The non-Canadian residential property purchase prohibition – three primary areas of concern

Posted on January 24, 2023January 24, 2023

The following article is re-printed with permission. It was written by David Tang and Mackenzie Laforet of the law firm Miller Thomson. Links to their bios and to the firm are included should you wish further information.

Why is the Greenstead Consulting Group re-printing an article concerning residential real estate, when our expertise is in commercial real estate? The answer is that the current iteration of the Act is broader than many may expect and it does affect commercial real estate developments of mixed use property that contains or may contain a residential component in the future.

David Tang, Mackenzie Laforet

Many readers are already aware that the Canadian government has banned, as of January 1, 2023, the purchase of residential property in Canada by non-Canadians. The Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”)[1] itself dates back to June 23, 2022, but relies upon regulations to fully flesh it out. Those have now been introduced.

Broadly speaking, the Act addresses housing affordability and availability challenges by ensuring more housing is available for Canadians by prohibiting non-Canadians from buying housing. Much has been written about the specific exceptions to the prohibition and this article will not describe the exemptions which are applicable. One place to begin understanding the primary provisions of the Act and Regulation is Canada Mortgage and Housing Corporation’s (“CMHC”) article: https://www.cmhc-schl.gc.ca/en/media-newsroom/notices/2022/ensuring-housing-owned-canadians

Our article looks at three critical concepts found in the Act and its primary regulation, SOR/2022-250 [2], which came into force on January 1, 2023. The Regulation answers the primary question of what real property is subject to the ban. However, the approach taken by the Regulation will raise significant concerns for many of our clients given the unexpectedly broad application of the ban to property that is not immediately or obviously residential in nature. It also provided criteria for determining what level of foreign control brings a purchaser within the ambit of the ban, and those are also broader than many anticipated. This article also looks at the potential for prosecution of those engaged in assisting someone who may or may not be a non-Canadian in a purchase of residential property. Unfortunately, the current language of the Regulations results in some significant ambiguity and what we believe are unintended consequences. The primary author of this article and others at Miller Thomson LLP are involved in an initiative to clarify and hopefully correct any unintended consequences and Miller Thomson will update our readers periodically.

Overly broad definition of residential property

The ban applies to “residential property”, which is defined fairly clearly in the Act to include any condominium units (and common areas) and buildings that contain three or less dwelling units; essentially single family homes, duplexes and triplexes. The Regulations however adds to the statutory prohibition the purchase of any “land that does not contain any habitable dwelling, that is zoned for residential use or mixed use, and that is located within a census agglomeration or a census metropolitan area”.

The Regulation thus apparently prohibits the purchase of either a vacant lot or a commercial/industrial or institutional building on land that is zoned for “residential use or mixed use.” There is no clear exemption for existing commercial/industrial/institutional-only buildings in mixed use zones where residential uses could be introduced, whether immediately or only upon significant redevelopment, as there is for multi-unit residential buildings. The Regulation only asks whether the land contains a habitable dwelling, which almost all office buildings, factories and warehouses do not. This result is likely not intentional since the CMHC, with whom the government consulted prior to promulgating the Regulation, notes in its press release that the Regulations prohibit applies to “vacant land that does not contain any habitable dwelling, that is zoned for residential use or mixed-use” despite the regulation itself not containing that word “vacant.”

Even if the prohibition only applies to vacant land, it has the effect of applying even if the lot is intended to be redeveloped for a multi-unit residential purpose, such as a rental apartment building or condominium. This is despite the fact that if those multi-unit buildings already existed, the property would be exempt. Redevelopment that increases the number of housing units available in Canada should be seen as actually advancing the purposes of the Act, by increasing housing accessibility. To prohibit the purchase of vacant land that will be developed into multi-dwelling units, is an unexpected action from the government, and one that seems counter-productive to the very purpose of the Act.

The Regulation’s reference to lands zoned for “mixed use” is unfortunately ambiguous. Our expectation is that the Canadian government intended the term “mixed use” to mean only zoning where a residential use is one of the permitted uses, despite the lack of clarity. Almost all municipalities zone some areas for a mixture of commercial, institutional and industrial uses while prohibiting residential uses. It is not clear that those lands are not captured by the term “mixed use”. There are even zoning by-laws that provide for very limited residential uses in industrial zones, for example for a caretaker of large industrial facilities, which would even on a purposive interpretation of that provision be captured by the ban.

Corporations and the importance of “control”

Corporations and other entities are subject to the ban if they fall within the definition of “non-Canadian” found at section 2 of the Act. Corporations incorporated pursuant to Canadian corporate law can be subject to the “ban.” The test is whether the corporation or entity is controlled by a non-Canadian entity. The Regulations have provided the following definition of “control”:

(a) direct or indirect ownership of shares or ownership interests of the corporation or entity representing 3% or more of the value of the equity in it, or carrying 3% or more of its voting rights; or
(b) control in fact of the corporation or entity, whether directly or indirectly, through ownership, agreement or otherwise.

The extremely low threshold of a less than 3% direct or indirect ownership interest, equity value or voting rights in a Canadian corporation by any non-Canadian entity may snare many potential buyers.

The second “control” test, “control in fact”, is not defined in the Act or Regulations and many purchasers will need to carefully discuss with their legal counsel whether their purchase of residential property contravenes this Act. The meaning of “control in fact” will need to be determined on a case-by case fact-specific basis even if some guidance can be found in case law and experience interpreting section 256(5.1) of the Income Tax Act and other provisions in the Investment Canada Act, where that term is also used in arguably similar policy circumstances.

Penalty provisions for collaborators and purchaser

The Act carefully avoids invalidating contravening sales, focusing on imposing penalties and allowing for subsequent enforcement actions against the purchaser. Indeed, it explicitly provides that the sale is not invalidated by a contravention to avoid the chaos potentially voidable sales would create.

Instead, contravention is punishable by a maximum fine of $10,000 but applies broadly to “every person or entity that counsels, induces, aids or abets or attempts to counsel, induce aid or abet a non-Canadian to purchaser, directly or indirectly, any residential property knowing that the non-Canadian is prohibited under this Act from purchasing the residential property. Individuals with managerial or supervisory functions of a corporation, along with “senior officials”, officers, directors or agents or mandataries of the entity are individually liable. A $10,000 fine represents a real deterrent to the purchase of the types of homes that we expect the Act is designed to ensure are made available to individual Canadian families.

However, in addition to the monetary fines, section 7(1) of the Act permits a court to order a residential property purchased by a non-Canadian in contravention of the Act be sold. This remedy is what we expect will be the real teeth of the Act in the case of larger transactions. This approach prudently allows discretion on the part of the government about whether to pursue the remedy based upon the circumstances of the purchase. The Act further mandates judicial consideration of the value or merit of imposing this significantly more draconian remedy. The court making the sale order must be “satisfied that the impact of the order would not be disproportionate to the nature and gravity of the contravention”. Once made, however, the order would penalize the non-Canadian purchaser by deducting the costs of the sale and the Minister in bringing the application fro the order, any fines from the proceeds along with scooping any increase in value above the purchaser price, which would be paid to the Receiver General. If a sale is ordered, the consequence is the loss of any commercial viability of the purchase.

The primary uncertainty at this time is which other players will be liable for prosecution for participating in some way in such a purchase. The charging language is quite broad. It likely includes any person acting for the purchaser in any sort of agency relationship, such as real estate agents, who has knowledge of the status of the purchaser. The question of whether others, such as lawyers, mortgage brokers, lenders and even the vendor of the property (and its agents etc.) are captured by the language in section 6 of the Act and whether there will be rigorous prosecution is much more difficult to answer. Careful consideration of the facts to determine the risk will be required in many cases.

While legal advisors will be able to provide some of these players with tools or solutions to minimizing the risk of prosecution, the question remains whether those measures create an unreasonable disincentive to the transaction. Particularly where the transaction was to further the public objective of the Act of improving access to housing (as would be the case in the case of a purchase of vacant residentially-zoned lands for the development of new housing), the question remains whether the risks will prove a significant deterrent to these transactions.

Conclusion

These are just some of the issues and challenges that will arise as this Act is interpreted and enforced. Fortunately, the government has indicated that it will provide answers to concerns as they arise. Miller Thomson LLP is part of an initiative to encourage the government to clarify some parts of the Act and its regulations and we will continue to provide updates as they become available. We will also be monitoring whether there are challenges to the constitutionality of the regime based upon the separation of powers between Canada and the Provinces.

If you have any questions regarding these issues or the specific exemptions or rules contained in the Prohibition on the Purchase of Residential Property by Non-Canadians Act, please contact a member of the Miller Thomson Real Estate Group.

[1] S.C. 2022, c. 10, s. 235.

[2] Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, SOR/2022-250 (“Regulations”).

This article was originally published by Miller Thomson LLP

What You Need to Know About the Recent Amendments to BC’s Contaminated Sites Regime

Posted on July 26, 2021July 26, 2021

The following article was provided courtesy of Gowling WLG and discusses important changes in disclosure under the BC Environmental Act for certain types of property together with additional reporting requirements to the BC government. Please contact any one of the authors for additional information about these changes.

