Canada: The International Comparative Legal Guide To: Real Estate 2014

1 REAL ESTATE LAW

1.1 Please briefly describe the main laws that govern real estate in Canada. Laws relating to leases of business premises should be listed in response to question 10.1. Those relating to zoning and environmental should be listed in response to question 11.1.

Real property is essentially a matter of provincial jurisdiction. Each province and territory has enacted statutes that govern the acquisition, ownership, use, financing and development of real estate. The province whose law varies most from the others is Quebec, where the law relating to real estate is based on civil law and is for the most part enshrined in the Civil Code of Quebec ("CCQ").

1.2 What is the impact (if any) on real estate of local common law in Canada?

Jurisprudence is a major source of law in the common law jurisdictions of Canada, and many common law principles have been codified and incorporated into the various statutes governing the area of real estate.

In Quebec, although the CCQ and other statutes are the primary source of law, analogies are drawn from case law as they pertain to statutory provisions to fill lacunae.

1.3 Are international laws relevant to real estate in Canada? Please ignore EU legislation enacted locally in EU countries.

International laws do not directly affect real estate in Canada, but international treaties are sometimes reflected in legislation enacted within Canada, and orders of foreign courts are, in appropriate circumstances, enforceable here.

2 Ownership

2.1 Are there legal restrictions on ownership of real estate by particular classes of persons (e.g. non-resident persons)?

Legal restrictions on ownership vary from province to province. Prince Edward Island, for example, significantly restricts the amount of land that may be held by persons (whether corporations or individuals) not resident in the province. Quebec prohibits the acquisition of interests in agricultural land by non-residents without the prior consent of a provincial agency and also restricts ownership of classified cultural properties. Alberta has legislation that restricts non-Canadian persons (including, without limitation, non-Canadian corporations and partnerships) from holding "controlled land" (which is generally land outside of urban centres), subject to certain exemptions. Some provinces have provincial licensing or registration requirements that must be complied with in order for a corporation to hold real property.

There is also federal legislation which provides for notification to, or review by, the federal government in certain circumstances.

3 REAL ESTATE RIGHTS

3.1 What are the types of rights over land recognised in Canada? Are any of them purely contractual between the parties?

There are various rights over land recognised under Canadian real estate law in the common law jurisdictions. An "estate" indicates an interest in real property of a particular type or duration, and is either "freehold", which is one of indefinite duration, or "leasehold", which is one the maximum duration of which is fixed or capable of being fixed in time. Amongst the various types of freehold estate, the fee simple is by far the most common and is, for all but the most theoretical of purposes, equivalent to ownership. A "leasehold" estate is derived through obtaining a lease from the owner of the "freehold" estate (and, therefore, it is not full ownership of the lands). Some other types of rights frequently encountered in the common law jurisdictions include easements, profits a prendre and restrictive covenants, all of which constitute rights in land, and licences, which are purely contractual.

Quebec law recognises absolute ownership of land as the right to use, enjoy and dispose of land freely, subject only to limits imposed by law. Co-ownership and superficies are special modes of ownership that result from express or implied contracts. Usufruct, servitudes and emphyteusis each result from the dismemberment, by contract, will or law, from ownership of certain of its associated rights. Ownership, its modes and dismemberments, legal and conventional hypothecs (mortgages) and prior claims are considered real rights (rights in property) that run with the property in question when it changes hands. Other rights, including rights resulting from leases, are personal in nature (rights enforceable against a person), although leases do not automatically terminate when land is transferred. Some real rights in land are perpetual (like ownership), some may be perpetual or temporary (like superficies and servitudes) and others can only be granted for a term (like emphyteusis).

3.2 Are there any scenarios where the right to a real estate diverges from the right to a building constructed thereon?

In common law jurisdictions, a building is almost always considered part of the land on which it is located. While contracting parties such as a landlord and tenant can agree between one another, for example, that the building may belong to the tenant, this contractual arrangement will not affect the treatment of the building as part of the realty vis-a-vis other parties, such as mortgagees. However, it is possible to subdivide land itself in such a way as to separate ownership of the land (or air space) in which a building is located from land underneath or above it which, while from a strictly legal perspective does not separate the building from the land of which it forms a part, has the practical effect of separating the building from the land that, from the layperson's perspective, would be considered the land on which it sits.

