger parking for trucks
and/or wheelchair access, requirements for drainage, reserved employee parking, and
cost-effective common parking for all tenants.

• Structured Parking: These are above-grade, ramp-access, open air, stand-alone

structures designed and built for safety, security, ease of entry/exit, and aesthetic appeal.

• Gated Parking: A parking mechanism using a gate protects the parking space and there
may be parking fees/charges.

• Parking in Mixed-Use Buildings: Due to two types of uses (dominant use and diverse use),
there may be shared parking area and/or structured, multi-level parking.

• Parking Garages: They are built using a short-span or a long-span structure with bays to
allow for two-corridors and an access/exit aisle.

2.11 Multi-Residential Buildings

Zoning Requirements
• Multi-residential zones, designated as “MR-n”, accommodate more people in smaller
areas and are categorized as low-rise, mid-rise, and high-rise.
• Zoning provisions include minimum lot area, frontage, and floor area; maximum lot
coverage and height; minimum front, side, and rear yard setbacks; units per hectare,
parking allocation per unit; and landscaping given as percentage of total lot size.

Construction Considerations
• Construction Techniques: Techniques and methods used for construction must comply
with the requirements set out in the Ontario Building Code.
• Many buildings are cookie-cutter box-like structures but the visual impact, aesthetic
appeal, and amenities in a building is important to attract tenants.

• Materials: Smaller, low-rise buildings may use wood framing combined with brick veneer
and larger mid-rise and high-rise buildings may use concrete, steel, and a combination.

• Walk-ups and Elevators: All multi-residential buildings must have stairs (for walk-up) as
required by Ontario Building Code but a building with 4 or more floors require an elevator.

2.12 Farm Structures – Design and Construction

Zoning and Related Regulations

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• Ontario Building Code and National Farm Building Code of Canada specify requirements
for construction of buildings for farm equipment, production, storage, and processing of
agricultural products and for housing livestock.
• A site investigation may be necessary to assess soil conditions.
• Zoning by-laws will set out minimum building setback requirements.

• Minimum Distance Separation (MDS): MDS-I is the minimum distance between new
development and existing livestock or storage facilities.
• MDS-II is the distance between livestock or storage facilities and houses.

Farm Equipment
• Barns: A building used for storage of hay, equipment, or livestock.
• Silos: A tall, cylindrical tower to store up to 20,000 tons of grain, corn, and other feed.
• Chicken Coops and Pens: A coop is a house type structure where hens can lay eggs and
a pen is an enclosed structure where they can be stored.
• Milking Sheds: A large building, usually housing 300-400 cows for milking.
• Slaughter Houses (Abattoir): A facility where animals are slaughtered.
• Stables: A large structure for keeping and training horses.
• Greenhouses: A large, framed structure with a transparent cover to allow sunlight for
specialty plants and herbs.

2.13 Trends and Innovations

New Concepts
• 3D Building Information Modeling (BIM) software helps commercial buyers in getting an
insight on the entire lifecycle of the building project, right from construction to occupancy.
• 5D Macro BIM are used in large-scale projects to create computerized models that show
how changes to materials, layouts, square footage, etc. affect the building’s appearance
and costs.
• Recycled materials can be used in construction of roofing, flooring, and interior walls.

Green Energy
• Energy-Efficient Buildings: Designed to use advanced equipment to reduce energy
consumption.
• Owners can obtain reports such as Life Cycle Cost Analysis and Sustainable Return
on Investment to reduce energy consumption.

• Smart Buildings: These buildings use constructions methods that provide monitoring
systems for lighting, heating, and cooling to save energy costs.

• Energy Audit: An evaluation of amount of energy consumption and sources of heat loss in
a building, including recommended improvements.

• Green Building: These buildings provide healthy environment, use environmentally friendly
resources, and reduce waste, pollution, and degradation of environment.

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3. OFFICE AND RETAIL PROPERTIES

3.1 Market Considerations

Supply and Demand

• Commercial office market typically follows a cyclic pattern due to changing supply and
demand, growth in available labour, and increasing number of workers looking for office
jobs.
• Both supply and demand are impacted by economic factors (growth or recession),
availability of labour, land and construction activities, and availability of mortgage funding.
• Favourable zoning provisions along with availability of land, favourable mortgage funding,
and government incentives also impact the office and retail market.

Key Indicators for Office Property

• Available Office Space: The existing total square footage of office space in a particular
office market.

• Inflow of New Office Space: The total square footage added in a particular office market.

• Absorption Rate: The rate at which space is leased/occupied over a specific time period
(monthly, quarterly, or yearly).
• Net Absorption Rate is preferred as it is more accurate and reflects total space
leased less space vacated during a period.

• Rent Rate and Net Rent Rate: Rent per square foot in a particular office market.
• Net Rent Rate is the rent paid after netting out the taxes, maintenance, and
operating costs.

• Natural (Equilibrium) Vacancy Rate: This is the normal vacancy factor, which achieves a
matching process between the landlord and the tenant when sufficient additional space is
available for further negotiations.
• Negotiations do not affect the rental rates but if the vacancy rate drops below
equilibrium, the rental rates tend to rise, and when vacancy rate rises above
equilibrium, the rental rates tend to drop.
• Generally, the normal vacancy rate ranges between 5% to 8% but may vary
according to local market conditions.

Commercial Submarkets
• Submarket refers to smaller areas within large urban market and are defined by
geographic considerations.
• Key factors include major highways, rivers, roads, man-made structures, government
offices, proximity to airport, parks, schools, and socio-economic demographics.
• Specific property types, such as industrial/office park, may create a certain ‘pocket’
submarket, which offers distinct options and benefits with lower real estate costs.

Considerations for Retail Market

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• Retail Mix: The frequency of consumer visits to a shopping centre is influenced by the mix
of goods and services available to satisfy the needs.
• The shopping centre should also have sufficient parking, lighting, trash receptacles,
and other amenities to provide a safe and comfortable shopping environment.
• Tenant leases should have a provision that allows them to expand, reduce, or
renovate their stores as well and renew their leases as agreed.
• Salespersons should understand that tenant leases may impact the decision of a
new buyer, especially who want to create a new tenant-mix after purchasing a
shopping plaza.

• Market Positioning: Market Positioning of a shopping centre refers to the image it

generates in the eyes of consumers and involves creation of distinct, recognizable, and
well-accepted identity with a specific trading area.
• It is based on the premise that consumers get familiar with only limited options in
retail market and smaller, less visible retail options rarely succeed.
• Individual or aggregated retailers within a complex must be positioned correctly
during the planning process.
• Many standalone retailers position themselves in a specific trading area by locating
within or near larger shopping centres to attract consumers.

Factors Affecting Retail Demand

• Range: The maximum distance a consumer will travel to acquire a particular product or
service.
• Since it involves both time and distance considerations, consumers may travel to a
greater distance if travel time is reduced by way of highways or other ease of
access.

• Clustering: Retail groupings available in a single shopping centre that can influence
consumer behaviour.
• For example, a power centre or a regional centre having an appealing tenant/retail
mix attracts a large number of consumers.

• Threshold: The population size that is necessary to support a particular type of business
and involves both demographic and economic considerations.
• For example, a home improvement store needs a much higher threshold than a fast-
food restaurant.

• Competition: Consumers will travel no further to obtain goods or services than necessary
and will pick the nearest location when two or more competitors are offering the same
product at a similar price.
• Hence, retailers and service business are typically found on main arterial roads
located between work areas and residential districts.

3.2 Office and Retail Sellers

Documents Required for Due Diligence

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• In addition to the Agreement of Purchase and Sale, additional documents may include
details of equipment leases, tenant leases and/or renewals, deed of ownership, transfer of
mortgage, and Environmental Site Assessment.
• Documentation related to commercial building inspection, up-to-date survey, copies of
appraisals, income verification, and selected tax return information may also be required.
• There is no standard set of due diligence documents, the needs vary with the type of
property being sold.
• The ultimate goal is to have a full knowledge of relevant facts.

• Financial Statements: Include analysis of income statements, balance sheets, rent rolls
and leases, bank statements, tax bills and returns, and information on operating costs.
• Seller supplied documents including inventory of equipment and other assets,
building service contracts, and insurance policies may also be obtained and
analyzed.

• Legal Documents: Legal analysis involves property title, major assets, existing mortgages
and other encumbrances, surveys, licenses, permits, and zoning compliance.
• Sellers should also be made aware of taxation issues so that they can obtain expert
third-party advice.

• Building Condition: A building inspection report usually includes a visual inspection, review
of relevant documents, identification of physical deficiencies, photographs, and a
summary report.
• Inspection reports generally follow the standards of the American Society of Testing
and Materials (ASTM).
• They may reflect ‘material facts’ and significant deferred maintenance issues that
must be addressed.

• Environmental: An Environmental Site Assessment may be required as hazards and

contamination can pose a significant risk to the owners as well as buyers.

Disclosure Requirements
• Salespersons should advise the sellers that they must disclose known latent defects and
obtain expert third-party advice to identify and assess the impact of defects.
• If the seller is hesitant about disclosing any information, they should be encouraged to
seek legal advice.
• In office properties, a parking garage may have an issue or network cables in the walls
may be limited or unavailable.
• In retail properties, air quality may be poor, pedestrian traffic may have limitations, or
structural changes by previous tenant may have been done without building permit.

• Property Defects (Material Facts): Salespersons must make full disclosure of all facts that
are known or ought to be known and that may affect the seller client’s decision.
• Patent Defect: A defect that is readily observable by an untrained eye. The seller is
not obligated to disclose these defects.
• Latent Defect: Not readily observable upon reasonable inspection and may include a
hidden flaw, weakness, or imperfection.

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• Material Latent Defect: The most severe type of defect, which poses a serious risk
and can render a property unsafe, unhealthy, or unusable for buyer’s intended
purpose.

Retail Chattels and Fixtures

• Sellers should decide which chattels and fixtures will be included in the Agreement of
Purchase and Sale.
• This helps avoid any misunderstanding between the buyer and seller as a detailed list of
included and excluded items would be attached to the agreement.
• Items that are leased cannot be included in the agreement and the buyer may assume the
lease contract.

3.3 Office and Retail Buyers

Economic Development Offices

• Buyers may contact the local Economic Development Office, which usually creates
connections between local businesses and regional, provincial, and federal resources.
• These offices can provide valuable information with respect to zoning, available space,
market conditions, and future municipal development plans.
• They can help guide a development application through municipal process and streamline
the approval process for those who are not familiar with regulatory requirements.
• These offices also compile data related to existing businesses, buildings and vacant land
inventory, and community statistics to help in buyer’s site selection process.

Users and Investors

• Decision Making: The decision making for a user falls into three categories – (i) Investor or
User Objectives, (ii) Physical requirements, and (iii) Financial requirements.
• User groups are different from investor groups, but the investment objectives are
similar for both groups when it comes to decision making.

• Investors: Needs assessment requires proper analysis such as fulfillment of investment

objectives, expected rate of return, period to hold investment, tax sheltering and long-term
strategy to diversify real estate through leverage.

• Users: The most important factor is whether the property satisfies their requirements or not.

• Some of the important questions include –

• Needs: Should I buy or lease based on my requirements? Is the money better invested
in equipment while leasing instead of buying?
• Risk: What is the risk in leasing for a long-term vs. a short-term?
• Return: What would be the effect on my business income and return if my operating
expenses increase or if the interest rates rise?

Risks in Decision Making

• Three major factors in decision making are- (i) Needs, (ii) Risk, and (iii) Return.

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• Risk refers to uncertainty, chance, exposure, and vulnerability imposed on an investor,

particularly financial loss that may occur.
• For real estate purposes, risk is based on fluctuations in the income stream and vulnerability
of that stream to external influences such as market trends, availability of financing, degree
of positive or negative Leverage and overall economic conditions.

• Financial Risks: Interest rates and purchasing power of future dollars (inflation), etc.
• Market Risks: Real estate markets and occupancy/vacancy rates, etc.
• Business Risks: Taxation, slow economic activity, and investment climate, etc.
• Building Risks: Physical calamities, depreciation, building code restrictions,
insufficient insurance coverage, etc.

Site Selection and Specific Factors

• Site selection and facility planning services can be provided by an internal team or
external consultants when starting a new business or when expanding or diversifying an
existing business.

• Zoning: Municipal zoning provisions include permitted uses, setbacks, coverage, floor
area ratio, and height restrictions.

• Site Location: Specific geographic location, price range, frontage, and total area may
impact the appeal of an office or retail building.

• Soil Conditions/Topography: Factors include the quality of soil, environmental factors

surrounding the soil, property terrain, physical barriers, proximity to wetlands, flood plains,
heritage issues, and/or the need for landfill.

• Services: Factors include availability of municipal water, storm and sanitary sewers,
electricity and natural gas, fuel oil and propane delivery, and communication facilities.

• Transportation: Proximity and cost of rail access, public transit, parking requirements,
condition of access roads, and potential municipal expansion or improvement plans.

Location Factors for Office Properties

• Access: Accessibility of the office property for employees and clients to travel to the
location has a great impact on its desirability.

• Appearance and Facilities: Buyers also look for condition and quality of the exterior and
interior appearance of the building including entrances, lobby, elevators, and common
hallways.

• Client Parking: Office property buyers specifically look for parking areas for employees
and clients, especially in densely populated neighbourhoods.

• Public Transit: Availability of sufficient public transit system has a great impact on
desirability of office properties.

Location Factors for Retail Properties

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• Traffic Counts: The traffic count factor is used to assess the volume of vehicle and
pedestrian traffic along a particular roadway or intersection.
• This also influences the availability and accessibility of both transportation and
parking near the retail facility.
• Traffic count is impacted by major traffic routes and patterns, pedestrian flow,
frequency of public transportation, and location of on and off-street parking.

• Demographics: Retail buyers require demographic information on neighbourhood

including population, income levels, shopping behaviours, and characteristics of
consumers in the surrounding areas.

• Surrounding Uses: Retail demand is a significant factor as a good mix and presence of
different types of retail facilities would be beneficial for buyer’s business.

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4. SELLING OFFICE AND RETAIL PROPERTIES

4.1 Due Diligence Obligations

Salesperson’s Duties
• Scope: Salespersons must conduct relevant checks and exercise reasonable care and
caution when providing services to a buyer or a seller because the scope of due diligence
in commercial real estate is expansive and complex.

• Competent Service: Section 4 of the Code of Ethics requires that registrants protect and
promote the best interests of their seller clients by advising them to release all relevant
information.
• Section 5 of the Code of Ethics requires that salespersons provide conscientious
and competent service by verifying information such as zoning, permitted and
prohibited uses, financial reports, lease agreements, environmental reports,
outstanding lawsuits, etc.

• Permitted Uses: Salespersons are responsible to inquire that all tenants are complying
with permitted uses of the property because zoning issues can pose problems.

• Location of the Unit: A copy of the site plan along with survey and building floor plan can
be used to verify that space occupied by tenants is correct as informed by the seller.

• Accuracy of Information: Documents related to financial, operational, and legal aspects of

the property must be thoroughly analyzed for accuracy.
• Salespersons should recommend that the sellers hire third-party professionals to
ensure that there is no discrepancy in information provided to potential buyers.
• If the buyer discovers problems with any information provided by the seller, or finds
inaccuracies, they may want to reduce the price or cancel the transaction.

• FINTRAC Requirements: Due diligence obligations for FINTRAC include identification of

sellers, whether individual or as a corporation, and completion of relevant forms.

4.2 Visual Inspections

Interior Features
• Salespersons have an obligation to assess the desirability and appeal of the property
based on its interior features, electrical, mechanical, HCAV equipment, fire protection
systems, and overall level of maintenance.

• Age and Condition: Personal assessment of interior age and condition of the building
helps estimate the value and appeal of the property.
• This allows the salesperson to recommend necessary renovations, repairs, or other
improvements after obtaining a permit (if required).

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• Building Permits and Inspection Reports: If any major renovations or retrofitting work has
been completed, the seller should have obtained a building permit, which helps identify
material facts.
• The salesperson should verify that there are no outstanding building permits, and
the seller has obtained occupancy permits after completion of work.
• Absence of inspection reports may indicate poor maintenance of the property.

• Impact of Design Layout: The desirability of a commercial property, its value, and appeal
is greatly impacted by its design and layout features.
• Knowledge of strengths and weaknesses of an office design helps the salesperson
find the right buyer.
• Investors are typically concerned about how easily the space can be converted for
different tenants.

• Interior Signage: The location and other features of interior signage, such as directory
boards, window frosting, and reception signs, enhances branding and attracts customers.
• Types of signs include illuminated and non-illuminated, 3D mounted, neon, and LED
signs.
• Salespersons should include detailed references to interior signage, their location,
and cost obligations of tenants in the Agreement of Purchase and Sale.

• Elevators: All elevators must be installed, maintained, and inspected by technicians

licensed by the Technical Standards and Safety Authority (TSSA).
• Salespersons are not required to be experts in examining or inspecting elevators,
but they can ask the seller for inspection reports and up to date elevator license.
• If the age and condition of the elevator is not satisfactory, the buyer may ask for a
price adjustment for installing a new elevator.

• Technology and Communication Features: Salespersons should ask the seller about
technology and communication features, such as Wi-Fi, security systems, smart locks,
and smart thermostats, that are installed in the property.
• A general assessment of a Class B or Class C building may reveal outdated
technological features, which makes the building unsuitable to buyers.

Condition of Exterior Features

• Entry Areas: Parking areas, reserved parking for employees, visitor parking, and
associated security features should be confirmed with sellers.

• Balconies and Roof-Top Terraces: When nicely maintained, these facilities contribute to
overall use and enjoyment of the property.

• Roof-Mounted Systems: Cell-phone towers or solar panels, must meet municipal

requirements, and the equipment may be on lease or there may be an easement
agreement.
• Roof top solar panels have the benefit of free electricity but also involve the cost of
repairs, maintenance, and insurance.

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• Exterior Signage: Salespersons should check the type of exterior sign, its location, and
condition when listing the property.
• Exterior signs may be located directly on the building exteriors or on a pylon near
the entrance and salespersons should enquire about municipal permits.
• Buyers want to know the cost of installation and maintenance and whether they can
recover the costs from tenants.

• Parking and Entry/Exit: Salespersons should verify availability and number of parking
spaces for employees, visitors, customers, and reserved parking for delivery trucks.

Development Site
• Site Size, Shape, and Topography: Site is a serviced parcel of land, ready for
development, the value of which depends on the size, shape, and topographical features.
• Large rectangular/square lots are best suited for development, whereas an oddly
shaped lot becomes a design challenge for the architect.

• Available Services: Seller should be asked about public and private utilities and services
such as electricity, water, sewer, telephone, cable TV, satellite, and well and septic
systems.

• Access to Public Transit: Availability and efficiency of public transportation enhances the
value of site as ease of travel is a major factor for employees and customers.

• Environmental Condition: Contamination on a property is considered a ‘latent defect’,

which must be disclosed to potential buyers.
• Salespersons should enquire if there are any environmental issues that might have
occurred on the property and the steps the seller has taken to resolve the problem.
• If an Environmental Site Assessment was done, a copy of the report should be
obtained from the seller.

4.3 Gathering Information

Key Information
• Type of Ownership: The ownership of a commercial property may be as sole
proprietorship, corporation, partnership, or a limited partnership.
• This information is required as the salesperson is responsible for identification of
owners and completion of FINTRAC forms.

• Measurements: Information on different types of areas, such as gross floor area, gross
leasable area, rentable area, usable area, etc. should be obtained for listing the property.
• Since the value of a commercial property is usually based on per square foot, the
accuracy of measurements is important, and salespersons should obtain services of
a third-party professional.

• Building Improvements and Costs: Information related to seller’s improvements should be

obtained as it helps salespersons in marketing and promoting efforts.

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• Recent improvements such as energy efficient equipment and/or replacement of

major structural components may significantly affect the selling price.

Chattels, Fixtures, and Inventory Control

• Rental Equipment: Rental items may include water heaters, furnaces, and security
systems, and the salesperson should obtain their rental contracts.
• Additionally, copies of conditional sales agreements should be obtained and
identified in the listing.

• Chattels: All chattels included in the sale should be identified and listed as ‘included’ in the
Agreement of Purchase and Sale.

• Fixtures: Salespersons should obtain detailed information on fixtures since they are
personal items, which are permanently attached to the property, unless specifically
‘excluded’ in the Agreement of Purchase and Sale.

• Trade Fixtures: Salespersons must clearly identify the fixtures that are owned by the
property owner or are trade fixtures that would be removed upon sale of property.

• Alarms and Security Systems: Alarms and security systems are expensive equipment and
may either be owned or leased by the seller.

• Inventory Control Systems: Radio Frequency Identification (RFID) tags and bar codes are
two common inventory control systems in buildings, especially where high-value items are
stored and sold.
• However, salespersons should be aware that these systems may be owned by
owners for managing their own business and are not part of sale.

Creating a Marketing Package

• Purpose: A summary information package helps narrow down potential buyers as most
investor buyers already know what they are looking for in a property.

• Contents: Marketing package includes a fact sheet, high-resolution images, street map,
and zoning information, permitted uses, demographics, and general information of the
property.
• It may also contain limited financial information while detailed financial reports are
provided later when an offer is conditionally accepted.

• Creation: The package may be created electronically or as a hard copy and is usually
distributed to other commercial brokerages.

• ‘For Sale’ Sign: Rarely found on retail or office properties but can still be used with
discretion.

• Accessibility for Showings: Showings must be discreet, well-coordinated with the sellers
by deciding whether potential buyers enter through front door or a rear entrance.

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• Showing Instructions: Showings must be unobstructive without interrupting seller’s

business.
• Strict conditions, such as days and hours of showing, must be carefully drafted.
• Talking to employees and/or customers should be prohibited as it may harm or
damage seller’s business.

4.4 Gathering Additional Information

Financial and Legal Issues

• Viability of a business depends on its revenue streams and overall return on investment.
• Salespersons must obtain various documents related to financial and legal matters for a
review by third-party professionals.
• These documents include title/ownership, surveys, existence of easements and restrictive
covenants, cost of various services, copies of inspections, and lease agreements.

• Building Insurance: Due to high cost of building components, insurance companies

perform an inspection before placing renewing a policy.
• Salespersons should be aware that deficiencies, age, and condition of the building
components may impact insurance premiums.

Restrictions on Property
• Easements: A hydro or natural gas easement, registered on the title of the property may
limit overall land value and must be disclosed to prospective buyers.
• Properly documented easements typically do not pose a problem from real estate
perspective.

• Rights-of-Way: The seller may have entered into a right-of-way agreement with another
person and this fact must be documented.
• For example, the owner may have allowed the neighbour to use the driveway for
parking or entry of delivery trucks.

• Encroachments: Salespersons should verify existence of any encroachment agreements

and relevant permits with the municipality.
• For example, a grocery store using the sidewalk for keeping fruit and vegetable
stands.

• Restrictive Covenants: These restrictions prohibit the use pf a property for certain use and
may come from the owner, deed restriction, or a lease.
• A non-competitive clause in the commercial lease is an example of restrictive
covenant.

Issues with Tenants

• Non-Payment of Rent: Buyers usually examine leases and ask questions about tenant
defaults as they have the right to take action under the Commercial Tenancies Act.
• If any tenant is consistently late in rent payments or is not paying, the owner may
face financial burden.

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• Damage Caused by Tenant: Any damage to the premises by a tenant, such as damaged
parking lot due to heavy trucks, may cause losses to other tenants.
• If the tenant refuses to pay for the damage, the owner may have to initiate some
legal action.

• Non-Compliance with Use Restrictions: Salespersons should find out if any tenants are
violating their use restrictions or conflict with other tenants.
• Buyers usually conduct their own risk assessment and may ask questions about any
apparent tenant conflicts.

Impact of Lease on Value and Marketability

• Income: Stability of the lease is determined by the length of the term and its durability is
determined from creditworthiness of the tenants.
• Financial Analysis: A thorough examination of lease agreements may reveal important
information about the rental income and other revenue potential of the lease.
• Terminate Dates: Buyers are concerned, examine leases, and usually ask questions
about the financial qualities of the lease including termination, expiry, and renewal dates.
• Non-Renewal: If any lease is not renewing, the new tenancy may not be favourable and
may impact the revenue of the buyer.

Physical Components and Energy Efficiency

• Electrical, Mechanical, and HVAC: Salespersons should be aware of the types of various
electrical, mechanical, and HVAC systems and inform the buyers if any of these
components need replacement.

• Water and Sewage: The source of water (municipal or private well), any purification
system, and inspection reports systems should be reviewed.
• The site may be on public sewer system or may have its own private septic system
for which the owner is responsible.

• Exterior Cladding: Aesthetically appealing exterior cladding (brick veneer, stucco, or

cement), its age, and general condition have positive or negative effect on value.

• Roof: The age and condition of the roof should be verified with the sellers and if it has
been repaired or replaced recently, it may help improve the salability of the property.

• Windows and Displays: In retail properties, the size, lighting, shelving features, decorative
qualities, and overall condition of windows and display areas should be examined.

• Energy Efficiency: Salespersons may use Green Information Checklist – Commercial

(OREA Form 825) for assessment of energy efficiency improvements and features.
• If the building is LEED certified, this information should be highlighted in marketing
efforts as the standards help in reducing operating expenses and increase profits.

4.5 Detrimental Conditions

Environmental Conditions

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• Asbestos: Presence of asbestos in building materials is easily identifiable by contractors

during renovations.
• The seller should be advised that this is a latent material defect and must be
disclosed to buyers.

• Light Fixtures: Old fluorescent lights may have ballasts containing polychlorinated
biphenyls (PCB), which is toxic and considered a hazardous substance.
• Salespersons should recommend an electrical inspection to identify if any light
fixtures were manufactured before 1980 and arrange for their removal to comply
with environmental regulations.

• Air Quality: Poor indoor quality is mainly caused by lack of proper ventilation and may give
rise to a medical condition for employees and/or customers.

• Hazardous Waste: Storage and disposal of hazardous waste should be done in

compliance with environmental regulations.
• Hazardous materials should be stored in a secure location to prevent tempering by
anyone until the time they are sent to authorized disposal sites.

• Water Leaks, Mould, and Dampness: Any identified issues related to moisture, water
leaks, and presence of mould should be raised with the seller and disclosures should be
made to potential buyers.

• Soil and Water Contamination: Industrial activities on nearby properties may have water
and soil contamination on seller’s property.
• While the salesperson is required to make enquiries, the seller is responsible for
necessary clean-up.

Fire and Security

• Inspection of Fire Safety Systems: The seller should be asked to provide copies of
inspection reports related to fire protection and suppression systems.

• Building Code and Fire Code Compliance: Deficiencies identified in building code and fire
code inspections are considered material facts, and the seller should be asked to rectify
these problems.

• Inadequate Security Systems: Salespersons should verify the security systems arranged
by the seller for protection of premises.
• There should be adequate insurance coverage for loss or damage and the lease
should mandate that tenants arrange their own insurance.

Safety of Vacant Building

• Not every commercial build is abandoned but may be vacant due to owner’s financial
inability to do required repairs, or the owner is just waiting for a new tenant during an
economic downturn.
• Salespersons should be extra careful when listing a vacant building as there may be
several detrimental conditions impacting the salability and marketing of the property.

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• General Building Condition: Neglected vacant buildings may have structural problems and
other hazards that impact their salability and security of anyone who enter it.

• Damage to Exteriors: Signs on vandalism, broken windows, graffiti, and general

deterioration due to lack of maintenance are common issues with vacant properties.

• Fire Risk and Flood Damage: Abandoned items in/around a vacant property pose a fire
risk and, if the property is left unheated, it may cause flooding due to bursting of water
lines.
• Water pumps should be functional, floor drains should not be blocked, and there
should not be any sewage backup.

• Preventing Trespassing: The seller should have taken steps to prevent security and
trespassing of the vacant building.
• Check if the seller has boarded up windows, installed a fence, a security system, or
hired a security company.

• Infestations and Contamination: A building may turn into an illegal dumping ground if it is
left unattended for a long time and may require cleanup from infestation.

• Government Work Order: Salespersons should be aware that if a government work order
was issued and not complied with, it may be registered on title.
• Potential buyers may ask for a price adjustment for necessary repairs depending on
the complexity of the word order.

4.6 Preparing to List

Measurements Standards
• Building Owners and Managers Association (BOMA): BOMA standards are used for most
commercial properties on a floor-by-floor basis.

• International Property Measurement Standard (IPMS): The IPMS standards are used in
different countries, address inconsistencies in different markets, and are mainly used for
valuation purposes instead of leasing.

• Source Documents: Salespersons should refer to both the documents provided by the
seller and source documents such as architectural drawings, surveys, and tax assessment
notices to confirm building measurements.

Areas and Terminology

• Base and Additional Rent: Salespersons need to know that tenants not only pay for the
rentable space but also pay additional rent, which is proportionate share of the tenant for
operating expenses.

• Exterior Measurements of Significant Structures: These structures have the capability of

housing employees, materials, or processes that contribute to general revenue/income of
the owner.

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• Accessory Buildings: Outdoor structures such as a parking garage, security booth, or

garbage collection areas.

Standard Terminology
• Gross Building Area: Total gross floor area based on external measurements but
excluding any enclosed areas.
• Gross Leasable Area: Total floor area designated for occupancy and exclusive use of
tenants in an office building or a retail complex.
• Rentable Area: Rentable space for a tenant is comprised of usable area and proportionate
share of common areas, such as lobby, janitorial, washrooms, electrical room, etc.
• Usable Area: The actual space or the area within the walls occupied by a tenant.
• R/U Factor: The relationship between rentable area and usable area.
• Loss Factor: The difference between rentable area and usable area.
• Common Area: All areas used by two or more tenants, such as lobby, janitorial,
washrooms, hallways, electrical room, etc.

Formulae
R/U Factor = Rentable Area ÷ Usable Area
Rentable Area = Usable Area X R/U Factor
Usable Area = Rentable Area ÷ R/U Factor

Example: A commercial building has a total of 120,000 square feet of rentable area and
105,000 square feet of usable area. If a tenant has 3,680 square feet of usable area, what
would be his rentable area rounded to nearest square foot?
R/U Factor = 120,000 ÷ 105,000 = 1.142857
Rentable Area for Tenant = 3,680 X 1.142857 = 4,206 Square Feet

Standard Measurement Tools

• Tape Measure: A convenient, reliable, and accurate tool to find length without involving
any electronics.
• Disadvantage is that another person is required to assist if there is no surface on the
other side.

• Laser Distance Meter: More accurate and easier to use than a tape measure to find out
the distance between two walls.
• Disadvantage is that it requires a hard surface at the other end, which means that
external measurements can be challenging.

