Canada: New Licensing Requirements For Retirement Homes In Ontario: A Lender’s Perspective

The operation of a retirement home in Ontario will soon require a licence in accordance with the Retirement Homes Act, 2010 (the Act) and its regulations. Part III of the Act sets out the licensing requirements for retirement homes. Effective as of July 1, 2012, no person will be allowed to operate a retirement home in Ontario unless that person is licensed under the Act to operate the specific home. This will similarly have an impact on lending to borrowers that operate and grant security interests in respect of retirement homes.

What is a Retirement Home?

The Act defines a "retirement home" as a residential complex or the part of a residential complex, (a) that is occupied primarily by persons who are 65 years of age or older, (b) that is occupied or intended to be occupied by at least the prescribed number of persons who are not related to the operator of the home, and (c) where the operator of the home makes at least two care services available, directly or indirectly, to the residents. There are specific exceptions from the definition for premises or parts of premises that are governed by or funded under other statutes (as, for example, nursing homes/long-term care facilities governed by the Long-Term Care Homes Act, 2007 and public or private hospitals governed by the Public Hospitals Act and Private Hospitals Act, respectively).

Applying for the Licence and Transition

Effective July 1, 2012, when the licensing requirements come into force, section 33(2) of the Act provides that any existing retirement home operators that have applied to the Registrar for a licence to operate the retirement home on or before that day, are deemed to be licensed under the Act until the Registrar issues a licence or a decision to refuse to issue a licence to the operator is final. (We understand from the Retirement Homes Regulatory Authority (RHRA) that the application for a licence to operate a retirement home in Ontario will be available commencing April 15, 2012, and must be submitted to the RHRA no later than 5 p.m. on July 3, 2012.) From a lender's perspective, it should make sure to obtain within its loan documentation, covenants from a retirement home operating borrower to promptly apply for and diligently pursue a licence under the Act as soon as required. In addition, the lender should contractually require the borrower to deliver to the lender copies of the licence application and any correspondence that the borrower receives from the RHRA. These notices will initially be relevant to the lender for the purposes of monitoring the borrower's application for a licence and thereafter, can serve as an early warning system to the lender for any defaults or other issues that may jeopardize the borrower's licence. The lender should also ensure that the borrower's failure to apply for, obtain and maintain the licence in good standing, are considered events of default under the loan documents.

Taking/Enforcing a Security Interest Regarding the Licence

Until such time as licences are issued to retirement home operators, the lender will not be in a position to take specific security over the borrower's licence. However, a lender should ensure that the charging language in its existing security documents for property subsequently acquired by its borrower is broad enough to include the licence, when obtained. The further assurance provisions should also enable the lender to obtain from the borrower such other security or comfort in respect of the licence as the lender may require.

Although section 45 of the Act provides that no person may transfer any interest in a licence, including a beneficial interest, section 46 of the Act specifically deals with security interests granted in a licence. Pursuant to section 46(2) of the Act, the exercise by a person of a security interest in a licence or in property of a licensee that includes a licence does not result in a transfer of the licence, if within 15 days after exercising the interest, the person who exercises the interest gives the Registrar a written notice of the exercise of the interest and a written plan specifying how the person intends to manage the operations of the retirement home. Following the lender's delivery of such notice, the Registrar shall determine the time period (which can be extended by the Registrar) for which the person may act as if the person were the licensee.

Section 46(6) of the Act provides that the rights accorded to a person exercising a security interest also apply, with necessary modifications, to a receiver appointed with respect to a licence or property of a licensee that includes a licence, as if the receiver were a person exercising a security interest. In the event of bankruptcy, the appointment of a trustee in bankruptcy for a licensee does not result in a transfer of the licence, but the Act applies with necessary modifications to the trustee in bankruptcy as if it were the licensee.

Lenders contemplating the enforcement of a security interest in the property of a licensee should be aware that pursuant to section 46(5) of the Act, during such time period(s) as the Registrar permits a person exercising a security interest to act as if the person were the licensee, the Act applies with necessary modifications to such person as if the person were the licensee.

A lender should carefully consider the potential consequences of the foregoing provision and be careful not to unknowingly assume additional liabilities when going into possession of a retirement home. For example, if the borrower has been unable to meet its obligations to the lender, such borrower may also be in default of its obligations under the Act (and more particularly the licence).

It remains to be seen whether a person exercising a security interest in respect of a licence under the Act will be required, by virtue of section 46(5), to rectify or cure any pre-existing issues or defaults caused by the borrower in order to bring the licence into good standing. This will very likely influence the manner in which a lender chooses to enforce its security, depending on the specific circumstances of each case.

Should the lender's enforcement strategy involve the potential closure of the retirement home, particular attention should be paid to section 49 of the Act. Prior to ceasing the operation of a retirement home, the licensee (and presumably a person exercising a security interest in the licence) must, among other things, provide a transition plan to the Registrar, deliver written notices to the residents and their substitute decision-makers, and if requested by a resident, take reasonable steps to find such resident appropriate alternate accommodation.

When lending to a borrower on the security of a retirement home, a lender should remain cognizant of the special provisions and time periods contained in the Act in respect of taking and enforcing such security interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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