Canada: ´Are We Closed Yet?´ Some Tools to Solve New Challenges

Last Updated: April 7 2003
Article by Ira Barkin

Reproduced from the March 21, 2003, issue of The Lawyers Weekly with the permission of LexisNexis Canada Inc., 75 Clegg Road, Markham, ON L6G 1A1

Are we closed yet?" This question is posed with more impatience to real estate lawyers than it is to our colleagues practising law in other areas. Such is life when the time of closing is dependent less upon the resolution of outstanding issues than upon the speed with which registration numbers are issued by government bureaucracies.

As real estate transactions increasingly move into the area of capital markets, the question "are we closed yet?" raises new challenges.

When units of Real Estate Investment Trusts (REITs) or shares of other publicly traded entities (of which real estate assets comprise a material part) commence trading, the public relies on the issuer’s title disclosure. Since most units or shares commence trading at the opening of the stock exchange on which they are traded (typically 9:30 a.m. ET when the Toronto Stock Exchange opens), title to the real estate must be confirmed prior to this deadline.

Of course, this presents a problem when it is not possible to confirm title before 9:30 a.m. ET on the day of closing. Even when it is possible, the experience of most real estate lawyers tells us that there is no certainty when it comes to the timing of registering real estate documents. Absent such certainty, title is better dealt with prior to the day of closing than on the day of closing.

Pre-closing title confirmation may also prove to be an effective solution to the Canadian Payments Association’s Large Value Transfer System (LVTS) which provides that all payments for sums in excess of $25 million (Cdn) must be made by electronic transfer. LVTS came into effect on February 3. As if the pressure surrounding a 9:30 a.m. ET closing were not enough, we must now contend with the frustrating world of mandatory wire transfers.

If the solution to the problem is to confirm title prior to the day of closing, the question becomes how to best effect pre-closing title confirmation. In many transactions, commercial title insurance may prove to be the best solution. If requested, commercial title insurers will provide a "gap" endorsement insuring over the liability associated with the possibility of intervening registrations between the period commencing at the time closing proceeds are released and ending at the time title is transferred.

However, while the use of commercial title insurance policies has increased significantly over the last few years, a surprising number of business entities resist purchasing title insurance. This resistance is often understandable because it often stems from what many clients see as a redundant cost given that commercial title insurance companies require a title opinion prior to issuing a commercial title insurance policy. Where a title opinion already exists, there is less resistance.

However, it continues to amaze me how many significant parcels of real property have been transferred over the years without any form of title opinion being delivered.

Where title insurance is not an option, pre-closing title transfer tools need to be explored. For example, one could simply register a deed in favour of the purchaser in advance of closing. At the same time, the vendor’s solicitors would hold a deed, in escrow, conveying the real property back to the vendor, which deed would be released from escrow and returned to the purchaser upon closing. If closing does not occur within the time set out in the escrow arrangement between the parties, the deed in favour of the vendor would then be registered.

One obvious disadvantage arising from this solution is the potential double payment of land transfer tax.

Additionally, it is likely that any lender that holds security against the real property would have consent rights.

Moreover, because the vendor may not exercise absolute control over the purchaser, it is possible that the purchaser could register an encumbrance against title to the real property, so that the registration of the transfer back to the vendor will not result in the vendor acquiring title in the same state in which it was originally conveyed to the purchaser.

While this last obstacle may be overcome by the registration of a caution or similar instrument that prevents the transferee from registering encumbrances, many vendors will simply not be comfortable in relinquishing any measure of control over title to their real property until closing.

Another method of accomplishing registration in advance of closing involves the granting of a beneficial transfer. These transactions often involve the following steps:

(a) prior to closing (leaving enough time for the applicable registry office to provide confirmation of registration),

  1. incorporate a company to act as a bare title nominee for and on behalf of the vendor (preferably the nominee company should have no history and, therefore, no assets or liabilities);
  2. deliver a nominee agreement whereby the nominee corporation agrees to act as nominee for the vendor, as beneficial owner;
  3. transfer title from the vendor to the nominee corporation for nominal consideration; and

(b) on closing,

  1. transfer beneficial title from the vendor to the purchaser for full consideration;
  2. deliver an amended and restated nominee agreement whereby the vendor, the nominee corporation and the purchaser agree that the nominee corporation now acts as nominee for the purchaser, as beneficial owner; and
  3. transfer the shares of the nominee corporation from the vendor to the purchaser.

The advantages of taking these steps, as opposed to simply transferring title to the purchaser with an escrow transfer back to the vendor, are at least threefold.

First, with respect to land transfer tax, there may be a considerable savings, since title is transferred for nominal consideration.

In Ontario, this should avoid the possibility of the double payment of land transfer tax, since land transfer tax would only be paid within 30 days following closing of the beneficial transfer. If closing does not occur, the vendor would simply retain control over the real property through its nominee.

Second, with respect to lender approval, many loan documents allow the borrower to transfer real property without the consent of the lender if the transferee is an affiliate of the borrower. Third, with respect to control issues, since the nominee corporation remains a subsidiary of the vendor until closing, the vendor retains full control.

Structuring a transaction using beneficial transfers is not without potential problems. With respect to land transfer tax, careful consideration should be given to any previous dealings with the nominal and beneficial ownership of the property by the vendor, as there may be negative land transfer tax consequences depending on such previous dealings.

In other provinces, registration/ land transfer tax is paid on the actual value of the property as opposed to the consideration, such that the potential double payment of land transfer tax may not be avoided. In other provinces, the rate of land transfer tax may be sufficiently low such that the potential double payment of land transfer tax is not a practical concern.

With respect to lender approval, some loan documents may contain consent rights in favour of the lender notwithstanding that the transfer is to an affiliate of the borrower. With respect to control issues, since the vendor has control over the nominee corporation prior to closing, the purchaser will be inheriting a nominee corporation whose history, however brief, cannot be known by the purchaser with absolute certainty. Accordingly, the purchaser will be taking on an unknown liability. If this is a practical concern to the purchaser, the purchaser should seek an appropriate indemnity from the vendor.

Whether it be through title insurance, escrow transfers or beneficial transfers, there are tools available to real estate lawyers which, if used appropriately, allow us to effectively deal with some of the significant time pressure placed upon us.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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