• Measuring Wheel (Surveyor’s Wheel): Ideal for measuring longer distances, such as a
garden or a parking lot.
• Disadvantage is that accuracy is affected if the surface is not smooth.

Improvements that Impact Marketability

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• During a walkthrough of the property, the salesperson may notice certain improvements or
may recommend various improvements that affect the value and marketability of a
commercial property.
• Some activities include cleaning carpets or installing new carpet, repainting walls,
ensuring halls and common areas are clean, remarking the parking lines, and installing a
new air conditioner.
• Additionally, certain renovations, such as updating washrooms, installing new roof,
enhancing curb appeal, new windows, etc. can also positively impact the value.
• Fixtures and other equipment, such as light fixtures, HVAC systems, refrigeration
systems, water softening or purification systems, etc. should be well-maintained.

4.7 The Appraisal Process

Hiring an Appraiser
• Salespersons may provide an estimate of value for listing purposes but are not qualified
for professional evaluation and should recommend services of a professional appraiser.
• The Appraisal Institute of Canada awards designations such as Canadian Residential
Appraiser (CRA) and Accredited Appraiser Canadian Institute (AACI).
• The seller/owner should be recommended at least three appraisers based on their
experience and the purpose of appraisal.
• It is important that an appraiser is hired early in the sale process because they need two
to three weeks’ time for their work.

• Refinancing: The owner may need additional financing due to business growth and the
lenders typically require an appraisal report.

• Sale of Property: Sellers may need a reliable estimate of the value of their property so that
it is not underpriced or overpriced.

• Family Transfers: Family transfer of a property often requires appraised value due to
taxation purposes.

• Corporate Transfer: Corporate transfer of commercial properties may require professional

appraisals due to complexity of assets or when there is a dispute about value between the
seller and the buyer.

• Estate Planning: Owners who want to equally distribute their assets to their heirs may
need qualified appraisals.

• Land Severance and Discharge by Lender: When a buyer is purchasing a parcel of land,
or when a mortgaged parcel of land is sold, lenders typically require professional
valuations.

Three Methods of Appraisal

• Cost Approach: This approach considers the market value in terms of cost of land and
cost of construction, less depreciation.

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• This method is reliable for newly constructed buildings, when sales and income data
is insufficient, and for special or single purpose industrial buildings.

• Income Approach: This method utilizes the income generated by the subject property to
arrive at its value using a market capitalization rate.
• However, this method cannot predict fluctuations in the market and what effect they
will have on future income and expenses.

• Direct Comparison Approach: The subject property is compared with recent sale of similar
properties and adjustments in their sale price are done for differences in features.
• However, no two properties are similar in location and features, and adjustments
based on deficiencies and advantages can be difficult.

Factors that Impact Value

• Zoning Designation: Appraisers usually check for zoning compliance because if a property
use is not in compliance, the buyer/owner may have to apply for zoning amendment.

• Compatibility with Surrounding Property Uses: Compatibility with uses of neighbouring

properties, such as an office building in proximity of other office buildings, enhances value.

• Population and Income Levels: A commercial property is considered better investment if

the income levels of the population are compatible with owner’s business.

• Pedestrian Traffic: Appraisers test the property for ‘walk score’ to assess pedestrian
friendliness and identify how far the consumers have to walk for their shopping.

• Major Traffic Routes: A property close to major routes or highways has a positive impact
on value and potential buyers are interested to know the volume of traffic the property is
attracting.

• Adequacy of Parking: Adequate parking positively impacts value as compared to

properties that have insufficient parking and are usually avoided by customers.

• Neighbourhood Trends: Growing and evolving neighbourhoods attract more retailers and
shoppers, and areas that are in stability or declining stage may not be preferable.

• Street Exposure/Visibility: Highly visible properties on corners may be beneficial to buyers

as it results in more pedestrian and vehicular traffic.

• Lot Size and Layout: Since commercial properties are sold on per square foot basis, the
larger the lot, the more valuable it would be.
• Further, the layout of an office of retail structure affects the utility of the building,
enabling the occupants to carry out their jobs in a smooth and efficient manner.

4.8 Valuation Process

Comparative Market Analysis

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• Salespersons may be required to estimate a reasonable listing price of a commercial

property by gathering information from the local listing service or other sources.

• Current Listings: The first step in estimating value is to find the list price of comparable
properties that are currently listed for sale.

• Recently Sold: The research is then extended to compare the subject property with
recently sold similar properties within the last 12 months.

• Expired Listings: Investigation may be extended to similar properties that were listed but
did not sell within the last 12 months.
• The reason why a property did not sell may be that the listing price was too high,
property condition was poor, or economy may be slowing down.

• Providing a Range of List Price: After proper research, the salesperson may be able to
advice the seller an acceptable range of values for listing the subject property.
• Sellers should be informed about the disadvantages of overpricing as well as
benefits of keeping the list price close to fair market value.

Capitalization and Income Multipliers

• Capitalization: A capitalization rate is obtained from sale of comparable properties and is
used with net operating income to arrive at an estimate of value.
• A change in market derived capitalization rate, depending on supply and demand
forces, overall economic conditions, and buyer’s expectations, affects the value of
subject property.
• A higher capitalization rate results in a lower value and vice-versa.
Cap Rate = Net Operating Income ÷ Sale Price
Example: The annual net operating income of a business after deducting the operating
expenses is $58,000. This type of business has a capitalization rate of 12.5%. What would
be the estimate of value?
Value = 58,000 ÷ 12.5% = $464,000
• Income Multiplier: The Gross Income Multiplier (GIM) derived from recently sold similar
properties may help in arriving at an acceptable listing price of the subject property.
• The Gross Income is calculated after deducting operating expenses such as utilities,
taxes, and maintenance.
GIM = Sale Price ÷ Gross Income
Example: The annual gross profit of a restaurant business is $35,500. Market research
suggests a Gross Profit Multiplier of 2.5. What would be the estimate of value?
Value = 35,500 X 2.5 = $87,750

List Price Based on Sale Price

• Sale to List Price Ratio: The sale to list price ratio of recently sold properties may help in
arriving at an acceptable list price for the subject property.

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• A ratio closer to 100% means that sellers are getting a sale price close to their
asking/listing price.
Sale to List Price Ratio = Sale Price ÷ List Price X 100
Example: Seller Warden listed his home for $379,900 with Cram Realty Inc. After two weeks
in the market, it was sold for $360,000. What was the Sale to List Price Ratio (rounded to
two decimal places)?
360,000 ÷ 379,900 x 100 = 94.76%

----------- MiniCram® -----------

Table of Contents

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5. SELLING COMMERCIAL CONDOMINIUMS

5.1 Condominium Governance

Condominium Developers
• Commercial condominium is registered after the developer registers Declaration and
Description documents in the Land Registry Office.
• After registration, a corporation without share capital is automatically created under the
Condominium Act.
• Use restrictions are initially set out by the Declarant and are later modified by the board of
directors.
• Within 21 days of ceasing to be a majority shareholder upon sale of units, the developer
must call a Turnover Meeting to hand over the control of the condominium corporation.

Board of Directors
• The developer appoints the first board with 3 members within 10 days of registration of
condominium, which calls a Turnover Meeting before the later of:
• 30th day after transfer of 20% units, or
• 90th day after transfer of the first unit.
• Unit owners may appoint 2 more directors at the turnover meeting, who must be over 18
years of age and mentally competent.
• A director ceases to be a director if he/she becomes bankrupt, becomes mentally
incompetent, or does not discharge a registered lien within 90 days.
• Directors are appointed for a maximum period of 3 years and are responsible for enforcing
bylaws and rules, and overall management of condominium management.

Condominium Managers
• Managers have more expertise than directors in management and help the board make
decisions related to condominium management.
• The Condominium Management Authority of Ontario (CMAO) regulates the education,
licensing, and Code of Ethics for managers.

Bylaws and Rules

• Bylaws: These are specific standard procedures and requirements for governance,
internal operations, borrowing funds, and overseeing regulatory matters.
• Bylaws are made, repealed, and amended by the board of directors and must be
registered in the Land Registry Office.

• Rules: Rules are developed for safety, security, and welfare of owners, prevention of
unreasonable interference with use of common elements, and property and assets of the
corporation.
• Registrants should be aware of rules, which can directly impact the seller in terms of
marketability.
• Rules become effective after a majority of unit owners vote to approve them, or
without approval if no meeting is requested within 30 days.

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• New Owner Information Certificate (NOIC): The corporation must provide the NOIC and
the most recent Periodic Information certificate (PIC) to new owners within 30 days of
purchase.
• To comply with this regulation, the new buyer must inform the corporation about
change in ownership.

• Use-Restrictions and Approvals: The condominium corporation may reserve the right to
approve a buyer as they want to restrict certain types of uses as per municipal zoning and
condominium bylaws.
• The Agreement of Purchase and Sale typically includes a clause regarding approval
by the corporation/management, which is not granted if the intended use is not in
compliance with bylaws or zoning.

Status Certificate
• The Status Certificate provides information on operational, legal, and financial aspects of
the condominium corporation.
• Upon request, the corporation must provide the certificate within 10 days, for a fee not
exceeding $100.

• Information in Status Certificate:

• Common expenses, arrears in payments, and any increase in common expenses in
the current fiscal year.
• Copy of current Declaration, bylaws, and rules.
• List of current agreements for management and insurance.
• Details of most recent Reserve Fund study, the amount held in the fund, and any
special assessments.
• Information on any proposed additions, alterations, or improvements to common
elements.

5.2 Commercial Condominiums

Ownership Benefits
• Equity Building: Regardless of the success of business, condominium ownership is helpful
in building equity due to increase in value over a period of time.

• Shell and Turnkey Units: Developers usually provide ‘shell’ or ‘turnkey’ units but may
complete customized internal finishes as per buyer requirements and the cost is included
in purchase price.
• Buyers also have the option to buy just a shell unit and finish the space themselves
after necessary approvals from the condominium corporation.

Commercial Condominium Uses

• Office Condominium: The unit may be a part of a larger condominium complex but
registered separately with its own title.
• As with retail units, facilities such as washrooms, media rooms, elevators, parking
spaces, reception, etc. are shared with other unit owners.

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• Retail Condominium: Each retail unit in a retail complex is separately registered with its
own title and shares common areas, such as washrooms, lobbies, signage, etc. with other
unit owners.

• Industrial Condominium: Industrial uses include warehousing and distribution,

manufacturing, and other light industrial activities.
• Common elements include signage, parking areas, shipping/receiving areas,
landscaping, HVAC, CCTV, sprinklers, and fencing.
• Maintenance fees in industrial condominiums is higher than residential due to
different tax rates and higher utility costs.

• Mixed-Use Condominium: These buildings usually have retail stores on the ground floor,
offices on the second floor, and residential units on upper floors.
• Residential owners may benefit from renting their units, and retail/office unit owners
benefit from an immediate market exposure within the complex.
• Residential unit owners have added advantage from shared maintenance expenses
with retail and office unit owners.

• Shared Facilities: The shared facility agreement between the corporation and another
party relate to maintenance, shared driveways, parking lights, landscaping, shared
storm/sanitary sewers, and shared entrances/exits.
• Salespersons should be aware of complexities of shared facility agreements and
should make appropriate enquiries.

5.3 Key Issues for New and Resale Units

New Condominiums
• Municipal Levies: Municipal costs for providing services to new developments, including
commercial condominiums, are charged from developers as ‘levies’, who then pass on
these expenses to new unit buyers.

• No Tarion Warranty: With the exception of mixed-use developments, commercial

condominiums do not carry the Tarion warranty, which only applies to residential
condominiums.

• Site Plan and Agreements: Salespersons should recommend the buyers to review the site
plan and site plan agreement with developer to ensure that it has been complied with.

• Occupancy and Registration Timings: The pre-registration occupancy timings can be

lengthy, resulting in buyers to pay the occupancy fees for a long time before the unit is
registered in their name.

• Business Conflicts: Buyers taking early possession should seek clarification from the
developer that business of other owners will not be in competition with the buyer’s
business.

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• Occupancy Costs: Occupancy fees paid by buyers before registration is not deducted
from the purchase price as they only cover developer’s prorated costs, such as taxes,
mortgage interest, and insurance.

• Issues Before Turnover: Although not a major concern, buyers should still have an
understanding of the condominium governance process, including the turnover meeting.

• Zoning: Salespersons should confirm that the buyer’s intended business in new
commercial unit will be in compliance with municipal zoning provisions.

• Parking: Salespersons should review the site plan with buyers as well as property
managers to determine that there is sufficient parking for employees and customers.

• Renovations: Finishing internal space is buyer’s responsibility as new units are usually
sold as ‘shell units’ and the buyers should check the costs and specifications if the
developer agrees to finish.

• Insurance: Buyers should be advised to insure their units, contents, business activities,
and window glass because it is not a part of condominium corporation’s insurance.

Resale Condominiums
• Status Certificate: The Agreement of Purchase and Sale should include a condition
related to review Status Certificate, which reveals information on Reserve Fund, special
assessments, levies against the unit, maintenance fees, and other capital improvements.

• Capital Improvements and Maintenance: If the Status Certificate review indicates certain
capital improvements or maintenance issues, the buyers should confirm the timeline for
carrying out maintenance and that there is sufficient Reserve Fund for the purpose.

• Renovations Before Resale: If the seller agrees to renovate or upgrade the unit before
sale, there should be a clause in the Agreement of Purchase and Sale specifying that the
work will comply with Declaration/Bylaws and buyer will inspect the unit before closing.

• Renovation Permissions: Any work in the unit that involves common elements must be
carried out with permission from the board of directors, and must be in compliance with
regulations such as Ontario Building Code, Occupational Health and Safety Act, etc.

• Renovation Permits: The unit owner or the contractor is required to obtain a building
permit from the municipality as well as Electrical Safety Authority for any renovation work.

• Remaining Warranty: Information on remaining warranties on the unit and any capital
equipment is considered ‘material fact’, which must be obtained and provided to the buyer.

5.4 Due Diligence Obligations

Financial

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• Salespersons should ensure that their clients understand their financial obligations related
to payment of maintenance fees, special assessments, etc.
• Commercial unit owners are expected to run their business according to Declaration
bylaws, rules, and regulations.

Zoning
• Salespersons should verify the zoning and associated restrictions from municipality’s
website to confirm that client’s business is permitted.
• The buyer’s lawyer will also confirm that the present use can be lawfully continued by the
buyer.

Declaration, Description, and Bylaws

• The constitution of a condominium is set out in its Declaration and Description, which may
set out permitted uses and use restrictions.
• Salespersons should ensure that buyer’s business is not in contravention of any bylaws,
rule, and/or regulations, and advise them to obtain expert legal advice about their
intended use.

• Declaration: Includes a statement that the Condominium Act governs, consent of

registered mortgagees, and corporation address for service.
• The proportionate share of common elements and contribution of unit owners to
common expenses.
• Exclusive use common elements and any conditions required by the approval
authority.

• Description: This document contains a series of plans, surveys and specifications

describing the property and structures.
• It includes architectural plans, certificate of Ontario Land Surveyor, unit boundaries,
shape, dimensions, and location.

5.5 Gathering Information

Visual Inspections
• Inspection of Unit: Attention should be paid to layout and location of various utility
services, features that benefit the client, and any modifications that may be required.
• When working with a seller, potential issues should be identified for disclosure of
material facts to potential buyers, and recommendations should be made for
improvements before listing the unit.

• Common Elements: Include common entrance, corridors, parking areas, central reception
area, hallways, lobbies, etc.
• Salespersons should include additional conditions in the agreement to ensure that
an assessment of common elements can be performed with appropriate permission.

• Structural and Mechanical Inspections: The inspection condition should include

mechanical and structural components, such as HVAC, electrical, and plumbing.

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• The buyer should be advised to hire third-party professionals to carry out these
inspections.

• Signage: Business signage is regulated by municipal zoning but may have further
restrictions from the condominium bylaws.
• The corporation retains the right to approve the design and size of street pylon signs
as well as signs in the lobby directory.

Gathering Information – New Units

• Consultation with Developer: Detailed information about the prosed project should be
obtained from the developer in order to avoid any misrepresentation or non-disclosure to
the buyer client.

• Covenants and Restrictions: When working with a seller of new unit in an assignment
situation, salesperson should obtain copies of various covenants and restrictions that may
impact potential buyers.
• In a Phased Condominium project, the adjoining ‘Future Development Phases’ may
affect the parking and other shared facilities.

• Lawyer Review: Salespersons are not expected to be experts in document review and
should ensure that their buyer clients have received copies of the Agreement of Purchase
and Sale, Schedules, and the Disclosure Statement.
• Advise the buyers that these documents should be reviewed by their lawyer to
understand the clauses and any use restrictions.

• Review Agreement of Purchase and Sale: The builder’s agreement is complex, contains
many clauses and schedules related to development, finishes, and signage.
• Since the unit is not built yet, it is important that the buyer reviews this agreement
with their lawyer before the agreement becomes legally binding.

• Zoning Compliance Letter: The buyer or buyer’s lawyer usually obtains a compliance
certificate for the unit from the local municipality as part of due diligence investigation.

• Floor Plans and Unit Measurements: Floor plans obtained from the developer usually
include the Surveyor’s Certificate, which describes the unit boundaries, size,
measurements, and boundaries for sign space.

Gathering Information – Resale Units

• Status Certificate: The Agreement of Purchase and Sale should be conditional upon
satisfactory review of the Status Certificate and related documents.

• Declaration and Description: Based on a review of Status Certificate, which includes

Declaration, Description, and Bylaws, the buyer’s lawyer provides specific advice with
respect to conditions, covenants, and restrictions that may impact buyer use of the unit.

• Review by Buyer’s Lawyer: The buyer should be advised to have the Status Certificate
reviewed by a lawyer, and if more information is needed, it should be obtained from the
property manager.

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• First Right of Refusal: The Agreement of Purchase and Sale should be reviewed to
confirm that it includes required conditions and disclosures as some condominium
corporations have the First Right of Refusal, which may nullify the agreement.

• Unit Measurements: Unit space should be confirmed according to BOMA or IPMS

measurement standards from floor plans or by obtaining services of Ontario Land
Surveyor, especially if alterations have been done to the unit.

5.6 Detrimental Conditions

Salespersons Obligations
• Salespersons have an obligation to their seller and buyer clients to identify and disclose
all material facts, latent defects, and potentially detrimental conditions related to the unit.

• Non-Compliance with Zoning: If the seller’s use of the unit is contrary to Declaration or
zoning, or if there are any latent defects, they should be discussed with the seller, and
must be disclosed to the buyer.
• Buyers should ensure that their intended use of the unit is also in compliance,
otherwise the use would be considered illegal, resulting in termination of the
agreement.

• Structural Integrity: The seller may have compromised the structural integrity during major
renovations and the property management may have asked them for an assessment.
• Any defect identified during assessment by a third-party will be considered a latent
defect, which may affect the value of the property.

• Electrical Overload: Sellers should be advised to take appropriate steps to rectify any
electrical detrimental condition caused by inadequate supply and overloading.

• Environmental Issues: Environmental conditions are serious issues in commercial

transactions and sellers should be asked if they are aware of hazards or contaminants.
• Environmental concerns should be openly discussed with sellers and buyers, expert
services should be recommended, and conditional clauses should be included in the
Agreement of Purchase and Sale.
• Current and past uses of the subject property as well as adjoining properties should
be investigated.

5.7 Listing a Commercial Condominium

Area Calculations
• Measurements – Systems and Methods: Salespersons need not perform measurements if
the seller declares the unit area based on documentation from a third-party professional.
• When there is no documentation, the seller should be advised to hire a professional
measurement company to get measurements as per BOMA or IPMS standards.
• Measurements can also be verified from the floor plan of the unit or the Municipal
Property Assessment Corporation (MPAC).

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• Complete Description of Areas: Salespersons should have detailed information about

various features to accurately and completely describe the property to potential buyers.
• For example, the accurate area, ceiling height, and volume may be important for a
buyer who wants to use the unit for storage and distribution.

• Allocation of Common Expenses (Schedule D): Common expenses (maintenance fees)

relate to all expenses with the management and operation of the common elements,
which are divided proportionately among the unit owners.
• Common expenses for a unit are calculated by multiplying the unit area with per sq.
ft. of cost of common expenses.

Additional Obligations
• Repairs and Alterations: Before listing a property, sellers should be advised to make
improvements to their unit by cleaning, repainting, and replacement of carpets, window
coverings, and equipment.
• When significant changes or alterations are required, sellers should be advised to
get necessary permission from the board of directors and/or building permit from the
municipality.

• Third-Party Professionals: As per the Code of Ethics, if the registrant is unable to provide
competent services, they are not authorized to do so.
• Instead, they should encourage their clients to obtain services or other third-party
professionals, such as lawyers, building inspectors, environmental engineers,
accountants, mortgage brokers, insurance brokers, etc.

5.8 Valuation

Factors Impacting Value

• Permitted Uses: The value of a commercial unit is affected by permitted uses under
zoning, which may restrict or prohibit a wide range of business activities.
• Lack of approvals for alterations and modifications, or vague documentation
negatively affects value.

• Maintenance Fees: Buyers are reluctant to buy a commercial unit if the maintenance fee is
too high.
• When using the Income Approach to value, an increase in maintenance fee
decreases the net income, which results in a lower value estimate.

• Reserve Fund and Special Assessments: Insufficient monies in Reserve Fund may result
in Special Assessment, which negatively affects value.
• Buyers may negotiate a lower price as compensation or may ask the seller to pay
for the entire special assessment amount before closing.

• Rules/regulations: Any rules or regulations that are too restrictive for use of common
elements negatively impact the value of commercial units.

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• Parking: Limited availability of parking for employees, customers, and delivery trucks
results in loss of value.

• Signage: Businesses that rely on walk-in customers need appropriate signage, and if it is
not available or is restricted, it results in lower revenues and loss of value for the unit.

• Surrounding Properties: Complimentary uses of adjoining properties positively impacts

value as they generate more business.
• But if a commercial condominium is surrounded by industrial properties, it will
negatively impact value.

• Environmental Issues: Environmental issues include hazardous substances,

contamination of soil, presence of endangered species, historic sites, waterways, etc.
• Property value is maintained if the seller has obtained an Environmental Site
Assessment report and no contamination was indicated.
• However, if contamination was identified and cleanup was required, the value is
negatively impacted.

Providing Value Opinions

• Direct Comparison Approach: This approach involves comparison of recently sold similar
properties and making adjustments to their sale price to arrive at an estimate of value for
the subject property/unit.
• The strength of this method depends on availability of reasonable comparable sales
and component values for adjustments.

• External Comparisons: When it is not possible to find reasonable comparable sales within
the condominium building, then sale of similar units from similar buildings can be taken.
• However, there must be appropriate value adjustments for differences in location,
features, and amenities.

• Salesperson’s Knowledge: Salespersons must have good experience in the type of

property for which they are providing a value opinion.
• If they do not have adequate knowledge, skill, competence, or judgement, they
should refer their clients to professional appraisers.

• Verifying Information: All information and material facts that affect the value must be
obtained and verified from reliable sources.
• Sources of information include the local listing service, financial institutions,
brokerage files, insurance companies, and land registry offices.

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6. INDUSTRIAL PROPERTIES

6.1 Key Market Considerations

Planning and Zoning Requirements

• Municipal zoning bylaws and Official Plans, under the provincial Planning Act, determine
the location, use, and restrictions on industrial activities.
• Industrial zones and residential and/or retail zones are kept apart by use of buffer zones.
• Salespersons should have an understanding of how planning and zoning segregates non-
compatible land uses and how they determine the location, use, and restrictions placed on
industrial buildings.

Building Requirements
• Buildable Percentage (Buildable Area): The total area that can be used for building and
other structures on an industrial lot is determined by setback requirements.
• Setbacks requirements relate to minimum distances that improvements, such as
buildings, parking, or fences, must be located from lot boundaries.
• The invisible rectangle created after applying the setback distances is called the
buildable area (Building Envelope).
• Since the value of industrial lots is based on per square foot of buildable area, an
industrial buyer would use the buildable percentage to figure out if the lot is large
enough for the proposed building.

• Other Factors: Parking requirements can affect the buildable area and are based on size
and use of building, given as spaces per 1,000 square feet.
• Outside storage facilities on the lot can further reduce the buildable area.
Example: An investor is looking to purchase 2.5 acres of land at the cost of $280,000 per
acre. If the municipal zoning by-laws permit a maximum of 35% coverage, what would be
the total buildable area in square feet? (1 Acre = 43,560 Square Feet)
Total Land Cost = 280,000 X 2.5 = $700,000
Total Area = 2.5 X 43,560 = 108,900 Square Feet
Buildable Land Area = 108,900 X 35% = 38,115 Sq. Ft.

Redevelopment of Industrial Properties

• Adaptive Reuse: Refers to redevelopment of old industrial properties to allow new uses,
which can be light use or heavy use, as per zoning.
• Older properties can often be converted into incubator buildings consisting of small,
low-rent units designed for newer industrial tenants who will ultimately move out.

• Rezoning: If the current zoning does not permit the proposed use, or the owner’s plans to
add facilities that are not permitted under current zoning, an application for zoning
amendment is required.

Sensitive Land Use

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• Provincial Policy Statements: Municipal land use provisions must be consistent with
Provincial Policy Statements that include guidelines for development and use of sensitive
lands.

• Sensitive Land: This term is used to regulate proximity of buildings that negatively impact
other buildings, such as parks, educational facilities, healthcare facilities, residential
properties, or wildlife areas.

• Safe and Healthy Communities: Any development that can cause environmental or public
health concerns must be avoided.

• Land Use Compatibility: Major facilities and sensitive land uses should be planned,
buffered, and/or separated from each other to prevent adverse effects from odour, noise,
vibrations, and other contaminants.

• Airports, Rail, and Marine Facilities: Land uses close to these facilities should be planned
based on their long-term protection and economic role.

• Protection of Airports: New residential development and redevelopment must be

prohibited near airports where the noise is above 30 Noise Exposure Forecast (NEF).

• Buffer Zones: Residential use is considered sensitive and must be separated from
industrial zones by having buffer zones.

Market Considerations
• Investors and Users: Investors look for large, credit-worthy, and long-term tenants
whereas users seek investors to fund their real estate needs as they want to use their
funds for their manufacturing needs.

• Interest Rates: Industrial market is greatly impacted by interest rates, which can drive the
borrowing capacity, property prices, and supply and demand in either upward or
downward direction.
• High interest rates means that it is expensive to borrow money, which may result in
slowdown of industrial market.
• Low interest rates make it less expensive to borrow, which may increase demand
and property prices.

• Government Policies: Federal, provincial, or municipal policies can affect the industrial
property market through zoning and planning regulations.
• These include taxation, environmental, health and safety, employment standards,
access to markets, waste disposal, and transportation facilities.

• Transportation: Industrial operations need to be located close to major transportation

facilities, such as highways, railways, or canals and waterways so that goods can reach
their destination in an unobstructed manner.
• Shorter distances to transportation corridors, and competitive freight rates result in
reduced costs and increased profits.

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• Demographics: Salespersons should be familiar with general demographics, such as

average age, income levels, educational background, ethnic origin, and language.
• Availability of suitable employees in a particular industrial area is greatly affected by
demographic factors.

• Local Workforce: Success of a business depends on availability of skilled workforce and

the market must be diverse enough.
• In a strong economy, businesses compete for staff, and skilled workers have more
choice when looking for a job.
• In a weak economy, unemployment increases, and businesses find it easy to fill
vacancies.

• Demand Driven: As with any other market, the industrial market is also driven by supply
and demand forces, industrial activity and uses.

6.2 Industrial Sellers

Value Added Opportunities

• Creating a Mezzanine: If the ceiling height permits, a mezzanine floor would add to
utilization the existing office area that can be used as additional space for office, break
room, or storage.

• Increasing Electrical Capacity: A licensed electrical engineer should be consulted to see if

the current electrical capacity can be increased.

• Adding Parking Spaces: Seller should be advised to consult a lawyer to verify if more
parking spaces can be added in compliance with municipal requirements.

• Upgrades: Salespersons should recommend internal or external upgrades, such as

installing a security fence, improving interior lighting, painting, etc.

Building and Environmental Reports

• Sellers should be recommended to obtain building and environmental site assessment
reports before the property is listed for sale.

• Building Inspection Report: Includes visual inspection, relevant document review,

identification of physical deficiencies, and photographs.
• Physical deficiencies identified by the building inspector are considered material
facts and significant deferred maintenance issues should be appropriately
addressed.
• All records related to the physical condition of the property, including any building
inspection reports, should be obtained for review.

• Environmental Site Condition Report: Includes information from one or more

environmental site assessments and confirms that there is no evidence of contamination.
• The report may be helpful to a buyer who wants to redevelop the property and if
rezoning application is to be submitted.

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• The report may be obtained from Environmental Registry of Ontario, which may
recommend certain remedial work to remove any contamination.

Environmental Disclosures
• Owners must report any environmental incident, such as a chemical spill, and subsequent
remedial work, to the Ministry of Environment, Conservation, and Parks.
• Salespersons should make relevant enquires and remind the seller that any environmental
incident must be disclosed to prospective buyers.

• Pollution and Spills: Must be reported to the Spills Action Centre and to the municipality,
including what action the owner has taken to address the situation.
• The environmental authority documents the information, action taken, checks health
impacts, tracks the cleanup activity, and coordinates with other agencies.
• The address of the property and the owner’s name can be added to the
Environmental Registry if environmental issues are revealed by an inspection.

• Documented Remediation: Salespersons should obtain any document from the seller that
relates to environmental condition of the property.

• Disclosure Obligations: Salespersons should advise the seller that any environmental
incidents and related reports must be disclosed to potential buyers.
• The Code of Ethics requires that salespersons should treat every person fairly,
honestly, and with integrity, provides competent service, and takes reasonable steps
to determine and disclose material facts at the earliest practical opportunity.

Due Diligence to Identify Risk

• Equipment Inspection: Inspection reports for equipment should be obtained as buyers
usually demand them.
• Environmental Reports: Salespersons should check the Environmental Registry of Ontario
if there are any environmental incidents on the seller’s property.
• Chemical Spills: Information on any chemical spills on the property and subsequent
remedial action must be obtained from the seller and disclosed to buyers.
• Landlord Status: Salespersons should check if the landlord has any ongoing issues with
tenant(s) and make the required disclosures to potential buyers.
• Goods Include in Sale: Sellers must be clear about any goods and equipment that will be
included in the sale.
• Disclosure to Lender: When the property is mortgaged, sellers should be advised they
have an obligation to disclose any environmental issues and/or major damage to their
lender.
• Tax Implications: Salespersons should recommend that sellers contact third-party
professionals with respect to their tax obligations, such as HST, Capital Gains Tax, etc.