By Wally Braul, Maya Stano, Mark Youden and Lee Hawkings, Gowling WLG Canada International Law Firm & Legal Firm | Business Solicitors & Lawyers | Gowling WLG

On February 1, 2021, a number of amendments to BC’s Environmental Management Act (the “EMA”) and the associated Contaminated Sites Regulation (the “CSR”) came into effect (the “Amendments”). The Amendments include new requirements on owners and operators of properties used for industrial and commercial purposes, and a shift from the long-standing “Site Profile” system to a more onerous “Site Disclosure Statement” system.

At a high level, the most significant departures from the previous regime are:

categories of industrial and commercial lands subject to the amended regime are now set out in a schedule, with the potential for more categories to be added in the future; and
when certain events occur – such as ceasing operations and decommissioning – owners and operators of ‘specified industrial or commercial use’ properties must prepare a Site Disclosure Statement (“SDS”) and hire an environmental consultant to conduct a preliminary site investigation (“PSI”) and submit both the SDS and the PSI results to the Ministry of Environment.

Below we describe the key changes in greater detail (Part A), and offer some hypothetical scenarios to demonstrate how these may impact commercial and industrial real estate transactions in BC (Part B).

A. Four Primary Changes

1. Mandatory Site Disclosure Statements

First, the amended EMA requires regulated persons to provide a SDS. The new SDS system applies to a wide range of sites that are (or may be) contaminated. It also introduces a new defined term: ‘specified industrial or commercial use’, that refers to activities listed in Schedule 2 of the CSR that are now subject to the new SDS requirements.

Section 40 of the EMA now requires owners and operators of lands that have been used for ‘specified industrial or commercial uses’ to provide an SDS to applicable regulators and municipalities when:

seeking subdivision, rezoning, or building permit approvals;
decommissioning or ceasing operations; and
seeking creditor protection or filing for bankruptcy.

The amended EMA also requires vendors of properties used for these ‘specified industrial or commercial uses’ to provide an SDS to the purchaser.

The amended CSR in turn provides a number of industry and circumstance-specific exemptions from these broad categories, including where a site is already subject to a regulatory instrument or other processes under the EMA.

2. Mandatory Preliminary Site Investigations

The second notable change (and perhaps the most consequential) requires many persons who are obligated to provide an SDS to also conduct a PSI (the requirements of which are prescribed in the CSR) and provide the results of the PSI to a director of the Ministry of Environment (s. 40.1 of the EMA). An important exception here is for vendors of real property that do not otherwise meet the requirements for “decommissioning” or “ceasing operations”. Such vendors selling a property ‘as is’ are only required to provide an SDS to the purchaser.

This new ‘mandatory investigation’ provision is in addition to the existing authority of a director to order owners or operators to undertake site investigations (as set out in s. 41 of the EMA).

3. The Administrative Penalties Regulation Amendments

The third notable change is with respect to penalties, with the Administrative Penalties (Environmental Management Act) Regulation being amended to provide an administrative enforcement regime to support the new SDS system. The potential maximum penalties are:

$75,000 per day for contraventions of certain EMA provisions; and
$40,000 per day for contraventions of certain CSR provisions.

These administrative penalties can be enforced against parties who fail to provide an SDS or fail to fulfill the automatic site investigation requirements.

4. Local Government Act and Vancouver Charter Amendments

Finally, the Local Government Act (“LGA”) and Vancouver Charter have also been updated to incorporate the new EMA and CSR provisions. This update continues the Ministry of Environment oversight of specified municipal approvals related to potentially contaminated sites, which is commonly referred to as a “freeze and release”.

Under this system, municipalities must not approve specified zoning or permitting applications until they have received one of several “notices” from the Ministry of Environment granting permission. Under the previous regime, the Ministry of Environment made such determinations based solely on the Site Profile and whatever other public data was available. As a result of the recent Amendments, the Ministry of Environment will now be able to rely on an SDS and the results of the PSI undertaken by the applicant when issuing such notices.

B. Hypothetical Transaction Scenarios

The following scenarios illustrate how the Amendments create new considerations for real estate transactions involving lands used for a ‘specified industrial or commercial use’.

Selling ‘Specified Industrial and Commercial Use’ property ‘as is’

The only regulatory requirement on vendors selling the ‘specified industrial and commercial use’ property ‘as is’ is to provide an SDS to a prospective purchaser.
Further site investigations may, however, be voluntarily conducted by the owner, and the results provided to the purchaser in order to accommodate the deal.

Selling ‘Specified Industrial and Commercial Use’ property after ceasing operations

For business reasons, an owner may choose to shut down operations at the ‘specified industrial and commercial use’ property well in advance of the sale. Depending on the extent to which industrial operations have ceased and how long operations are ceased for, this owner may be required by the EMA and CSR to:
- provide an SDS to the registrar of the Ministry of Environment;
- provide the results of a PSI to a director of the Ministry of Environment; and
- provide an SDS to the purchaser.

Selling ‘Specified Industrial and Commercial Use’ property after decommissioning

To accommodate a deal, an owner may agree to decommission and remediate parts of the ‘specified industrial and commercial use’ property prior to sale. Depending on the extent to which the site has been decommissioned, this owner may be required by the EMA and CSR to:
- provide an SDS to the registrar of the Ministry of Environment;
- provide the results of a PSI to a director of the Ministry of Environment; and
- provide an SDS to the purchaser.

Seeking to rezone or redevelop ‘Specified Industrial and Commercial Use’ property before sale

To attract purchasers, an owner may seek municipal approval to rezone or redevelop the ‘specified industrial and commercial use’ property to a more valuable land-use prior to sale. Depending on the intended use of the property (and corresponding municipal approval that will be required), such owner may be required under the EMA and CSR to:
- provide an SDS to the applicable municipality;
- provide the results of a PSI to a director of the Ministry of Environment;
- seek a “notice” from a director of the Ministry of Environment (such notice allows the municipality to approve the application); and
- provide an SDS to the purchaser.
Further, under the updated provisions of the LGA and the Vancouver Charter, the applicable municipality would:
- assess the SDS;
- forward the SDS to the registrar of the Ministry of Environment;
- ‘freeze’ the zoning application until it has received a “notice” from the Ministry of Environment; and
- if a “notice” is received, ‘release’ the zoning application and proceed with making a decision whether to approve or deny.

ASTM Proposes Changes to Phase I ESA Standard (E1527)

Posted on July 12, 2021July 12, 2021

The following article discusses proposed changes to the Phase 1 Environmental Site Assessment [ESA] process. It was provided to us by the original author, whose contact information is after the article.

Although the lawyer-author is based in the USA and references the EPA in the USA, the ASTM standard for Phase 1 ESA is used in Canada as well. The major difference you should be aware of however, is that Canada and the USA, and its various states, have different items considered to be Hazardous Material. Therefore, your ESA consultant should be aware of the differences, between the countries or between the various states; particularly as they apply to a site under investigation, and so-called ‘non-scope considerations’.

Highlights

ASTM International’s E1527-13 Standard Practice on Phase I Environmental Site Assessments (ESAs) is required to be revised, reapproved as is or abandoned this year.
The ASTM E50.02 Task Group has been reviewing the existing standard, and many of group’s proposed changes are intended to correct what are viewed as deficiencies in implementation of the current standard. Other changes are offered to provide greater consistency in the language of the standard.
The current draft is out for ballot with results due on July 10, 2021. All users (and their counsel) are encouraged to actively participate in these discussions.

Every eight years, ASTM International’s standard-setting committees are required to evaluate existing ASTM standards. The ASTM E1527-13 Standard Practice on Phase I Environmental Site Assessments (ESAs) is required to be revised, reapproved as is or abandoned this year. The ASTM E50.02 Task Group has been diligently reviewing the existing standard for more than a year, and has been developing a series of proposed changes to the standard. Many of the proposed changes are intended to correct what are viewed as deficiencies in implementation of the current standard. Other changes are offered to provide greater consistency in the language of the standard. Several of the proposed changes are very nuanced. Not all of the proposed changes are uniformly supported. This Holland & Knight alert highlights what are believed to be some of the key proposed changes. The current draft is out for ballot with results due on July 10, 2021. It behooves everyone who relies on Phase I ESAs to actively engage in this updating process. The voices of the development and legal communities are currently sorely underrepresented in these discussions.

Nuanced Changes to the Definition of REC

Anyone who reads dozens of Phase I ESAs each year knows that, historically, one could give the same fact pattern to three different Environmental Professionals (EPs) and get three completely different opinions about whether there were Recognized Environmental Conditions (RECs) on the property, and why. In order to try to reduce the amount of variability in REC opinions, the E50.02 Committee is proposing a nuanced change to the REC definition in order to obtain more consistent interpretations. The new definition would read as follows:

The term recognized environmental condition means (1) the presence of hazardous substances or petroleum products in, on, or at the subject property due to a release to the environment; (2) the likely presence of hazardous substances or petroleum products in, on, or at the subject property due to a release or likely release to the environment; or (3) the presence of hazardous substances or petroleum products in, on, or at the subject property under conditions that pose a material threat of a future release to the environment. A de minimis conditions is not a recognized environmental condition.

