In commercial real estate transactions, the pre-deal due diligence process is essential to ensure that the property is up to code and that no unpleasant surprises will jeopardize the investment. While physical inspections (such as building inspections or environmental site assessments) are critical, this article focuses on the second part of the due diligence process: gathering and analyzing documentation and information on the target property. We will discuss title searches, searches with other government agencies, and the analysis of contracts and leases associated with the property.
Title searches: Building a solid foundation
Buyers can rely on the accurate and detailed information in the Quebec Land Register for their due diligence efforts. The title report, prepared by a lawyer or a notary, typically covers 51 years and provides a detailed analysis of the chain of title to the property as well as the relevant legal elements affecting it.
The report also provides a legal description of the property, identifies conventional easements and restrictions, and flags any encroachment on the Certificate of Location, if applicable. It also includes information on mortgages, leases, and the enforcement of various laws (e.g., the Cultural Property Act or the Environment Quality Act). The most important section of the report addresses title irregularities and defects, allowing you to work with the seller to correct or at least begin to correct the defect before the transaction closes.
Title insurance has become increasingly popular in Quebec over the past decade. Although historically unnecessary given the reliability of the Land Register, it can be useful in certain circumstances, such as short-term transactions, timeshare purchases across the country, or at the request of the lender. Be sure to read the policy and its clauses carefully to ensure that it meets your specific needs.
Off-title searches: Key information from beyond the registers
Some important information cannot be found in the Land register, but is available through public organizations. Generally, these organizations have a legal obligation to respond to a request for information within 20 days. In practice, the process can take up to 60 days.
To save time, include an appendix with the seller’s written authorization in your offer to purchase, allowing the buyer and their counsel to make the necessary requests to the relevant organizations. Authorization can be granted when the offer is signed. Sellers are advised to restrict the authorization to specific organizations, specify its expiration date, and ensure that it expressly prohibits any organization from conducting physical inspections of the property.
Municipalities are also worth exploring, as they can uncover notices of non-compliance and may require that work be done on the property. For environmental issues, contact the ministère de l’Environnement, the ministère des Ressources naturelles or Environment Canada. For existing buildings, we recommend verifying the information with the Régie du bâtiment du Québec and the Commission de la construction du Québec.
Register searches: Covering all of the bases
An experienced legal advisor will recommend that you conduct searches in various registers, such as:
RDPRM (Register of personal and movable real rights): To verify mortgages on movable assets associated with the property.
Court dockets: To identify ongoing disputes involving the seller that could affect the property, such as a lawsuit filed by a neighbour claiming part of the desired property.
Contracts and leases: Reviewing existing obligations
Analyzing contracts or leases that affect the property is crucial. For example, the new buyer will automatically be bound by a commercial lease in the Land Register and will need to abide by its terms, such as paying allowances or providing incentives. Be sure to examine those documents carefully to avoid costly, unexpected obligations.
Conclusion
Due diligence is a critical step to ensure the security of a commercial real estate transaction. Essentially, it allows you to identify the risks associated with the property. When problems or defects are identified at this stage, increased cooperation from the seller allows for easier correction. Searches should be tailored to the property: the due diligence process for a vacant lot differs from that for an urban, multi-tenant building.
For practical tips and common mistakes to avoid in transactions, don’t miss the next article in the series!
This article was published in Les Affaires on 4 December 2024.