Sale/Leaseback
• Sale/leaseback arrangement involves the sale of property to an investor and leasing it
back from the buyer.
• The seller liquidates his equity in the property for use with other projects while retaining
the location under a long-term lease.

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• The buyer as investor is assured of a long-term lease and cash flows. and the seller may
have the option to buy it again after lease is over.

Design/Build Arrangement
• The owner of land agrees to build a structure based on size, quality of construction, and
design for a specific tenant who signs a long-term lease.
• Design/build activities are popular in seller’s market when demand of land is high and
existing space is limited.

• Brokerage Services: Commercial brokerages must perform detailed analysis of user’s

needs, building, and site criteria.
• They usually prepare cost estimates, including land and building costs, interim and
permanent loan costs, remunerations, closing expenses, and contingencies.
• They also prepare ‘Pro Forma Statements’ with cash flow projections, present value
estimates, and internal rates of return.

• Pro Forma Statement: A projected or estimated financial statement that presents a

reasonably accurate idea about financial situation if the present trends continue and
assumptions hold true.

• Stages of Design/Build: Typical steps include tenant qualification, preliminary qualification,

developer meeting, detailed proposal, presentation/acceptance, and follow up.

6.3 Industrial Buyers

Source of Industrial Information

• Sourcing Properties: Resources for industrial properties include the Ontario Investment
Service, the Ontario Investment and Trade Centre, and the Ontario Real Estate
Association (OREA).

• Networking: Appropriate properties for a buyer may not be on the local listing service and
the salesperson’s networking with other commercial brokerages are of great help.

• Site Selection: Site selection involves regional, local, and site-specific analysis, and
relates to new businesses, consolidation, diversification, or reconfiguration of current
industrial operations.
• The process or scope of analysis and facility planning services can be provided by
an internal team, external consultants, or a combination.

• Economic Development Offices: Local/community economic development offices can

provide information on demographic details, wage rates, availability of labour, and
transportation facilities.
• Additionally, they can help the buyer with financial services, tax information, and
municipal incentives that promote local development.

Satisfying Buyer Needs

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• Researching Buyer Needs: Salespersons should thoroughly understand buyer’s needs to

locate a suitable property, and this needs strong communication and interviewing skills.

• Responding to Buyer Needs: There is no standard checklist for buyer’s needs due to the
fact that their needs are diverse and depend on their industrial operations, such as
warehousing, manufacturing, or other services.

• Investor Buyers: Investor buyers are typically focused on ‘Return on Investment’ from
long-term credit-worthy tenants, their financial risk, and are less concerned about location
and features of the property.

• User Buyers: Salespersons should obtain as much information as possible about buyer’s
business needs as they would be buying the property for their own use.

• Obtaining Capital Expense Quotes: Since the scope of analyzing capital expenses is
different from residential properties, a salesperson is expected to provide more in-depth
range of services.
• Capital expenditure refers to the money spent on acquiring or maintaining fixed
assets, such as buildings, land, machinery, equipment, and furniture.
• Salespersons should get help from third-party professionals in obtaining necessary
reports.

• Identifying Expansion Possibilities: Salespersons should determine that the property

satisfies the current needs and/or future expansions plans of the buyer.
• Availability and expandability of industrial sites is related construction and serving
extensions, and the buyer may investigate capital improvement funding by local
municipality.

Salesperson’s Due Diligence

• Documentation: Salespersons are expected obtain documentation from the seller and
analyze them for the buyer to verify that they meet buyer’s expectations.
• Due diligence typically focuses on financial, legal, structural, and environmental
issues, and the ultimate goal is to have full knowledge of facts before a binding
agreement.

• Financial/Operational: Documents include income statements, balance sheets, bank

statements, rent rolls, lease contracts, tax bills, employee records, and details of operating
expenses, etc.

• Legal: Analysis includes title search, assets and liabilities, outstanding mortgages or other
encumbrances, surveys, licenses, contracts, permits, and zoning compliance.

• Structural: Building inspection is done to identify physical deficiencies through visual

inspection as well as review of documentation.

• Environmental: Buyers should be advised to obtain services of professional environmental

engineers to determine the presence of hazards and/or contaminants.

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Due Diligence to Identify Risk

• Financial Condition: An industrial buyer will be exposed to the risk of rise in interest rates,
cash flows, slowdown in sales, and increased inventories and operating costs.
• The financial climate may change quickly due to changes in either economic
environment or government policies.

• Market Condition: Markets are influenced by local conditions, such as increase in

occupancy rates, cost of leasing, availability of investment capital, increase in competition,
and relocation of tenants.

• Building Condition: Buyers should investigate the building condition before purchase and
ensure that necessary inspections are done to identify poor conditions that pose a risk
and will be expensive to repair.

Zoning Restrictions and Buyer Needs

• Use Restrictions: Salesperson should understand the nature of buyer’s industrial needs to
see how zoning restrictions may affect the buyer’s manufacturing or processing activities.

• Access Restrictions: Buyers should be made aware that the Highway Traffic Act and the
Public Transportation and Highway Act regulate access to industrial properties from
provincial highways whereas access from local roads is regulated by municipalities.

• Lot Size: Buyer’s requirements of lot size usually depend on type of business, parking
needs, and storage requirements, and may be affected by lot coverage restrictions.

• Building Size: Salespersons should perform due diligence by thoroughly analyzing buyer’s
needs in terms of building size (gross floor area, height, etc.), building restrictions, and
applicable zoning bylaws.

• Ceiling Height: Buyer’s industrial operations may require certain specific ceiling
height/clear height and the salesperson should search properties accordingly.

• Office-to-Plant Ratio: Buyer’s requirements should be discussed as office space in

industrial buildings, determined by zoning bylaws, is typically between 15% to 20%.

• Parking: Property should have sufficient parking to meet buyer’s needs.

• Outside Storage and Truck/Trailer Parking: Outside storage and truck/trailer parking
requirements should be discussed with the buyer and locations should be analyzed
according to zoning requirements.

• Signage: The buyer should be informed about signage permissions given to tenants in
lobbies, corridor signs, and sign pylons at the unit entrance.

Internal Building Features

• Types of Doors:
• Overhead Doors: Manual or automatic door made of sections and folds upwards.

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• Roller Door: Manual or automatic door rolls up or down and is completely out of way
when open to prevent accidents.
• Dock-High Door: Used for loading docks, which are at tractor-trailer height.
• Drive-in Door: A ground level door to allow movement of vehicles and machinery in
and out of the building.
• Rail Door: This side-loading door provides access to railroad tracks for
loading/unloading from a rail car.
• Ramp Door: This door has a ramp from ground to dock level.

• Bathrooms: As set out in the Ontario Building Code, the number of bathrooms in an
industrial building are determined by the size of the building.

• Lunchroom: Although not legally required, the lunch room or break room provides a
comfortable and sanitary space to employees.

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7. SELLING INDUSTRIAL PROPERTIES

7.1 Due Diligence

Building Categories and Unique Features

• Salespersons should have an understanding of the type of building and its features which
they are going to list so that it can be appropriately marketed.

• General Purpose: The most common type of building, which offers features and facilities
that have widest appeal and suit a majority of industrial operations.

• Special Purpose: These buildings have selected features that are of interest to a limited
class of industrial processes and have narrower applicability.
• For example, specialized warehousing or manufacturing buildings may require
reinforced floors.

• Single Purpose: This building is specially built for one particular industrial process, such
as an oil refinery or some heavy industrial manufacturing.
• The cost of conversion is not economically feasible; they are difficult to appraise and
sell due to their unique features.

Redevelopment Potential
• Redevelopment projects involve rehabilitation of existing structures into altered uses, such
as conversion of a heavy industrial site into smaller light industrial or warehousing
operations.
• Older industrial properties can be converted into ‘incubator’ buildings, which have small
low-rent units designed for those tenants who will eventually outgrow and move out.
• Salespersons should investigate potential for redevelopment in order to increase the
property value and make it more appealing to buyers.

Ontario Brownfields Legislation

• Brownfields are vacant or abandoned properties where past industrial uses have left the
land contaminated or polluted.
• These underused properties are often located in desirable urban areas and have the
advantage of in-place infrastructure, such as roads, utilities, water/sewer services, and
transit facilities.
• The Ontario Brownfields Statute Law Amendment Act encourages clean-up and
revitalization of abandoned and/or contaminated lands.
• Objectives of the legislation include –
• Accessing valuable land resources for remediation and redevelopment,
• Address liability issues,
• Provisions for municipalities to offer financial assistance and tax relief, and
• Speed up the planning and approval process.

Confirming Information

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• Commercial buyers must carefully assess all risks associated with a business or property
purchase, with particular emphasis on factors that impact stability of ongoing income.
• Salespersons are not expected to have the expertise necessary for examining due
diligence documents related to financial legal, structural, and environmental issues but
they can refer the owners/sellers to third-party professionals.
• Salesperson’s failure to verify facts from source documents may result in inaccurate
representation of the property and incorrect estimates of income/expenses.

• Financial/Operational: Analysis of financial aspects of the property should be performed

from source documents, such as income statements, balance sheets, rent rolls and
leases, and details of operating costs.

• Legal: These documents include confirmation of seller’s identity (corporation or individual),

property title, mortgages, surveys, permits, and licenses.
• The salesperson should verify the zoning compliance with local municipality and
obtain a copy of current zoning bylaws.

• Structural: The building inspection report includes visual inspection, review of relevant
documentation, identification of physical deficiencies, photographs, and summary report.
• Identified physical deficiencies reflect material facts and deferred maintenance
issues that must be addressed by the seller before listing the property.

• Environmental: Information about environmental issues can be obtained from owner’s

documents, registry office, or from municipal and provincial records.
• Salespersons should conduct a visual inspection of the property, and if any clues
are identified, the seller should be advised to hire third-party professionals to
determine the nature, cause, and extent of any contamination.

7.2 Conducting Visual Inspection

Interior Components
• Condition of Improvements: Salespersons should conduct a thorough visual inspection to
look for any signs of structural damage, cracks, holes, peeling of paint, etc. and point out
these deficiencies to the seller.
• Actual Age: The actual number of years passed after the structure was built.
• Effective Age: The estimated age in years based on the amount of care and
maintenance the building has received, which may be less than or more than its
actual age.
• Effective age is more than the actual age if the building has received above average
care, maintenance, and upgrades, and less than the actual age if the building has
received below average care and inadequate maintenance.

• Functionality and Layout: Salespersons should be well-informed about the physical layout
and characteristics of industrial buildings in order to advise sellers, and if required, refer
them to third-party professionals.
• Industrial areas typically have a single floor with clear height between 16 feet and 32
feet and poured concrete slab floors of 6 inches or more, steel frame roof with open

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web steel (OWS), steel strip windows, metal doors, and overhead doors for loading
docks.

• Technological Features: Salespersons should be aware of current trends in technology

and recommend the seller that updating may lead to better return on investment.
• Many newer distribution centres are equipped with electronic equipment for
efficiency in their storage and delivery operations.
• Wide-band radio technology is used for transmitting instructions from the order desk
to forklift or crane operator.
• Bar code readers simplify grouping, packaging, and delivery to retail outlets.

Interior Assessment
• Internal Features: Salespersons should conduct a thorough visual inspection of features
such as ceiling heights, bay sizes, heating systems, doors, electrical systems, and lighting
fixtures.
• They should verify that all interior renovations, alterations, or additions are in
compliance with Ontario Building Code and zoning bylaws.
• The seller may be asked to provide third-party inspection reports and survey of the
property for verification.

• Utilities: Sellers should be asked relevant questions related to electricity, water, gas, and
sewage utilities because availability and cost of these services impacts property value.
• Seller’s documentation may be checked and, if buyer’s intended use needs
upgrades, the services of a third-party professional should be recommended.

Expansion, Redevelopment, and Signage

• Potential for Expansion: Buyer may need salesperson’s help in verifying the zoning and
see if more parking spaces can be added.
• If yes, the buyer’s salesperson works with appropriate third-party professionals to
prepare a site plan and apply for a building permit.

• Demolition for Redevelopment: The buyer may have purchased a ‘brownfield’ property
and needs to demolish and decommission the existing building for redevelopment.

• Condition of Exterior Signage: The buyer may need to install individual signs for future
tenants, which requires a permit application to the municipality with design, size, and
location details.

Parking, Driveways, and Sidewalks

• The location and value of a particular site is assessed in terms of its relationship to
surrounding facilities and conditions.
• Some of the location factors include patterns of land use, availability of utilities, access to
transportation facilities, hazards and nuisances close to the site, and traffic flow.
• Parking regulations on a site are determined by municipal zoning bylaws, which dictate
parking allocation on per sq. ft. basis, including accessible parking and parking for delivery
trucks.

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• Salespersons should also check the age and condition of driveways and sidewalks to
confirm that they allow for smooth entry and exit of all vehicles.

7.3 Gathering Key Information

Identifying Financial and Legal Issues

• Verify Ownership: Ownership of the subject property must be verified from source
documents for FINTRAC identification purposes as well as to prevent fraud.
• If any party, other than the seller, has an interest in the property, such as a
partnership, a mortgagee, an easement or right of way, then legal documentation
should be referenced.

• Lot Coverage Restrictions: Zoning bylaws are considered subsidiary laws, which mainly
regulate the use of land, and may prohibit or restrict the use of land or construction in a
specific manner or on specific types of land.
• Lot coverage is usually restricted in terms of frontage, lot area, and minimum front,
side, and rear yard requirements.

• Survey: A survey, prepared by an Ontario Land Surveyor, should be referenced to verify

the information provided by the seller.
• There are 4 types of surveys – Surveyor’s Real Property Report, Reference Plan (R-
Plan), Plan of Survey, and Plan of Subdivision.

• Floor Plans and Designated Use: Some buyers may want to alter the building to meet their
specific needs, which requires that the salesperson should obtain copies of floor plans
and designated uses from the seller.
• The buyer should be advised that the modifications will need to be in compliance
with local zoning bylaws, otherwise the buyer may have to apply for minor variance.

• Environmental Issues: Salesperson may notice several environmental issues during visual
inspection of the property, which may have occurred due to presence of underground oil
tanks, dumping or hazardous waste, or chemical spills.
• Since salespersons are not experts in environmental issues, they should ask the
seller to provide relevant documentation and obtain records from the municipality or
provincial authorities.

• Existing Leases: If the buyer needs to invest in an industrial property, the seller will need
to share the operating expenses and revenue details of the property through review of
existing leases.

Services and Physical Components

• Hydro: A transformer is commonly used in industrial hydro service to change the voltage
of 3-phase electrical supply by transferring electricity using electromagnetic induction.
• Pole Transformer is located on a pole near the street.
• Mat Transformer is a cabinet located on ground.
• Pad Transformer consists of several Mat Transformers located on a pad.

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• Water and Sewage: Source documents, inspection reports, water and sewage system
capacity, and maintenance/repair records should be obtained from the seller.
• A Hydrogeological Report may be required if there is no water service, which
describes surface water features, evaluates groundwater quality, and identifies any
contamination.

• Office Area: The seller should be asked to provide copies of source documents about the
size and dimensions of the office area within an industrial building.
• The office area is typically between 15% and 20% of the total building area and is
either within the main industrial building or extends out from the primary structure.

• Ceiling Height and Clear Span: Ceiling height is the distance from floor to the ceiling and
clear span is the floor area clear from any interferences, such as columns.
• Salespersons should ask the seller to provide copies of building blueprints or
inspection reports to get these measurements as these details are important for any
industrial buyer.

• Bay Size, Height, and Depth: Bay refers to the unfinished area between a row of columns,
and bay depth is the distance between the bearing wall and the closest column, or from
one column to the next.
• Bay size, depth and height are important for industrial buyers and the salesperson
should obtain a copy of floor plan to verify measurements.

HVAC Systems
• The industrial HVAC systems are usually installed on roofs to maintain even distribution of
heating, cooling, and fresh air.
• Salespersons need to be aware of the type of HVAC system in the industrial building, ask
the seller about maintenance reports, and should include the details in the Listing
Agreement.
• Air Handler: Refers to the blower (series of fans) within the HVAC system to move
the heated or conditioned air through the structure using the ductwork.
• Condensing Unit: Contains a compressor for the coolant to provide cooling effect.
• Ductwork: For distribution of warm and cool air throughout the structure and return
of cold air to the HVAC unit.
• Rooftop HVAC: Large unit mounted on roof top to provide heating and cooling.
• Suspended Unit Heater: Interior roof-hung unit for heating, cooling, or ventilation.
• Zone Control: Use of dampers in the ductwork to regulate air to specific areas.
• Underfloor Air Distribution (UFAD): For distribution of hot and cold air through
plenums under the floor.
• Radiant: Made of temperature-controlled surfaces, which exchange heat using
convection and radiation.

Sprinklers Systems
• The term Sprinklered refers to a building that has a built-in sprinkler system that use
interconnected pipes, risers, mains, and sprinkler heads.
• These automatic systems are triggered by flow of water that sets off a water or electric
alarm.

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• It releases colourless and odourless carbon dioxide to extinguish fire in electrical

equipment, gasoline, oil, grease, and paints.

• Sprinkler Types:
• Wet Pipe: Fitted with water under pressure, which is released when a plug melts at
high temperature.
• Dry Pipe: It has compressed air extending from sprinkler head to a dry pipe valve. It
releases water when the plug melts and air pressure drops.
• Pre-Action: This system contains air under pressure and water is released when a
heat activated device is operated by a valve.
• Deluge: This system uses large quantities of water for unusual fire hazards.
• Combined Dry Pipe and Pre-Action: Use automatic sprinklers attached to a piping
system containing air, which is under pressure, and a heat sensitive trigger that sets
off an alarm.

• Floor Load: Capacity of the floor to support live loads comprising of the weight of people,
equipment and furnishings, and stored materials whereas dead lead refers to the weight
of the structural materials.
• Both live load and dead load requirements are set out in the Ontario Building Code
as pounds per sq. ft. for various types of uses.
• If case the seller does not have any documentation, the buyer should be informed
so that they can conduct an engineering assessment.

• Loading Docks: This area is designed for loading and unloading products and is at truck
level height to provide direct loading.
• Shelters are flexible, enclosed canopies which prevent wind drafts.
• Wells are for servicing the inclined areas for grade level structures.
• Grade level loading permits access to forklifts and is at the level of surrounding
parking areas.

7.4 Redevelopment

Reasons for Redevelopment

• Salespersons should investigate if it would be beneficial for the seller to redevelop the
property instead of selling.
• Sellers should consider the cost of selling, relocating, availability and price of new
building, and suitability for their business needs.
• Sometimes the reason for redeveloping a building is that its age, condition, and location
are not the highest and best use anymore.

Highest and Best Use – Industrial Property

• The highest and best use of a building or vacant land is that which, at the time of listing,
will produce the greatest return in terms of money or amenities to the land over a given
period of time.
• Redevelopment for highest and best use is analyzed from two perspectives – the value of
improved land (property value with existing structure) vs. vacant land (as if there is no
structure on the land).

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• Zoning Bylaws: The highest and best use for redevelopment must conform to and
permissible under the current zoning bylaws.

• Property Layout: The proposed redevelopment by should be physically possible.

• Financial Consideration: The owner must ensure that the redevelopment is financially
feasible in terms of costs related to redesign, hiring third-party professionals, construction,
business interruption, and reinstallation of equipment.

Zoning and Official Plan Requirements

• Official Plan: The Official Plans is prepared by local municipality under the Planning Act
and is approved by the Ministry of Municipal Affairs and Housing.
• It contains goals, objectives, and policies for management of changes with respect
to social, economic, and natural environment, and description of measures to attain
these objectives.

• Zoning Bylaws: Zoning bylaws are made and enforced by municipalities to regulate
permitted uses, building structure standards, and setback requirements.
• They also control the type of construction, minimum elevation of doors, windows,
loading and/or parking facilities, and minimum area/density provisions.

• Zoning Amendment: A property may fall under ‘non-conforming use’ status if its present
use predates the passage of the zoning bylaw.
• Owners are usually allowed to apply for continuation of the non-conforming use.
• Zoning Amendment (Rezoning) is required if the buyer’s intended use is different
than current zoning, which would make the use as non-conforming.
• If the proposed use is different from zoning but generally adheres to its intent, an
application for minor variance can be made.

Site Plan Control

• The site plan approval process allows the municipality to review the overall design of
proposed structures and make an assessment of impact on surrounding land uses.
• Municipalities typically consider factors such as adequacy of landscaping, buffering from
adjacent areas, grading, and any need for widening of roads, provision of curbs, signs,
walkways, and storm/sanitary sewers.
• The review process also includes traffic, parking, emergency vehicle access, lighting,
perimeter fencing, and enclosure of storage areas.
• When the review process is complete and all requirements are met, the owner is required
to enter into a Site Plan Control Agreement with municipality to ensure that the
development is according to the approved drawings.

Current Trends
• Knowledge of current redevelopment projects and trends helps salespersons determine if
the seller’s property is suitable for possible redevelopment.

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• Typical considerations include vacant buildings in the market, replacement of heavy

industrial buildings to light industrial buildings, renters vs. owners, average price trends
(increasing/decreasing), average time to sell, and status of local demand.
• Salesperson should also check if there is significant activity related to building permits,
rezoning applications, and interest of municipality in improving services and facilities.

Industrial Parks (District)

• A controlled development, which is designed and zoned for specific types of industries
and has features such as public utilities, streets, railroad sidings, and water and sewage
facilities.
• Their regulations include compliance with standards related to noise, vibration, odours,
toxic and noxious matter, radiation hazards, explosive hazards, glare, and heat.
• Planning issues relate to adequate roads, proper land use and site coverage, lot sizes,
and minimum acceptable architectural and landscaping.
• Planning elements are designed by Society of Industrial and Office REALTORS® (SOIR)
so that the industrial park integrates with the remainder of the community by using buffers,
restrictions, and preservation of open lands.

7.5 Detrimental Conditions

Restricted Access/Easements
• Restricted Access/Easements: An easement on the subject property may cause access
problems, which negatively affect the property value.
• A single property may be subject to one or multiple easements, such as natural gas,
drainage swage, large catch basin, or underground storm sewer line.
• Properly documented and registered easements do not affect the transaction, but
they do affect the overall utilization of land.

• Environmental Issues: Salespersons should be aware of environmental issues such as

soil and groundwater contamination, hazards from underground oil tanks, and dumping of
hazardous waste.
• They should confirm the past uses of the property from the seller or from appropriate
municipal, or provincial records.

• Soil Conditions: The seller should be advised that the buyer’s offer will include conditions
related to completion of soil tests unless the seller has recently done these tests.
• Soil testing is done by third-party professionals and includes environmental testing
to check soil or water contamination.
• Geotechnical testing is done to determine soil make up, ground water location, and
support for intended structure.

• Costs: When preparing a property for sale, it needs to be accessed, repaired, remedied,
and/or monitored for potentially detrimental conditions.
• Salesperson should discuss the estimated cost with the seller with respect to
repairs, environmental site assessment, and professional appraisal of the subject
property.

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• Neighbouring Area and Properties: The types of industrial operations in adjoining

properties may impact the value of the subject building and make it less attractive to
buyers.
• For example, there may be a metal recycling facility causing soil contamination or a
neighbour may be using part of subject property without seller’s knowledge.

Safety Issues in Vacant Buildings

• Structural Integrity: The skeleton structure includes foundations, footings, floors, walls,
and the roof, and the building is evaluated in terms of its structural integrity and stability.
• It is not possible to make assessment of below ground building components and if
certain imperfections are concealed by way of patching work.

• Exterior Improvements: Certain exterior conditions of the vacant building may affect the
safety of the property.
• These include external storage, storage of toxics and chemicals on property,
exposed external electrical wires, and condition of roof overhangs, parking lots,
walkways, and fencing.

• Overall Safety Issues: Salespersons should verify that overall safety issues are not
compromised in terms of compliance with fire code, environmental site assessment, and
structural safety.
• If there is a suspicion, the salesperson should advise the seller to obtain services of an
appropriate third-party professional.

7.6 Preparing to List

Area Calculations
• Salespersons should ensure that areas and related linear measurements are accurate as
per BOMA or IPMA standards.
• The Building Owners and Managers Association (BOMA) developed the standard
methods for measuring floor area in office and industrial buildings to ensure consistency.
• These methods relate to building-wide measurement on a floor-by-floor basis, gross floor
area, and rentable and usable areas.
• Since industrial measurements are complex and may include exterior wall and drip line,
salespersons should advise their seller clients to hire a professional measurement
company before listing the property for sale.

Measurement Terminology
• Salespersons should have a general understanding of the following terms and ask the
seller to provide source documents for verifying accuracy.
• Bay Depth: The distance between columns.
• Bay Width: Distance between one side of the bay to the other side.
• Ceiling Height: Distance from floor to inside overhead upper surface and is higher
than hanging objects such as beams, joists, or trusses.
• Clear Span: Open area without any obstructions.
• Column Spacing: Distance between posts or vertical beams.

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• High Cube/High Bay: Refers to industrial buildings which have abundant clear height
or vertical cube space.
• Truck Turning Radius: The tightest turn a truck can make depending on truck
configuration, trailer size, and adjacent obstructions.
• Truss Height: Distance from floor to the bottom of truss that supports the ceiling or
roof.

Exterior and Interior Measurements

• Significant Structures: Significant structures include one or more process structures, and
their area is calculated by taking exterior or linear measurements.

• Accessory Buildings: Mainly used for external storage of raw materials, adds value to the
property, and makes it attractive to buyers.

• External Improvements: These improvements include parking lots and truck aprons, which
add value to the property.

• Interior Measurements: Interior measurements represent the total area a prospective

buyer is looking for, which must be accurate and consistent with BOMA standards.

Improvements Before Listing

• Salespersons should discuss potential benefits of improvements to seller’s property that
would generate greater interest in buyers and possibly increase the property value.

• Reduced Marketing Time: Marketing time may be reduced by collecting information on

property and reviewing key information related to zoning, building condition reports,
surveys, environmental reports, leases, and financial statements.
• It can also be reduced by marketing the property on appropriate websites and to
other commercial brokerages.

• Identification of Change of Use: Sellers should be advised to make improvements to the

property before listing and investigate if there is a possibility of change of use to enhance
its appeal and value.

• Identification of Detrimental Factors: If a seller does not want to remedy any detrimental
condition, he should be advised that it will affect the listing, marketing, and sale of
property.
• However, the seller should be advised that a building inspection and environmental
site assessment should be completed before listing.

----------- MiniCram® -----------

Table of Contents

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8. SHOWING OFFICE, RETAIL, AND INDUSTRIAL PROPERTIES

8.1 Showing Commercial Properties

Salesperson Obligations
• Due Diligence: In complex commercial transactions, due diligence is typically focused on
financial, legal, structural, and environmental considerations and the salespersons should
investigate all relevant facts.

• Remuneration: Code of Ethics requires that salespersons show all properties that meet
buyer’s search criteria without any regard to the remuneration they will receive.

• Material Facts: Salespersons must take reasonable steps to identify and disclose material
facts to prospective buyers, which may impact the value or the intended use of property by
the buyer.
• Failure to disclose known latent defects and material latent defects may leave the
property dangerous, unfit for habitation, or in violation of municipal/provincial
requirements.

• Fairness, Honesty, and Integrity: All parties involved in the transaction (unrepresented
customers and third parties) should be treated fairly, honestly, and with integrity,
especially with respect to disclosure of material facts.

Commercial User’s Spatial Needs

• General Considerations: Some sites can be easily identified as unsuitable for certain uses
while others may need further investigation.

• Space Needs for Retail: Knowledge of retail store categories (furniture, personal care,
clothing, etc.) and sizes can help select properties for a particular buyer or tenant.

• Space Needs for Office: Office buyers usually have unique needs for area and layout of
the space, specific to their number of employees, businesses, or tenants expected on the
premises.

• Space Needs for Industrial: Space and layout are determined based on an industrial site
constructed for general, special, or single purpose, and needs vary depending on whether
the user specializes in warehousing, service, or manufacturing activities.

Location and Community

• Location: The choice of location depends on buyer’s business, with industrial buyers
looking outside the urban areas and retail buyers focusing on shopping malls with good
parking and transit facilities.

• Workforce Availability: If the buyer’s business is labour intensive, they may need
demographic information on wage levels, availability of skilled labour, training facilities,
and access to public transit.

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• Transportation: The frequency of shipping for raw materials or finished products

determines the buyer’s needs with respect to transportation routes, especially in urban
areas.

• Parking Needs: Buyer’s parking needs should be evaluated as inadequate parking for
employees, tenants, and/or customers negatively impacts the site value.

• Utilities: Availability and cost of utilities, such as hydro, water, sewage, telephone, and
internet access, should be properly analyzed to determine buyer’s needs.

Financial Considerations
• Affordability: Affordability for a particular buyer depends on purchase price, and other
factors such as cost of borrowing, management expenses, and expected returns from the
investment.
• Some buyers may have difficulties in financing their purchase due to large down
payment or restrictive lender requirements.

• Finances: Salespersons should be aware that commercial buyers are typically concerned
about their risks and returns from the investment.
• Analysis of commercial financial needs should include buyer’s available capital and
their credit history.

• Business Plans: Salespersons should check the buyer’s business plan to determine their
business goals, benchmarks, and strategies in order to search for a suitable commercial
property.
• Buyers who require financing as part of their business plan should be advised to
consult mortgage brokers, lenders, and venture capitalists.

Investors Objectives/Goals
• Return: The yield realized on an investment, which is expressed as a percentage and may
be positive or negative.
• Return OF Investment: The recapture of initial investment at some future time
through cash flow.
• Return ON Investment: The return on invested funds through cash flow (operations
cash flow or sale proceeds cash flow).

• Types of Risk: Return in investment is associated with risk, which means that a higher risk
(cost) has higher return.
• Financial Risk is related to potential increase in interest rates, purchasing power of
future dollars because interest rates may rise, operating costs may increase, and
sales activity may slowdown.
• Market Risk is related to possible slowdown in real estate market, rising occupancy
rates, high rental rates, less capital for new equipment, new competitors, etc.
• Business Risk is related to government taxation, economic activity, overall
investment climate, decreased profits, etc.
• Building Risks are related to physical deficiencies, significant damages, insufficient
insurance coverage, enforcement of building codes, zoning, etc.

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• Calculating Returns: Value of a commercial property is determined by dividing its Net

Operating Income by a suitable capitalization rate realized from market analysis.
• The Net Operating Income is calculated after deducting the operating expenses
from gross potential income derived from all sources.
Value = Net Operating Income ÷ Cap Rate
Cap Rate = Net Operating Income ÷ Value

Tenant Mixes in Retail

• Tenant-Mix: Refers to a mix of retail goods and services offered in a shopping centre by
all tenants to satisfy customer needs and is critical to the success of the retail centre.