In Quebec, superficies (ownership by one person of constructions situated on the land of another) may result from the renunciation by the owner of the subsoil of the benefit of accession (the right that would otherwise make him owner of such constructions), the transfer of the right of accession or the division of the object of ownership (by creating a new lot that designates the air space in which a building, for instance, is located and then transferring that lot to a third party). Emphyteusis, by contrast, does not separate ownership of buildings from ownership of land, but it does result in one person having the full enjoyment of land for a term, provided that he makes constructions, works and plantations that durably increase its value. The grantor of emphyteusis retains the right to resume ownership of the improved real estate upon its termination.

4 SYSTEM OF REGISTRATION

4.1 Is all land in Canada required to be registered? What land (or rights) are unregistered?

All privately owned (as opposed to Crown-owned) real property in Canada is registered.

There are two land registration systems used in Canada: the registry system; and the land titles system. Each province uses a modified system of either one or both of these systems.

The older more traditional registry system is a "registration of deeds" system which provides only for the public recording of instruments affecting land and does not itself make any qualitative statement concerning the status of title. The land titles system, by contrast, is operated by the relevant province pursuant to detailed legislation, and title to land within the system is, within certain statutory limits, effectively guaranteed by the relevant province.

4.2 Is there a state guarantee of title? What does it guarantee?

As mentioned above, the register or certificate of title produced for properties registered under the land titles system may be relied upon implicitly by all persons as constituting the true and accurate status of title (subject typically to fraud and limited exceptions defined by the relevant statute). In those relatively rare cases in which a person is wrongfully deprived of an interest in property by virtue of an error on the register or certificate, access may be had to a state-administered assurance fund for compensation.

There is no state guarantee of title in provinces and territories using the registry system of recording title (for example, Quebec). Quality of title is determined by the individual searching the file and is based on priority in terms of the time of registration.

4.3 What rights in land are compulsory registrable? What (if any) is the consequence of non-registration?

Rights in land (or immoveable property in Quebec) are generally not compulsorily registrable, but, as a general rule, they need to be registered in order to make them opposable to third parties, establish their priority, or protect their priority or against possible loss given that third parties acting in good faith are entitled to rely upon the registry records.

4.4 What rights in land are not required to be registered?

See the answers to questions 4.1 and 4.3 above.

4.5 Where there are both unregistered and registered land or rights is there a probationary period following first registration or are there perhaps different classes or qualities of title on first registration? Please give details. First registration means the occasion upon which unregistered land or rights are first registered in the registries.

First registration of land occurs most frequently when the Crown makes the original grant to a registered owner. There is no probationary period. However, with respect to interests in land, where the land titles system applies, most jurisdictions provide for a certification of the registration. Typically, until this certification is complete, the registration is subject to amendment at the request of the registry officials, and may not be fully effective.

4.6 On a land sale, when is title (or ownership) transferred to the buyer?

In common law jurisdictions, registered (or legal) title or ownership is typically transferred to the buyer upon registration of a deed or transfer in the appropriate land registry office. In Quebec, as between the parties to the sale, title is transferred as soon as there is a "meeting of the minds", but the sale may not be set up against third parties until registration.

4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later rights?

In the common law provinces, earlier rights have priority over later rights, although a court's application of principles of equity may adjust the order of priorities in certain situations. In other words, earlier rights in time will prevail over later rights unless there is some element of fairness that requires equity to address the order of priority, and possibly alter it.

Prior registered interests have priority over subsequent registered interests, and registered interests generally enjoy priority over unregistered interests. There are exceptions to this principle, such as when the party with the registered interest has notice, at the time of registration, of the prior unregistered interest. In such situations, under certain circumstances, the priority will be reversed.

