Real Estate in Canada

Types of Ownership

There are two usual forms of concurrent ownership: joint tenancy and tenancy in common. To create joint tenancy four so-called unities must be established, which together describe the need for near perfect equality between or among the joint tenants. Each joint tenant must be equal in nature, extent and duration (unity of interest); their interests must arise from the same instrument or act (unity of title); their interests must arise at the same time (unity of time); and their rights must relate to the same piece of property (unity of possession). The underlying notion is that in a joint tenancy there is effectively only one owner rather than joint tenants holding distinct shares. The most important trait of a joint tenancy is the right of survivorship, the jus accrescendi. Essentially, once a joint tenant dies, his or her interest is extinguished. In a joint tenancy, survivorship occurs automatically, by operation of law and therefore is an alternative to a transfer by last will and testament.

For a tenancy in common to exist, unity of possession must exist; however, any of the three other unities may not be present. For instance, there may not be a unity of interest if one-third of the interest in the property belongs to A and two-thirds belong to B. Unity of possession nevertheless remains intact as the individual shares remain undivided during the length of the relationship. There is no right to survivorship under a tenancy in common meaning, when a tenant in common dies, their interest in the property is divided among their heirs, by will or according to the law of intestacy.

If all four unities are present, the question of whether ownership is joint tenancy or tenancy in common will depend on the intention of the predecessor in title or of the tenants themselves. When there is no reference to either form, there is a presumption that the grantor intended to convey the property as a joint tenancy. However, the courts have shown a tendency to favour the tenancy in common. With the result that even the slightest indication by the grantor to create a tenancy in common will rebut this presumption and result in a tenancy in common. The court will determine whether there are any words of severance such as “equally amongst them” “respectively”, “between”, “each” or similar words or phrases which would indicate an intention to create distinct shares of the property. However, in number of jurisdictions, including Ontario, this debate is now moot as property and conveyancing legislation has been enacted imposing a statutory presumption of tenancy in common.

Land Registration System In Ontario

Land registration systems provide a uniform method of tracking instruments creating or disposing of interests in land and other instruments that affect the use of land. They serve the very important purpose of providing notice to the public about the various interests that individuals or other entities have in a piece of land. There are two such land registry systems in Ontario: the registry system, governed by the Registry Act, and the land titles system, governed by the Land Titles Act. The key difference between the two is that under the land registry system title to property is based on and evidenced by a set of historical legal instruments which have been deposited on title, key among them being one or more deeds. Under the land titles system on the other hand, each parcel of land is represented by a parcel register, which serves as the primary legal document on which title is based. The parcel register is a document in a prescribed form which provides a legal description, ownership information, and a history of transfers, easements, charges and other events which affect title. The parcel register under the Land Titles system is a document whose content is verified by the government of Ontario and which, subject to certain qualifications, can be relied upon as accurate. In recent years the government of Ontario has embarked on a project to convert all real property parcels to the Land Titles system, and at present nearly all real property in Ontario has been converted to the Land Titles system.

Leasehold Types

A lease has been defined as a demise of land that confers exclusive occupation by a landlord to a tenant. There are five types of leases: (1) fixed term; (2) periodic tenancy; (3) tenancy at will; (4) tenancy at sufferance; and (5) perpetual lease. A fixed term lease is a lease that is for a specific duration with a particular commencement and termination date. A periodic tenancy is a lease that doesn’t specify a particular end date, but does specify recurring periods of tenancy. A lease under periodic tenancy can be terminated by notice, the amount of which is typically equivalent to the length of the tenancy period unless it is a yearly tenancy, in which case a six-month notice period is required according to common law. This may vary from province to province depending on the presence of relevant statutory requirements. A tenancy at will does not have a set period or term and continues only as long as the tenant and landlord so desire. Under this arrangement either party has the power to terminate the tenancy. A tenancy at sufferance is the type of lease that tends to arise when a tenant continues to occupy leased property after their lease has expired. This type of lease continues in effect as long as the tenant remains in occupation of the property and continues to pay rent. A tenancy at sufferance ceases to exist when the landlord asks the tenant to vacate the premises. Perpetual leases, which have no fixed term and no right of termination on notice and can last forever, are very rare, but are sometimes still found in the law such as in certain Crown grants of land.

Lease Formalities

There are several characteristics that should be contained in every lease to make it a valid contract. There must be certainty as to the parties (landlord and tenant, as well as any guarantor or indemnifier), the premises to be leased, the commencement and duration of the term, the rent, and all material terms of the contract that are not incidental to, or otherwise implied by the legal relationship between landlord and tenant.