• Ideal Tenant-Mix: A well-balanced tenant-mix caters to the needs of customers, develops

customer traffic, encourages customers to stay in the retail centre, and provides stores
that complement each other.

• Investor Influence on Tenant-Mix: Although the tenants make selection of their location,
the property owner is the one who ultimately decides which tenants will be provided
space.
• Property managers usually provide advice to owners and are responsible to fill up
vacancies in the shopping centre based on owner preferences.

Sources of Revenue
• Discussions on buyer needs should include potential sources of income, such as rent,
sales, and a combination thereof.
• Different types of rent are Base Rent (minimum rent per sq. ft. of rentable area), Additional
Rent (tenant’s proportionate share of common expenses), and Percentage Rent (periodic
payments based on gross sales over the base sales).
• Revenue can also be generated by vending machines, parking fees, storage facilities, and
ATMs.

Potential Expenses
• A thorough analysis of potential expenses associated with the property helps investors
make an assessment of their return on investment.

• Utilities: Utility expenses include the cost of electricity, heating costs, water and sewage
tax, and internet service.

• Maintenance and Repairs: These expenses include wages for in-house staff, maintenance
contract charges, garbage disposal fees, security contract, fire protection equipment, cost
of small tools, landscaping, parking lot maintenance, roof repairs, plumbing repairs and
replacements, equipment, painting, and water treatment.

• HVAC: Repairs and maintenance of the HVAC system, maintenance contract charges,
and maintenance of energy conservation systems.

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• Janitorial: Wages for in-house janitorial staff, janitorial contract charges, cleaning supplies,
and washroom supplies.

• Administrative: Payroll for administration staff, telephone charges, office equipment,

stationery and other supplies, advertising, and promotion of the retail centre, staff travel
expenses, and license fees.

• Legal and Management: The cost of legal counsel, accounting services, insurance
premiums, and management fees for the building.

Cash Flow
• Salespersons should ensure that the buyer is aware of different types of cash flow and
provide relevant financial documentation obtained from the seller.
• The buyer should obtain expert services of third-party professionals before removing due
diligence conditions.

• Operations Cash Flow: Periodic monies received from the operation of a business, which
can be positive or negative.
• A single year’s cash flow can be calculated by using income and expense analysis
to arrive at the Net Operating Income, which leads to cash flow.

• Sale Proceeds Cash Flow: The profit or gain realized after the sale of the property, after
subtracting the adjusted cost base, and the cost of sale (legal fees, remunerations, etc.),
capital improvements, and mortgages.
• The net proceeds of the sale may be subject to Capital Gains Tax, and calculations
or projections are usually performed by third-party professionals.

Stability of Income Stream

• The state of income stream is typically determined by verifying the income derived from
leases and other contracts.
• Items such as length of time remaining on existing leases, opportunity for renewals, and
rent/revenue escalations are analyzed.
• A thorough analysis of income statements, balance sheets, rent rolls and leases, bank
statements, tax bills, tax returns, employee records, and operating costs should be
undertaken.

8.2 Leading Practices

Gathering Information
• Record of Site Conditions (RSC): Salespersons should ensure that the Agreement of
Purchase and Sale is conditional upon buyer’s due diligence investigation with respect to
environmental matters.
• Since the law requires that certain standard procedures must be adhered to during
the clean-up process, it is a leading practice to obtain a Record of Site Condition
(RSC) report from the seller.

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• Legal Issues: The title of the property should be searched by buyer’s lawyer to identify
registered easements, encroachments, and restrictive covenants.

• Zoning: Commercial zones, such as C1, C2, C3, C4, etc., specify the types of activities
permitted in these zones as well as restrictions related to maximum lot coverage,
setbacks, and minimum/maximum height.
• Location specific identifiers include LC (Local Commercial, MD (Mixed-Use
Downtown), AM (Arterial Mainstreet), and NC (Neighbourhood Commercial).

• Zoning for Parking: Zoning regulations specify the number of parking spaces, minimum
parking dimensions for each space, which may impact buyer’s decision.
• Zoning conformation must be verified with the local municipality and copies of
zoning bylaws, permitted uses should be obtained.

Gathering Information (Income)

• Income Streams: Due diligence documents include income and bank statements, balance
sheets, rent rolls and leases, tax bills, and returns, employee records, detailed operating
costs, utility bills, building service contracts, and insurance policies.

• Property Risks: Every buyer is concerned about possible risks associated with property,
which must be appropriately investigated.
• Tenant risks are related to length of leases and renewal of existing leases.
• Building risks are related to the age and condition of the building and its electrical,
mechanical, and HVAC systems.
• Economic risks are related to dropping sales, unavailability of workforce, high
interest rates, and competition.

• Economic Development Offices: Salespersons should contact the local Economic

Development Office to gather information on demographics, labour statistics, financial
services, and real estate profiles.

Buyer Information Package

• The buyer information package should be carefully prepared to comply with Section 4 and
5 of the Code of Ethics to protect the best interests and to provide competent and
conscientious service.
• The package should provide information on selected properties including map and images
of the site, survey, and a summary highlighting the features of properties.

• ‘Brokers Protected’ Sign: When properties are not listed on local listing service, the
owners generally put up this sign indicating the remuneration is protected if a salesperson
or broker introduces a buyer, leading to the sale of the property.

Preparing to Show
• Consulting the Seller’s Listing Salesperson: The listing salesperson is usually consulted
on matters such as safety and accessibility during showings.
• The seller may require that showings be done only during specific hours so that the
sale is kept confidential from employees and customers.

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• Confidentiality Agreement: Usually signed by the buyer to ensure that seller’s private,
personal, or financial information is safeguarded.
• Salespersons should seriously consider their seller client’s confidentiality
requirements and should be conveyed to prospective buyers.

Offsite Considerations
• Range: The maximum distance and time a consumer travels to acquire specific goods or
services, which is reduced if the shopping centre is near a highway or a major traffic route.

• Clustering: Consumers are influenced by a mix of merchants (retail groupings) in a retail

centre so that their shopping trip is consolidated, and they can purchase various items at a
single location.

• Threshold: The demographic and economic factors that determine the minimum
population base to support a specific type of business, such as a hardware store.
• This analysis also considers average household income, household expenses, and
helps owners determine the demand for their products.

• Competition: All possible competition within the trading area must be properly analyzed to
determine the retail demand and market share.
• Customers usually go to the closest location if two or more competitors are offering
the same product or same service at similar price.

8.3 Showing and Advising on Office Properties

Understanding Buyer’s Needs

• Freestanding and Condominiums: The choice of a free-standing office or a condominium
office depends on buyer’s business needs and affordability.
• Freestanding office buildings can be a better investment as they improve company’s
individuality, and they are free of maintenance fees, bylaws, and condominium
regulations.
• However, office condominiums can be attractive to those buyers who seek
independence from occupancy costs and landlord controls of leasing.
• They also offer a variety of facilities and services, shared reception area, video
surveillance, building security, and other premium professional services.

• Layout: Salespersons should ask the buyers about their preferences with respect to layout
and other specific needs.
• Typical layout considerations include boardrooms, private offices, reception and
central service area, kitchen/lunchroom, type of flooring, and storage spaces.

• Employee Space: The buyer may need adequate space and separate rooms or cubicles
for employees, or a specific buyer may need space for several department on multiple
floors.
• Buyers needs should be assessed with respect to their choice of an open concept
office verses a traditional office layout.

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Selecting an Office for Buyer

• After the buyer’s specific needs and wants are understood, the salesperson should locate
suitable properties for the buyer.
• The buyer may not like a building where a competitor is already present, or there is
another company within the same industry as buyer’s.
• Buyers should be made aware that shared facilities sometimes create conflicts, such as
timing for scheduled meetings, lack of privacy, etc.

Showing Office Properties

• The seller’s salesperson or brokerage should be contacted before showing to ensure
there is minimum interruption to the existing occupants, and to know who will be present
during the showing.
• The salesperson should also get information on access, availability of parking, security
during showing, and procedures for entry/exit, etc.
• During the showings, special notes should be taken with respect to office features, layout,
limitations on parking, structural restrictions, and anything else that does not meet buyer’s
expectations.

8.4 Showing and Advising on Retail Properties

Understanding Buyer’s Needs

• Freestanding Buildings: These buildings are preferred by those retailers who have unique
marketing services, and established clientele, such as gas/convenience stores, banks,
furniture stores, drug stores, home/décor products, and restaurants.
• They are often located in busy urban areas, arterial roads, and in close proximity to
shopping centres with greater vehicular exposure, visual separation, and distinct
identify.

• Retail Condominiums: These buildings combine office, residential, and/or retail uses within
the complex and appeal to those buyers who seek more identity with the communities.
• Mixed-use office, retail, and residential buildings have street level parking and are
popular due to their affordability as compared to freestanding buildings.
• A disadvantage is that the owner/tenant has to pay condominium fees and share the
common area with other owners/tenants.

• Product Display and Storage: The buyer’s specific shipping and receiving needs dictate
the choice of retail property (free-standing or mixed-use) and may prefer a property close
to transportation routes.
• Some shared retail spaces and their timing restrictions for shipping/receiving may
not be suitable to the buyer.

• Utilities: Buyers should be advised that zoning regulations as well as condominium bylaws
in a mixed-use building may impact the parking facilities for employees, customers,
accessible parking, and delivery vehicles.
• Depending on buyer’s parking needs, a building with insufficient parking can impact
the buyer’s decision to purchase or lease.

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• Traffic Flow: Traffic flow is extremely important for retail buyers as greater exposure to
business results in greater revenue in the long run.
• Stores that are located in remote areas, or off-highway franchises, largely depend
on the traffic flow but also benefit from lack of competition.

• Signage and Visibility: Some buyers are concerned that they need to change old signs at
their own expense.
• Buyers should be made aware that zoning regulations and restrictions with respect
to setbacks and height can impact buyer’s visibility.

• Business Hours: Restrictions on business hours is often imposed in shopping malls unless
the buyer purchases/leases a store with outside access.

• Parking and Shipping/Receiving: Buyer’s choice of retail properties is also impacted by

parking and shipping/receiving facilities.
• Salespersons should always consider buyer’s specific needs before selecting retail
properties for them.

Selecting and Showing Retail Properties

• After understanding buyer’s needs and wants, the salesperson should search for suitable
properties in mixed-use or freestanding buildings.
• In case of mixed-use buildings, information should be obtained about current mix of
tenants so that there is minimum conflict or competition for the buyer.
• Listings should be examined for use restrictions, display and signage, business hours,
traffic flow, and parking facilities.
• Only those selected properties should be shown to the buyers which fulfill their
requirements in terms of their specific investment needs.
• If showing is to be done during seller’s business hours, care should be taken that the
buyer and the salesperson do not interrupt seller’s business and maintain discretion.

8.5 Showing and Advising on Industrial Properties

Understanding Buyer Needs

• Floor Loads: Floor load refers to the capacity of the floor to support live loads consisting of
people, furniture, furnishings, and equipment/machinery.
• Salespersons are not expected to determine floor load capacity for the buyer as the
buyer would hire a qualified third-party professional (engineering consultant).

• Office and Shop Allocation: Requirements of office vs. shop space depend on buyer’s
intended business and the design of property, which is regulated under zoning bylaws.
• Salespersons should refer to zoning bylaws, search listing information, and/or take
measurements to see if the available space matches buyer’s search criteria.

• Ceiling Height and Bays: Ceiling height and bay dimensions will vary depending on
buyer’s intended use because they significantly impact their industrial processes.
• Bay depth refers to unobstructed distance from one column to the next and clear
height is the unobstructed distance from floor to lowest hanging object on ceiling.

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• Door Combinations: The buyer preferences for doors may include single doors, double
doors, automatic doors, garage doors, and doors for loading docks.

• Loading Docks: Salespersons should be familiar with terminology and components of

loading docks, and if it is a material fact for the buyer, the details should be obtained and
verified.
• Levelers are driven by hydraulic motors to provide adjustable platforms between
trucks and permanent docking.
• Shelters are flexible, enclosed canopies which prevent wind drafts.
• Wells are for service the inclined areas for structures which are at grade level.
• Grade level loading allows access to forklifts and is at the level of surrounding
parking areas.

• Mezzanines: A mezzanine is a raised floor surface, commonly used to extend office space
or additional storage, and creates a partial second floor.
• A buyer may not require a mezzanine floor, but if it is available, it adds to utility and
appeal of the industrial building.

• Sprinkler Systems: The term ‘Sprinklered’ refers to a building that has a built-in sprinkler
system that uses interconnected pipes, risers, mains, and sprinkler heads with automatic
systems, which are triggered by flow of water and sets off a water or electric alarm.
• The system releases colourless and odourless carbon dioxide to extinguish fire.
• Sprinklers mitigate the risk of fire associated with industrial operations as well as help
the buyer in getting favourable insurance.

• Vehicular Access: Buyer’s specific needs with respect to vehicular space, ingress/egress
locations, and proximity to highways should be considered.
• If overnight parking on the property is necessary, on-site trailer storage space may
be required, depending on the anticipated number and type of vehicles.

• Utilities and Services: Unique industrial processes may use volume-sensitive electrical
equipment and heating/cooling equipment that demand higher power ratings.
• As such, the cost of hydro should be considered when selecting properties.

• Workplace Health and Safety: Properties must meet health and safety standards for
protection of workers, environment, and surrounding areas according to the Occupational
Health and Safety Act, the Environmental Protection Act, and other regulations.
• Some obligations include backflow preventers to protect public water supply, hard-
wired smoke alarms, integrated sprinklers, machine and equipment guards, and
provision of safety equipment.

Searching and Showing Properties

• Property selection depends on buyer’s needs in general purpose, single purpose, or
special purpose categories.
• The search is narrowed down based on buyer preferences, transportation,
loading/unloading, and storage needs as well as access to road and rail freight terminals.

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• Affordability is another factor and cost estimates should be done with respect to industrial
operations, including health and safety measures.
• When showing suitable properties to the buyer, the salesperson should obtain information
on safety precautions during showings, including safety hats, goggles, steel toed boots,
and any other special items.
• Buyer’s items of interest should be highlighted during showings, especially if the buyer is
in manufacturing sector, so that buyer’s questions or concerns may be appropriately
addressed.
• Salespersons should be well aware of buyer’s needs with respect to office area, services,
utilities, transportation, storage, docking facilities, and parking before properties are
shown.

8.6 Due Diligence and Third-Party Professionals

Salesperson’s Obligations
• Deal everyone (clients, customers, and third parties) with fairness, honesty, and integrity.
• Provide competent and conscientious service to all clients and customers.
• Demonstrate reasonable knowledge, skill, judgement, and competence when providing
value opinions.
• Advise the clients and customers to obtain services of third-party professionals if the
salesperson is not competent or not authorized by law to provide services.
• Take reasonable steps to identify all material facts and disclose them to clients.
• Disclose all material facts that are known or ought to be known to customers.

Due Diligence Issues

• Title Issues: Identification and verification of issues such as third-party interest, Consent to
Sever, first right of refusal, encroachments, easements, restrictive covenants, any notice
of claim, heritage designation, expropriation notice, local levies or taxes, conditional sales
contracts, HST matters, and condominium special assessments.

• Tenancy: Obtaining rental information on all tenants including their deposits, lease expiry,
renewals, and copies of leases.

• Zoning: Information with respect to zoning conformation, legal non-conforming use, and
potential for rezoning.

• Water Supply and Sewage: Municipal water and sewage connection or private water well
and septic system, and any known problems.

• Physical Condition: Approximate age of building, known structural problems, renovations,

survey showing building location, non-compliance with Ontario Building Code, water or
moisture problems, age of roof and any leakage, and rating of electrical system and type
of wiring.

• Environmental Conditions: Soil contamination, waste dumps, disposal sites, landfills,

pending projects in the area, floodplain map, presence of hazardous substances (UFFI,
Asbestos, or Lead), and any galvanized metal plumbing.

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• Special Municipal Tax Assessments: Ask the listing salesperson to provide copy of
notification with details and if the seller agrees to pay the amount before closing.

Environmental Site Assessment (ESA)

• Phase 1: This phase involves visit to the property for visual evidence of possible
contamination and completion of a Report of Site Condition (RSC).
• A review of documents, aerial photographs, title search, information from the
ministry, and municipality is conducted.
• It determines if reasons exist to believe that a property may have some form of
contamination.

• Phase 2: This phase involves collecting samples of soil and water (by on-site drilling),
which are sent to a laboratory for analysis.
• The tests determine the extent of contamination and suggests a remediation plan.
• The purpose of this phase is to have a conclusive evidence whether a property is
contaminated, and if some remedial action is required.

• Phase 3: This phase involves remediation of the contaminated land, which may take from
a few days to a few months.
• The environmental clean-up report is a confirmation for contamination removal,
treatment, and current status of the site.
• Unsuccessful remediation may result in a Site-Specific Risk Assessment, which
specifies the type of development that can be done on the site.

• Performing ESA: The person conducting ESA and the filing the Record of Site Condition
(RSC) must be a member of Association of Professional Geoscientists of Ontario (APGO).

• ESA Cost: The buyer should be informed that ESA is costly if remediation is required and
will vary according to the scope of assessment.

• ESA and Impact on Value: A positive ESA report does not impact value but if
contamination is identified and remediation is required, it negatively impacts value.
• Poor ESA report deters potential buyers from purchasing, but if a buyer is ready to
buy the property in ‘As Is’ condition, they should know that remediation would be
costly.

• ESA and Due Diligence: An up-to-date ESA report should be obtained from the seller as
the buyer will need it for getting a mortgage loan and arranging insurance.
• In case the seller’s ESA report is very old (more than 2 years), the salesperson
should make the agreement conditional on positive results of a new ESA.

• Risk Based Site Assessment: This due diligence investigation refers to an assessment of
buyer’s intended use of property from risk perspective.
• This assessment determines if the buyer’s future industrial processes will create any
environmental hazards or contamination.

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• Brownfields: Vacant or abandoned properties where past industrial uses have left the land
contaminated or polluted.
• These underused properties are often located in desirable urban areas and have the
advantage of in-place infrastructure, such as roads, utilities, water/sewer services,
and transit facilities.
• Salespersons should inform buyers that such properties require significant
investment, but municipalities usually help the buyer with financial assistance and tax
incentives.

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9. AGREEMENT FOR OFFICE AND RETAIL PROPERTIES

9.1 Agreement of Purchase and Sale – Commercial

Complexity of Agreement
• Commercial Transactions: They are usually complex involving several factors such as
multiple businesses, properties with tenants, complicated surveys, a variety of financial
statements, and environmental issues.

• Clauses for Specific Needs: Commercial agreements usually contain clauses to protect
the best interest of clients, which also ensure that parties understand their obligations.

• Conditional Clauses: Conditional clauses provide certain time to a party to complete

necessary due diligence before the agreement becomes binding.
• Condition Precedent: The agreement does not become binding unless one party
provides a written notice, within specified time, that the condition is fulfilled or
waived.
• Condition Subsequent: The agreement is binding right from the time of acceptance,
but a party can still terminate it within specified time, if the condition is not fulfilled.

• Third-Party Professionals: Salespersons should ensure that their clients obtain necessary
expert advice from third-party professionals, such as engineers, accountants, lawyers,
building inspectors, and environmental engineers.

• Tenants: The agreement addresses complexities of a tenanted commercial property in

clauses related to provision and investigation of documents provided by the seller.
• Buyers need to understand the use of property by tenants, get expert advice on
lease agreements, and verify chattels and fixtures owned by them.

Due Diligence
• Buyer and Seller Identification: The legal proof of identity of buyers and sellers, either
individuals or entities, should be verified to satisfy FINTRAC requirements.
• For corporations, the identity of both the corporation (through corporate search) as
well as individual authorized signatories is required.
• For partnerships, the identity of every partner is required, except in a limited
partnership where only the general partner signs the agreement.
• In a sole proprietorship, the individual who owns the business or property should be
identified.

• Irrevocability: This is the time period during which an offer or counter offer remains valid
but becomes null and void if this time period expires.
• In commercial transactions, the irrevocable time is usually during business hours.

• Notices by Fax/Email: Salespersons should include appropriate information in the

agreement as some clients prefer notices by email and other prefer by fax.

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• Deposits: Due to large amounts of purchase price, the deposit amounts are also large,
and sometimes given in stages as the transaction proceeds.
• Buyers may request that their deposit be placed in an interest-bearing trust account
and appropriate clauses should be added to the agreement.

• Chattels and Fixtures: Chattels are movable items owned by the seller and are usually
removed on closing whereas fixtures are permanently attached and remain with the
property on closing.
• Salespersons must be extra careful when inserting the details of chattels and
fixtures in the agreement as any misunderstanding may cause disputes between the
parties.
• Some common chattels unique to office and retail properties include cleaning
equipment, product displays, garment racks, flower planters, chairs, and
workstations, and filing cabinets.
• Some common fixtures include trade fixtures, built-in cabinets and shelves, and
industry specific equipment.

• Harmonized Sales Tax (HST): Most commercial transactions (sales or leases) are taxable,
subject to exceptions, and the seller is responsible to collect and remit the collected HST.
• If an exemption exists, such as a charitable or educational institution, expert advice
should be obtained.

• Closing Date: Commercial transactions usually have long closing dates, sometimes
several months after the acceptance, due to the time required for completion of due
diligence investigations.

• Present Use: The Present Use inserted in the agreement only describes how the seller is
using the property and does not reflect the current zoning classification.
• Salespersons should be aware of zoning bylaws and how changes to zoning may
affect the intended use by the buyer or the tenants.

Commonly Used Clauses

• Legal and Financial: This conditional clause provides specified time to the buyer’s solicitor
to review the financial and legal documents related to the property.
• Legal analysis of the property involves review of property title, major assets, existing
mortgages, surveys, licenses, permits, contracts, and zoning compliance.
• Financial due diligence involves review of financial documents, such as
income/expense statements, balance sheets, rent rolls, bank statements, tax
bills/returns, employee records, and operating costs.

• Building Condition: Commercial building inspections include visual inspection, review of

relevant documents, identification of physical deficiencies, photographs, and a detailed
summary.
• The report includes items such as building envelope, structural design, mechanical
systems, electrical systems, interior finishes, and life safety systems.
• The inspection may reveal certain material defects and deferred maintenance.

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• Environmental: This conditional clause provides specified time to the buyer to determine
satisfactory environmental condition of the property.
• An Environmental Site Assessment(ESA) report may be required to assess the
overall environmental condition of the property because hazards and contaminants
pose a significant risk.

• Additional Inspections: This clause allows the buyer to conduct further inspections of the
property before closing to ensure compliance with the agreed terms.
• For example, the buyer may want to ensure that the equipment included in the sale
is in good working order.

• Assignment: The assignment clause allows the buyer to transfer the rights and obligation
of the agreement to another buyer.

• Showing to Future Tenants: This clause is used when the buyer wants to show the
property to future tenants before closing.
• The sellers are usually given 24 hours prior notice for such showings.

• Seller’s Documentation: This conditional clause allows a specified time to the buyer to
conduct due diligence inspection and verification of documentation provided by the seller.
• Salespersons should ensure that the time period inserted in the agreement is
sufficient for such investigations and reviews, and that the agreement becomes null
and void if the buyer is not satisfied.
• In this clause, the seller agrees to provide such documentation as required by the
buyer to complete due diligence analysis of the property.

• Cleaning After Renovations: If the seller has done renovations in the property, this clause
ensures that the premises is left in a clean and broom swept condition on closing.

• Confidentiality Agreement (OREA Form 560): This separate agreement is used to ensure
that proprietary and personal information of the seller is kept confidential by the buyer.

Balance Due on Completion

• Clause Format:

The buyer agrees to pay a further sum of ___________, subject to adjustments, to the seller, upon
completion of this transaction, with funds drawn on a lawyer’s trust account in the form of a bank
draft, certified cheque, or wire transfer using the large value transfer system.

Calculation: Balance can be calculated using the SAD method, where S is Seller Take Back, A
is assumed mortgage, and D is total of all deposits.
Balance = Purchase Price – Seller Take Back (S) – Assumed Mortgage (A) – Deposits (D)

Initials and Signatures

• Signatures: When the offer is finally accepted; all parties must sign and initial the
agreement.

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• Corporations: The authorized individual(s), identified as officers of the corporation,

add “Per” before signature and use Seal or write “I/We have the authority to bind the
corporation”.
• Partners: All authorized partners insert their signatures and add “Per” before the
signature.

• Confirmation of Acceptance: The acceptance is typically confirmed by the last party to

accept all terms/changes by signing this section.

• Acknowledgement: Parties sign the Acknowledgement section, copies of the accepted

offer are distributed to each party, and the salesperson retains a copy for the brokerage.

• Remuneration/Commission Trust Agreement: When two different brokerages are involved

in the transaction, the salespersons sign the Commission Trust Agreement on behalf of
their brokerages.

Salesperson’s Obligations
• Best Interests: Salespersons should explain the agreements details to their clients and
ensure that they understand the terms and conditions included in the agreement.
• They should understand their obligations with respect to identification requirements,
confidentiality agreements, and seeking appropriate third-party advice.

• Due Diligence: When working with the seller, salespersons should ensure that applicable
documents are provided to the buyer.
• When working with the buyer, salespersons should include conditions for obtaining
appropriate documents to help the buyer complete the assessment and verification
tasks within due dates.

• Identification of Defects: Salespersons are responsible to identify defects, easements, and

restrictions and disclose them to the buyer.
• Physical deficiencies in the property pose a risk to the buyer and affect buyer’s
decision with respect to their intended use.

• Legal and Other Advice: Parties (sellers and buyers) should be encouraged to obtain
expert third-party advice to ensure that the agreement protects their best interests and
their legal rights.

9.2 Completing the Agreement for Office Property

Steps in Offer Plan

• Offer Mathematics: The amount of deposit and how it is paid (herewith, upon acceptance,
or otherwise) is identified to calculate the balance due on completion.

• Identify Dates: Key dates for Irrevocability, Completion, Title Search, and timeframes for
various conditions are identified to ensure that sellers and buyers have adequate time to
perform their obligations under the agreement terms.

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• The dates for fulfillment of conditions and completion are based on time required for
due diligence and buyer’s specific requirements.

• Information Required on Schedules: Due diligence clauses, depending on the type of

property, are identified and may require modifications in their standard wording, as each
property is unique.

• Additional Information: Depending on the type of property and buyer’s specific

requirements, additional information should be identified and included in the agreement.
• Some common clauses that are usually inserted in the agreement are related to
documentation, list of chattels and fixtures, representation and warranties, mortgage
conditions, etc.

Due Diligence
• Document Verification: Salespersons are responsible to ensure that all required
documents have been received from the sellers.

• Timeframes for Due Diligence: Conditional clauses related to due diligence typically
require the seller to provide documentation and provide a specific time to the buyer to
assess them and notify the seller if the results are not favourable.
• The time required for assessment may be 30 days or more depending on the
complexity of documentation.

• Third-Party Professionals: Salespersons are not expected to conduct due diligence for
their clients and most of these matters are handled by experts such as lawyers, engineers,
accountants, building inspectors, and environmental engineers.
• Salespersons should recommend names of at least 3 third-party professionals in
each field so that the buyers may make their own selection.

Completing the Agreement

• Buyer and Seller Details: This section identifies the buyers and sellers using their
individual legal names of legal names of the entity (corporation or partnership).

• Real Property Details: The details about the property should be as accurate as possible
including the address, legal description, and indication of any easement or right-of-way.

• Purchase Price and Deposit: The deposit is usually paid by the buyer upon acceptance
and is placed in the non-interest-bearing trust account of the listing brokerage, unless
otherwise specified in the agreement.
• If there are multiple/additional deposits, the Deposit clause specifies ‘As otherwise
described in the agreement’, and a Supplementary Deposit clause is inserted in the
Schedule.

• Irrevocability: The time period that one party gives to the other party to review the terms of
the offer and consult their lawyer whether to accept, reject, or counter the offer.
• For commercial transactions, the time period expires within normal business hours
and does not occur on a Friday, weekend, or a holiday.

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• Completion Date: This date provides adequate time for due diligence as per buyer’s
requirements and must be on a weekday.

• Initials: All pages of the offer are initialed at the appropriate space by buyers and sellers,
except the signature page.

Signing Requirements
• Offer: When submitting the offer, each page of the agreement is initialed by the sellers
and buyers and the authorized signatory (if any) signs the offer under seal.

• Counteroffer: The party making the changes initials the changes and may also change the
Irrevocability date to provide time for the other party to review the changes.

• Acceptance: When the offer is accepted, the last party to accept all changes initials all
changes and signs the Confirmation of Acceptance.

• Information on Brokerages: This section is signed by salespersons/brokers of the

brokerage involved in the transaction and contact information of respective brokerages is
inserted.

• Acknowledgement: The buyers and sellers insert their signatures to indicate that they
have received copies of the accepted agreement.

• Additional Requirements: The salesperson signs the Remuneration/Commission Trust

Agreement and provide copies of the agreement to their buyer and seller clients.
• Salespersons also retain a copy for their respective brokerage records.

9.3 Completing the Agreement for Retail Property

Areas of Concern
• Sign Bylaws: Sings provide visibility to a business and the buyer must be informed that
municipal sign bylaws impose restrictions on location of the sign, its size and maximum
height.
• If the buyer continues using the existing pylon sign, a Representation and Warranty
clause from seller should be inserted in the agreement to ensure that the sign
conforms to sign bylaws.

• Zoning Compliance: Zoning bylaws, enacted by municipalities, regulate the types of

buildings, their use, and other items such as lot coverage, parking requirements, building
heights, setbacks, and signage.
• When preparing an offer, salespersons should ensure that the property is
appropriately zoned for buyer’s intended business needs.
• The buyer might need zoning compliance and building permit if he wishes to change
the building appearance or alter its use.

• Parking: Parking areas in the property may have high demand from employees and
customers, which largely depends on the types of retail operations and their schedules.

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• Parking Ratio refers to the number of available parking spaces divided by the gross
leasable area of the property.

• Traffic Flow: Depending on the type of business, the buyer will have to ensure that entry
and exit points are on to the street or the seller has entry/exist rights registered on the
title/deed.
• Due diligence clauses should provide that if ingress/egress rights are not found in
title search, the seller will need to demonstrate possession of these rights.

• Tenant Leases: If the buyer intends to assume existing tenants, the salesperson should
add a clause with respect to details of tenancies.
• The clause should require the seller to provide tenant acknowledgements,
assignments of tenancy, and direction to tenants to pay rent to the new owner
(buyer).
• As part of due diligence, the buyer needs to evaluate the income stream, payment
histories, and tenant credit files to determine potential risks.