This revised definition is supplemented with examples in Appendix X4 that are intended to clarify what each of these three phrases in the definition means. For example, under the first part of the definition, the presence of hazardous substances or petroleum products in, on, or at the subject property due to a release or likely release to the environment, an EP could not conclude that an off-site property was a REC. Under the second part of the definition, the likely presence of hazardous substances or petroleum products in, on, or at the subject property due to a release or likely release to the environment, an EP could conclude, based upon his or her experience and observations, that the subject property’s use as a gas station or dry cleaner for a significant period of time prior to regulatory controls, or the presence of a bare-steel underground petroleum storage tank installed at the subject property decades ago without any leak detection systems, may be examples of a REC due to the likely presence of a release of hazardous substances or petroleum products to the environment. Finally, Appendix X4 provides examples of what constitutes a material threat of a future release under the third part of the definition, including precariously stacked drums and bulging tanks. Appendix X4 explains that the past closure of a leaking underground storage tank, for example, may not constitute an Historical Recognized Environmental Condition (HREC) unless the EP has evaluated the data associated with that closed tank to be sure that the sampling data meets current regulatory standards for unrestricted use and whether there is an open vapor exposure pathway. Appendix X4 also provides examples of RECs, HRECs and Controlled Recognized Environmental Conditions (CRECs) in order to try to achieve greater consistency in the use of these terms in the future.

These written examples are supplemented further by a REC, HREC and CREC diagram in Appendix X4. All of this supplemental information should facilitate more informed discussions between users and EPs to be sure that they are using the terminology of E1527 as intended and reaching consistent conclusions whether a given fact pattern constitutes a REC, HREC or CREC.

Recognition via a Footnote that Emerging Contaminants Are Currently an Issue in Many States and Perhaps Should Be Addressed in the Phase I ESA (as a Non-Scope Consideration)

If someone is commissioning a Phase I ESA in a state where emerging contaminants, such as per- and polyfluoroalkyl substances (PFAS), are an issue, the EP will not be identifying these contaminants under the changes proposed to E1527. This is because the U.S. Environmental Protection Agency (EPA) has not yet designated any of the PFAS compounds to be a hazardous substance under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). ASTM continues to consider these compounds to be “non-scope.” So users in the growing number of states that are regulating PFAS under one or more of their regulatory programs should be alert to adding PFAS as a non-scope item (13.1.5.15) to their consultant’s scope of work.

ASTM addressed this issue indirectly via a footnote in Section 1.1.4 of the standard, by reminding users and EPs that there may be other state requirements, including those which may define emerging contaminants as hazardous substances:

If a Phase I Environmental Site Assessment is being conducted to satisfy state requirements and to qualify for the state (or other jurisdiction) equivalent of LLPs, users and environmental professionals are cautioned and encouraged to consider any differing jurisdictional requirements and definitions while performing the Phase I Environmental Site Assessment. Substances that are outside the scope of this practice (for example, emerging contaminants that are not hazardous substances under CERCLA), may be regulated under state law and may be federally regulated in the future. Although the presence or any release/threatened release of these substances are “non-scope considerations” under this practice, the user may nonetheless decide to include such substances in the defined scope of work for which the environmental professional conducting the Phase I Environmental Site Assessment is engaged. See Section 13.1.2 [sic].

Controversy Over the CREC Definition

There remains a vigorous debate about the CREC definition in the standard and its inclusion of the phrase “property use limitation” (PUL).

3.2.17 controlled recognized environmental condition—a recognized environmental condition affecting the subject property that has been addressed to the satisfaction of the applicable regulatory authority or authorities with hazardous substances or petroleum products allowed to remain in place subject to implementation of controls (e.g., property use limitations or activity and use limitations). For examples of controlled recognized environmental conditions, see Appendix X4.3.2.17.1. Discussion— …

(2) In determining whether a recognized environmental condition is “subject to implementation of controls (e.g., property use limitations or activity and use limitations),” the environmental professional shall identify the documentation providing the property use limitation or activity and use limitation that addresses the recognized environmental condition in the report’s Findings and Opinions section(s).

(3) When the environmental professional determines that a recognized environmental condition is “subject to implementation of controls (e.g., property use limitations or activity and use limitations),” this determination does not imply that the environmental professional has evaluated or confirmed the adequacy, implementation, or continued effectiveness of the property use limitation or activity and use limitation.

Those who oppose the current CREC definition see no need for the phrase PUL to be included in the standard. Users are reminded that there has been a long-accepted definition of Activity and Use Limitations (AULs) for more than 20 years – ASTM E2091, Standard Guide on Activity and Use Limitations, Including Institutional and Engineering Controls. AULs are described in detail in Section 6 of ASTM E2091; they include proprietary controls, state and local government controls, statutory enforcement tools and informational devices. See, e.g., 6.6.1 of E2091. The AUL terminology is consistent with the 2002 Brownfields Amendments statutory language and EPA’s 2019 Common Elements Guide, both of which require a purchaser to be in compliance with land use restrictions and not to impede the integrity or effectiveness of institutional controls in order to maintain its Landowner Liability Protections (LLPs). Neither the 2002 Brownfields Amendments nor the Common Elements Guide ever uses the term PUL. Developers are looking for bright-line tests, which the well-established term AULs provides. There is no need for the ambiguous term PUL to be used in the E1527 standard. The opponents are asking for this ambiguous phrase to be deleted throughout the standard.

When pressed to provide a definition of PUL, the E1527 Task Group came up with a tautology – simply repeating the words without offering any other meaning. PUL is not an accepted term of art in the industry. Instead, the Task Group now attempts to define the phrase through examples in Appendix X4 (examples 8, 9 and 10). But Examples 9 and 10 appear to be examples of sites that have met a risk-based cleanup standard, without any clear description of what constitutes the “control.” More than 20 years ago, ASTM rejected the concept that achieving a risk-based cleanup standard was, by itself, any type of control. That is why ASTM instructed one of its Task Groups to develop the E2091 standard on AULs, to supplement the E2081 standard on risk-based corrective action.

Concern Over Scope of Historical Resources to Be Reviewed on Adjoining Properties

The E1527 Task Group made significant changes in Section 8.3 regarding the scope of review of historical records. This section has been reorganized to emphasize that the standard historical information sources include aerial photographs, fire insurance maps, local street directories, topographic maps, building department records, interviews, property tax files, zoning/land use records and other historical resources. When evaluating the uses of adjoining properties (Section 8.3.9), the standard now emphasizes reviewing the “top four” sources of historical information (aerial photographs, fire insurance maps, local street directories and topographic maps) for those properties as well, at least if the “top four” sources were obtained for the subject site and included the adjoining properties. Several EPs have expressed concern that the proposed changes will result in a significant expansion of the scope of review for adjoining properties, as the existing E1527 language simply states that this historical information “should” be reviewed for those properties.

8.3.9 Uses of the Adjoining Properties—During research of the subject property, as described in 8.3.8, uses of the adjoining properties that are obvious shall be identified to evaluate the likelihood that past uses of the adjoining properties have led to recognized environmental conditions in connection with the subject property. This task requires reviewing the following standard historical resources if they have been researched for the subject property (see 8.3.8), provide coverage of one or more adjoining properties, and are likely to be useful in satisfying the objective in 8.3.1:

aerial photographs (see 8.3.4.1),
fire insurance maps (see 8.3.4.2),

iii. local street directories (see 8.3.4.3), and

historical topographic maps (see 8.3.4.4).

In cases where any of the preceding four standard historical resources are not reviewed for the adjoining properties but they were reviewed for the subject property, the environmental professional shall indicate in the report why such a review was not conducted. Additional standard historical resources should be reviewed if, in the opinion of the environmental professional, such additional review is warranted to achieve the objective in 8.3.1. Factors to consider in making this determination include, but are not limited to: the extent to which information is reasonably ascertainable; likely to be useful; the time and cost involved in reviewing such resources (for example, reviewing property tax files for adjoining properties may be too time-consuming); and local good commercial and customary practice. Other historical resources may be used to satisfy the objective of 8.3.1, but are not required to comply with this practice. The report shall describe identified uses at the adjoining properties, indicate the earliest dates identified for the first developed use of the adjoining properties (for example, records showed no development of the adjoining properties prior to the specific date), and identify significant data gaps. The term “developed use” includes agricultural uses and placement of fill dirt, and other uses that may not involve structures.