A lease or agreement to lease must generally be in writing and signed by the lessor (not an agent thereof) to comply with the Statute of Frauds. If this requirement is not met a tenancy at will is created provided the tenant possesses the premises with the consent of the landlord. It should be noted that this requirement does not apply to leases for a term of less than three years and, in Ontario, where the rent amounts to at least two-thirds of the rental value. In some Canadian provinces, a prescribed form is used. Due to the unfairness that results from formal requirements, there are several principles in common law that counter the effect of non-compliance. For example, if a tenant possesses the premises under a void lease but pays the rent and the landlord accepts that payment, a periodic tenancy is presumed to be created at common law. In other circumstances, the equitable concept of “part performance” may create a binding oral agreement where a lease is not in writing. In order for part performance to apply, the following criteria must be met: (1) there must be acts undertaken pursuant to the contract asserted (2) the contract, if prepared in writing would have been enforceable (3) there is proper evidence of the existence of the contract, and (4) denying a recognition of part performance would enable a party to fraudulently take advantage of the fact that the contract was not in writing.

Mortgages And Other Security Interests

A mortgage is an important security interest in real property that is conferred by the mortgagor (the borrower) on the mortgagee (the lender), typically in exchange for a loan used to purchase the real property in question. A mortgage provides the mortgagee with secured real property that it can realize upon if the repayment obligations are not complied with. Generally, legal title to the property will be conveyed to the mortgagee as security and the mortgagor will have a contractual right to redeem the mortgaged property or interest. However, in Ontario, legislation has reversed this system and provides that the mortgage is viewed as an encumbrance on the legal estate of the mortgagor. In most cases the mortgaged property will be a freehold estate, but can also be a leasehold or other interest such as an easement. Most standard loan transactions in Ontario are conducted with respect to a commitment which contains the standard terms and conditions of the contractual relationship such as the principal amount of the loan, the interest rate, the monthly payments, the period over which the loan is amortized and the maturity date of the charge at which time the amount outstanding must be repaid.

Enforcement Of Mortgage Security

There are a number of remedies available to a mortgagee that is faced with a defaulting mortgagor. These include sale of the mortgaged property (either through power of sale or court order), obtaining title to the mortgaged property (either through foreclosure or acceptance of a “quit claim deed”), taking possession of the mortgaged property privately by court or order, or through a receiver, and obtaining a judgment against the mortgagor or owner of the property, or any guarantors if applicable.

A mortgagee may exercise a power of sale if it is expressly provided for in the provisions of the mortgage. If it does so, the mortgagee conveys the mortgaged property to a purchaser free and clear of the interest of the mortgagor and any other person having an interest in the property which ranks lower in priority than the mortgagee. A sale pursuant to court order or “judicial sale” has effectively the same result. By exercising a foreclosure action, the mortgagee will become the owner of the mortgaged property, and those interests in the property which rank lower in priority to the mortgagee will be extinguished. The decision as to which remedy to pursue will depend on the circumstances of the mortgagee, and will involve considerations of the time required to pursue each remedy (power of sale generally being the most expedient), the cost (including land transfer tax), the administrative burden of dealing with other encumbrancers …. who may raise objections with the process, whether the mortgagee wishes to take control of the property, and the amount of debt owing. On this final consideration it is important to note that under a power of sale or judicial sale, if the sale is not sufficient to recover the amount of debt owing, the mortgagee retains a right to pursue the mortgagor and others to recover the shortfall. Conversely, by obtaining a final order of foreclosure, the mortgagee is deemed to have accepted the property in full satisfaction of the debt. Therefore the mortgagee is precluded from making a claims against the mortgagor for any deficiency.

Transfer Formalities In Ontario

Real estate purchase transactions typically have three stages: (1) negotiation and drafting of documents, (2) the title search and due diligence process, and (3) closing of the transaction. During the negotiation and drafting process, the key document is the agreement of purchase and sale which is a written, binding contract that includes all of the key terms of the transaction including a description of the land, the parties, the financial terms, deadlines and closing date, other prescribed terms and any other terms that are of importance to the parties.

Once the agreement of purchase and sale is received the purchaser will typically proceed to search title to the target property. A title search is a process by which all documents that are deposited or registered on title are reviewed to determine whether there are any encumbrances or other interests on title that would be problematic for a purchaser, such as an easement, lien, or mortgage that has not been discharged. A title search will also reveal information such as the legal description of the property, and whether it is in the Registry System or the Land Titles System. Beyond the title search a number of so-called “off-title searches” are also conducted on a property before purchase, which include searches related to the payment of realty taxes, water, sewer and utilities arrears, zoning compliance, work orders and building code compliance.

After completion of the title and off-title searches, a requisition letter is typically written by the purchaser’s counsel to the vendor’s counsel, requesting that certain defects in title be explained or rectified. Vendor’s counsel will then reply to the letter and the parties will typically attempt to resolve any outstanding issues. The form and content of requisitions and replies are tightly prescribed by convention, and should be followed closely.

In preparation for closing the parties will begin drafting the required legal documents and identifying the issues that need to be attended to prior to the closing date. The legal documents that are typically required include the transfer/deed of land, mortgage document, discharge of existing mortgage, direction regarding title, statement of adjustments for expenses that arise post-closing (such as utilities charged up to the closing date), direction regarding funds, an income tax affidavit with respect to the vendor’s residency status; a bill of sale if movable property is also being transferred to the purchaser; an insulation warranty to insure that there is no urea formaldehyde foam insulation in the structure; documentation relating to leases (if any) to indicate whether or not they will be assigned; and any undertakings and other documents dictated by the terms of the transaction.