Steps in Offer Preparation

• Offer Plan: Create an offer plan to gather, organize, and verify all relevant information.
• Due Diligence: Include all information that must be confirmed, documented, and verified.
• Documents: List of documents and schedules that are to be included in the agreement.
• Buyer Information: Verify information provided by the buyers for offer preparation.
• Timeframes: Identify and estimates timeframes required for conditions and due diligence.
• Third-Party Professionals: Identify which professionals will be required to assist the buyer
in due diligence.

9.4 Additional Sale Related Documents

Amendment (OREA Form 570)

• An Amendment to Agreement of Purchase and Sale form is used by the parties to make
changes to an accepted agreement.
• The wording being deleted is inserted exactly as in the original agreement.
• New wording, which is to be added to the agreement, is inserted, and new Irrevocable
date and time are inserted.
• The party making the changes signs the form before it is sent to the other party.
• If the changes are not accepted or a counter offer is not made by the other party within the
Irrevocable time, the amendment becomes null and void and the original agreement
remains effective.
• If changes are acceptable, the other party signs the Confirmation of Acceptance and the
Acknowledgement sections.

Notice of Fulfillment of Conditions (OREA Form 574)

• When completing this form, a cross reference is given to the original agreement, the
condition(s) being fulfilled is/are inserted, and the parties sign the form.
• This form is used to notify a party that a Condition Precedent or a True Condition
Precedent has been fulfilled.

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• When signed by all parties, this form makes the Agreement of Purchase and Sale a legally
binding contract.
• The form must be sent by the party which was to fulfill the condition before the date and
time specified in the condition to notify the other party.
• The Acknowledgement must be signed either by the party or the brokerage before the
expiry of the time period specified in the condition.
• Copies of the signed notice are provided to each party and the brokerages retain a copy
for their records.

Waiver (OREA Form 573)

• When completing this form, a cross reference is given to the agreement, the condition(s)
being waived is/are inserted, and the parties sign the form.
• This form is typically used by the buyer before expiry of the conditional date to remove
one or more conditions in the agreement.
• As with the Notice of Fulfilment of Conditions, this form makes the agreement a legally
binding contract.
• However, this form cannot be used with True Condition Precedent and it is not required for
a Condition Subsequent.
• The Acknowledgement must be signed either by the party or the brokerage before the
expiry of the time period specified in the condition.
• Copies of the signed notice are provided to each party and the brokerages retain a copy
for their records.

9.5 Pre-Closing Issues

Factors Beyond Salesperson’s Control

• Financing Difficulties: Due to complexity of the transaction or the time taken for closing,
the buyer’s financial situation may change.
• This may result in buyer becoming unqualified as per lender’s criteria and financing
may no longer be available.

• Innocent Misrepresentation: A statement made by one party to the other, is believed

honestly, but turns out to be false at a later date.
• While there is no intention to deceive or mislead, an innocent misrepresentation may
result in buyer’s refusal to close the transaction.

• Title Problems: Title search may reveal some unfavourable results, such as a lien on the
property, a judgment against the seller for failure to pay a creditor, a right-of-way that may
pose problems to the buyer in intended use, etc.

• Change in Property Condition: The property may suffer some physical damage, or the
chattels/fixtures might be damaged or stolen before closing.
• The seller should be notified to handle the deficiencies, or the agreement may be
amended to adjust the purchase price based on the cost of repairs or replacement.

Leading Practices

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• Salesperson Competency: Factors includes research skills, financial literacy,

documentation capabilities, adoption of best practices, and relationships with third-party
professionals.

• Accuracy of Documents: One of the most important safeguards against closing problems
starts with ensuring that documents are prepared and handled with accuracy and in a
timely manner.

• Maintaining a Checklist: A checklist helps track transaction progress since commercial

agreements contain a number of conditions, which may have different timeframes for
fulfilment.

• Providing Documents to Buyer: It is salesperson’s obligation to obtain and provide all

pertinent documents to the buyer or buyer’s lawyer for review and assessment.

• Up-to-Date Information: Since commercial transactions take a long time to close and
certain information may change during this time; salespersons should update their
information as and when required.

• Financing and Insurance: Buyer’s interim financing should remain available during the
transaction and insurance coverage should continue until the time of closing.

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10. AGREEMENT FOR COMMERCIAL CONDOMINIUMS

10.1 Key Components of the Agreement

Pre-Printed Clauses
• Property Description: This clause provides the details of the unit, level number, legal name
of the condominium corporation, plan number, and the street address of the building.

• Parking and Lockers: This clause provides details of the parking and locker spaces
associated with the unit, their number and level.
• When parking and/or lockers are ‘owned’, there is a separate deed, and it can be
sold separately from the unit.
• In case of ‘exclusive use’ or ‘assigned’ spaces, only the unit owner can use the
spaces.
• This clause also states that the ownership of unit provides a proportionate,
undivided ‘tenancy-in-common’ interest in the common elements of the
condominium.

• Property Manager: The name and contact information for the property manager.

• Common Expenses: Approximate monthly amount of the current common expenses

(maintenance fee).
• This is the amount every unit owner pays to maintain the common elements of the
property and may include the cost of maintaining land and parking areas.

• Additional Parking and Lockers: This clause provides details of parking spaces and
lockers, and their cost when they are not ‘assigned’ and not described earlier.

• Approval: This clause states that the Agreement of Purchase and Sale is subject to
approval by the condominium corporation and the seller agrees to apply for such consent.
• If consent is not approved, the agreement becomes null and void.

• Present Use: This clause is within the Title Search clause of the agreement and provides
the time frame (Requisition Date) for the buyer’s lawyer to conduct the title search and
confirm that the Present Use conforms to the current zoning.
• Salespersons should confirm that the future intended use of the property is
permitted under zoning, otherwise, the transaction may not complete.

Status Certificate and Management

• The status certificate, provided by the condominium corporation, includes Declaration,
Description, bylaws, rules/regulations, financial statements, insurance details, and a copy
of the Reserve Fund audit.
• The seller agrees that the buyer may request the status certificate from the condominium
corporation and warrants that there are no special assessments or lawsuits against the
corporation.
• The buyer also acknowledges that the condominium corporation may have entered into a
property management agreement.

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• The buyer’s lawyer reviews the status certificate because the information may have
significant impact on buyer’s intended use of the unit.

Meetings
• The seller confirms that they have not received any notice for special meeting regarding
termination of the corporation, for any major additions or renovations of common
elements, or for changes to the finances of the corporation affecting the assets and/or
liabilities.
• The seller agrees that if they receive any such notice prior to completion, they will notify
the buyer, and the buyer then will have the right to terminate the agreement.

Outdoor Signage
• If the condominium corporation provides an option to purchase the outdoor pylon sign, it
may be a separate unit with its own legal description.
• Salespersons should ensure that the details are given in the Agreement of Purchase and
Sale because the unit owner would be responsible for the property taxes and
condominium fees of the sign.

Chattels and Fixtures

• Salespersons should be careful when describing chattels included and/or fixtures
excluded from the agreement.
• The clause states that if any chattels are included in the sale, they will be free of all liens,
encumbrances, or claims.

10.2 Review of the Agreement

Clauses and Conditions in the Schedule

• Access/key Fob: This clause is included so that the buyer gets access to the unit using the
unit keys, key fob, or other access device such as a swipe card, or entry code.
• The device listed should allow access to the unit as well as other areas such as the
building itself and the parking area.

• Special Assessments: Special assessments are levies charged by the condominium

corporation to cover unforeseen expenses, under-budgeted repair costs, or costs of
lawsuits against the corporation.
• This Representation and Warranty clause is added to ensure that that there are no
special assessments planned by the corporation.

• Occupation Before Completion of Construction: This clause is used when the interior of
the unit is mostly complete, but the common elements are still under construction.
• The seller (developer) agrees to complete the construction in a professional and
timely manner.
• However, this clause does not permit the buyer to terminate the agreement if the
construction is not completed by the occupancy date.

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• Occupation Before Completion of Transaction: The buyer may be able to get occupation
of the unit before the scheduled completion date of the agreement.
• This clause states that the buyer will be responsible for pro-rated occupancy fee
based on proportionate share of common expenses.

Areas of Concern for the Buyer

• Status Certificate: Information included in the Status Certificate and attachments may
have a significant impact on the intended use of the unit by the buyer.
• As such, salespersons should ensure that the status certificate conditional clause is
included in the agreement that provides sufficient time to the buyer’s lawyer to
review the information and advise the buyer accordingly.
• If the unit is not suitable for buyer’s intended use, the conditional clause should
allow the buyer to terminate the agreement and get full refund of deposit without
penalty.

• Alterations: Salespersons should ensure that a Representation and Warranty clause is

included in the agreement when the seller has made any improvements, alterations,
repairs, or additions to the unit.
• This clause provides a warranty that the work was done in accordance with both the
Condominium Act and the Declaration and bylaws of the corporation.
• Any work performed on the exclusive use areas or on common elements, it should
have the approval of the condominium corporation.

10.3 Completing the Agreement of Purchase and Sale

Note: To understand this lesson, please review the Agreement of Purchase and Sale –
Condominium (OREA Form 501) given in the official text.

Pre-Printed Clauses
• Buyer and Seller Names: Each party must be identified to satisfy the FINTRAC
requirements and, if a party is a corporation, corporate records should be checked to
verify the signing authority.

• Property: Accurate description of the property includes condominium plan number, unit
number, level, and building number.

• Parking: Information on parking and lockers with their number and level should be
identified in this section.

• Purchase Price and Deposit: The purchase price and deposit amount are given in words
and figures.
• The deposit clause identifies the listing brokerage that will hold the deposit in trust
account and whether the deposit is paid ‘Herewith’ or ‘Upon Acceptance.’

• Irrevocability: The date and time before the seller/buyer can accept, reject, or counter the
offer.

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• The time inserted is usually within office hours and sellers should be given sufficient
time to consult their lawyer.

• Completion Date: Completion date is a weekday and there should be adequate time for
due diligence matters.

• Common Expenses: The amount of monthly fee is inserted in this section with a list of
items included in the fee.

• Parking/Lockers: This section provides additional information on parking and lockers as

well as their cost.

• HST: HST is applicable to most commercial transactions and is in addition to the purchase
price.
• In case HST is not applicable, the buyer must provide a certificate to confirm that the
seller is not required to collect HST.

Commonly Used Clauses in the Schedule

• Balance Due: This clause gives the correct amount owed to the seller on completion date
and includes the method of payment.

• Status Certificate: This conditional clause provides that the buyer’s lawyer will review the
status certificate and attachments to advise the buyer to proceed or not proceed with the
transaction.
• The date and time inserted should be adequate for requesting the statis certificate
from condominium corporation and for the lawyer to complete the review.
• The clause provides a date and time within which the buyer must send Notice of
Fulfilment or Waiver to make the agreement a legally binding contract.

• Inspection: This conditional clause is modified from residential inspection clause to include
the common elements.
• The clause provides the date and time within which the buyer must send Notice of
Fulfilment of Conditions or the Waiver to make the agreement a legally binding
contract.

10.4 Pre-Closing Issues

Possible Concerns Before Closing

• Budget: The corporation may decide to revise the budget or impose a special assessment
before closing of the transaction, and this may increase the cost of ownership for the
buyer.

• Bylaws and Rules: Salespersons should ensure that the buyer’s intended use of the
property is in compliance with zoning as well as condominium’s Declaration and bylaws.
• However, the condominium may make changes to its bylaws before closing and it
may interfere with buyer’s use of property.

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• Special Meetings: A special meeting may be requested before closing either by the
condominium board of directors or by the unit owners.
• These issues typically address specific issues related to the status of the Reserve
Fund, changes to common elements, or corporation’s assets and liabilities.

Buyer’s Options
• The buyer’s lawyer reviews the condominium’s status certificate, which includes its
Declaration and bylaws, projected expenses, and plans for any special meetings.
• Based on their lawyer’s advice, the buyer may decide to proceed with the transaction,
make amendments, or terminate the offer.
• The buyer should be aware that an amendment to the original agreement is a new offer to
negotiate and the seller may not accept the amendments, which means that the terms of
original agreement remain valid.

Change in Assessment Value

• When a buyer purchases a unit from the builder or as an assignment from another buyer,
the municipal assessment for taxes is typically not completed before closing.
• If the final assessment value is much higher than what was given by the builder, it may
result in higher property taxes for the purchased unit.
• In this scenario, the clauses and language of the agreement provides that buyer has no
options but to complete the transaction.

Leading Practices
• Use Restrictions: Commercial condominiums are subject to use restrictions under the
Condominium Act as well as Declaration and bylaws.
• Salespersons should research and review any use restrictions with their buyer
clients so that there are no conflicts with the buyer’s intended use of property.

• Review of Documents: Salespersons should always recommend that the buyer obtains
services of third-party professionals, such as a lawyer or an accountant, to review the
condominium documentation during the conditional time period.
• These professionals provide expert advice to the buyer on legal, financial, and other
aspects of the condominium unit so that the buyer can make an informed decision
about the purchase.

• Understanding the Issues: Salespersons should ensure that the buyer understands the
impacts of any issued discovered by third-party professionals.
• They should never assume that the buyer understands the implications of the issues
identified.
• They should clearly explain the issues and recheck with them to make sure that the
buyer understands them.

Resolving the Issues

• Once the conditions are fulfilled or satisfied, the Agreement of Purchase and Sale
becomes and legally binding contract.
• The buyer must understand that legal consequences (loss of deposit or possible lawsuit) if
the transaction does not complete due their default or neglect.

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• Salespersons can help their buyer clients in resolving any issues that may arise before
closing.

• Increase in Common Expenses: If there is a significant increase in the maintenance fees,

the parties may agree to reduce the purchase price.
• This is usually done by completing the Amendment to the Agreement, which both
parties must accept and sign.

• Changes in Bylaws/Rules: The buyer may be advised to request an extension of the

completion date to address the changes in bylaws or rules of the condominium.

• Incomplete Property Assessment: In case the buyer is purchasing a newly constructed

unit, a clause should be added to the agreement to address possible increase in
property’s assessment value.
• This clause provides a compensation to the buyer for the increased property taxes.

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11. AGREEMENT FOR INDUSTRIAL PROPERTIES

11.1 Review of Agreement of Purchase and Sale

Complexity of Industrial Properties

• Transactions involving industrial properties can be complex due to their varying sizes,
present use, environmental contamination issues, and equipment included.
• Salespersons must understand the needs of users and their knowledge of industrial
operations involving service, manufacturing, or warehousing facilities, etc.
• The Agreement of Purchase and Sale – Commercial (Form 500) is used for industrial
transactions and salespersons must include due diligence clauses, which may be unique
and specific to each industrial property.

Chattels and Fixtures

• Chattels are movable personal items belonging to the seller whereas fixtures refer to any
items that are permanently fixed to the property.
• When an industrial property is on sale, the listing usually provides details of chattels,
fixtures, equipment, and other items included in the sale.
• For an industrial property, it may be difficult to distinguish between chattels and fixtures,
with sale of chattels being subject to HST.
• Specific clauses detailing what fixtures or trade fixtures are to be removed by the seller,
and what chattels are included in the sale must be included in the Agreement of Purchase
and Sale.

• Example: A compressor with lines connected to the building; the compressor may be a
chattel, but the lines may be considered fixtures.
• The salesperson must make it clear as to what the seller wants to include in the sale
as the buyer may be thinking that he will get the compressor, but the seller might
want to take it away.

• Clauses for Equipment: Typical industrial equipment includes heating, air conditioning,
sprinklers, conveyors, elevators, furniture, and office items such as photocopiers, etc.

• Good Working Order: This is a warranty clause to ensure that all the equipment
included in the sale is in good working condition on closing.
• Inspection: This conditional clause is included so that the buyer may hire a third-
party professional to conduct an inspection of all the equipment specific to the
industrial operation.
• Maintenance Records: Certain equipment such as HVAC system, conveyors,
elevator, etc. require proper maintenance and this clause permits the buyer to
review their maintenance records.
• Buyer’s Right to Purchase Additional Equipment: This clause is included when the
buyer wants to purchase additional items or equipment from the seller, such as
office furniture or photocopiers, which are otherwise excluded from the sale.
• The clause provides a timeframe to the buyer for the purchase and specifies that
the sale may be subject to HST.

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• Removal of Equipment: Typically given on a separate schedule, this clause requires

the seller to remove, at seller’s own expense, certain specific equipment, or
machinery, and repair any damage caused by such removal.
• Lighting Fixtures: This clause ensures that all exiting light fixtures are included in the
sale and they will be in good working order on closing.

Present Use and Intended Use

• Salespersons must ensure that the intended use of the industrial property by the buyer is
permitted and is in compliance with the zoning bylaws.
• Although there is no legal requirement to fill in the Present Use in the Agreement of
Purchase and Sale, it is typically inserted in the Title Search clause such as ‘warehousing’
or ‘industrial/office’.
• The municipal zoning of the property is not provided but the buyer or buyer’s lawyer must
use due diligence to verify that the intended use complies with zoning.
• If the buyer’s intended use is different than the present use, a conditional clause may be
inserted for obtaining a ‘Minor Variance’ or a ‘Re-zoning’.

• Minor Variance: This conditional clause is inserted when the buyer wants to apply for
approval of minor variance, such as using 20% space for office when only 10% is
permitted.

• Re-zoning: This conditional clause is inserted when the buyer wants a apply for approval
of a major change in the permitted use of the industrial building, such as an additional
structure.
• While the buyer pays for all costs involved in rezoning, the seller agrees to execute
all applications and submit required documents for amendment of zoning bylaw.

Environmental Due Diligence

• Manufacturing, processing, and other industrial activities involve storage, handling, use,
and disposal of hazardous materials and wastes.
• Harmful raw materials and/or chemicals/oils may be improperly stored or disposed of,
which may be contaminating the soil or groundwater.
• Salespersons must include appropriate environmental assessment clauses to protect the
buyer as any contamination is a potential risk due to possible liability for expensive
cleanup.
• Phase 1: This phase involves visual inspection of the property along with review of
documentation, registry information, and other relevant environmental records to
determine whether the property may have some environmental contamination.
• Phase 2: This phase involves collection of samples and tests for soil, water, and
hazardous waste to determine the scope of contamination and recommendation of
remedial steps.
• Phase 3: This phase involves remedial steps as well associated costs.

Environmental Site Assessment (ESA)

• Environmental site assessment protects the buyer from any liability that may arise after
closing due to contamination.

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• Since the cost of cleanup of an industrial property may be significant for the buyer, most
lenders require at least a Phase 1 Environmental Site Assessment (ESA) report for
providing a mortgage loan.
• Salespersons are not expected to be experts in all environmental issues, but they must
have a clear understanding of how the property is currently being used.
• They can search municipal records, owner’s documentation, or the registry information as
part of due diligence because the consequences of not conducting such investigation may
be disastrous for the buyer.

Clauses for Oil Tanks

• Existing Oil Tank: This conditional clause provides assurance to the buyer that the oil tank
and its operation meets safety standards.
• A fuel oil distributor registered under the Technical Standards and Safety Act
(TSSA) may check the condition of the tank.

• Compliance Warranty for Underground Oil Tank: This Representation and Warranty
clause assures the buyer that the underground oil tank complies with technical and safety
standards.
• The seller provides registration number and other documents to the buyer.

• Previously Removed Underground Oil Tank: This Acknowledgement section assures the
buyer that a licensed TSSA contractor has previously removed the underground oil tank
and cleaned up the soil contamination (if any).

• Seller to Remove Underground Oil Tank: This clause ensures that the seller agrees to get
the underground oil tank removed by a licensed TSSA contractor before closing and will
provide evidence of testing, cleaning, and restoration of grading/landscaping.

Additional Areas of Concern

• Equipment Included in the Sale: To avoid any misunderstandings related to chattels and
fixtures, the Agreement of Purchase and Sale must clearly identify which items are
included and which items are excluded from the sale.

• Utilities and Services: Due to high rate of consumption of energy in warehousing, cooling,
and processing facilities, the buyer must consider the power consistency factors.
• Third-party electrical experts should be hired to verify the utility loads of the
proposed project by the buyer.

• Exterior Storage and Zoning: Industrial zones in different municipalities have different
standards for external storage, especially in industrial parks where the intention is to
minimize their impact on nearby residential areas.
• Most common regulations are related to noise, vibrations, odours, noxious matter,
radiation hazards, fire, and explosive hazards.

• Timeline for Environmental Assessments: Usually, a two-months’ time period is required

for environmental site assessment.
• The buyer must also consider the cost of such assessments and may terminate the
agreement if the property is not worth the cost of assessments or cleanup.

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11.2 Completing the Agreement of Purchase and Sale

Note: Since this lesson is an exercise, you need to review the scenarios given in the
official course.

11.3 Pre-Closing Issues

Additional Environmental Contamination

• The Phase 1 assessment report may result in a Phase 2 assessment to determine the
extent of environmental contamination.
• In case significant contamination is revealed, the buyer has the option to terminate the
agreement or may negotiate a reduction in the purchase price.
• Since the cost of Phase 2 and Phase 3 assessments can be significant, the salesperson
should advise the buyer accordingly.

Damage Due to Removal of Fixtures

• As per the pre-printed Insurance clause of the Agreement of Purchase and Sale, the seller
is responsible to keep the property insured against damage until the time of closing.
• If there is any damage to the building structure due to removal of equipment or other
fixtures, the seller’s insurance covers the cost of repairs.
• Salespersons must ensure that the seller has adequate insurance coverage for the
property and should ask the seller to provide a copy of the policy.

Water Damage or Electrical Fire

• An electrical fire or water flooding may result in significant damage to the property
between the time of acceptance and closing.
• Most sellers have insurance policies to cover the damage to the building and their
inventories.
• In case the buyer wishes to proceed with the transaction, the salesperson may request a
copy of the seller’s insurance to verify that the damage is adequately covered.

Importance of Environmental Site Assessment

• Salespersons must ensure that the buyers are educated on environmental issues as part
of due diligence as Phase 1 Assessment is often required by lenders.
• The sellers must also be made aware of potential consequences of environmental site
assessment and should be prepared for remediation costs or reduction in purchase price
to compensate the buyer.
• Appropriate clauses for environmental site assessment should be added to the
agreement, and salespersons should ensure that the sellers and buyers have good
understanding of these clauses.

Third-Party Professionals
• A team of third-party professionals should be referred to buyers and sellers to assist them
in completion of the transaction.
• Environmental Engineer/Consultant: To determine if any previous use of the
property may have caused contamination.

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• Building Inspector: To inspect the building structure for issues that may require
substantial costs.
• Accountant/Financial Advisor: To help the buyer with financial issues such as
budgets, taxation issues, and analysis of financial statements.
• Banker/Lender: To determine the amount of mortgage financing based on buyer’s
budget.
• Lawyer: To review the Agreement of Purchase and Sale, the conditional clauses,
and advise the buyer on taxation issues.

Resolving Issues for Completion

• Issues that may otherwise affect the closing of a transaction, may be resolved either by
extension of the closing date or by way of compensation.

• Extension of Completion Date: If the buyer needs more time to investigate the
environmental contamination or the seller needs time to repair the damage to the
property, the parties may negotiate an extension of the closing date.

• Compensation for Environmental Contamination or Damages: The buyer may

negotiate a reduction in purchase price to cover the cost of environmental
contamination or damage to the property due to removal of equipment or fixtures.

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12. LEASING: OFFICE, RETAIL, AND INDUSTRIAL

12.1 Basics of Commercial Leases

Definition of Lease
• A lease is a contract between a landlord and a tenant for occupation/use of landlord’s
property by the tenant, for a specified period of time (term), and for a specified payment
(consideration or rent).
• In a commercial lease, the premises are primarily used for business activities.
• Although commercial leases can be complex due to different types of properties and
specialized wording, most of them contain similar essential elements.

Essential Elements of a Lease

• In a commercial complex, the landlord’s standard form of lease is known as a ‘standard
lease’, which is the most general form of agreement, and is applicable to maximum
tenants in the complex.
• This standard lease is then modified to suit the specific requirements of individual tenants.
• Every lease must include the name of the landlord and the tenant, description of the
premises, rent, permitted uses, dates of commencement and expiry, and the rights and
obligations of the parties.

Types of Commercial Leases

• Gross Lease: The tenant pays only a fixed amount of rent and the landlord is responsible
for all other expenses related to operation of the commercial complex.
• Tenants prefer this type of lease due to security of rent cost and landlords prefer it
due to the additional cost of installing separate utility meters, etc.
• However, some landlords prefer net lease so that they can transfer the increase in
utility and other costs to the tenants, which is not possible in a gross lease.
• Certain gross leases contain a provision of annual rent increases to absorb
increasing costs.

• Net Lease: The tenant pays the base rent and the additional rent, which includes the
expenses depending on the type of net lease.
• Single Net Lease: The tenant pays the base rent plus additional rent, which includes
property taxes. All other expenses are paid by the landlord.
• Double Net Lease: The tenant pays the base rent plus additional rent, such as
property taxes, maintenance, and insurance. The cost of major repairs, such as roof
replacement, is not included in additional rent.
• Triple Net Lease: The tenant pays the base rent plus additional rent, which includes
all expenses related to the operation of the complex, such as the cost of roof
replacement and major structural repairs.

• Percentage Lease: This type of lease is mainly found in retail complexes, where the
tenant pays the base monthly rent, additional rent, plus a percentage of their gross
monthly sales over the base sale (calculated using the base minimum rent).
• This is like a partnership between the tenant and the landlord wherein the
percentages are negotiable depending on the type of tenant’s business.

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• This allows the landlord to receive at least a base minimum rent but share the
growth in tenant’s revenues as the sales volume increases.
• The tenant must report their monthly sales so that the landlord can receive monthly
interim payments of percentage rent instead of waiting until the end of year.
• Some landlords also use these monthly sales figures to monitor the tenant’s
chances of success or risk of failure.

• Retail Ground Lease: Also known as ‘Land Lease’ or ‘Pad Lease’, the landlord leases only
the land on which the tenant may construct a custom building.
• This long-term lease (for a period of 10-20 years) is beneficial to the landlord as he
gets an improved site at the end of lease where someone else has put the money
for the building.
• The tenant gets the benefit of having a commercial space at a lower cost without
having to pay the cost of land.
• However, the tenant may face difficulties if they want to expand the building at a
later time, but the landlord does not agree.

Types of Rent
• Base or Minimum Rent: The minimum rent payable by the tenant and is calculated using
the rentable area (square feet or square metre) occupied by the tenant.
• The base rent does not include variable expenses or operating costs of the property.

• Additional Rent: Tenant’s proportionate share of operating costs of the complex, as

agreed in the lease document, and is estimated at the beginning of each financial or
calendar year.
• The total rent is the sum of base rent and the additional rent, paid as equal monthly
instalments along with the base rent.
• Additional rent includes the costs recoverable by the landlord from the tenants as
opposed to the costs that cannot be recovered.
• Typically, the additional rent includes operating costs, property taxes, utilities,
landlord’s insurance, snow removal, landscaping, paving/repaving, painting,
garbage removal, etc.
• Salespersons should make their tenant client aware of the items included or
excluded from the additional rent, and to obtain their lawyer’s advice on the contents
of the lease clauses.

• Percentage Rent: Percentage rent, found in retail shopping centres, is calculated using
the tenant’s gross monthly sales figures.
• The effective rent is greater of the base minimum rent and the percentage of gross
monthly sales.
• Percentage rates vary with the type of business and businesses with higher gross
sales (greater business volume) usually have lower rate whereas those with lower
gross sales have higher rate.
• This way, the landlord receives a share of tenant’s success whereas the tenant
enjoys the benefits of low base rent.

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Example: Assume that a tenant is occupying a 2,000 square feet store. The base
minimum rent is $30 per square foot and the percentage rent is 5% over the base
minimum rent. The estimated annual gross sale is $1,450,000.
Base Minimum Rent = 2,000 X 30 = $60,000
Percentage of Sale = 1,350,000 X 5% = $67,500
Percentage Rent = 67,500 – 60,000 = $7,500

• Fixed Rent: The tenant pays an agreed amount of fixed rent (plus HST) and the landlord
remains responsible for all operating costs.
• The tenant may be responsible for the cost of utilities, but this is negotiable.

12.2 Key Considerations for Commercial Leasing

Representing Landlords and Tenants

• Salespersons must understand leasing fundamentals, the needs of their landlord or tenant
clients, and work in good faith at all times.
• They should use their expertise to ask right questions on matters such as measurements,
rentable vs. usable area, common areas, insurance, parking, business restrictions, repair
and maintenance, operating costs, etc.
• They should research available properties and draft the lease offer carefully to ensure that
the needs of both the landlord and the tenant are properly detailed.
• A Comparative Market Analysis (CMA) can be prepared to improve the efficiency of
negotiations.

Rental Terms Included in the Lease

• Names of Parties: Minimum two signatories (landlord and tenant) are required and the
individual or entities must be clearly identified.

• Description of Premises: Specific location, with reference to the site plan, should be a part
of the lease.
• For a single purpose property, the entire building and the parking lot becomes the
leased premises.
• For multiple buildings with a common parking lot, the leased premises should be
identified with municipal address, unit number, and the legal description.

• Permitted Use: Should be in simple and clear, precise, and limited in scope.
• In a shopping complex, every tenant operates with specific store type.
• While anchors tenants may demand a broad-use definition, smaller tenants are
usually permitted only one type of use and non-permitted uses are clearly defined.

• Commencement and Expiry Dates: These two are mandatory dates, and if one of the
dates is missing, the lease cannot be enforced.

• Rights and Obligations: The lease must clearly define the rights and obligations of the
landlord and the tenant, any restrictions, special privileges, and exclusive covenants.

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• Term and Renewal: Term is the period of time during which the landlord transfers the
premises to the tenant, and the premises reverts to the landlord when this time period
passes.
• If the expiry date is missing, it may not be considered a lease but sale of the
property.
• If there are renewal options, they are negotiated with the original lease and the
tenant must provide a notice to the landlord for renewal.
• Often, the rent for renewal term is negotiated at the time of renewal and is based on
percentage change in Consumer Price Index (CPI).

• Rent-Free Period: Leases often provide a rent-free period so that the tenant can renovate
the premises, stock up their shelves, and prepare the premises to begin operations.
• During rent-free period, the tenant does not pay the minimum rent but pays for the
utilities and the operating costs (TMI).

• Rent Calculations: The lease must clearly specify how the base rent, additional rent,
and/or percentage rent is calculated.
• There should be a definite schedule for rental payments, with clauses for payment of
additional rent and percentage rent, and applicable HST.