Clarification That the 180-Day or One-Year Shelf Life of the Report Begins to Run from the Date of the First Task Conducted, and That Those Dates Must Be Listed in the Report

Section 4.6.1 of the standard describes how long the Phase I report will be presumed to be viable. It will be presumed to be viable if the report was completed no more than 180 days prior to the date of acquisition, or up to one year if certain components of the report have been updated: the interviews, review of government records, visual inspection of the property and EP Declaration. The E1527 Task Group intends to clarify in the next update of the E1527 standard that this update clock begins to run from the first of these activities, and that the date each component (interview, environmental lien search, review of governmental records, visual inspection and EP Declaration) must be identified in the report. If the EP conducts the environmental lien/AUL search, the date of that report should also be listed in the Phase I ESA.

Clarification That AUL/Environmental Lien Title Reports Must Search Land Records Back to 1980.

The user is responsible under Section 6.2 of the standard for providing land title records that describe any environmental liens or AULs. The revisions to the standard explain that this is typically done in one of two ways: through a Preliminary Title Report/Title Commitment, or through a Condition of Title Report/AUL-Environmental Lien Title Report.

An important issue that came to the attention of the E1527 Task Group was that many companies running so-called AUL/Environmental Lien Title Reports were only searching the land records back to the last change in title, giving purchasers a false sense of security that there were no environmental liens or AULs. The Task Group proposes to address this issue by clarifying the methods for searching title in Section 6 and explaining that companies preparing AUL/Environmental Lien Title Reports must search the land title records back to 1980 for potential restrictions on title. Users who rely on these types of searches are encouraged to talk with the companies performing these searches for them to be sure that they are prepared to comply with this clarification of the current requirement.

6.2.1 Method 1 Transaction-Related Title Insurance Documentation Such as Preliminary Title Reports and Title Commitments – the user may rely on title insurance documentation, commonly fashioned as preliminary title reports or title commitments, which are prepared in the course of offering title insurance for the subject property transaction to identify environmental liens or AULs filed or recorded against the subject property. Title insurance documentation involves a reliable review of land title records or judicial records. See Appendix X1. However, the user (or a title professional engaged by the user) should closely review the title insurance documentation, particularly the areas of the documentation listing subject property encumbrances or “restrictions on record,” for indications of AULs or environmental liens.

6.2.2 Method 2 Title Search Information Reports Such as Condition of Title, Title Abstracts, and AUL/Environmental Lien Reports – Alternatively, users may rely on title search information reports to identify environmental liens or AULs filed or recorded against the subject property. Title search information reports, commonly fashioned as Condition of Title, Title Abstract, AUL/Environmental Lien or similarly titled reports, provide the results of land title record and/or judicial records research (as applicable) for information purposes only, rather than for the purposes of offering title insurance. Users may rely on title search information reports as long as the title search information reports meet the following scope.

6.2.2.1 Scope of Title Search Information Reports – Title search information reports shall identify environmental covenants, environmental easements, land use covenant and agreements, declaration of environmental land use restrictions, environmental land use controls, environmental use controls, environmental liens, or any other recorded instrument that restricts, affects, or encumbers the title to the property due to restrictions or encumbrances associated with the presence of hazardous substances or petroleum products. Title search information reports shall review land title records for documents recorded between 1980 and the present. In the case of jurisdictions that rely on the judicial records for filing of environmental liens, the judicial records shall also be reviewed for environmental liens filed anytime between 1980 and the present. If judicial records are not reviewed, the title search information report shall include a statement providing that the law or custom in the jurisdiction at issue does not require a search for judicial records in order to identify environmental liens.

Findings/Conclusion

For those who have always disliked the awkward phrasing of the conclusion in a typical Phase I report, the Task Group has now changed the phrasing (Section 12.7) so that it reads as an affirmative statement.

12.7.1 “We have performed a Phase I Environmental Site Assessment in conformance with the scope and limitations of ASTM Practice E1527-21 of [insert address or legal description], the subject property. Any exceptions to, or deletions from, this practice are described in Section [ ] of this report. This assessment has revealed no recognized environmental conditions, controlled recognized environmental conditions, or significant data gaps in connection with the subject property,” or

12.7.2 “We have performed a Phase I Environmental Site Assessment in conformance with the scope and limitations of ASTM Practice E1527-21 of [insert address or legal description], the subject property. Any exceptions to, or deletions from, this practice are described in Section [ ] of this report. This assessment has revealed the following recognized environmental conditions, controlled recognized environmental conditions, and/or significant data gaps in connection with the subject property:” (list).

Key Takeaways

Many of these proposed changes are quite nuanced but important and could lead to greater consistency in the findings and conclusions of Phase I ESA reports, if taken to heart by EPs. However, the proposed inclusion of “property use limitations” as a “required control” within the CREC definition remains extremely troublesome, as it appears to encompass mechanisms that are neither “land use restrictions” nor “institutional controls,” and therefore mechanisms that go well beyond the requirements of the 2002 Amendments to CERCLA or the 2019 EPA Common Elements Guide. The direction in which the ASTM E50 committee is headed puts EPs at risk of having to make legal judgments without a license, and their clients at risk of losing their landowner liability protections under CERCLA. It’s not too late to weigh in on this very important issue.

For more information or questions on the ASTM Phase I ESA Standard proposed changes, contact the author, who is chair of the ASTM Activity and Use Limitations Task Group as well as an active member of the ASTM E50.02 Committee and several of its task groups.

If you would like further information about this article and you do business in the USA, contact the article author:

Amy L. Edwards, Partner, Holland & Knight

Amy.Edwards@hklaw.com

Washington, D.C. 202.457.5917

Do You Speak Legalese?

Posted on January 15, 2021January 15, 2021

This article was written by Martin A. Schwartz, Partner at the law firm Bilzin Sumberg, and is reprinted here with his permission. His primary area of focus is Real Estate law and he can be reached at 305-350-2367 or mschwartz@bilzin.com

Peter Morris’ comments: As someone who must read, and interpret, leases and purchase and sale documents daily I agree with him. I add the word “interpret” because of the ambiguity in most documents. In some cases, the drafter of the document inserts words specifically so the true meaning of the concept can be read in multiple ways. I call these ‘wiggle words’, and I root these out for my clients whenever possible. Three (3) Cheers for Martin for his clear thoughts on this matter in his article that starts now.

Each profession has its own jargon but most professions rely on modern English as their base. Real estate and other transactional lawyers, those who draft legal documents, seem to be the exception. This is a strange phenomenon since most litigators, those attorneys who write only for fellow lawyers (i.e., judges), seem to have little problem writing in modern English. However, most real estate and other transactional lawyers whose work-product involves nonlawyer parties, usually find it difficult to express their thoughts in modern English. Instead, they rely on a strange language referred to as “legalese” to convey their message.

Merriam-Webster defines “legalese” as follows: “the language used by lawyers that is difficult for most people to understand; legal jargon.”¹ The Oxford Guide to Plain English describes it somewhat differently:

“Fog in the law and legal writing is often blamed on the complex topics being tackled. Yet when legal texts are closely examined, their complexity seems to arise far less from this than from unusual language, tortuous sentence construction, and disorder in the arrangement of points. So the complexity is largely linguistic and structural smoke created by poor writing practices.

“Legalese is one of the few social evils that can be eradicated by careful thought and disciplined use of a pen. It is doubly demeaning: first it demeans its writers, who seem to be either deliberately exploiting its power to dominate or are at best careless of its effects; and second it demeans its readers by making them feel powerless and stupid.”²

William Safire, a former op-ed columnist with The New York Times, describes it more humorously: “[L]egalese often has the virtue of eliminating ambiguity, and should be read more as a mathematical equation than as prose, anything herein to the contrary notwithstanding.”³

Legalese is a language that relies on archaic language, poor grammar and sentence structure, repetition, surplus language, and legal jargon. The predicate for use of legalese seems to be that the parties will be represented by attorneys, and their attorneys will understand the documents even if their clients cannot. Although such an assumption may assist in promoting legal employment, it appears no more defensible than having legal documents written in Arabic in reliance on the parties using persons familiar with Arabic to explain the contents of the documents to their clients. Since legal documents will govern the rights and obligations of the parties for whom they are written, it seems only proper that such parties should be able to read and understand them. The use of legalese has been criticized by the courts: “[This is a] document checked full of legalese that can make a Byzantine scholar proud.”⁴

Some legalisms seem to be going out of vogue. Does anyone use “the party of the first part” and “the party of the second part” to reference the parties to an agreement? Use of these terms allows the drafter to avoid identifying the parties throughout the document, but to an untrained reader, it may be unclear which party is obligated to which obligations under the agreement.

Other terms seem to have survived the transition from the age of the bow and arrow to that of automatic weapons. Many drafters continue to use terms like “witnesseth” and recitals preceded by the term “whereas.” Frequently, last paragraphs in agreements conclude with “In witness whereof.” One may well wonder if such drafters think it is essential their documents look like legal proclamations intended to be admissible in the English courts of the 14th century or be in a form sufficient to be affixed to the nearest tree. And what about title affidavits that conclude with the phrase “further affiant sayeth naught”? This last phrase adds nothing to the affidavit that a period at the end of the preceding sentence would add, but it does perhaps provide the drafter with the comforting feeling that the affidavit is a “legal document.”