On closing, the transfer of title to the target property will occur electronically unless the target property is registered under the Registry System in which case the lawyer or an agent will attend the land titles office to deposit the documents on title. Immediately prior to closing the purchaser’s lawyer will typically perform a follow-up title search to ensure no additional interests have been registered on title since the initial title search was performed. The purchaser’s solicitor will in most cases also obtain an execution certificate for the vendor to determine whether or not there are any writs of execution issued against the vendor which could compromise the purchaser’s title to the property. The closing process involves the execution and exchange of documents, and the exchange of keys and funds. Once the executed documents are exchanged the purchaser’s solicitors will agree to lift the escrow conditions, register the documents and exchange the keys and funds.

Title Insurance

Purchasers of real property in Canada will often obtain a title insurance policy to protect them against any losses that may arise from title defects that are not known to the purchaser at the time the property is acquired. Title defects are liens, encumbrances or other rights that a party other than the registered owner has over the title to property. Meaning the existence of an unknown title defect can in many cases compromise the registered owner’s rights of ownership over their own property. Title insurance policies help insure against these risks by indemnifying purchasers of property for any damages arising out of title defects that are not discovered until after the property is transferred.

Title insurance policies can insure owners, lenders or both, and can vary from one jurisdiction to another and from one insurer to another. Typically title insurers will require the lawyer representing the purchaser to satisfy a number of requirements before the policy is issued. These include searching title, reporting any defects and recently registered instruments, providing the insurance company with certain information about the purchaser, and delivering a final report on title to the insurer.

Restrictions On Acquisiton: Residency Of The Parties

Non-residents are generally not restricted from purchasing real property in Canada. However, if the vendor is a non-resident, certain special considerations are required. Specifically, if a vendor is a non-resident of Canada, pursuant to the Income Tax Act the purchaser must withhold a portion of the purchase price necessary to satisfy the vendor’s tax liability. However, if the purchaser, after due inquiry has no reason to believe that the vendor is a non-resident of Canada it does not need to satisfy this requirement. The position of the Canada Revenue Agency is that “due inquiry” requires the purchaser to take prudent measures to confirm the vendor’s residence status. This is most commonly achieved by the vendor providing to the purchaser on closing an affidavit stating that he or she is not a non-resident of Canada within the meaning of the Income Tax Act.

Planning ACT

The Planning Act must be given specific consideration in any transaction regarding the purchase and sale of property in Ontario. In particular, section 50 of the Planning Act creates strict regulations around the control of subdivisions in Ontario. The basic proposition underlying Section 50 is that a person cannot convey interest in land unless it falls within one of the exceptions listed in the Act. The exception most commonly relied on pertains to property that is described by a registered plan of subdivision. Another exception applies to property that is not within a registered plan of subdivision and allows the land-owner the carry out certain transactions (including a sale, transfer or mortgage) only if that person does not retain an ownership right in any land which abuts the target land. This exception has the effect of prohibiting a transaction where the land-owner owns land which abuts the target property. This prohibition commonly requires lawyers to search title on lands abutting the target property in a purchase transaction or seeking certain assurances from the vendor’s lawyer in respect of compliance with the Planning Act. Compliance with the Planning Act is of critical importance to any transfer of property in Ontario. If it is not complied with, title will not legally pass from one party to another, regardless whether the purchase or other transaction has occurred between the parties.

Zoning And Permits

In Ontario, all development and use of property, including subdivision planning, as well as any construction that occurs on such property must comply with the zoning by-laws and official city plans of the municipality in which it is situated. Zoning by-laws are a method a municipality uses to control the use and type of development of the lands within its borders. The zoning by-law of a municipality will set out specific requirements that must be followed such as how certain property may be used, requirements for lot-size, frontage and setbacks, building heights, the number of parking spaces, the size of the back yard, etc.

Passing and amending zoning by-laws requires compliance with the circulation and notice provisions contained in the Planning Act, and includes avenues for appeal if an amendment is rejected. Proposed changes to the zoning by-law that are minor in nature can be effected by way of a “minor variance”. To obtain a minor variance an application must be made to the local committee of adjustment, which will follow certain prescribed circulation and notice procedures and hold a hearing on the variance request.

If a structure is in violation of a zoning by-law but was built prior to its enactment it may be the case that such property has the designation of “legal non-conforming use”. One must look to the by-law in question to determine the rights that property owners would acquire if a non-conforming structure predates the by-law’s enactment.

Building permits are also required before constructing, demolishing, altering, or changing the use of a building or structure. All construction in Ontario must comply with the Ontario Building Code Act which requires eowners to obtain building permits prior to construction in order to ensure compliance with basic Building Code standards and other municipal requirements.