• Non-Payment of Rent: The default clause protects the landlords and provides remedies if
the tenant fails to pay the rent.
• This clause establishes landlord’s right to charge an interest on unpaid rent, specify
a time limit within which the tenant must pay rent, terminate the lease with notice,
enter the premises, and make payments to third parties on behalf of the tenant.

Common Area Maintenance (CAM)

• Common Area Maintenance (CAM) is the landlord’s costs to maintain, repair, operate,
administer, and supervise the common areas such as lobbies, corridors, stairways,
parking lots, etc.
• CAM charges are billed to tenants as part of their additional rent, based on their
proportionate share of leased area.

Assignment vs. Subletting

• Privity: The difference between assignment and subletting is based on privity, which states
that only parties to a contract are liable for rights and obligations under the contract.
• Commercial tenants are generally not permitted to assign, sublet, or transfer their
interest in the lease without the written consent of the landlord.

• Assignment of Lease: In general, when the lease is assigned to another tenant

(assignee), the assignee assumes the obligations of the original tenant (assignor) and has
no privity with the landlord.
• However, the original tenant may retain their privity with the landlord if he/she is not
specifically released by the landlord.

• Subletting: If the tenant sublets the premises, there is no privity of contract between the
landlord and the subtenant.

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• Most landlords include a provision in the lease that the subtenant must also directly
covenant with the landlord so that the landlord can pursue action against either the
tenant or the subtenant.

Dispute Resolution
• Both the landlord and tenant should make an attempt to resolve their disputes by way of
meetings, negotiations, mediation, arbitration, and by seeking expert legal advice before
considering legal actions.

• Small Claims Court: Either the landlord or the tenant can approach the Small Claims Court
for compensation for losses incurred as a result of other party’s neglect, default, or failure
to fulfill obligations. The current limit for small claims is $35,000 (As of January 2020).

• Superior Court of Justice: Either the landlord or the tenant can approach the Superior
Court of Justice for resolving their disputes regarding compensation for damages, reduced
revenue, or other expenses.

12.3 Considerations for Office, Retail, and Industrial Leases

Office Leasing
• LEED Certification: LEED stands for Leadership in Energy and Environmental Design,
which promotes healthy, efficient, and cost-saving green buildings.
• It offers several benefits to landlords and tenants, such as enhanced corporate
image, improved employee relations, efficient and reduced waste control, reduced
utility consumption for heating and air conditioning, water, and gas.

• Space Customization: ‘Tenant Fit-up’ refers to customization of office space by tenants for
their specific business needs wherein they may expand or contract the available space.
• Open concept office designs in downtown areas allow for customization based on
tenant needs and they can create floor partitions to create individual offices and
reception areas.
• Landlords can create lease clauses to allow customization of office space to attract
wide range of tenants but without permitting them to make structural changes.

• Shared Meters: If the building has only one electricity meter, the total electricity charges
would be shared by all tenants and included in their rent.
• Electricity charges are estimated based on amount of office equipment and the
number of hours they are used each week.
• Another method to charge electricity costs from tenants is to include it in tenant’s
additional rent, based on their proportionate share.
• Internal meters may also be installed inside each individual office so that each
tenant pays the electricity charges based on individual meter readings.

• Accessibility: Accessibility features, which are mandatory from legal perspective for new
office buildings, are good for tenants to attract a wide range of employees or customers.
• Salespersons may help their tenant clients determine if the office building complies
with Accessibility for Ontarians with Disabilities Act (AODA).

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• If the tenant wants to lease a building that needs extensive renovations, it must be in
compliance with the Ontario Building Code.
• Although improving accessibility in a building may add financial burden to the
landlord, it helps distinguish the building in real estate market.

• Parking: The lease must contain a schedule that includes details of parking spaces in
terms of ratio per 1,000 sq. ft. of rentable area.
• Free parking, reserved parking, as well as charging stations for electric cars, etc.
must also be clearly mentioned in the lease.

• Signage: Details such as location of sign, sign pylons, tenant directory in lobby, window
signs, etc. should be included in the lease.
• Signs must comply with municipal regulations, and the lease must specify who is
responsible for installation, maintenance, and removal of signs.

Retail Leasing
• Retail real estate market is diverse, which means that it is important for salespersons to
understand the unique needs of their landlords and tenants.

• Customization of Space: Most commercial leases allow the tenants to customize their
stores according to their business needs, provided that any extensive renovations are in
compliance with the municipal regulations.
• In case of an indoor shopping mall, the tenant provides their own standardized store
front as part of tenant improvements.
• The lease must specify which party pays the cost of store customization, and the
precise type and range of improvements that are permitted both legally and under
the lease.

• Anchor Tenant: Anchor tenants in a shopping centres occupy a large proportion of the
total area and are helpful in bringing traffic to the mall.
• They usually have long-term leases resulting in steady income for the landlord and
pay lower rent per square foot but attract other small ‘satellite’ businesses to the
area.
• Landlords may offer an ‘exclusive use’ clause to an anchor tenant, which results in a
restriction for smaller tenants for selling any competitive products.
• Presence of the anchor tenant may also result in reduced parking for the customers
of smaller tenants.

• Exclusive Rights: This clause gives a tenant exclusive rights to sell certain products while
restricting other tenants from selling the same/similar products.
• Since this clause is about conflicting uses, rather than different tenants having the
same use, the focus of the lease should be the primary use instead of specific
products.
• Some landlords prefer to use the ‘non-permitted use’ clause for most tenants when
a specific use (such as a bank in a mall) is exclusively granted to a tenant.

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• Hours of Operation: Landlords exercise greater level of control over daily operation of the
shopping centre by specifying hours of operation, and the flexibility of extended hours
during peak/festive periods.
• This helps maintain reputation of the centre as well as increased sales volume for
the tenants, which results in higher percentage rent for the landlords.
• Some businesses such as restaurants, movie theatres, etc., are permitted to stay
open late and the landlords calculate their additional rent based on additional cost of
utilities, maintenance, etc.

• Accessibility: Newer shopping centres are equipped with facilities accessible by disabled
persons whereas older malls may be functionally obsolete due to lack of accessible
features, such as ramps for wheelchair users.
• Some municipalities require the landlord to upgrade the facilities and include
accessible features when older shopping centres are renovated.

• Parking and Stock Delivery: Every retail store needs convenient parking access, effective
signage, and easy delivery of stock.
• The parking clause should clearly specify the spaces and whether the tenants are
required to provide their license plate numbers to the management.
• Requirements and restrictions on the time and location for delivery should be
considered.

• Signage: Using this clause, the landlord exercises control over the location, format, and
size of tenant’s signs.
• The tenant is usually responsible for the cost of installation and maintenance of the
sign while complying with the municipal bylaws as well as landlord’s requirements.
• The clause includes a provision that the tenant will remain owner of any signage and
advertising material, will remove them upon expiry of the lease, and be responsible
for repairing any damage caused by such removal.

Industrial Leasing
• Allocation for Office Space: Municipal zoning bylaws regulate the percentage of office
space allocation (e.g., maximum 10% of total building size) in single-use and multi-use
industrial buildings.
• Industrial malls may have a single or a group of buildings, for multiple uses, owned
individually or divided into units for separate occupancy, and with shared parking
and loading facilities.

• Floor Load: The weight that the floor can support is important for tenants who use heavy
equipment and/or products.
• Live Load: Weight of persons, equipment and furnishings, and the stored material.
• Dead Load: Weight of the structural components of the building.

• Electrical System: The electrical needs of the tenant must not exceed the permitted limits
and they should know the maximum cumulative consumption.

• Sprinkler Density: The volume of water released in a given period of time over a certain
area.

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• Warehouses use several variables to determine the sprinkler density to protect

personal property and staff from fire hazards.

• Clear Height/Ceiling Height: It is the unobstructed distance from floor to ceiling and
typically varies from 20 ft. to 30 feet for warehouses but may be up to 36 ft. depending on
the type of tenant.

• Bay Size/Bay Depth: Bay refers to the unfinished area between a row of columns and the
demising wall.
• Bay depth refers to the distance from the bearing wall to the row of columns or from
one row of columns to the next row of columns.

• HVAC System: Industrial buildings need a stable air quality and temperature from roof
mounted HVAC systems.

• Cost of Utilities: Industrial tenants should consider availability and cost of utilities and their
maintenance because they are responsible for these costs.

• Loading Docks/Delivery Areas: Industrial tenants heavily rely on loading docks equipped
with dock levelers and should carefully consider their specific loading/unloading
requirements.
• Grade level loading allows trucks to be driven into the warehouse whereas bigger 18
wheelers need specialized loading docks.

• Environmental Issues: If the tenant’s industrial operation involves discharge of

contaminants (smoke, noxious odours, etc.), the landlord may be liable for cleanup costs.
• Industrial operations, which are usually restricted to heavy industrial zones, may
have an impact on surroundings due to noise, steam, and/or storage and disposal of
hazardous materials.
• As such, it is important to determine the correct industrial zone in which the tenant’s
industrial use falls.
• Any operation that creates hazardous nuisance is regulated by the Ministry of
Energy and Environment (MoEE).
• Certain landlords provide a baseline environmental assessment before the lease
starts and the tenant is required to complete a second environmental assessment
and the end of lease.

12.4 Regulations Affecting Commercial Leasing

Statute of Frauds
• This law provides that certain contracts, including those related to real estate, must be in
writing to be enforceable.
• A lease for less than 3 years need not be in writing, but it may not be a good practice for
either the landlord or the tenant.
• The ‘Doctrine of Part Performance’ applies to those leases which are verbal, where one
party has performed part of contract, (e.g., the tenant has occupied the premises and paid
rent), this doctrine supports the existence of contract.

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• Salespersons should protect the best interest of their client and advise them to have the
lease contracts in writing to avoid any disputes.

The Short Form of Leases Act

• This law provides if the lease document is sealed and made according to prescribed
format, selected short form wordings may be used instead of complex forms.
• The first column of the form provides abbreviated wording, and the second wording
provides the details.

Commercial Tenancies Act

• This Act outlines the rights and obligations of the landlords and tenants in a commercial
tenancy.
• The precise wording of a signed lease takes precedence over the Act on matters such the
rents, operating costs, and leasehold improvements.
• Any party can approach the Small Claims Court or the Superior Court of Justice if there is
a breach of obligation under the lease agreement.

• Non-Payment of Rent: Landlord may change the locks and evict the tenant on the 16 th day
after the rent was due without providing notice to the tenant.
• However, the landlord must allow access to the tenant to remove their property.

• Rent Increase: The Act neither regulates rent increases nor it requires landlords to pay
interest on security deposits, unless agreed in the lease.
• However, most leases include details of how the rent would increase during the term
of the lease with a written notice to the tenant.

• Termination Notice: For a month-to-month tenancy, either the landlord or the tenant can
give one month’s notice to terminate tenancy.
• In a fixed-term lease, the tenant does not have the right to occupy after the lease
expires.

• Landlord’s Rights and Obligations: Landlord must notify the tenant in writing regarding any
breaches of lease and allow time to the tenant to comply.
• If the tenant fails, the landlord has the right to terminate the tenancy.

• Tenant’s Rights and Obligations: Tenants must fulfil their obligations specified in the lease
and pay rent on due dates.
• Tenants cannot stop rental payment if the landlord does not fulfill lease obligations.

• Trade Fixtures: These items are installed by the tenant for their specific business and are
removable before the lease expires.
• Any other alterations, additions, and improvements done by the tenant or the
landlord becomes landlord’s property, except installation of specific trade fixtures.

Municipal Zoning Bylaws

• Salespersons should be aware of zoning bylaws that affect commercial leases and
confirm that the zoning of the leased property is permitted for tenant’s use.

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• They should be aware of any changes to the zoning bylaws and must not assume that any
previous use would also be permitted for the new tenant.
• Any improvements for the new tenant should be done after obtaining building permit and
in compliance with zoning.
• Requirements for signage and parking spaces must be confirmed before signing the lease
agreements.

Licensing Acts
• If the tenant needs a license for running the business or needs a transfer of license from
the previous owner, the lease should be made conditional upon the tenant obtaining the
permits or licenses.
• Some examples of businesses that require licensing include restaurants that serve alcohol
and business that sell lottery, or tobacco.
• Similarly, a daycare centre may need appropriate license and/or permits and the tenant
should be advised to obtain expert legal advice in these matters.

12.5 Due Diligence of the Salesperson

Information Before Agreement

• A client is that party which has entered into a Representation Agreement with the
brokerage whereas a customer is that party which has signed a Customer Service
Agreement.
• Salespersons must provide Information Before Agreement, which includes disclosures to
both clients and customers, and describe the restricted nature of services to the customer.

Documentation Requirements
• Contents of Agreement: Representation and customer service agreements must include
the commencement date, one definite expiry date, the amount of remuneration, how the
remuneration is calculated and paid, remuneration to co-operating brokerage, and written
consent if the agreement is for over 6 months.

• Copies of the written agreement must be provided to clients or customers immediately

upon signing.
• Representation or Customer Service Agreement with landlords or tenants must be
reduced to writing, signed by the salesperson, and submitted to the party for signing.

Material Facts
• Salespersons must take reasonable steps to determine and disclose sufficient material
facts that would affect a client’s decision to acquire or dispose of the property.
• For landlord or tenant customers, the salesperson should disclose the material facts that
are known or ought to be known by the salesperson.

Verifying Information
• Since commercial properties require in-depth due diligence, salespersons should request
and obtain necessary documents from the other party and verify the information.

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• Industrial: Verification of zoning is essential based on tenant’s intended use and allocation
area for office.
• Office: Verification of tenant’s history as a company or business and their rental history.
• Retail: Verification of licensing and permit requirements for tenant’s business and any
restrictions imposed by the landlord that may affect tenant’s business.

12.6 Services Provided to Landlords and Tenants

Services to Tenants
• Searching Properties: Propertied that meet tenant’s criteria should be searched based on
location, amenities, demographics, site, and soil conditions, building size, ceiling heights,
office finishes, rents, taxes, utilities, insurance requirements, etc.
• Shortlisted and relevant properties should be compared to determine the best
options for the tenant.

• Recommending Third-Party Professionals: If the salesperson is unable to provide advice,

the tenant should be asked to seek expert advice from relevant third-party professionals
with respect to inspection, environmental, and legal matters.

• Verification of Information: All information provided by the landlord or listing brokerage,

including area, floor loads, sprinklers, etc., should be verified.

• Confirming Lease Restrictions: Any lease restrictions that may affect the tenant’s business
operation should be investigated.
• Restricted uses in a multi-tenant office or retail property along with permitted uses
for the tenant or exclusive uses for other tenants must also be verified.

• Analysis of Tenant-Mix: Existing tenant-mix in a retail building should be analyzed to

ensure that the tenant’s business is supported.

• Terms of Lease Offer: Lease terms should be prepared and negotiated to protect the best
interests of the tenant so that they fulfill tenant’s business requirements.
• Factors such as tenant’s current and future business needs and goals, gross lease
vs. net lease, confirmation of market rents, etc. should be discussed.
• Ask the landlord for any inducements, such as three-months’ rent-free period, and
negotiate cost sharing for leasehold improvements.

Services to Landlords
• Conscientious and Competent Service: Landlords want to attract high-quality tenants to
ensure steady income to enhance their asset value and reduce financial risks.
• An in-depth analysis of landlord’s property helps salespersons provide competent
service combined with knowledge of current leasing market, existing zoning
information, and negotiating skills.

• Listing and Marketing: Salespersons must ensure that information provided by landlords is
accurate before it is used for listing and marketing purposes.

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• Property facts such as location, area measurements, rents, additional rent, or other
expenses should be verified.

• Potential Uses: Salespersons may investigate potential new uses for landlord’s property,
especially when an older building is repurposed to accommodate various new uses.
• If the landlord’s property no longer generates sufficient rental income, the
salesperson may help the landlord in identifying potential new uses to attract a
variety of tenants.

• Preparing a Marketing Plan: Targeted marketing plans for leasing involves analysis of
market condition, determining the tenant profile, highlighting strength of property, and
researching appropriate marketing media.

• Assessing the Tenant: Assessment and evaluation of a prospective tenant regarding their
ability to pay rent is one of salesperson’s duties to the landlord.
• Relevant information regarding tenant’s business, prior experience, future plans, etc.
should be obtained and forwarded to landlord.
• Tenant’s should be qualified based on their space requirements, length of tenancy,
rental rates, and other tenant allowances or inducements.

• Negotiating Lease Offers: Salespersons should present all offers to the landlord at the
earliest practical opportunity and negotiate favourable terms of the lease.
• Well-documented lease includes terms that generate consistent and long-term
income for the landlord.

• Lease Renewal: Negotiations include the renewal term, rental rate based on comparable
properties, and leasehold improvements.
• The ‘Blend and Extend’ option allows landlords and tenants to negotiate renewal of
existing lease before the end of original lease and offers flexibility in response to
changing business or market conditions.

Remuneration Calculations
• REBBA Provisions: Remuneration can be a percentage of rental price, a fixed amount, or
a combination of both.
• When percentage is used, it can be a series of percentages, which decrease as the
price increases.
• Remuneration cannot be calculated based on difference in listing price and rental
price and salespersons cannot indicate that remunerations are fixed by any
regulatory authority or association/board.
• When remuneration is not paid by the landlord or the listing brokerage to the
tenant’s brokerage, the tenant becomes responsible to pay the entire remuneration
or the difference between agreed remuneration and remuneration received from the
landlord.

• Office Lease: Remuneration is calculated based on a price per sq. ft. per annum,
regardless of the rental rate.

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• Industrial and Retail Lease: Remuneration is calculated using a percentage of Net Rent
over the term of the lease and may vary in each year of the lease.

12.7 Landlord and Property Manager Responsibilities

Responsibilities of a Landlord
• Providing Information: It is the responsibility of the landlord to provide accurate information
about the property listed for lease.

• Access for Showing: Landlords must ensure that salespersons and prospective tenants
are granted access to the building or the unit for showing.

• Compliance with Building Codes: Landlords must ensure compliance with the building
code when the landlord or any tenant undertakes extensive renovations or upgrades.
• Typical commercial leases include a Schedule wherein the tenant is required to
obtain landlord’s approval as well as necessary building permits for any work.

• Lease Obligations: Landlord’s lease obligations must be specified in such a manner that
protects them from excessive or unreasonable requests from tenants.

• Quiet Possession: As per the Commercial Tenancies Act, every tenant has the right to
quiet possession of the leased premises and the landlord cannot cause any interference
that results in interruption to tenant’s business.
• However, the landlord is protected if the tenant fails to fulfill obligations under the
lease.

• Property Maintenance: ‘Preventive maintenance’ is for preventing deterioration whereas

‘corrective maintenance’ is for repairs, breakage, damage, and routine maintenance.
• Effective maintenance can be achieved by hiring property manager, as well as in-
house or contract maintenance staff, depending on the size of the building.

• Insurance: Landlords need adequate property insurance as the rental building is their
investment that needs protection.
• In addition to repair costs for the damage, typical coverage also includes coverage
for loss of rental income, third-party liability, machinery and equipment, HVAC,
electrical systems, elevators, and other extensive repairs or replacement.

• Responding to Tenant Issues: Landlords must address tenant issues in a timely manner
as specified in the lease.
• Since not every lease requires the tenant to perform repairs and maintenance, it
may be added so that tenants have direct control of repair costs.

Responsibilities of the Property Manager

• Managing and Maintaining Property: Professional property management includes areas
such as energy management, maintenance and repair, periodic inspections, and
preventive maintenance.

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• They are responsible for provision of staff and supervisors, negotiating contracts,
environmental protection, rent collection, bill payments, and arranging third-party
contractors.

• Tenant Issues: Since the property manager is considered landlord’s agent having
delegated authority, they are responsible to address tenant’s concerns with minimum
delays.
• They should neither ignore tenant’s requests nor deny any services for the purpose
of increasing landlord’s financial gains.

• Financial Management: Property managers are responsible for financial management to

maximize revenue from the leased property.
• Responsibilities include bill payments, preparation of budgets, rent collection,
accounting and bookkeeping, review of property taxes, and other rent related issues.

• Arranging Insurance: Landlord’s insurance includes liability for the common areas and the
lease should ensure that the landlord is the beneficiary in tenant’s all-risk insurance policy.
• Typical coverage includes fire, general liability, property damage, errors and
omissions, catastrophe, loss of rental income, boiler and machinery coverage,
money, employee benefits, and additional hazards.

• Security: Providing security is the duty of care to tenants and general public, which
depends on type of use, number of tenants, terms of lease, and management contract.
• In addition to arranging security personnel for the building, property managers
prepare the Emergency Procedure Manual and plan for conceivable emergency.
• They should be aware of potential hazards and risks, such as fire, explosion, bomb
threat, vandalism, environmental contamination, robbery, malfunctioning, and power
failure, etc.

12.8 Measurements and Area Calculations

Standard Terminology
• Gross Building Area: Total gross floor area based on external measurements but
excluding any enclosed areas.
• Gross Leasable Area: Total floor area designated for occupancy and exclusive use of
tenants in an office building or a retail complex.
• Rentable Area: Rentable space for a tenant is comprised of usable area and proportionate
share of common areas, such as such as lobby, janitorial, washrooms, electrical room,
etc.
• Usable Area: The actual space or the area within the walls occupied by a tenant.
• R/U Factor: The relationship between rentable area and usable area.
• Loss Factor: The difference between rentable area and usable area.
• Common Area: All areas used by two or more tenants, such as lobby, janitorial,
washrooms, electrical room, etc.

Formulae
R/U Factor = Rentable Area ÷ Usable Area

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Rentable Area = Usable Area X R/U Factor

Usable Area = Rentable Area ÷ R/U Factor
Example: A commercial building has a total of 120,000 square feet of rentable area and
105,000 square feet of usable area. If a tenant has 3,680 square feet of usable area, what
would be his rentable area rounded to nearest square foot?
R/U Factor = 120,000 ÷ 105,000 = 1.142857
Rentable Area for Tenant = 3,680 X 1.142857 = 4,206 Square Feet

12.9 Preparing a Comparative Market Analysis (CMA)

Gathering Information for CMA

• Identify the strengths and weaknesses of comparable properties.
• Analyze the rental history for the last 5 years and current market trends.
• Understand the rules and regulations, and restrictions that impact business activities.
• Analyze the occupancy details, vacancies, and tenant-mix.
• Analyze the current status of supply and demand for rental properties.
• Analyze the property with respect to improvements, services, and amenities.
• Consider the average time that properties remain in the market before they are leased.

Providing Opinion
• When providing an opinion on rental rates to the landlord, the salesperson should
consider factors such as management fees as well as additional rent.
• Market rent is the amount that a landlord should reasonably receive, and a tenant should
reasonably pay.
• When the advertised rental rates are reasonable and not too high, they help in attracting
potential tenants.

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13. COMMERCIAL LEASE TRANSACTIONS

13.1 Lease Documents

Agreement to Lease vs. Lease

• An Agreement to Lease is an unsettled form of lease that sets out basic terms of the
proposed tenancy between the landlord and the tenant.
• This agreement includes the fundamental, material aspects of the agreement, and
includes a provision for final execution of formal Lease.

• Essential Elements: The Agreement to Lease must include names of parties (landlord and
tenant), description of the premises, amount of rent, and terms of the Lease.
• It must also include specific exceptions, reservations, covenants, and/or specific
conditions so that the landlord can include them in the final Lease.

• Letter of Intent: A Letter of Intent is a preliminary written agreement between the parties
that establishes provisions, covenants, terms, and other matters to be included in the
detailed agreement.
• It is simply a statement of general understanding and does not have any legal
details or clauses that would be included in the final Lease.

Formal Lease
• The formal Lease is a customized contract, prepared by the landlord’s lawyer, and
includes unique clauses specific to the type and condition of the property.
• Once signed by all parties, it becomes a legally binding contract between the landlord and
the tenant.
• Salespersons should obtain a copy of blank Lease and attach it to the Agreement to
Lease so that the prospective tenant can have their lawyer review the clauses before it is
signed.

13.2 Essential Components of a Lease

Guarantor, Indemnifier, and Co-tenant

• Commercial landlords typically require the tenant to bring a guarantor, an indemnifier, or a
co-tenant, who will sign the lease with the tenant.
• This assures the landlord that, in the event of default by the tenant, the individual will
become responsible.

• Guarantor: The guarantee by a guarantor is limited, extending only up to the tenant’s

obligations.
• In case the tenant files for bankruptcy/insolvency, then the guarantor’s obligations
also come to an end.

• Indemnifier: The scope of liability for an indemnifier is greater than the guarantor.
• The obligations of the indemnifier remain even when the tenant files for
bankruptcy/insolvency.

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• Co-Tenant: When a proposed guarantor becomes a co-tenant with the tenant, both
become equally responsible for lease obligations.
• If the tenant files for bankruptcy/insolvency, the landlord can demand payments from
the co-tenant.

Rights and Obligations

• Landlord’s Rights and Obligations: Landlord must notify the tenant in writing regarding any
breaches of lease and allow time to the tenant to comply.
• If the tenant fails to fulfill obligations, the landlord has the right to terminate the
tenancy.

• Tenant’s Rights and Obligations: Tenants must fulfil their obligations specified in the lease
and pay rent on due dates.
• Tenants cannot stop rental payments if the landlord does not fulfill lease obligations.

Indemnification
• Indemnification: It is the right of one party (landlord or tenant) to claim damages from the
other party when that party fails to fulfil obligations, as described in the lease contract.
• If there is a guarantor, the landlord must initiate legal action against the tenant
before taking any action against the indemnifier.
• The indemnity agreement is absolute and unconditional and can only be terminated
by mutual agreement between the landlord and indemnifier.

• Indemnity by Principal: Under the Agency Law, the principal (client) of a brokerage must
indemnify the agent (brokerage and its salesperson) against losses, liabilities, and
expenses, provided that the agent has acted in a lawful manner and within the authority
granted.
• However, the duty to indemnify the agent does not apply if the agent (brokerage or
salesperson) has acted unlawfully, negligently, or is in breach of duty.

• Indemnity by Agent: The agent (brokerage) must indemnify the principal (client) for any
acts undertaken personally or delegated to agent’s employees (salespersons).
• If the principal is liable to third parties for agent’s acts or breach of duties, the
principal may recover the damages from the agent.
• In real estate, legal cases regarding indemnity may arise when salespersons make
representations on behalf of the client, fail to carry out their duties diligently, and in
matters involving offers.

Rent Related Clauses

• Rent and HST: The tenant must pay the rent as stipulated in the lease, which is subject to
Harmonized Sales Tax (HST).

• Deposits: Rent and security deposits are usually equal to one month’s rent or more and
the landlord is not required to pay interest on deposits, unless specifically provided in the
lease.

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• Rent Increase: The rent increases are not regulated under the Commercial Tenancies Act
but carried out as per the lease agreement.

• Rent Free Period (Early Occupancy): In new developments, landlords generally allow the
tenant to occupy the premises at no cost before their lease starts.
• Landlords usually provide that only the Base Rent is not payable, but the Additional
Rent (operating expenses) is still payable during early occupancy.
• Early occupancy typically requires that (i) the tenant has signed the lease and paid
the security deposit, (ii) all landlord’s work is complete, (iii) tenant provides
insurance certificates, and (iv) the tenant has received approval for drawings and
plans for tenant’s construction work.
• Salespersons should be careful in including details of number of months and exactly
what portion of the rent is free.

• Advance Tax: Commercial rents generally include advance payment of property tax so
that the landlord has sufficient funds when the municipal property tax becomes due.

• Supplementary Rent: This is in addition to the Additional Rent to cover tenant’s share of
operating expenses and is based on Consumer Price Index (CPI).

• Pass-Through: Landlord’s expenses on capital improvements to maintain the building are

passed on to the tenants.
• However, some anchor tenants, due to their negotiating power, may insert a
provision in their lease that allows them not to be charged.

• Non-Payment of Rent: Under the Commercial Tenancies Act, the landlord can change the
locks of the unit and evict the tenant on the 16th day after rent was due, without notifying
the tenant, but the tenant must be allowed reasonable access to remove their property.
• Landlord has the right to seize and dispose of tenant’s property after notifying the
tenant the amount of rent due.
• The landlord must hold the seized property for 5 days so that the tenant can make
payment arrangement.
• The landlord must obtain at least 2 appraisals to estimate fair value of tenant’s
property and return excess amount from sale to the tenant.
• Property belonging to subtenants cannot be seized or sold by the landlord.

Termination
• Termination: For a month-to-month lease, any party can terminate the lease with one
month’ written notice, which must include names of the landlord and the tenant, address of
the rental premises, date of termination, and date of notice.
• For a fixed-term tenancy, the tenant has no right to occupy the premises after expiry
of the lease, and the landlord can approach a court to get eviction order.

• Overholding Provision: Most leases include a Holdover provision that allows the landlord
to charge 2 months’ rent for every additional month after expiry of the lease.
• This allows the landlord to receive temporary income after expiry of the lease and
the tenant gets reasonable time to search for a new rental property.

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Tenant Improvements and Concessions

• Inducements and Concessions: Provided by the landlord to attract tenants and usually
relate to expenses borne by landlord for improvements done by the tenant.
• Expense Stop refers to the maximum amount of landlord’s contribution for all
concessions.

• Tenant Improvements: These changes are made to the property to accommodate the needs
of tenant and may involve various concessions, abatements, incentives, and Tenant
Improvement Allowance paid by the landlord.
• Common improvements include construction of an office, new carpets, re-painting,
and new shipping doors, which ultimately become landlord’s property.

• First Right of Refusal: This clause allows the tenant 72 hours to refuse occupation of the
adjacent vacant space, on terms matching with the offer received by landlord, before the
landlord leases the space to another tenant.

• Option to Renew or Purchase: The renewal provision allows the tenant to continue leasing
the space on the agreed terms.
• The Option to Purchase gives the tenant right to purchase the property within a
specified time but there is no obligation that the tenant must purchase.

• Quiet Enjoyment: The tenants have the right to occupy their premises without interference
or threats from the landlord, provided that the tenant is not in violation of lease terms.

Assignment and Subletting

• Privity: The difference between assignment and subletting is based on privity, which states
that only parties to a contract are liable for rights and obligations under the contract.
• Commercial tenants are generally not permitted to assign, sublet, or transfer their
interest in the lease without the written consent of the landlord, which the landlord
cannot refuse arbitrarily.
• The lease may also provide that the tenant is not permitted to receive rents higher
than that payable to the landlord.

• Assignment of Lease: In general, when the lease is assigned to another tenant

(assignee), the assignee assumes the obligations of the original tenant (assignor) and has
no privity with the landlord.
• However, the original tenant may retain their privity with the landlord if he/she is not
specifically released by the landlord.