Attorneys do not seem to question why is it necessary to use language from the age of Shakespeare to express their thoughts. Such archaic language is nowhere else found in modern writing, and it surely does not improve the readability of the document in which it is contained.

Another tenet of legalese involves repeating numbers with Arabic characters and in words. It might not be necessary to provide for “a ten (10) day notice” rather than “a 10-day notice” but a reader seeing both the character and word will appreciate that he or she is reading a legal document. This has been referred to as the “stupid reader syndrome” since it appears to be predicated on the assumption that the reader will not be able to understand a number if it is only mentioned once. A danger, however, of this needless repetition sometimes appears in documents when the character and word do not match, e.g., “ten (15) day period,” which presents an interpretive problem as to which number is correct. This needless repetition is so engrained in the legal vocabulary that a request to a legal secretary to transmit two copies of a survey will appear as “enclosed are two (2) copies of the survey.”

Perhaps the hallmark of a legal document is the inclusion of “h” words. The words “herein,” “hereto,” “hereof,” and “hereinafter” are the staples of drafting in legalease. These words, other than “hereinafter,” defy precision because it is never clear whether they are referencing a particular paragraph, section, or the entire agreement. Typically the use of such language requires the drafter to add a separate definitional section to clarify their meaning because of their latent ambiguity. You will not see these words used in common parlance or even in nonfiction writing except perhaps the use of “hereinafter” referencing an existence beyond the grave. But these words are typically liberally sprinkled throughout a document serving as a beacon to identify the document: “This is a legal document!”

Another frequent device for drafting in legalese is the use of the expression “provided, however, that….” This phrase serves to introduce an exclusion to the immediately previously expressed idea. Although one may substitute a period for this entire phrase and follow with the start of a new sentence with the same effect, the use of this term allows the draftsperson to establish his or her credentials as a lawyer and, as a side benefit, permits drafting run-on sentences galore. One can test the elimination of this phrase by substituting a period before “provided, however, that…” and determine its absence has no effect on the meaning of the paragraph but only serves to increase its readability.

Legalese embraces repetition: one word is good; six words are better. Why refer to the “provisions” or “terms” of an agreement when you can mention the “terms, provisions, covenants, agreements, representations, and warranties” of an agreement? Would anyone without legal “training” think that the terms of an agreement would not include any representations, warranties, or covenants in the agreement? I think not, but verbosity is a preferred drafting technique.

Another form of repetition frequently utilized is couplets: two words used in conjunction when a single word will convey the same message. Frequently used couplets include: “terms and provisions,” “good and valuable,” “covenants and agreements,” “free and clear,” “each and every,” and “any and all.” Many attorneys sprinkle these liberally into their drafting so the reader will understand the document was drafted by a lawyer.

Related to repetition is the inclusion of unnecessary extra language. In referring to exhibits and schedules in a document, the drafter will frequently qualify such exhibits or schedules with the phrase “attached hereto and incorporated herein by reference.” It is not clear whether such a phrase has any legal effect. Would a reader think that an exhibit or schedule appearing at the end of a document and referenced in the document might be a stapling error? That is, it was never intended to be part of the agreement. Or that such documents were merely attached to the document to increase its length?

The use of legalese is perpetuated by reuse of form documents replete with legalese. New lawyers instructed to use form documents are inculcated into the use of archaic language, repetition, and run-on sentences. It has been noted that there is no economic incentive to “clean up” these documents by spending extra time merely for the sake of readability.⁵ Even lawyers conscious of the use of legalese frequently avoid removing such language in the haste to produce a document for distribution. Will Rodgers famously noted, “If I had more time, I would have written a shorter letter.”

There is a perception among new lawyers, and even among seasoned lawyers, that writing in plain English dumbs down the language of the instruments. This is surely the case in some consumer forms in substituting “I” and “you” for “buyer” and “seller.” However, in response, it has been noted that:

“[W]riting in plain English need not mean giving up sophisticated use of language and affecting a chatty informality. On the contrary, it requires sophistication to produce documents that are consistently coherent, clear and readable. By contrast, this “specialized tongue” of lawyers, “legalese,” may even be easier to write because it relies on convention instead of thought. At best, however, the result is wordy, pompous, and dull. At worst it is unintelligible.”⁶

Does legalese really improve the content? As an example of how legalese affects readability, below are two short paragraphs. The first is written in English and the second re-written in legalese.

Jim had the flu and went to see Dr. Jones. The doctor told Jim he would be better in 10 days if Jim stayed home, drank liquids, and slept for eight hours each night. If his condition did not improve by the end of 10 days, the doctor said he would prescribe antibiotics.”

Jim had the flu (hereinafter referred to as the “Disease”) and went to see Dr. Jones (hereinafter referred to as the “Doctor”) and the Doctor told Jim that Jim would be better in ten (10) days, provided, however, that (i) Jim stayed home, (ii) Jim drank liquids, and (iii) Jim slept eight (8) hours each night (hereinafter collectively referred to as the “Remedial Conditions”) and provided further that if by the expiration of said ten (10) day period and full and complete fulfillment of the Remedial Conditions the Disease was not fully or partially abated to the full and complete satisfaction of the Doctor, in the Doctor’s sole and unfettered discretion, then the Doctor would prescribe antibiotics.

In a survey in 1988 sent to 1,116 Florida judges and lawyers selected at random that contained six phrases written in two different styles without identifying legalese but only a “test of language trends in the legal profession,” the preparer of the survey received 628 responses: 352 came from judges and 279 from lawyers. The judges preferred plain English in 86 percent of their responses and the lawyers in 80 percent.⁷

The courts have been critical of the use of legalese.⁸ Is there any downside to use of such language? If ordinary individuals not represented by an attorney are intended to be bound by legal instruments not otherwise decipherable as written in the English language, courts have refused to enforce such agreements to the detriment of the drafters.⁹

Beyond the issue of enforcement, why is it necessary to draft documents far removed from common English? Why does the poor use of the English language with run-on sentences and unnecessary repetition make a document legal? In surveys of judges and attorneys, the overwhelming percentage of respondents opted for plain English over legalese.¹⁰

Any real estate attorney believing use of legalese is benign should be ordered to review and decipher language appearing in many securitized financing documents. There are numerous examples in such documents when one sentence can run an entire page.¹¹ It is frequently impossible to understand the content of any provision with a single reading.

Consumer groups have been struggling for years to require consumer documents to be written in plain English. Since the world outside of the legal profession operates using plain English, it is difficult to justify using a different language to create enforceable legal rights and obligations. In some cases, the reward for using legalese is an unenforceable agreement.¹²

¹ Merriam-Webster’s Learner’s Dictionary, “Legalese.”

² Martin Cutts, Oxford Guide to Plain English (3d ed. 2009).

³ William Safire, Safire’s Political Dictionary (Rev. ed. 2008).

⁴ In Re Benninger, 357 B.R. 337 (Bankr. W.D. Pa. 2006). See also Gelinas v. State, 398 S.W. 3d 703 (Tex. Crim. App. 2013) (Cochran concurring opinion) (“These instructions are 100 [percent] legalese. They make no sense.”).

⁵ See Hills, Why Contracts are Written in “Legalese,” 77 Chicago-Kent Law Rev. 58 (2001).

⁶ Barbara Child, Language Preferences of Judges and Lawyers: A Florida Survey, 64 Fla. B. J. 32 (Feb. 1990).

⁷ Id.

⁸ State of Wisconsin v. Eason, 629 N.W.2d 625 (Wisconsin Sup. Ct. 2001) (dissenting opinion) (“The warrant and affidavit replete with terms normally found in attorney-drafted documents including “whereas,” “curtilage,” “to-wit” and other such similar terms. . . . Indeed law students have been taught for at least the last 50 years to avoid this kind of legalese.”); But see Bo Bingham, Lawyers Speak “Legalese” for a Reason, The Legal Lowdown (Oct. 6, 2015), http://www.thespectrum.com/story/life/features/mesquite/2015/10/06/lawyers-speak-legalese-reason/73460860/ (discussing the virtues of legalese).

⁹ See In Re Benninger, 357 B.R. 337.