In some jurisdictions (primarily where the registry system applies), it is also possible to acquire ownership by way of prescription, and in most jurisdictions, some creditors (for example, certain governmental entities and construction lien holders) benefit from priority over prior registered mortgages (or, in Quebec, hypothecs). Bankruptcy legislation may also modify the order of priority of different creditors, but this will not generally affect ownership rights.

5 THE REGISTRY / REGISTRIES

5.1 How many land registries operate in Canada? If more than one please specify their differing rules and requirements.

As mentioned in question 4.1, each province uses a modified system of either one or both of the registry or land titles system.

The registry system applies throughout Prince Edward Island and Newfoundland and Labrador, and an analogous system applies throughout Quebec.

The provinces of Manitoba, Ontario, Nova Scotia and New Brunswick employ both systems and are in various stages of conversion from registry systems to land titles systems, with Ontario and Manitoba being the farthest along.

The western provinces of British Columbia, Alberta and Saskatchewan use only the land titles system.

5.2 Does the land registry issue a physical title document to the owners of registered real estate?

A transfer of registered ownership of real property is effected by the registration of a transfer or deed, copies of which can be obtained from the relevant registry office, often electronically (see question 5.3 below). While land registry offices in provinces which use the land titles system will issue a certificate of title or parcel register in respect of a particular parcel of real estate which indicates the name of the registered owner and other information relating to the relevant property, this is merely a certificate as to the state of title, and the physical document is not required by an owner to evidence his or her ownership of the property.

5.3 Can any transaction relating to registered real estate be completed electronically? What documents need to be provided to the land registry for the registration of ownership right? Can information on ownership of registered real estate be accessed electronically?

Transactions relating to registered real estate can be (and in some cases must be) completed electronically and information on ownership can be accessed (to varying degrees) in most provinces, including British Columbia, Alberta, Saskatchewan, most of Ontario, Quebec, New Brunswick (for certain prescribed transactions relating to land titles properties) and Nova Scotia (for supported transactions). As noted above, a transfer of registered ownership of real property is effected by the registration of a transfer or deed. In provinces where land is being converted to the land titles system from the registry system, formal applications or other requirements have to be made or satisfied in order to convert the relevant property to the land titles system.

5.4 Can compensation be claimed from the registry/registries if it/they makes a mistake?

In the common law jurisdictions, compensation may generally be claimed under the land titles system only. In those relatively rare cases in which a person is wrongfully deprived of an interest in property by virtue of an error on the register or certificate, access may be had to a state-administered assurance fund for compensation.

In Quebec, an action in damages can be brought against the registrar for failure to maintain the register accurately.

5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and other rights affecting real estate?

There are no restrictions on public access to information contained in a Canadian land register, and a buyer can typically obtain all the information he might reasonably need regarding registered encumbrances and other registered rights affecting real estate. However, as discussed in question 6.1, full due diligence including letter inquiries to various governmental authorities is recommended to identify certain rights in respect of real property that are not required to be registered.

6 REAL ESTATE MARKET

6.1 Which parties (in addition to the buyer and seller and the buyer's finance provider) would normally be involved in a real estate transaction in Canada? Please briefly describe their roles and/or duties.

a) Selling and purchasing agents (or realtors)

Generally, real estate is listed for sale and marketed through a real estate broker. The agent acting for the buyer will often prepare the offer and submit it to the listing agent, while sophisticated buyers (particularly with respect to commercial real estate transactions) will typically negotiate the offer to purchase directly with the seller, often with assistance from their lawyers.

b) Lawyers

Lawyers play a role in virtually all real estate transactions. When acting for buyers, lawyers will perform the task of examining title to the subject property as well as conducting various "off-title" inquiries, regarding issues ranging from the status of realty taxes to environmental matters. A buyer's lawyer will then negotiate resolutions to the issues raised. The lawyers will also prepare each of the parties' respective closing documents, and will generally hold all deliveries in escrow until the appropriate documents have been registered in the appropriate land registry office.