• Subletting: If the tenant sublets the premises, there is no privity of contract between the
landlord and the subtenant.
• Most landlords include a provision in the lease that the subtenant must also directly
covenant with the landlord so that the landlord can pursue action against either the
tenant or the subtenant.

Maintenance Related Clauses

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• Commercial leases commonly include rules and regulations with respect to maintenance
issues such as interior and exterior cleaning, service of mechanical equipment, and
garbage disposal.
• Landlords usually prefer Net Leases so that their unexpected expenses can be passed on
to the tenants, which is not possible in a Gross Lease as the costs must be borne by the
landlord.
• The Common Area Maintenance (CAM) clause includes charges related to repair,
maintain, operate, supervise, and administer the common areas of the property and are
proportionately billed to tenants as Additional Rent.

Fixtures and Trade Fixtures

• Fixtures, whether installed by the landlord or by the tenant, become landlord’s property
upon expiry of the lease term.
• The tenant is permitted to remove only the trade fixtures, unless the lease specifies
otherwise, if the tenant has fulfilled all rental obligations.
• The lease provides that the tenant is responsible for repairing any damage to the leased
premises caused by removal of trade fixtures.

Insurance
• The insurance requirements depend on the type of property and its use, and landlords
usually get coverage for every possible eventuality including non-payment of rent, liability,
fire, boiler failure, damage to premises, etc.
• The tenant gets insurance coverage for their loss of income, damage to improvements
and fixtures, machinery, and plate glass equipment.

Use Restrictions
• The restrictive use clause in the lease restricts or limits the activities of the tenant or the
landlord and may determine which products or services the tenant is permitted to offer.
• Landlords typically include this clause to ensure a proper tenant-mix in the shopping
centre and may be specific to a particular trading area.
• Some exclusive uses granted to a particular tenant (such as a bank) may also be included
as restrictive use for other tenants.

Commercial Subleasing (OREA Form 515)

• A tenant may need to sublease the entire premises or a portion due to financial hardships
or changes in business requirements.

• Provisions: The structure of the Agreement to Sublease is similar to the Agreement to

Lease, wherein the full legal names of the Sub-Tenant and Sub-Landlord (tenant) are
inserted.
• The term of sublease and right to renew is inserted in months.
• A copy of the Head Lease (original lease) is attached as a Schedule to the
agreement.
• The Agreement to Sublease includes provisions for approval of the sub-tenant by
the landlord, and approval of head lease by subtenant.
• Any work required by the sub-landlord (tenant) or the sub-tenant must be approved
by the landlord.

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13.3 Components of Office, Retail, and Industrial Leases

Common Components in All Commercial Leases

• Hours of Operation: Most industrial properties do not have any hours of operation but
office buildings and retail shopping centres may restrict the hours during which the tenants
can operate their business.

• Security Features: Landlords may already have some security systems in place, such as
security cameras and access cards for lobbies and elevators or may require the tenants to
install their own security systems.
• Retail centres usually have a provision that the entrance doors are automatically
locked after business hours.

• Base and Additional Rent: The commercial lease should clearly distinguish the base rent
from additional rent, which includes the proportionate share of landlord’s operating
expenses.

Calculation Example: The base minimum rent for a retail unit is $13.50 per square foot per
annum. The percentage rent clause specifies 5.5% of gross annual sale over the base
minimum. A tenant leases rentable area of 2,200 square feet unit in this shopping centre.
The gross annual sale for the first year is expected to be $700,000. What would be the
base minimum rent, the base sale amount, and the percentage rent?
Base Minimum Rent = 2,200 X 13.50 = $29,700
Base Minimum Sale = 29,700 ÷ 5.5% = $540,000
Note: Percentage Rent is not payable if the Gross Sales do not exceed $540,000.
Percentage of Gross Sales = 700,000 X 5.5% = $38,500
Rent Payable in the First Year = $38,500
Note: This is the ‘Total of Base Minimum and Percentage Rent’.
Percentage Rent = 38,500 – 29,700 = $8,800

• Common Area Maintenance (CAM): This clause specifies the tenant’s proportionate
share, billed as Additional Rent, of costs related to repair, maintain, operate, supervise,
and administer the common areas.

Components of an Office Lease

• Common Facilities: Depending on the type of space being leased, these facilities include
boardrooms, reception, elevators, lobbies, and bathrooms.

• Parking: Most commercial leases do not include any provision for exclusive parking
spaces for employees or visitors of office tenants.

• Accessibility: Accessibility features, according to Ontario Building Code, include

acceptable accessibility, means of exit, fire, and safety standards, and service features.

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• Signage: Office leases typically specify that the tenant must get approval for signs and is
responsible for the cost of installation, maintenance, repair, and their removal after expiry
of the lease.

Components of a Retail Lease

• Percentage Lease and Audit Rights: The percentage lease clause provides that the tenant
will pay a specified percentage of their gross sales over the base minimum sale,
calculated using the base rent.
• The clause requires the retail tenant to report their monthly sales figures to the
landlord.
• The landlord reserves the right to audit tenant’s sales and receive interim monthly
payments.
• It also allows the landlord to evaluate the success or chance of failure of the tenant
as well as effectiveness of landlord’s advertising and promotional activities.
• Percentage rent is payable only if the tenant’s annual gross sales are greater than
the base minimum rent, otherwise the tenant pays only the base rent.

• Tradespersons: When the tenant is completing store finishing during the early occupancy
period, the tenant must get approval/permits, provide proof of insurance, and the
tradespersons may be required to be unionized.

• Continuous Use and Dark Space: A Continuous Use clause requires that the tenant
continuously occupies the space, maintains substantial stock, and fully staffs the
business.
• Dark Space refers to a situation when the tenant leases a large space in a
commercial complex, keeps on paying the rent but physically remains absent.
• Dark Space puts the landlord in a difficult situation if the tenant is an anchor tenant
as other tenants would not be attracted to the complex.

• Improvements and Fixtures: Most leases provide that any fixture attached to the property
becomes the property of the landlord at the time of installation.
• Unless a lease specifies otherwise, a tenant who installs a trade fixture to the
property can remove it at the end of the lease term, provided that all rents have
been paid in full.
• The tenant may also be required to bring the property back to its original condition
and repair any damages.

• Exterior and Interior Signage: Exterior signs are regulated by the municipality and the
tenant must get municipal permit as well as landlord’s written approval for installation.
• Interior signs are regulated solely by the landlords under lease terms.

Components of an Industrial Lease

• Environmental Testing: Industrial tenants must conform to the Occupational Health and
Safety Act as well as the Environmental Protection Act.
• Industrial leases usually specify the environmental rules applicable to the property
and tenants are not supposed to contaminate their leased spaces or perform any
processes that result in harmful emissions.

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• The tenant is usually required to have Environmental Site Assessment (ESA) before
and after the lease.

• Parking and Transportation: Parking requirements as well as transportation needs of the

tenant are verified during site selection.

• Extra Storage: The lease must have specific clauses that address outside storage
requirements of the tenant.

13.4 Additional Documents

Rental Application and Attachments

• Rental Application: Landlord’s rental application may include credit checks, references
from previous landlords, and history of tenant’s business and client base.
• The Ontario Human Rights Code permits a landlord to request credit references,
rental history, authorization to conduct a credit check, rent deposit, and guarantee
for rent.
• Landlord is permitted to request income information only if a credit reference and
rental history are also requested.

• Identification: Salespersons should ensure that identity of both the landlord and the tenant
is confirmed when negotiating or signing lease agreements.
• If the tenant is a corporation, the existence of corporation as well as individual’s
authority to sign the lease should be confirmed.

• Confidentiality Agreement: Used during lease negotiations to ensure that landlord

maintains integrity of tenant’s personal and financial information, which is provided for
tenant qualification.

• Schedules: Most common schedules attached to the commercial Agreement of Lease

include signage, parking, site plan, floor plan, and rules and regulations of the complex.

13.5 Review of Agreement to Lease

Pre-Printed Clauses
Note: Please refer to the actual Agreement to Lease (OREA Form 510) provided in
the online official text.

• Parties to the Agreement: Both the landlord and the tenant are identified in this section,
whether they are individuals or entities, such as a partnership or a corporation.

• Premises: Identifies the address and the premises including the sq. ft. rentable area of
leased space.

• Use: This section specifies the how the leased space will be used by the tenant, as
permitted under the zoning bylaws.

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• Term of Lease: Information on length of lease in months with start and end dates, and
option for renewal.

• Rental: This section details the minimum rent payable by the tenant during the term of the
lease, after considering any rent-free period, expense stop, and early occupancy.

• Deposits and Prepaid Rent: Includes the amount of deposit, to whom it is payable, and
how it is applied to the rent.

• Additional Rent and Charges: This section is typically applicable in Net, Double Net, and
Triple Net leases and provides details of services for which the tenant is responsible.
• This box is left unchecked in case of a Gross lease.

• Schedules: This section gives a list of schedules attached to the agreement.

• Irrevocability: The time period (date and time) given to the other party to accept, reject or
counter the lease offer, after which the offer becomes null and void.

• Notices: Information on brokerages for the landlord and the tenant who are authorized to
send or receive notices for their clients.

• Landlord’s and Tenant’s Work: This section includes reference to separate schedules for
any work to be completed by the landlord and the tenant.

• Signage: Details of signs to be installed by the tenant, at tenant’s own cost, and after
approval from the landlord.

• Parking: This clauses states that parking is common for all tenants, and details are
inserted if the tenant is allocated some specific parking spaces.

• Signing: Every page of the Agreement to Lease, including attached Schedules, must be
initialed by both parties, except the last page where full signatures are inserted.

13.6 Pre-Closing Issues

Potential Problems Before Closing

• Failure to Fulfill Obligations: If one of the parties fails to fulfill obligations under the
contract, such as replacement of flooring and painting, it may result in breach of contract.
• Major tenants usually insert a penalty clause for the landlord in terms of a fixed
amount if the landlord fails to complete the work on time, as specified in the lease.

• Change to Property Condition: The condition of the property to be leased may have
changed due to fire, flooding, or other damage.
• This may require repairs to the unit causing delays or possible termination of the
lease agreement.

• Previous Tenant Not Vacating: If the previous tenant has not vacated the unit, the landlord
may approach a court to get an eviction order.

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Resolving Problems
• Maintaining Checklist: Due to inclusion of multiple conditions and different timeframes to
fulfill them, salespersons should maintain a checklist to ensure that appropriate actions
are taken on time.

• Obtain Due Diligence Documents: Salespersons should obtain all relevant documents so
that the prospective tenant is able to complete due diligence.
• They should be advised to obtain their lawyer’s advice if the terms and conditions of
the lease are acceptable.
• Documents related to the transaction should be handled in an appropriate manner
and notices should be delivered on time so that the transaction is safeguarded.

If the Transaction Does Not Close

• Salespersons must get mutual written consent from both parties to return the deposit to
the tenant.
• In some cases, when the transaction does not close due to non-fulfilment of conditions,
the deposit is equally split between the landlord and the tenant.
• Some agreements include a clause that provides for forfeiture of deposit if the transaction
does not close due to tenant’s default.
• In the event of a dispute between the parties, the parties may need to approach a court to
clarify how the money will be returned or distributed.

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14. DEVELOPMENT LAND AND FARM PROPERTIES

14.1 Land Development Transactions

Highest and Best Use

• The value of development land is based on highest and best use, which may be the
current use or a different use.
• The amount of money a buyer would pay is based on the use and enjoyment (residential)
and future income or profit (commercial) that the buyer would derive from the property.
• The value forecast is typically included into an appraisal report because the property may
be sold much later than the effective date of appraisal.

• Vacant Site:
• Zoning Conformance: What is or not allowed to be built on the site? The highest and
best use should conform to zoning.
• Physical Characteristics: Is the proposed use physically possible depending on size
and shape of site?
• Demand: Is there a demand for proposed use and would it be economically
feasible?

• Improved Site:
Current Use: The current use may be the highest and best use if the improvements
conform to zoning, conform to other land uses in the neighbourhood, and add value
to land.
• Other Use: If the current use is not the highest and best use, the appraiser would
look at an alternative use.

• Land Assembly: Assemblage is the process (act) of combining two abutting parcels of
land into single ownership for the purpose of a greater utility.
• It is common when properties are redeveloped, and smaller lots are combined to
form a single commercial property.
• If the utility of the single site is more than the individual sites, there may be an
increase in value owing to the merging process.

Properties for Land Developer

• Raw and vacant lands, which are usually less expensive due to lack of services.
• Unoccupied property up to 5 acres where the improvements are less expensive than
development of larger parcels of land.
• Large parcels of land (more than 5 acres), ready for change of use, may appeal to
developers for larger projects, such as a new subdivision or a retail plaza.
• Operational or non-operational farmland may appeal to adjacent farm land owners for
expanding their farm operations.
• Smaller properties, which the developer can ‘assemble’ for their proposed project.
• Brownfield sites due to their location in urban areas where municipal and other
infrastructure is already in place.

Risks

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• Risks for an Investor: Risk refers to uncertainty, chance, exposure, and vulnerability
imposed on an investor, particularly financial loss that may occur.
• For real estate purposes, risk is based on fluctuations in the income stream and
vulnerability of that stream to external influences such as market trends, availability
of financing, degree of positive or negative Leverage, and overall economic
conditions.

• Risk Categories:
• Financial Risks: Interest rates and purchasing power of future dollars (inflation), etc.
• Market Risks: Real estate markets and occupancy/vacancy rates, etc.
• Business Risks: Taxation, slow economic activity, and investment climate, etc.
• Building Risks: Physical calamities, depreciation, building code restrictions,
insufficient insurance coverage, etc.

Risk of Changes in Legislation

• The provincial Planning Act, municipal Official Plans, zoning bylaws, and administrative
procedures define the scope of regulatory requirements for land development projects.
• In commercial development, the regulations typically focus on uncontrolled development,
compliance, availability of services and funding, and public input.
• A developer may purchase land for future development but changes in legislation, non-
compatibility with use of neighbouring land, or objections from public could impact the
value of land.
• The issue of zoning amendment is considered during a pre-consultation meeting between
the land developer and the planning department.
• This meeting ensures that the proposal aligns with existing planning priorities, key issues
are identified and verified, and identifies the documents that should be attached to the
application.
• If the development plan is not approved, the developer can make an appeal to the Local
Planning Appeals Tribunal (LPAT) for a review.

The Places to Grow Act

• The Places to Grow Act provides for long-term strategies for identified growth areas for
tourism, employment, or specific economic growth, and this may impact a land
developer’s plans.
• The legislation enables – (i) designation of a geographic area as growth area, (ii)
development of a growth plan in consultation with municipalities, general public, and
stakeholders, and (iii) decisions to promote greater housing and transportation options.
• Salespersons are expected to be aware of development criteria of their buyer client and
conduct research for locating appropriate development land.

Unknown Detrimental Conditions

• Environmental Conditions: Developers may face a serious challenge if they discover some
detrimental environmental condition (i.e., land contamination) after the development work
has started.
• Salespersons should include appropriate conditions in the agreement and
recommend that the land developer hires an environmental site assessor to conduct
an Environmental Site Assessment (ESA) on the land.

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• Change in Use of Adjoining Property: The owners of neighbouring properties may object
to the developer’s proposed use of land.
• There is additional risk if the neighbouring property is sold and the new owner
proposes a different use of developer’s land.
• This triggers a new municipal process involving various consultations that may delay
developer’s project.

Site Selection Factors

• Physical Requirements: Site specific conditions and criteria typically include –
• Site details, location, lot dimensions, and price.
• Proximity and costs related to rail access, parking, condition of roads, and public
transit.
• Availability and cost of services, such as municipal water, sewage, electricity, and
natural gas.
• Soil conditions, environmental factors, topography, terrain, wetlands, tree clearing,
and land that requires fill.
• Zoning provisions related to permitted and restricted uses, lot coverage, and
setback requirements.

• Title Restrictions: Title search may reveal some ‘restrictive covenant’ registered on land
that limits or prohibits use of land in certain manner.
• Restrictive covenant may have been placed by a previous owner, which binds all
subsequent owners/buyers of land.

• Easements: A right enjoyed by one land owner over the land of another and is usually
granted for a specific purpose.
• Since an easement is registered on title and is transferred to subsequent owners, it
may limit or restrict the proposed use of land by the new buyer.

• Financial Considerations: The buyer must demonstrate to the lender that the requirements
of land development agreement can be satisfied.
• Financial commitments involved in purchase of development land include the value
of land, cost of third-party professionals, and the cost of preparing and submitting
application for approval.
• Further, the developer has to pay the cost of environmental studies and labour for
physical development.

14.2 Due Diligence in Land Development Transactions

Salesperson’s Obligations
• Gather and Verify Information: Gather key documents related to zoning, restrictive
covenants, easements, title restrictions, environmental conditions, transportation services,
municipal services, and a list of expenses for expansion of services.
• Further, the salesperson should check the physical features of the development land
and availability of tax incentives.

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• Disclosing Material Facts: The buyer’s salesperson must take reasonable steps to
determine and discover material facts related to development land and disclose them to
the buyer.
• Material facts and detrimental conditions (latent defects) of the land affect the
buyer’s decision and the sellers are obliged to disclose them at the earliest practical
opportunity.
• Latent defects are often related to environmental issues, such as land, water, and
soil contamination.

• Understanding Buyer Needs: The buyer’s salesperson should make appropriate inquiries
to understand the needs, risks, and returns that will affect the buyer’s decision.
• Risks are related to uncertainty, change, exposure, and vulnerability while return
refers to the yield realized on an investment.

• Including Conditions in the Offer: Conditions included in the agreement for purchase of
development land have longer timeframes and may include –
• Approval for Zoning Amendment,
• Soil condition and testing,
• Verification of existence of utilities/services,
• Verification of potential to add new services and their cost, and
• Obtaining a satisfactory property inspection report.

• Third-Party Advice: When the salesperson is unable or unauthorized to provide services,

the buyer client should be referred to hire third-party professionals for expert advice.
• Some of these professionals include zoning officials, accountants, property
inspectors, lawyers, surveyors, environmental engineers, and contractors.

• Regulatory Obligations: Code of Ethics requires salespersons to provide competent and

conscientious service, protect the best interests of the clients, and treat everyone (clients,
customer, and third parties) with fairness, honesty, and with integrity.

Third-Party Professional Advice

• Hydrogeological Engineer: Confirms the sewage capacity in service areas and options for
community or private septic systems.

• Stormwater Management Expert: Creates a preliminary stormwater management plan,

which is a key component of the project to ensure that lands are protected from flooding.

• Environmental Site Assessor: Assesses the impact of proposed activities on the

environment and provides guidelines.

• Municipal Engineer: Conducts technical analysis of existing municipal services and the
impact of proposed development project.

• Acoustics Expert: Conducts noise studies related to industrial processes and recommends
methods to reduce noise levels.

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• Urban Designer: Designs an effective streetscape including entry features, fencing,

turning circles, parklands, and trails.

• Remediation Expert: Conducts detailed studies to remedy past environmental problems,

protect and improve wetland, strength natural habitat, and re-channel watercourses.

• Role of a Lawyer: Lawyers help developers in reviewing the Agreement of Purchase and
Sale prepared by salespersons because they are complex and include several conditions.

14.3 Farm Properties

Types of Farm Properties

• The term agriculture refers to the production of goods through farming.
• A farmer is described as an individual, corporation, co-operative, partnership, or other
association that is engaged in farming for commercial purposes.
• Farming is defined in the federal statute as-
• The production of field-grown crops, cultivated and uncultivated, and horticultural
crops.
• The raising of livestock, poultry, and fur-bearing animals.
• Production of eggs, milk, honey, maple syrup, tobacco, fibre, wood from wood lots,
fodder crops; and
• The production or raising of any other prescribed thing or animal.

Key Considerations
• Larger Farms: The farming scene is rapidly changing with number of farms, farmers, and
farm labourers on the decline.
• There are fewer family farms now, and domestic and international competition is
getting tougher.
• Marketing boards are becoming stronger and individual farmers are not very
independent.
• Constant improvements in quality, more reliance on training, and education and
management have contributed to changing farm scene.

• Farm Quotas: Farm Quotas affect the value of farm property and a dairy farm may have
little value in spite of large production if farm quota is not assigned.
• Marketing Boards are governed by farmers and the Negotiating Boards negotiate
the minimum price paid to producers.
• Boards with Authority to Establish Price set the price paid to producers but cannot
limit production.
• Boards Regulating Production and/or Marketing Using Quotas can establish exact
quotas for each farmer.

Farm Types
• The Small Farm: Small farmers, who may also have a part-time job, may be financially
better than many full-time farmers.

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• Farm Corporation: The trend for farm corporations with larger farms is due to rising farm
labour costs, rising food prices, larger investments in equipment, the need to get
reasonable return from investment, and availability of different types of financing.

• Viable Farm: This is a type of business that, under good management, is able to provide
good returns.

Farm Leasing
• Under lease terms, the landlord provides the farm land and storage facilities, and pays for
property taxes.
• The tenant pays the expenses for supplies, labour and machinery for farming.
• In all types of farm leases, there may be restrictions on the type of crops that can be
grown, and the types of chemicals and fertilizers that can be used.
• Crop Share lease: Most common division of income is that one-third share of all
crop sales goes to the landlord.
• Cash Rent Lease: The tenant pays a fixed amount to landlord but receives all
income from the crop sales.
• Flexible Cash Lease: The tenant receives all income from crop sales, but the
amount paid to landlord varies with the price of the grain or the yield of the grain, or
both.

Legislative Requirements
• Municipal Restrictions: Zoning provisions prevent the farm land from being converted to
non-farming uses.
• Agricultural Use refers to the use of land involving the tillage of soil, growing and
harvesting of vegetables, field crops, tender fruits, and other cash crops.
• Dairy operations such as breeding, grazing, boarding, and training of livestock
activities are also considered agricultural operations.
• Buildings used for manufacturing, processing, and servicing establishments that
support agricultural uses are also included.

• Other Legislations: A farm buyer/owner must comply with other legislations, such as –
• Animal Health Act for health of livestock.
• Beef Cattle Marketing Act for permits to sell cattle for beef.
• Feeds Act to ensure that cattle feed is certified by the Canadian Food Inspection
Agency.
• Food Safety and Quality Act to get license for slaughter and meat processing.
• Health of Animals Act to report diseases.
• Farm Products Containers Act for licensing, packaging, and marketing.
• Grains Act for license to operate grain elevators.
• Seeds Act for quality of seeds.

• Minimum Distance Separation (MDS): MDS-I is the minimum distance between new
development and existing livestock or storage facilities.
• MDS-II is the distance between livestock or storage facilities and houses.

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Nutrient Management Act: This act regulates storage, handling, use and transportation of
commercial fertilizers.
• Commercial farming industries are required to document and retain records relating
to Nutrient Management Plans (NMP) and Nutrient Management Strategies (NMS).
• The act also specifies minimum distance requirements regarding land applications
(i.e., fertilizers) to protect adjacent land and water sources.

Financing and Taxation Issues

• Farm Credit Corporation (FCC): This federal corporation provides loans and other
financial services to farmers for buying land, equipment, livestock, and constructing or
improving buildings.

• HST Exemption: Personal use farmland may be exempt from HST if it is sold to a related
individual who will continue the use.
• Further, any portion of the farmland used for residential purposes is exempted.

• Farm Property Class Tax Rates: Ontario farmers receive 75% tax reduction for municipal
taxes if the property is assessed as farmland and if they-
• Continue the farming business,
• Are Canadian citizens or permanent residents,
• Have Farm Registration Number, and
• Annually submit the appropriate application.

• If the sale closes after September 1, the buyer may lose the reduced tax rate and a
reassessment is made for the balance of the current year at full rate.
• The buyer then has until October 31 to submit a Request for Reconsideration (RFR)
to the Administrator of the Farmland Class.

• Income Taxes: Farm land is treated similar to improved real property.

• Capital Gain is subject to tax on seller’s income (50%) and previously claimed
Capital Cost Allowance may also be Recaptured.

Factors That Impact a Seller

• Ownership: To comply with FINTRAC requirements, the salesperson should verify the
identity of an individual farm owner or the authorized signatory in case of a farm
corporation.
• Copy of the Article of Incorporation should be obtained to verify the authority to sign
on behalf of the corporation.

• Sale of Shares vs. Assets: When shares of a farm corporation are sold, the buyer
assumes all assets and liabilities, and can use company’s name, real estate, leases,
copyrights, etc.
• When only assets are sold, the seller remains liable for existing debt and the buyer
acquires ownership of assets such as equipment, inventory, and goodwill.

• Tax Liabilities: Due to complexities of taxation issues, such as Capital Gains Tax,
salespersons should advise their clients to obtain third-party professional advice.

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• Capital gain on a farm property is calculated as the difference between the adjusted
cost base and the sale price of farmland, stocks, and other capital property.

• Land Condition After Harvest: An important factor for farm leasing is that the land has to
be worked upon after harvesting to recondition it for growing the crops again.
• Salespersons should confirm if the tenant farmer is interested in purchasing the land
in its present condition.

• Windmills and Solar Panels: Several windmills or solar panels are installed on farm
properties due to their revenue benefits to the owner.
• Since most of these installations are on contract basis, the salesperson should
check the contract documents and verify if the buyer would assume the contract.

14.4 Due Diligence in Farm Property Transactions

Salesperson’s Obligations
• Gather and Verify Information: All information that a salesperson has collected should be
verified.
• This includes soil types, livestock, arable acreage, seeding and harvesting
problems, ownership status, farm structures, and condition of well and septic
systems.
• Additionally, it should be verified how the buyer will obtain operating financing and
how the farm produce would be marketed.

• Identify and Disclose Material Facts: Salespersons must take reasonable steps to
determine and disclose material facts and latent defects to both clients and customers.
• A buyer’s decision may be affected by improper measurements, misrepresented soil
quality, undisclosed use of harmful pesticides, and existence of environmental
hazards.

• Providing Service: Salespersons obligations under the Code of Ethics include –

• Act fairly, honestly and with integrity with clients and customers.
• Promote and protect the best interests of the clients.
• Provide competent and conscientious service to clients and customers.
• Demonstrate reasonable skills, knowledge, judge, and competence in providing
opinions and service.
• Advise the clients and customers to obtain services of third-party professionals.

• Draft the Offer: Since commercial farm transactions are complex, the salesperson should
ensure that appropriate conditions with adequate timeframes are inserted in the
agreement.
• Some conditions that may require longer timeframes include soil testing, ESA
reports, water and septic system inspections, verification of services, and property
inspection.

Protection of Farmers

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• Farming and Food Production Protection Act (FFPPA): This Act gives protection to
farmers from nuisance complaints and subsequent lawsuits or injunctions.
• It also ensures that farming and food production industry is protected from municipal
by-laws that restrict Normal Farm Practice.

• Normal Farm Practice: Farming operations which are conducted in a manner consistent
with proper and acceptable customs and standards, uses innovative technology, and good
management.
• The Farming and Food Production Protection Board (NFPPB) is authorized to rule
on various complaints against farmers or farming operations.

• Nuisance Complaint: The board may dismiss the complaint if disturbances result from a
normal farm practice, order the farmer to cease the practice (injunction), or to modify the
practice and be consistent with normal farm practice.

• Bylaw Challenge: The board may state that the farm practice is normal farm practice, or it
would become normal farm practice if specific modifications were made within the given
time frame.

Third Party Professionals

• Soil: Soil tests are done to determine the best suitable crops and type of fertilizers.
• The results of soil testing depend on the number of samples, depth of sampling, and
sampling patterns used for the sampling area.
• Salespersons should include a clause in the agreement so that the buyer can
arrange soil tests from an accredited laboratory.

• Water Quality: Water testing includes bacteriological testing (from local public health
office) to ensure there is no contamination, the condition of water pump, and supply rate of
water.
• Tests for possible chemical contamination are usually conducted by private
laboratories.

• Septic System: The condition of outdated, inadequate, or otherwise inoperative septic

systems must be investigated by local health authority or licensed professional.
• The Ontario Building Code requires site evaluation for both new and replacement
septic system installations.

• Equipment: A qualified specialized appraiser should be hired for valuation of farm

equipment.

• Trees and Bushes: In a woodlot property, an arborist conducts an inspection of the bush
acreage for the type and health of trees, especially when the owner wants to qualify for
lower taxes under the Managed Forest Tax Incentive Program.

14.5 Agreement for Sale of a Farm Property

Key Components of the Agreement

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• Chattels and Fixtures: Chattels are movable personal property of the owner, removable
upon sale, whereas fixtures are permanently attached to the property and are usually
included in the agreement.
• Farm properties typically have in-barn feed handling systems, milking equipment,
feed carts, wheelbarrows, forks, shovels, scrappers, fly floggers, high-pressure
washers, feed mill, and augers.

• Irrevocability: This is the time period within which a seller or buyer needs to accept, reject,
or counter an offer or counter offer.
• Offers for farm properties usually give about one week’s time as irrevocable as
compared to typical 24 hours in residential offers.

• Breakdown of Purchase Price: The total purchase price is usually broken up into
components, such as land, residence, barns and shed, silos and bunkers or other crop
storage structures, and farm equipment.

Unique Clauses and Conditions

• Inspection of Bush Acreage: Clauses in the agreement should address tree-cutting on
privately owned properties, especially woodlots, because a municipal permit is required
once a tree has reached certain height.
• Permit is generally not required for cutting a few trees or trees that are hazardous,
dead, or have terminal disease.
• Salespersons should insert an appropriate conditional clause in the agreement so
that the buyer can obtain an arborist’s satisfactory inspection report.

• Appraisal of Machinery and Equipment: Since the condition of machinery and equipment
deteriorates and their value depreciates over a period of time, there should be a clause for
valuation of these items by a professional appraiser.
• The clause should allow the appraiser access to the property and equipment for
physical inspection.

• Transfer of Farm Quota: Transfer of seller’s farm quota from the marketing board is a
major factor in valuation of farm properties.
• The salesperson should check the transfer/assignment procedures of the marketing
board and include a condition that the quota can be transferred, and the production
contract can be assigned to the buyer.

• Crops: For crops that give more than one yield per year, the crop may already have been
planted, for which proper valuation may be required.
• A clause should be inserted in the agreement to ensure that the seller has continued
right of ‘profit a prendre’ on the farm land to harvest the existing crop.

Scenarios for Clauses

• Environmental Site Assessment (ESA): A condition to address a situation where some old
rusty or leaking tractors are parked in the barn, which are causing contamination.

• Tile Drainage: The seller may have received a loan under the Tile Drainage Act for
installation of equipment to remove the access water from crop roots.

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• Crop Ownership: A clause in which the buyer agrees that the crops that are already
planted belongs to the seller after closing.