¹⁰ See Kimble & Prokop, Jr., Strike Three for Legalese, Michigan B. J. 40 (Mar. 2014); Barbara Child, Language Preferences of Judges and Lawyers: A Florida Survey, 64 Fla. B. J. 32 (Feb. 1990).
¹¹ For example: “‘Certificateholder’: With respect to any Certificate, the Person whose name is registered in the Certificate Register (including, solely for the purposes of distributing reports, statements or other information pursuant to this Agreement, Beneficial Owners or potential transferees of Certificates to the extent the Person distributing such information has been provided with an Investor Certification by or on behalf of such Beneficial Owner or potential transferee); provided, however, that, except to the extent provided in the next proviso, solely for the purpose of giving any consent or taking any action pursuant to this Agreement, any Certificate beneficially owned by the Depositor, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator, the Operating Advisor, a manager of a Mortgaged Property, a Mortgagor or any Person known to a Responsible Officer of the Certificate Registrar to be an Affiliate of the Depositor, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator, the Operating Advisor, a manager of a Mortgaged Property or a Mortgagor shall be deemed not to be outstanding and the Voting Rights to which it is entitled shall not be taken into account in determining whether the requisite percentage of Voting Rights necessary to effect any such consent or take any such action has been obtained; provided, however, that for purposes of obtaining the consent of Certificateholders to an amendment of this Agreement, any Certificate beneficially owned by the Depositor, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator, the Operating Advisor or an Affiliate of the Depositor, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator or the Operating Advisor shall be deemed to be outstanding, provided that if such amendment relates to the termination, increase in compensation or material reduction of obligations of the Depositor, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator, the Operating Advisor or any of their Affiliates, then such Certificate so owned shall be deemed not to be outstanding; provided, however, if the Master Servicer, the Special Servicer or an Affiliate of the Master Servicer or the Special Servicer is a member of the Controlling Class, it shall be permitted to act in such capacity and exercise all rights under this Agreement bestowed upon the Controlling Class; provided, further, if an Affiliate of the Depositor, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator or the Operating Advisor has provided an Investor Certification in which it has certified as to the existence of an Affiliate Ethical Wall between it and the Depositor, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator or the Operating Advisor, as applicable, then any Certificates beneficially owned by such Affiliate shall be deemed to be outstanding.”

¹² See Paladino v. Avnet Computer Techs, 134 F.3d 1054 (11th Cir. 1988); Nicosia v. Wakefern Food Corp., 136 N.J. 401, 643 A.2d 554 (N.J. 1994).

This article was first published in the April 2017 issue of The Florida Bar Journal, Volume 91, No. 4.

The Ties That (May) Bind: ensuring letters of intent do not impose binding obligations on parties

Posted on December 17, 2020December 17, 2020

The following article is reprinted with permission from the authors at McCarthy Tétrault. Their contact information is listed at the end, so you may contact them directly concerning this or other legal matters you may to discuss with them.

From our business perspective the three points that really stood out for those in the commercial real estate field, are the following:

1. Ideally any matters that are to be legally binding, such as a confidentiality agreement, and exclusive negotiation; should be separate from the LOI itself and needs to executed by the parties to that agreement – NOT the real estate agent, who may typically draft, and sign the LOI to advance an understanding of a negotiation.

2. Your actions, as an agent for your client, cannot be inconsistent with the intent of the LOI being non-binding.

3. Although not mentioned in this article, as we have stated many times before, it is vitally important to prominently note that the LOI is NON-BINDING, and you include a paragraph in the LOI letter noting that your client has not reviewed or approved of the contents of the LOI the agent is drafting.

Here is the article:

Non-binding letters of intent (“LOIs”), which sometime take the form of ‘indicative term sheets’ or ‘memorandums of understanding’, can be useful tools to start negotiations between parties in a commercial transaction. These documents, typically lay out the principal terms of a transaction and facilitate negotiations of a binding agreement between the parties.

LOIs are most useful when parties can set forth the main points of a proposed deal, such as the structure of the transaction or purchase price arrangements, without committing to a legally binding contract. However, recent Ontario jurisprudence confirms that, based on certain language of the LOI or the behaviour of the parties, LOIs may be interpreted as binding even where the parties explicitly intend for them not to be. As such, it is key to draft the LOI with purpose and be mindful of your actions during negotiations.

Risks and rewards of LOIs

There are several important advantages to using an LOI in the course of a transaction. Entering into an LOI signals to the parties – and in certain instances to the public – that the parties are serious about the potential deal, and it lays a foundation to further negotiation, thus creating deal momentum. An LOI also allows parties to set out their basic understanding of the key business terms they want to achieve before investing time and money into hiring a team of advisors and negotiating the full deal. The increasingly popular “Hybrid” LOIs, or LOIs that have both binding and non-binding terms, help the parties protect themselves during negotiations, such as through committing to confidentiality, exclusivity and non-solicitation terms.

Signing an LOI may also come with some hazards. Negotiating through an LOI may increase the costs and tensions of a transaction by requiring a separate round of negotiation. LOIs, which by their nature are shorter than definitive legal documents, can be internally incoherent and lend themselves to varied interpretations and expectations by the counterparties. An LOI may also create unintended disclosure obligations for reporting issuers by triggering material change and/or early warning reporting. The most critical risk of an LOI, however, is the possibility of a binding obligation being unintentionally imposed on the parties. In the private equity space, this can be of particular concern given the prevalence of investor or third party rights of first refusal that could be triggered by a party inadvertently creating binding obligations. The current case law on this issue is summarized below.

Recent developments in Ontario jurisprudence

As discussed in our recent Canadian M&A Perspectives blog post, Canadian common law courts have not formally recognized a general pre-contractual obligation to negotiate an agreement in good faith, however the Supreme Court has refrained from definitively indicating that such a duty might not be recognized in the future[1] and in certain provinces, such as Ontario, such a duty has been recognized in instances a “special relationship” exists between the parties. Our aforementioned blog post delineates a list of factors which may influence a court’s determination of whether a duty to negotiate in good faith exists on a case-by-case basis, including after an LOI has been signed.

Ontario courts have been more definitive in establishing when binding obligations may arise from a signed LOI. In Wallace v. Allen, the Ontario Court of Appeal held that an LOI must be read as a whole, with an eye to the presence of contractual language.[2] In the LOI in Wallace, the clause “this letter of intent must be reduced into a binding agreement of purchase and sale by the parties within the next 40 days” demonstrated a clear intention of the parties to be bound.[3] However, the Court of Appeal also held that general use of “the language of contract”, such as “it is agreed”, “upon acceptance” and “this agreement” created a binding implication even in the absence of language as unambiguous as the clause above.[4] The Court of Appeal also considered the behavior of the parties in making its finding. It held that the parties in Wallace behaved as though they were bound by the LOI – the seller announced his retirement upon the sale of the business, and referred to the buyer as the new owner.[5] The Ontario Superior Court recently extended this reasoning in Seelster Farms et al. v. Her Majesty the Queen and OLG, noting that contractual language may not be necessary provided that hallmarks of contractual intention – an offer, an acceptance at its inception and consideration – are present both within the wording of the LOI and the behaviour of the parties.[6] In Seelster, a contractual relationship was formed, which led the court to consider the LOI as an enforceable agreement.

Drafting considerations

Parties drafting an LOI should do so with clarity and a sense of purpose – it is key to identify at the outset which terms are intended to be binding, and which are not. The following tips will be helpful if the intention is to draft a non-binding LOI:

Avoid any contractual language, such as “it is agreed”, “upon acceptance”, “this agreement” or “the parties shall/will”.
Clearly state the conditions under which parties intends to be bound, for example by stating that a binding intent will only be crystalized in a definitive agreement and the entering into of a definitive agreement is contingent on the Recipient’s satisfaction of its due diligence review, external factors and the Recipients sole discretion.
Include a “non-binding” provision that expressly covers which terms are and are not intended to be binding on the parties. For example, an LOI may state that, other than the confidentiality and exclusivity clauses, all other sections are not binding on the parties and any such provisions will only be binding when incorporated in an executed definitive agreement.
Consider dealing with any non-generic binding provisions in a separate agreement or exempting them from the LOI, such as an exclusivity letter agreement or confidentiality agreement for example.

Making sure to “practice what you preach”

The language of the LOI, however well-drafted, is not alone sufficient to prevent binding obligations from arising. In the aftermath of Wallace and Seelster Farms, the intention of the parties to enter a binding agreement is to be determined on the entirety of the evidence. Where the parties intend for the LOI to not be binding, they must act as such. Behaviour that implies that the deal is going to happen and that negotiations are a mere formality may influence the courts to read in contractual obligations between the parties of a non-binding LOI. Any inter-related agreements will also be considered in this determination, meaning other contractual relations between the parties must not differ from the intention stated in the LOI.[7]

Post-script: Extra caution in the Province of Québec

Parties contemplating an LOI governed by Québec law should be mindful that the Civil Code of Québec provides a statutory duty of good faith which requires the parties to conduct themselves in good faith both at the time the obligation arises and at the time it is performed (as opposed to only when the obligation is performed, which is the current law in Ontario, for example).[8] In its recent August 2020 decision in Beauregard v. Boulanger, the Quebec Superior Court reiterated that an LOI is an agreement akin to a preliminary contract, and thus imposes that the parties conduct themselves in good faith.[9] That said, the obligation to act in of good faith at the pre-contractual stage does not prevent either of the parties from putting an end to negotiations that have failed or that have been carried out in bad faith by the other party. While the court ultimately found that the defendants could withdraw from the LOI, the court in an obiter explained that a party who breaks off negotiation in breach of its duty to act in good faith could expose itself to the damages suffered by its counterparty between the signing of the LOI and the breakdown of the discussions (for example, damages could include the fees and expenses of advisors incurred in that period and travel expenses). The obligation of good faith in preliminary contractual relations is particular to the Civil Code of Quebec. It has yet to be determined whether the Supreme Court of Canada decision in Bhasin v. Hrynew, [10] which recognized as a general organizing principle of common law good faith in contractual performance, extends to preliminary contractual relations.