c) Notaries

Notaries tend not to play a role in real estate transactions other than in Quebec, where they can act for both parties to transactions, unless one party is already represented by another notary or lawyer.

d) Surveyors

Surveyors will often be retained to provide a survey of the property, which, among other things, will identify all structures on the property and enable the buyer to determine whether the building performance provisions of the zoning have been complied with.

e) Title insurers

The use of title insurance is common in commercial real estate transactions and is becoming increasingly common in residential transactions. Typically the title insurer will provide insurance in favour of an owner and/or lender on the basis of a title opinion provided by an independent lawyer. This insurance can sometimes take the place of certain off-title due diligence (for instance, zoning compliance or survey matters), and can insure against the risk of an intervening registration between the time of closing and the time of registration if there is such a gap.

6.2 How and on what basis are these persons remunerated?

Real estate agents are typically remunerated on the basis of commission which is generally paid out of the purchase price that would otherwise go to the seller.

Lawyers are generally remunerated on the basis of legal fees plus disbursements.

Surveyors are typically paid a flat rate based on a quote.

Title insurers will be paid a rate per dollar of value of the property insured. Rates differ depending upon the insured interest and, in some cases, on the endorsements to be provided.

6.3 Are there signs of recovery to the real estate market in Canada following the recent global economic downturn? How important a role has foreign investment played in any such recovery? What were the most significant real estate transactions in Canada in the past year? Please include all types of investors in your answer.

The Canadian economy fared well compared with others following the global economic downturn. Canadian financial institutions notably were relatively unscathed by CMBS defaults. Commercial real estate investment volumes and activity had largely recovered to pre-recession levels by 2011. Increases continued in 2012 and the market has kept pace in 2013. There has been significant foreign investment in Canadian real estate and infrastructure over a range of asset types. Foreign investment has historically provided significant support in particular jurisdictions and continues to do so. However, much recent activity is homegrown and attributable to investment by domestic institutional investors such as pension funds and REITs.

The most significant real estate transactions in Canada in 2013 included property types across the spectrum. Of particular note were the following three separate shopping centre acquisitions: Bayview Village (at a reported C$500M, the highest price paid for a single property in Canada in 2013), Oakville Place and Upper Canada Mall, all in Ontario; Sobeys Inc.'s C$5.8 billion acquisition of Canada Safeway (a retail acquisition but with a significant real estate aspect especially in British Columbia and Alberta); the separate sales by GE Capital Real Estate of a portfolio of office properties and a portfolio of industrial properties; the sale of a 50% interest in Montreal's Place Ville Marie; and the acquisition of the wind project Blackspring Ridge, in Alberta, by EDF EN Canada Inc. and Calgary-based Enbridge Inc.

6.4 Is there an increased trend towards investment in and redevelopment/regeneration of student accommodation in Canada?

As cap rates compress in other classes of commercial real estate, some investors may be turning to alternatives such as student housing as a way to generate yield while still maintaining investments in real estate. There have been a number of conversions of hotels to student residences in the past few years.

6.5 Has the real estate market in Canada seen an increase in renewable energy transactions during recent years? What are the principal real estate issues a buyer or investor should consider when entering into such transactions?

During recent years, there has been an increase in renewable energy transactions, in part due to favourable incentives provided by provincial governments (such as British Columbia and Ontario). Although the availability of a renewable energy resource ultimately governs the potential siting of renewable energy projects, there are a number of other real estate issues for a buyer or investor to consider. For instance, it is important to ensure: (i) that a potential site has sufficient access to roads and access and proximity to local electrical infrastructure (including connections to the local distribution or transmission system); (ii) that there are no existing site conditions that could jeopardize future development, including environmental, flood plain, or natural heritage issues; (iii) that the location of the site is appropriately zoned and that there is municipal and/or community support for the project; and (iv) particularly in the context of Crown-owned land, that affected First Nations have been adequately consulted and/or accommodated.

To read this Chapter in full, please click here.

Originally published by Global Legal Group Ltd, London.

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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