• Water: A Representation and Warranty clause, especially for dairy farm, to ensure that the
water pump is working properly and has adequate capacity.

Personal Use vs. Commercial Use

• Personal Use: The portion of farm property which is not owner’s primary source of income
while the remaining portion of the property is leased.

• Commercial Use: The entire farm property is treated as commercial when it is the primary
source of income for the owner.

Organic Farming
• Organic farming does not use synthetic pesticides, synthetic fertilizers, synthetic drugs,
synthetic food processing ingredients, genetically modified organisms, antibiotics, and
growth hormones.
• The principles of organic production are given in the Canadian Organic Standards for
protection of environment, long-term soil fertility, maintenance of biological diversity,
recycling materials, and health and safety of livestock.
• They prevent soil degradation and erosion, decrease pollution, and optimize biological
productivity.

14.6 Additional Sale Related Documents

Amendment to the Agreement (OREA Form 570)

• An Amendment to Agreement of Purchase and Sale form is used by the parties to make
changes to an accepted agreement.
• The wording being deleted and new wording, which is to be added is inserted, and
new Irrevocable date and time are inserted.
• The amendment is valid only when both parties sign the form, otherwise the original
agreement remains valid for enforceable.

• Extension of Completion Date: The buyer may request an extension of the closing date
due to delays in completion soil tests by a designated laboratory.

• Change in Purchase Price: The purchase price may have to be adjusted due to
unforeseen changes in the condition of the property, barn, or there may be some
damaged or missing farm equipment.

• Chattels and Fixtures: If the seller wants to keep certain fam equipment, the list of chattels
and fixtures may have to be amended.

• Farm Quotas: This amendment is usually required when the buyer is not able to secure a
reasonable quota for farm produce from the marketing board.

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Notice of Fulfillment of Conditions (OREA Form 574)

• When completing this form, a cross reference is given to the original agreement, the
condition(s) being fulfilled is/are inserted, and the parties sign the form.
• When signed by all parties, this form makes the Agreement of Purchase and Sale a legally
binding contract.
• The form must be sent by the party which was to fulfill the condition before the date and
time specified in the condition to notify the other party.

Waiver (OREA Form 573)

• When completing this form, a cross reference is given to the agreement, the condition(s)
being waived is/are inserted, and the parties sign the form.
• This form is typically used by the buyer before expiry of the conditional date to remove
one or more conditions in the agreement.
• As with the Notice of Fulfilment of Conditions, this form makes the agreement a legally
binding contract.

14.7 Pre-Closing Issues

Resolving Closing Issues

• Missing Equipment: Include a condition in the agreement to ensure that no equipment will
be removed by the seller or extend the closing date so that the seller can arrange the
equipment.
• Alternatively, the purchase price may be adjusted for the value of the missing
equipment.

• Damaged Crops: The seller should have insured the crops to cover the damages or the
purchase price can be adjusted according to the value of damaged crops.

• Fewer/Diseased Animals: Agreement should be conditional that the seller will continue
farming up to the closing date or the agreement may be amended to reflect the change
the number of animals.

Leading Practices
• Proper Farm Permits: The buyer should be advised to have a lawyer check any
outstanding permits and make the offer conditional upon the buyer obtaining proper
permits for farming.

• Role of Buyer’s Lawyer and Accountant: The buyer’s lawyer should check that all required
municipal permits are in place and there is no outstanding work order on the residential
portion.
• The agreement should be conditional upon satisfactory review of financial
statements, leases, tax bills and returns, employee records, and operating costs
with respect to the farm business.

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• Compliance with the Nutrient Management Act: Salesperson should include a condition in
the agreement to ensure that the seller’s farming activities are in compliance with the
Nutrient Management Act.
• The buyer should be advised to hire a nutrient management consultant to review
seller’s approval of the Nutrient Management Strategy (NMS).

• Compliance with Building Codes: Salespersons should ensure that farm structures are
built according to the Ontario Building Code or the National Farm Building Code of
Canada.
• The offer should be conditional upon satisfactory report of an agricultural inspector.

• Insurance Requirements: The buyer should be advised to consult a farm insurance

specialist to ensure that the seller has correct insurance for farm produce and animals.

• Inspection of Well and Septic Tank: The offer should be conditional upon satisfactory
inspection reports with respect to operating condition of the well and septic tank.
• Bacteriological analysis of well water should be conducted to ensure service
capacity and no evidence of any contamination.

• Property Conditions: Salespersons should take all reasonable steps for a thorough
inspection of soil, water quality, well capacity, water pressure, farming equipment, and
structures on the property.

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15. SALE OF A BUSINESS

15.1 REBBA Requirements

REBBA’s Impact on Sale of Business

• Definition: A ‘business’ is an undertaking carried on for gain or profit, including any interest
in such undertaking.
• A ‘Business Operation’ is separate from real property but sometimes the two may
coincide.

• Sale of Business: May include one or more components, such as an agreement for sale of
real property, a lease, purchase of ‘assets’ or ‘shares’, or a combination of shares and
assets.
• Sale of a business may involve sale of only assets or sale of shares.

Regulatory Requirements
• REBBA requires that the listing salesperson must deliver to the buyer three statements,
signed by the seller, before a binding agreement.

• Three Statements:
• A profit and loss statement for the past 12 months or ever since the seller acquired
the business,
• Statements of assets and liabilities, and
• A list of all fixtures, goods, chattels, and other assets NOT included in the sale.

• If the seller does not provide a list of items NOT included in the sale, then all fixtures,
goods, chattels, assets, or other items are considered included in the sale.

• Affidavit: When the seller is unable or unwilling to provide financial statements (Statement
of Profit and Loss, and Statement of Assets and Liabilities), the seller must provide an
affidavit, signed under oath, to the buyer stating the reason.
• The buyer must sign the affidavit provided by the seller to acknowledge that they
have received and read the affidavit from the seller.

• The statements in the affidavit include –

• The terms and conditions under which the seller possesses the business
premises.
• The terms and conditions under which the seller has sublet a part of premises.
• A statement of all liabilities of the business.
• A statement that the seller has made available the books of account to the buyer,
or has refused to provide books of account, or does not have books of account.

15.2 Additional Regulations and Legislations

Municipal Bylaws

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• Zoning Bylaws: Municipal zoning controls the use of land by specifying the location, type,
height, and location of structures as well as lot sizes, setbacks, signage, and parking
requirements.
• The buyer needs to get a business license from the municipality, depending on the
location and type of business.
• If the buyer wants to start a new business, the buyer and the salesperson should
check with the municipality if the location is zoned for that business.

• Prohibited Businesses: Zoning restrictions vary by area within a municipality and may
prohibit certain types of businesses in a particular zone.
• For example, restrictions may apply to maximum number of payday loans in the
area, cannabis for recreational use, casinos, and gambling spots.

Other Legislations
• Business Corporations Act: The process of business incorporation involves a name
search, completing an Article of Incorporation, and filing the application with the Ministry of
Government and Consumer Services.
• Salespersons need to confirm the corporation identity, its existence, and verify the
signing authority from the Article of Incorporation, the Corporate Resolution, or from
a letter that grants authority to the seller to sign on behalf of the corporation.

• Partnerships Act: Salespersons may encounter a General Partnership or a Limited

Partnership when selling a business.
• General Partnership is based on a Partnership Agreement where all partners are
personally and jointly liable for the assets and liabilities.
• Limited Partnership is created with at least two partners – General Partner and
Limited Partner.
• The General Partner manages the business operation and his/her liability is not
limited but the Limited Partner(s) must be passive investor(s).
• The liability of the limited partner is limited to the funds invested and profits shared.

Employment Standards Act (ESA)

• Impact of ESA: This provincial Act sets out minimum standards for notice periods for
termination or termination pay in place of notice.
• Salespersons should have a general understanding of the sections of the Act that
apply to the employees of the business being sold.

• Continuity of Employment: The Act provides that when an employer sells the business, the
employee’s job is not terminated.
• The length of service is calculated from the date of joining and not from date of sale
of business.

• Employee Records: Employers must maintain employee records with information such as
name and address, start date, number of hours worked, wages, vacation taken, and
vacation pay.

• Termination and Severance: In compliance with the Act, the seller of the business may
terminate the employees with proper notice or pay them the termination pay.

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Federal Legislations
• Income Tax Act (Capital Gain): The Act provides that certain percentage of gain from sale
of a property must be added to taxable income.
• The seller should be advised to obtain legal advice in this regard.

• Excise Tax Act (HST): HST applies to sale of goods and services and may apply to sale of
business unless the seller and buyer jointly elect not to do so.
• The condition is that the buyer acquires the ownership, possession, or use of at
least 90% of the property as necessary for carrying out the business activity.

• Personal Information Protection and Electronic Documents Act (PIPEDA): This Act
provides that personal information (whether subjective or factual) cannot be collected,
used, or shared for commercial activities without prior written consent of the persons
providing such information.

• Canada Labour Code: The requirements apply to employees in banking sector, federal
crown corporations, first nations band councils, interprovincial and international
transportation, telecommunications and broadcasting, and uranium and nuclear energy
production.

15.3 Providing Services to Sellers and Buyers

Services to Sellers
• Business Specifics: Prepare a detailed list of items (fixtures, chattels, goods, and
equipment) that are included or excluded from sale and verify the list with the seller.
• REBBA requires that a list of items NOT included in sale must be given to the buyer.

• Obtain Documents: A profit and loss statement for the past 12 months or ever since the
seller acquired the business, a statement of assets and liabilities, and a list of items not
included in the sale.
• In case the seller cannot provide financial statements, the seller must provide an
affidavit, which the buyer will acknowledge as having received and read.

• Create a Marketing Plan: Marketing plans are specific to business and should include
analysis of trends, demographic studies, and location specifics.
• The salesperson should prepare a buyer profile (the type of buyer who would be
interested in seller’s business), design advertising for target market, and include the
highest and best use analysis in the plan.

• Market Considerations: The seller may want to keep the sale confidential (from
employees, customers, and competitors) and may not want a ‘For Sale’ sign.

• Visiting the Business: Buyer’s visits to the business should be discrete so that employees
are not alarmed, business is not interrupted, creditors/lenders do not panic, and public is
not alarmed.

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• Explain Agreements: Explain the details of documents to the seller including the
Agreement of Purchase and Sale, assignment of lease, and sale of business assets or
sale of business shares.

• Recommend Third-Party Advice: When the salesperson does not have reasonable
knowledge, skill, judgement, or competency, the sellers should be advised to obtain expert
advice from professionals.
• These third-party professionals include zoning officials, accountants, property
inspectors, lawyers, appraisers, and environmental assessors.

Confidentiality Agreement
• A confidentiality agreement is typically signed before sensitive business information is
forwarded to any buyers, and if the seller is unaware of such an agreement, the
salesperson should recommend it.
• The agreement includes the names of the parties, the purpose of the agreement, and
provides that the injured party may seek legal relief if the terms are breached.
• However, the information that is generally known to commercial brokerages, is in public
domain, or is commonly known in the marketplace is not considered confidential.

• Provisions: Some inclusions in the agreement are –

• Hold all information confidential and use it only for the intended purpose,
• Return all documents when the negotiations conclude,
• Do not make or retain any copies, and
• Do not disclose information to anyone, unless specifically permitted.

Services to Buyers
• Searching and Showing: Based on the type, location, and affordability of the buyer, the
salesperson should search for businesses that satisfy buyer’s needs and arrange for
showings.

• Prepare the Agreement of Purchase and Sale: The agreement should include conditions
for obtaining property inspection, financing, and review of legal, title, and zoning
conformation.

• Obtain Documents from the Seller: Obtain documents from seller including financial
records, lease documents, inventory of equipment and other assets, utility bills, building
service contracts, and insurance policies.

• Provide Assistance and Advice: The salesperson should ensure that the buyer has all
necessary information to make an informed decision for the purchase.

• Refer Third-Party Professionals: The buyer should be advised to obtain expert advice from
third-party professionals on legal, financial, environmental matters.

15.4 Financial Statements

Income and Expense Statement

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• Also called the Profit and Loss Statement, provides financial performance of a business
for a specific time period, usually one financial year.
• Three elements in the statement are revenue (from all sources), operating expenses, and
cost of goods.
• Revenue is recorded when the sale is made, and expenses have two groups – cost of
sales and operating expenses.
• The organization of the statement depends on type of business, personal preferences,
and ease of reading.
• REBBA requires that salespersons obtain this statement from the seller and provide it to
the buyer.
• This statement helps estimate the sale price, profitability, and viability of the business.

Balance Sheet (Statement of Assets and Liabilities)

• The Balance Sheet is a snapshot of the financial position of the business, which
summarizes the assets and liabilities and helps assess the stability and financial risk for
investors.

• Assets: These resources may be monetary or non-monetary, tangible or intangible, and

current or non-current.
• Intangible assets are not physical, such as goodwill, patents, and trademarks but
cannot be separated from the business and are treated as capital property.

• Liabilities: Debts or other obligations that are payable now or in future.

• Shareholder’s (Owner’s) Equity: Investment in the company plus the undistributed

earnings.
Total Assets = Total Liabilities + Shareholder’s Equity

Audited and Unaudited Statements

• Difference: The difference between audited and unaudited financial statements depends
on the depth of review or research conducted by the accountant and includes supporting
documents.
• Audited statements are tested, every item is investigated, and undergoes multiple
checks to ensure the accuracy of assets and debts.
• The accountant is responsible for accuracy and the statement is prepared according
to standards of International Financial Reporting Standards.

• Review Engagement Statement: The accountant only conducts spot checks but does not
investigate or verify the financial statement.

Notice to Reader Report

• This is another type of unaudited statement that provides basic information on financial
health, but the accountant does not offer any professional opinion.
• This report includes a notice from the accountant that it is not reviewed or audited, the
reader is advised to exercise proper due diligence.

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• The buyer can still use this report for initial estimate of value, but the actual revenues
should be verified.

15.5 Key Considerations for Sale

Asset Sale vs. Share Sale

• Salespersons should know the difference between two methods used for sale of business
due to tax implications and advise their clients to obtain professional advice.

• Sale of Assets: This involves transfer of business assets including both tangible (land,
buildings, equipment, and inventory/stock) and intangible (business name, clients,
contracts, intellectual property, and goodwill).
• If only physical assets are sold, the seller usually assumes responsibility for existing
payable debt but also retains the receivables.

• Sale of Shares: This happens when a corporation itself is sold and the buyer assumes all
assets (tangible as well as intangible) and liabilities (receivables and payables).
• The buyer gets the company name, copyrights, leases, and real estate.

• Tax Considerations: In sale of Assets only, the seller may be liable for Capital Gains Tax if
there is a profit.
• In sale of Shares, the seller may be eligible for Capital Gains Tax exemption and the
buyer may have to pay a lower purchase price.

Key Considerations
• Included and Excluded Items: Salespersons should prepare a comprehensive list of all
fixtures, chattels, goods, assets, or other rights that are included, and that are specifically
NOT included in sale.

• Copy of Lease: Since the seller is responsible for the terms of the existing lease, the
listing salesperson should obtain a copy of the lease and verify the financial and credit
worthiness of the buyer.
• A copy of the lease should also be provided so that the buyer can obtain
professional advice.
• The lease should be reviewed to verify the remaining term, that it can be assigned to
the buyer, and the terms under which it can be assigned.

• Disclosure of Sublease: If the premises or a part of it is sublet, there should be a written

consent from the landlord and this information should be disclosed to the buyer.
• In case it is revealed that the landlord’s consent was not obtained for sublease, the
landlord reserves the right to terminate the lease.

• Inventory Valuation: Since inventory/stock is a fluid item, there may be discrepancy in the
value from the day of offer acceptance and the day of closing.
• The Agreement of Purchase and Sale usually provides that the seller and the buyer
will conduct a final inventory count at the time of closing so that there is no dispute
about the value of inventory.

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Additional Considerations
• Business License: Salespersons should ensure that the seller’s business license is valid
and help the buyer in either transfer of this license or obtain a new business license.
• Certain business licenses, such as a liquor license in a restaurant, are given to
individuals and an application of transfer the license must be approved along with
sale of business.

• Trade Unions: If the employees are represented by a trade union, the buyer may have to
assume the trade union contract, which must be reviewed by the buyer.
• Since the terms of trade union contracts cannot be modified by the buyer,
appropriate cluses should be inserted in the agreement to avoid any disruptions to
the business or strike by employees.

• Intellectual Property Use: Salespersons should verify that the seller owns intellectual
rights for the name or products that are being sold, and the fact should be included in the
Agreement of Purchase and Sale.

• Distribution Rights: These rights allow the business owner to legally sell the supplier’s
products or services under a contract, which must be transferred to the buyer.
• Salespersons should verify that the buyer can assume the rights of the seller to offer
the same products or services within the geographic area as per the distribution
rights agreement.

• Retaining Employees: Certain employees (such as a chef in a restaurant) are key to the
success of a business and the buyer might want to retain their services.
• If the buyer does not want to retain existing employees, the seller may have to
terminate their employment according to the provisions of the Employment
Standards Act.

Seller Financing
• Seller Financing: When the buyer is unable to obtain traditional financing, the seller may
want to finance the sale of business with assets as a collateral.
• A seller financing agreement may be drafted after obtaining professional legal
advice.
• The seller can benefit from increased number of potential buyers, leading to a quick
sale, and pay a lower income tax.
• The buyer can benefit from low-cost seller financing when traditional lenders are
reluctant to advance a loan.

• Terms of Seller Financing: These are usually included in the Agreement of Purchase and
Sale to protect the interests of the seller in case of default by the buyer.
• Seller may retain the right to take control of the business if the buyer misses a
payment.
• The buyer must submit a business plan and an upfront down payment of 35% to
40%.
• The buyer provides personal guarantee for payments and is required to keep
minimum level of inventories.

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• Earnout: This is a method of financing the sale of a business by the seller wherein the
balance of payment is based on the actual performance of the business after closing.
• This is helpful in finding the difference between what the seller is asking and what the
buyer wants to pay.
• Base Period Earnout: Additional payments in excess of balance due on purchase,
are paid as a proportion of the increase in profit, over and above the profit in the
base year.
• Incremental Earnout: Similar to Base Period approach except that additional
payments over fixed debt are calculated on a proportion of the year-to-year
increase, capitalized at a pre-determined rate.
• Cumulative Earnout: This approach is based on total increase in earnings over the
base year for the number of years of contract.

15.6 Business Valuation

Direct Capitalization
• The Net Operating Income generated by the business is capitalized based on analysis of
comparable sales.
• However, establishing net operating income of comparable sales may be difficult
and may be affected by extent of owner contribution, seller’s skills, and other
subjective factors.

Value = Net Operating Income ÷ Cap Rate

Example: The annual net operating income of a business after deducting the operating
expenses is $158,000. This type of business has a capitalization rate of 12.5%. What
would be the estimate of value?
Value = 158,000 ÷ 12.5% = $1,264,000

Gross Profit Multiplier (GPM) Method

• In this method, the gross profit of the subject business is multiplied by the Gross Profit
Multiplier, which is based on recent sale of similar businesses.
• This method is used when a reasonable capitalization rate is not available from
comparable properties.
• Salespersons should note that profit is a matter of perception and the profit reported
for tax may not truly reflect the value of the business.

Value = Gross Profit X Gross Profit Multiplier

Example: The annual gross profit of a restaurant business is $135,500. Market research
suggests a Gross Profit Multiplier of 2.5. What would be the estimate of value?

Value = 135,500 X 2.5 = $338,750

Weighted Average Method

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• This method is used when the profits have varied over the past years. It is greater than the
simple average, indicating that the business has higher profits in the later years.

Example: A small hardware store in Cram City has provided some information on its gross
profit to the listing brokerage. The amounts were $122,500 for year 4; $126,200 for year 3;
$132,000 for year 2, and $137,800 for year 1. The brokerage applies a weighting to these
profits as follows:
Year 1 – 4, Year 2 – 3, Year 3 – 2 and Year 4 – 1.
The year 1 is considered the most recent year for calculations. What would be the
weighted average of gross profits for these four years?
Calculate profits based on weightage.
137,800 X 4 = $551,200
132,000 X 3 = $396,000
126,200 X 2 = $252,400
122,500 X 1 = $122,500
Add all these numbers = 1,322,100
Divide by 10 (4+3+2+1) = 1,322,100 ÷ 10 = 132,210
Weighted Average of Gross Profits = $132,210

Discounted Cash Flow Method

• This method is useful when both the business and property are being sold by discounting
future cash flows based on pre-determined interest rate as well as sale of the property.
• It provides more accurate value than other methods as it uses projected future cash flows
over a period of time and the interest rate includes the risk factor.
• The method is beneficial to investors because it provides a dynamic picture of cash flows
as opposed to one year analysis used in capitalization method, and before-tax and after-
tax calculations.
• The drawback is that it requires complex calculations based on certain assumptions that
may provide fluctuating returns.

Adjusted Book Value Method

• This approach is used when a business has marginal earning potential but notable
retained earnings (tangible net worth) and only assets are being sold.
• The emphasis is placed on actual value of equipment, fixtures, inventory, and other goods
but the value of goodwill is not considered.
• Assets are broken into components that are valued separately and then added to get the
sale price.
• The latest statement of assets and liabilities is consulted to calculate the value based on
either adjusted book value or fair market value.
• The final estimate of value reflects retained earnings plus the adjusted book value.
• Goodwill may still have some value based on marginal profits.

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15.7 Third-Party Professionals

Role of Third-Party Professionals

• Accountants: Accountants prepare and review financial statements, such as balance
sheet, income and expense statement, audited and unaudited statements, and the Notice
to Reader report.

• Lawyers: The lawyer reviews the leases, franchise agreements, licenses, contracts with
suppliers, contracts with customers, and contracts between trades.

• Chartered Business Valuators: Trained valuation specialists evaluate a business based on

capital, intellectual property, brand value, employees/management, past performance,
profitability, and marker expectations.

• Lenders: Financing for purchase of a business is commonly through a bank, a private

lender, a trust company, or a government institution, such as the Business Development
Corporation.

Site Contamination – Sources and Locations

• Gas stations, dry-cleaning facilities, and auto repair shops.
• Rail yards, refineries, and landfill sites.
• Vacant land with odorous and/or discoloured surface water.
• Land that has debris all over or that has lower grade level than adjacent potential source
of contamination.
• Indications of underground buried materials or bulk metal storage.
• Buildings that have been altered or changed after original construction.
• Abandoned structures or structures where the use was changed after initial construction.
• It is important to know the past use of land which is being sold as development land.

Relevant Legislations
• Clear Water Act: The Drinking Water Source Protection Program under the Clear Water
Act includes water treatment systems, inspections, testing, distribution, and drinking
water.

• Places to Grow Act: An area may be designated under the Act for tourism, employment, or
specific economic growth.
• The Act enables long-term strategies for development of a growth plan in
consultation with local officials and members of public.

Due Diligence
• Financial: Financial due diligence involves review of financial statements, such as
income/expense statements, balance sheets, rent rolls, bank statements, tax bills/returns,
employee records, and operating costs.

• Legal: Legal analysis of the business involves review of property title, major assets,
existing mortgages, surveys, licenses, permits, contracts, and zoning compliance.

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• Structural: Commercial building inspections include visual inspection, review of relevant

documents, identification of physical deficiencies, photographs, and a detailed summary.
• The report details items such as building envelope, structural design, mechanical
systems, electrical systems, interior finishes, and life safety systems.
• The inspection may reveal certain material defects and deferred maintenance.

• Ownership Verification: The seller must provide a proof of ownership, which may be as
sole proprietorship, partnership, or corporation.
• Salespersons may verify ownership from tax returns for individual owner or, in case
of a corporation, check the Article of Incorporation or conduct a corporate search.

• Contracts and Leases: A lawyer’s help would be required to review the existing contracts
and terms of the leases to verify that they are assumable by the buyer.

Salesperson’s Compliance Issues

• Insufficient Due Diligence: Salespersons should ensure that all required financial
statements, franchise agreements, leases, and confidentiality agreement are provided to
the buyer and verified by third-party professionals.

• Misrepresentation of Income and Expenses: The income and expense statement must be
prepared by seller’s accountant and should be audited to ensure that pertinent facts have
been checked for the reported time period.

• Inaccurate Financial Reporting: The financial reports must not be inaccurate, outdated, or
incomplete.

• Non-verification of Chattels and Fixtures: Salespersons are required by law to inquire,

investigate, verify, and disclose the condition of various goods, chattels, equipment, and
fixtures included in the sale.
• They should ask specific questions to the seller, record the responses, and
personally verify the existence of material facts and/or defects.

• Undisclosed Liabilities: Salespersons must make the sellers aware that any undisclosed
liability may create legal troubles and all goods must be paid in full before the closing date.

15.8 Turnkey and Franchise Businesses

Introduction
• A Turnkey or a Franchise business is that which provides a new owner everything they
need to start the operation.
• The real estate, the term ‘Turnkey’ is used to advertise the sale of an established business
that already has all the equipment and is ready for the business operation.
• In a franchise business, the franchisor grants rights to the franchisee to sell goods or
services perfected by the franchisor using the franchisor’s name, logo, methods, and
expertise.

Benefits of a Franchise Business

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• The franchisor assists in startup and ongoing operation of the business.

• If the business of the franchisor expands, the franchisee also gets benefit in terms of
increase in value.
• The franchisor provides a ready-made image, training for employees, business logo, and
marketing techniques.
• Group purchasing power of the franchisor lowers the costs for the franchisee.

Considerations for Buyer

• Cost: The initial cost for an established franchise can be high, depending on market
penetration of the franchisor.
• Royalties: Royalties are generally based on monthly sales figures and failure to pay may
be considered a breach of contract.
• Advertising: Fees are usually based on gross sales (up to 10% of gross sales) and the
franchisor collects them from every franchisee.
• Loss of Freedom: The franchisor expects the franchisee to follow strict operational
standards.
• Purchase of Franchisor Products: The owner must buy products only from authorized
suppliers of the franchisor.
• Remote Head Office: If the head office is in another country, it is difficult to get support.
• Difficulty in Selling: The franchise may be bound by the terms of franchise agreement and
may only sell to someone who is approved by the franchisor.
• Reputation: The actions of one franchisee or an incident at one location may affect the
reputation of other locations.

Franchise Categories
• Retail: Fast food chains, specialty food shops, automobile services, convenience stores,
etc.
• Business/Personal Services: In-house cleaning services, security systems, car/truck
rental, tax returns, real estate brokerage, employment services, education/training, etc.
• Travel and Leisure: Travel agencies, tanning parlours, hotel chains and campgrounds.

Considerations When Selling

• Franchise documentation must be carefully reviewed by the buyer.
• The franchisor may require approval of any agreement of purchase and sale.
• The franchisor may have taken Head Lease of the premises and the buyer may have to
assume the sub-lease from franchisor.
• A copy of franchise agreement should be attached to the Agreement of Purchase and
Sale as a schedule.
• The buyer must also agree to the terms of franchise agreement.

15.9 Preparing to Sell

Gathering Information and Asking Questions

• Premises: Verify whether the business location is owned by the seller or is leased.
• If leased, do they have a copy of the lease, and if any part of the premises is
subleased.

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• Financial Statements: Check if the sellers have current financial statements, and if they
have a list of chattels, goods, fixtures, and other relevant items.

• Shares or Assets: Clarify with the seller whether they are selling only assets/inventory or
selling the corporation shares.

• Inventory: Ask the seller if inventory is included in the sale and if they have estimated its
value.

• Business License: Ask the seller if the business operation needs any license and, if yes,
whether the seller’s license is transferable or not.

• Supplier Agreements: Ask the seller if there are any contracts with suppliers of inventory,
equipment, or other business-related items.

• Buyer Requirements: Ask the seller if there are any license, permit, or compliance
requirements for the buyer to run the business.

• Discretion for Sale: Ask the seller if they will permit advertising the sale of business and
identify the property.
• Ask if the employees are aware of the sale and if there are any special procedures
for showing.

15.10 Pre-Closing Issues

Issues That Affect Transaction

• Misunderstandings, disputes between the seller and buyer, oversight, or some unforeseen
circumstances may either delay the closing or even cause termination of the agreement.
• Some examples of issues that may affect closing –
• Certain major equipment is found to be leased instead of owned by the seller.
• The lender may decide not to advance loan to the buyer considering that their risk is
high.
• Buyer’s business insurance rates may increase due to some unforeseen incident
(flooding or fire).
• Buyer demands compensation for some missing or damaged item, but the seller
does not agree.
• A franchisor may not approve sale of business to a specific buyer.
• Seller does not want to fulfil the agreement term to allow buyer to work in the
business and the buyer does not want to close.

Exchange of Documentation
• The dates for delivery of documents to buyer and fulfilment of conditions are critical and
salespersons should work diligently.
• Financial statements, list of items include or excluded, leases, and other relevant
documents must be delivered to the buyer on time so that they can obtain professional
expert advice.

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• Sale related forms, such as Notice of Fulfillment of Conditions or Waiver, must be

completed in a timely manner to ensure successful closing of the transaction.

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10 TIPS FOR THE EXAM

by MiniCram®
1. RELAX! Too much anxiety, panic, stress, and fear are big distractions. Focus on the
question and choose the best answer.
2. GAME OF WORDS. All multiple-choice exams are merely variation of words. If you
know your course materials, it is only a matter of interpreting the question and then
selecting a correct option.
3. EASY ONES FIRST. In this exam, some of the questions are easy, simple, and
straightforward. Do these questions first. If math is your weakness, do it in the end.
4. READ ALL OPTIONS. Even if you think A is the correct answer, read options B, C and
D to make sure they are incorrect.
5. MANAGE YOUR TIME WISELY. Skip the question that you think is difficult to answer.
Mark it for review and proceed to the next one.
6. EXTREME PHRASES. Beware of absolute words in any option such as ALL, NONE,
ALWAYS, NEVER, MUST, EVERY, EXACTLY, ONLY, etc. In most cases, the options that
include any of these words are rarely correct.
7. HEDGE PHRASES. When a question asks you to conclude something and includes
words such as MAYBE, LIKELY, OFTEN, ALMOST, USUALLY, GENERALLY,
TYPICALLY, SOMETIMES, etc., do not pick any answer that does not leave any room for
exception.
8. ALWAYS read the question twice. You must know what information is given and
exactly what is being asked. More than one choice may seem to be correct if you do not
understand the question properly. If that is the case, use the method of elimination.
9. REMEMBER that your first instinct is mostly a correct answer. Be careful when
changing your answer but do not be afraid if you must change it.
10. REVIEW. Complete the test and make a final review of all questions before you finish.
Make sure you did not skip any question and that all questions have been answered.

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