[1]Martel Building Ltd. v Canada, 2000 SCC 60 at para. 73.

[2]Wallace v. Allen, 2009 ONCA 36.

[3]Wallace v. Allen, 2009 ONCA 36, at para 27.

[4]Wallace v. Allen, 2009 ONCA 36, at paras 29-31.

[5]Wallace v. Allen, 2009 ONCA 36, at para 34.

[6]Seelster Farms et al. v. Her Majesty the Queen and OLG, 2020 ONSC 4013, at para 175-178.

[7]Seelster Farms et al. v. Her Majesty the Queen and OLG, 2020 ONSC 4013, at para 177.

[8] Civil Code of Québec, section 1375.

[9]Beauregard c. Boulanger, 2020 QCCS 2090.

[10]Bhasin v. Hrynew, 2014 SCC 71.

Authors

Here is a link to the original article: CLICK HERE

B.C. Introduces Land Owner Transparency Registry to Record Indirect Ownership of Land

Posted on November 9, 2020November 9, 2020

The following article was written by Mark V. Lewis (Partner) & Sunjeet Grewal (Associate) of the law firm Bennett Jones, Vancouver; and reprinted with their permission. Please contact them directly for more information about LOTA & how it may apply to you.

On November 30, 2020, Bill 23 (2019), the Land Owner Transparency Act (LOTA) will come into force together with the Land Owner Transparency Regulation (LOTR) to create the Land Owner Transparency Registry, a first-of-its-kind registry in Canada intended to record the indirect ownership of land by certain individuals.

Background

Following various reports and allegations of illicit money being used to acquire British Columbia real property, the province initiated several measures in 2018 and 2019 to identify means by which it could either limit the use of such funds to acquire interests in land or track the identities of the individuals who were ultimately providing the funds for the purchase of such interests in land. While the Provincial government intends LOTA to create additional means for government authorities, tax authorities and law enforcement to combat fraud, money laundering and tax evasion, it is clear that LOTA will have far-reaching consequences—beyond reducing illegal and nefarious activities—on day-to-day real estate transactions and the ownership of interests in land in B.C.

In launching the Registry the government is creating a second database of land ownership records that will operate in parallel to, but separate from, the Land Title Office (LTO), which records registered ownership of real property interests. The Registry will record indirect ownership of interests in land (e.g., shareholdings in a corporation, partnership interests in a partnership and beneficial interests of trust beneficiaries) in an online database operated by the British Columbia Land Title and Survey Authority (LTSA). A land transfer filed in the LTO (among other filings) will require at least one and possibly two concurrent filings in the Registry. According to the LOTR, the search functionality of the Registry is intended to be made operational on April 30, 2021, giving the government a five-month cushion to resolve all outstanding practical and technological issues in activating the Registry.

The operative disclosure and reporting language in LOTA is largely borrowed from the Information Collection Regulation made under the Property Transfer Tax Act, RSBC 1996, c.378 (PTTA). The concepts of relevant corporations, relevant partnerships and relevant trusts, and the types of disclosure contemplated in LOTA are generally (but not completely) consistent with the PTTA. We will not revisit those concepts here.

LOTA Fundamentals

LOTA requires the disclosure of the names of certain individuals (interest holders) who have an indirect interest in privately-held real property in British Columbia as well as also their key personal and contact details. Contrary to many misleading publications, the Registry is not intended to identify real property “beneficial ownership” and it does not specifically focus on the “beneficial owners” of real property, as those terms are commonly known and used at law.

Instead, LOTA focusses on the individuals who ultimately have material control over specific interests in land, in some instances over multiple layers of ownership well beyond that of the actual beneficial owner at law. In some instances this may align with the identity of beneficial owners who are individuals. However, in the majority of commercial instances in which the beneficial owner is a non-individual person, the ultimate controlling owner(s), whose identities and interests must be disclosed under LOTA, will be one or more individuals higher up an organizational chart.

When a parcel of land (for which there is a title raised and registered in the LTO) changes hands in the normal course (via the filing of the Form A Freehold Transfer at the LTO), new parallel documentation must be filed in the Registry to satisfy the LOTA requirements. Where a parcel of land is transferred at the beneficial ownership level (e.g., on the transfer of shares of a nominee corporation) and there is a change of interest holders, then no LOTA filing is immediately required at the Registry but one would have to be made within two months of the transfer to identify the new interest holders associated with that parcel.

LOTA Reporting Requirements

Reporting requirements under LOTA are required in connection with any “interest in land”, which is currently defined as the following:

an estate in fee simple;
a life estate in land;
a right to occupy land under a lease that has a term of more than 10 years;
a right under an agreement for sale to occupy land or to require the transfer of an estate in fee simple; or
an estate, right or interest to be prescribed by regulation, which could eventually include interests such as mortgages, options to purchase and rights of first refusal.

Under LOTA, upon the registration of an interest in land at the LTO, all transferees (including individuals) must file a transparency declaration pursuant to s. 10 of LOTA (the Declaration). A transferee must disclose in its Declaration whether the transferee is a reporting body, being a relevant corporation, a trustee of a relevant trust or a partner of a relevant partnership that is required to file a transparency report under either sections 12(1), 15(1) or 15(4) of LOTA (the Report). If the transferee is not a reporting body, then no further filings at the time of transfer are required.

For the purposes of LOTA:

a relevant corporation means a corporation or limited liability company but does not include a corporation or limited liability company that is included in Schedule 1 of LOTA;
a relevant partnership means a general partnership, limited partnership, limited liability partnership, professional partnership or foreign partnership within the meaning of the B.C. Partnership Act, a prescribed partnership and any legal relationship created in another jurisdiction that is similar to any of the legal relationships described in this paragraph; and
a relevant trust means an express trust, including a bare trust, a prescribed trust and any legal relationship created in another jurisdiction that is similar to any of the legal relationships described in this paragraph.

If a transferee identifies itself as a reporting body in a Declaration, then the transferee must also file a Report, which must be filed concurrently with the Declaration. Without filing the Declaration and, if applicable, the Report, the LTO registrar is required to refuse the registration of the relevant interest in land in the LTO. Reporting bodies will be required to disclose detailed information within the Report including (but not limited to) the name, date of birth, address, social insurance number, tax residency, certain contact information and information regarding the interest in land indirectly owned by relevant interest holders. The information contained in a Declaration or a Report is available for inspection by an enforcement officer appointed by the minister under the Public Services Act, unless the individual is under 19, is incapacitated, or the individual applies to omit information as it is a health or safety risk, and that application is approved by the administrator appointed by the Chief Executive Officer of the LTSA as set out under Part 4 of LOTA.

A Report must identify who the ultimate interest holders are of the interest in land being transferred. Interest holders required to follow such disclosure obligations are those individuals who hold either (i) a “significant number of shares” in a corporation which equates to 10 percent of the shares in a relevant corporation or shares which carry 10 percent or more the voting rights, (ii) a beneficial interest in land, or (iii) an interest in land through a partnership.

It is important to note, it is only those individuals who fall within the definition of either beneficial owner, corporate interest holder or partnership interest holder, not all owners of interests in land, who will be required to disclose the required information. Pursuant to s. 21 of LOTA a reporting body is required to take reasonable steps to obtain and confirm the accuracy of the information reported. However, failure to comply with the requirements with respect to obtaining and confirming such information could result in significant penalties, as noted below.

The initial versions of the Reports to be filed at the Registry make clear that not only is certain personal information required to be included with respect to interest holders, but also that generic descriptions following the language of LOTA will be required as to how an individual is an interest holder, without providing specific details.

Accordingly, for purchasers and their advisors, it will soon be mandatory for the full extent of ownership structures to be disclosed by a purchaser to its lawyer prior to closing real property transactions so that a Declaration and, if required, a Report can be prepared for filing with the Registry at closing. It is important to note that all of this information will not need to be disclosed either to a vendor as part of the closing (absent specific contractual language requiring such disclosure) or in a Report, as only information regarding individuals who meet the LOTA definition of “interest holders” at the end of the structure must be submitted.

It should also be noted that s. 24 of LOTA requires that before filing a Report, a reporting body must take reasonable steps to give written notice of the filing of the Report to each interest holder and settlor who is identified in the Report. The Report itself requires confirmation that notice was given and, if notice was not given then, pursuant to s. 24(2)(b) of LOTA, a summary of the steps taken to give notice must be provided. This notice will be an additional transaction document that will need to be prepared and delivered.

In addition to the LTO filings required by a transferee who acquires an interest in land as contemplated by LOTA, in 2020¹ the government added s. 17.1 to LOTA requiring a corporation, trustee or partner that is a registered owner of an interest in land to give notice to the Registry if, after the corporation, trustee or partner has filed a Report, the corporation, trust or partnership ceases to be, respectively, a relevant corporation, relevant trust or relevant partnership. This notice must be filed within two months after the date on which the corporation, trust or partnership ceases to be, respectively, a relevant corporation, relevant trust or relevant partnership.

Indirect Control

The LOTR has extensive language to address indirect control exercised through a “chain of relevant intermediaries”. A relevant intermediary is defined to include any person that is one or more of the following and is controlled by another person: (1) a relevant corporation, (2) a relevant partnership, (3) an individual, relevant corporation or relevant partnership that is a trustee of a relevant trust, (4) an individual, relevant corporation or trustee of a relevant trust that is an agent, and (5) an individual, relevant corporation, relevant partnership or trustee of a relevant trust that is a personal or other legal representative.

The purpose of these provisions is to ensure that in examining the ownership structure, one does not stop at the bottom of a chain of relevant intermediaries or stop upon reaching an individual who is still subject to some prescribed element of control.

These new elements and nuances mean that a significant amount of due diligence and effort will be required on the part of purchaser’s counsel to work with clients to correctly identify the identity of the individuals who are the ultimate owners or controlling individuals of any registered owner of an interest in land, which ultimate owners are considered a relevant corporation, a relevant partnership or a trustee of a relevant trust. The B.C. government has gone to significant and detailed lengths in its attempt to capture various means by which direct and indirect ownership of interests in land may be controlled by related or unrelated third parties. Counsel will need to pay close attention to the requirements in LOTA and LOTR to ensure that correct disclosures are made in any required Declaration and Report.

Excluded Corporations and Trusts

While LOTAis broad in scope, the legislation does exclude from the definitions of relevant corporate and relevant trust entities that are identified, respectively, in Schedules 1 and 2 to LOTA. Schedule 1 contains exclusions (among others) from the definition of relevant corporation for a corporation or limited liability corporation that is:

a corporation that is a reporting issuer or reporting issuer equivalent with the meaning of the B.C. Business Corporations Act;
a corporation that is listed on a designated stock exchange within the meaning of section 248(1) of the federal Income Tax Act (ITA);
a strata corporation within the meaning of the B.C. Strata Property Act;
a savings institution, insurance company or trust company;
a pension fund society within the meaning of the B.C. Pension Fund Societies Act; or
a wholly owned subsidiary (as that term is defined in the B.C. Business Corporations Act) of a corporation to which any of the exclusions in Schedule 1 apply.

Similarly, Schedule 2 contains exclusions (among others) from the definition of relevant trust for any trust that is:

a real estate investment trust, mutual fund trust or SIFT trust within the respective meanings of the ITA;
property vested in a person licensed or appointed under the federal Bankruptcy and Insolvency Act;
spousal or common-law partner trust within the meaning of the ITA;
a charitable or testamentary trust; or
a trust the trustee of which is an administrator of an estate.

LOTA has provided for the flexibility to have additional exclusions added to Schedules 1 and 2 by regulation.

Important Timelines

The following circumstances will trigger the requirement to report:

for any transfers of land in the LTO, a Declaration and, if applicable, a Report must be filed at the time of filing an application to transfer an interest in land with the LTO;
for individuals who are currently holders of an interest in land (as of November 30, 2020), they have until November 30, 2021, to file a Declaration and, if applicable, a Report as to the current interest in land held as at November 30, 2020; and
if there is a change of interest holder that does not result in an LTO filing, then LOTA requires a reporting body to file a new Report within two months after the reporting body becomes aware, or reasonably ought to have become aware, that (a) a previous Report no longer accurately discloses the current interest holders, or (b) a determination of incapacity has been made in respect of an interest holder.

Implications for Leases

Section 21 of the LOTR adds clarity around the obligations to file Declarations and Reports in respect of registered leasehold interests as it exempts the filing obligations of any relevant corporation, trustee of a relevant trust or partner of a relevant partnership that hold a registered leasehold interest for which the remaining term of the lease (excluding renewal/extension terms) is 10 years or less.

Accordingly, upon either the filing of a lease at the LTO, or the application of s. 15(1) of LOTA with respect to existing registered leases (determined as at November 30, 2020), if the current remaining term of the registered lease is 10 years or less then neither a Declaration or Report needs to be filed².

Implications for Individuals Holding Registered Interests

As noted above, another key provision in the LOTR is s. 19, which confirms that all “pre-existing” owners of real property in B.C. will have until November 30, 2021, to file a Report with respect to all interests in land recorded in the LTO so that its records are complete without having to wait for transfers to be filed. This applies to any interest in land to which s. 15(1) of LOTA applies.

As long as an individual is not a trustee of a relevant trust (which includes a bare trust) then LOTA will not apply and, in particular, s. 15(1) will not apply to require a Report to be filed on or before November 30, 2021. Importantly, there is no obligation for individuals holding a registered interest in land to file a Declaration pursuant to s. 10 of LOTA to identify whether or not they are a reporting body.

Distinctions Between Ownership Thresholds Applied Under LOTA and the B.C. Business Corporations Act

The threshold for ownership disclosure under LOTA is 10 percent of the shares or voting shares of a corporation, whereas the threshold under the B.C. Business Corporations Act in respect of the corporate transparency registry requirements is 25 percent (which is, in turn, consistent with the Canada Business Corporations Act).

With respect to partnerships, the LOTR adds clarity around the disclosure obligations that are not addressed in LOTA. Section 7 of the LOTR provides that, with respect to a relevant partnership, disclosure is required in respect of any partner who is not a limited partner and also for any limited partner of the relevant partnership who is (1) entitled to at least 25 percent of the profits of the partnership assets, (2) is entitled on wind up to at least 25 percent of the assets of the partnership, (3) has at least 25 percent of the votes in the partnership management, or (4) has the right to appoint or remove the majority of the partnership’s management.

Release of Disclosed Information

In line with the goal of creating transparency under LOTA, the public will be able to access some of the information filed in Reports by conducting a search of the Registry. This has raised obvious concerns as to security and privacy; however, more sensitive information included in required Report disclosures, such as social insurance numbers, tax details and dates of birth, will only be available to law enforcement agencies and government agencies such as Canada Revenue Agency.

As an added security measure, information disclosed in a Report will not be accessible to the public until at least 90 days after the Report has been filed with the Registry. The purpose of this delay is to provide individuals with an opportunity to request that some or all of the individual’s disclosed information be concealed from the public record if the health, safety or mental health of an individual is at risk. As an additional security measure, the LTSA is required to conceal information with respect to individuals under the age of 19 and those incapable of managing their financial affairs.

Only primary identification information, as defined under LOTA, which is included in a Report will be available for search by the public. For individuals this will include the name, citizenship information and city and province where the individual resides. In the case of corporate entities or partnerships, primary identification information will include name of entity, address, and information as to applicable jurisdiction(s) in which such entity is registered. A Report may be inspected by tax authorities, law enforcement and by regulators as such terms are defined under LOTA. In the case of inspections by such authorities, the entire Report may be reviewed for the purposes set out under LOTA.

As noted, the B.C. government currently intends for the search functionality of the Registry to be available as of April 30, 2021.

Penalties

A reporting body that fails to file a transparency declaration or provides false or misleading information in a Report may be subject to administrative penalties no more than the greater of (i) $50,000 for corporations or other entities or $25,000 for individuals; and (ii) 5 percent of the assessed value of the property to which the Declaration or Report relates. Audits of certain applications will be conducted by the regulator to determine whether penalties should be enforced.

Failure to file a Report or the provision of false information may constitute a violation under LOTA and LOTR, which violation could trigger a penalty of no more than the greater of (i) $25,000 to $50,000 for individuals or $50,000 to $100,000 for corporations or other entities; and (ii) 15 percent of the assessed valued of the property to which the Declaration or Report relates.

Taxation of Beneficial Interest Transfers

Many people have inferred that LOTA will soon allow the province of British Columbia to tax the transfer of beneficial interests in land, as those interests are known under the Income Tax Act. When Bill 23 was in committee, the Opposition specifically asked Finance Minister James whether LOTA would result in additional taxation of the owners of beneficial interests in land. The Minister quickly and unambiguously responded that it would not.

With the NDP now having been re-elected with a majority of seats in the B.C. Legislature, and Finance Minister James having retired from politics, that response may now be moot; however, it is worth noting, as mentioned above, that LOTA does not require the disclosure of “beneficial owners” as we have come to know them as distinct from the “legal” owners of real property under the federal Income Tax Act. The information to be recorded in the Registry will not necessarily include the beneficial ownership of real property (although it will in some instances). Accordingly, while the Registry does provide a framework that could with some modifications be used to track transfers of beneficial ownership, LOTA in its current form will not allow for that to happen.

Notes

See Bill 13 – 2020, Miscellaneous Statutes Amendment Act, 2020.
Section 21 of LOTR defines “remaining term”, in relation to a lease to exclude “any periods for which the lease may be extended or renewed”.