Canada: Preparing The Property For Sale – Pre-Market Due Diligence

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Commercial Real Estate, September 2009

Due Diligence

Now that the bidding war environment of 2007 and early 2008 is a thing of the past, the current market affords vendors the luxury of time to conduct pre-market due diligence. Carefully planned and executed due diligence can translate into real advantages for a vendor when the property goes to the market, including:

  • facilitating proper pricing of the property;
  • allowing for appropriate representations to be given in the agreement of purchase and sale with the knowledge that they are sound and based in fact, or properly qualified;
  • reducing the likelihood of delays which often result when a purchaser unearths in its due diligence something about the property that the vendor had not fully considered or evaluated; and
  • allowing the vendor the opportunity to correct property deficiencies which might otherwise lead to unnecessary delays and price abatements.

The extent of pre-market due diligence conducted will be tempered by cost considerations as well as the likely expectations of prospective purchasers. The following are areas of investigation to consider.


Registered ownership of the property should be confirmed by a subsearch and updated as necessary to reflect any name changes or amalgamations. If beneficial ownership is different from registered title, this should be identified at an early stage as it is relevant for other due diligence searches and impacts on Planning Act considerations. Often a title that is split between registered and beneficial owners is indicative of a previous land transfer tax deferral arising from a corporate reorganization. If so, there may still be security posted with the Ministry of Revenue and the vendor must be alert to the need to make arrangements to have this security returned after sale of the property has been completed.

Ownership Structure

If the owner is a joint venture or a partnership, the relevant documentation should be reviewed to ascertain what notices need to be given, buy-sell rights dealt with or consents obtained before exposing the property to market. In some cases, the notice periods attached to such rights may impact timing and will need to be taken into consideration in determining when the property is put up for sale, as well as appropriate time-frames for conditional periods and closing.


The vendor should consider whether there are any expired notices of leases, options, or construction liens that should be discharged from title or otherwise dealt with. It can be time-consuming if a court order is required to discharge a lien, if it is necessary to locate a party to release an old agreement, or to obtain a discharge for a mortgage long ago paid off. If this can be done at an early stage, it will minimize title requisitions and avoid the need for extensions in the context of a signed agreement of purchase and sale. If there are mortgages affecting title, an evaluation will need to be made as to how they are to be dealt with – discharged or assumed? Purchasers will most certainly be interested in the status of development, subdivision, servicing agreements and the like. If obligations under those agreements have been completed, the vendor should attempt to arrange for the release of the agreement from title, if available, and the return of security. Otherwise, arrangements will need to be made by the vendor to have letters of credit and cash deposits held by government agencies replaced on closing by the purchaser. Any relevant cost-sharing agreements or other front-end load agreements should be reviewed and taken into consideration in the pricing of the property. Consider whether there are any easements, restrictive covenants or encroachment agreements that need to be put into place to document existing situations. For example, the owner of two adjoining properties proposing to sell only one of them may need to regularize joint driveway use by registration of appropriate easements and maintenance agreements. Finally, if equipment is included in the proposed sale, it is a good idea to identify Personal Property Security Act registrations in respect of which a purchaser is likely to require comfort letters or discharges. The vendor should start this process in motion early – it can take time.

Physical Issues

Before a property is exposed to market is a good time to conduct a cost-benefit analysis to determine whether expending money on capital improvements or deferred maintenance is likely to be reflected in the ultimate sale price for the property. The vendor should consider what fixtures and equipment are to be included in the sale and which, if any, are to be removed. It is also a good time to evaluate what physical due diligence prospective purchasers will likely want to conduct. Since environmental due diligence is typically top of mind for both purchasers and their lenders and can be very time-consuming, many vendors find it useful to have a phase 1 environmental assessment and, if indicated, a phase 2 report completed before the property goes to market. As well as being prudent corporate practice to establish an environmental bench mark, it allows the vendor to control the process. Particularly if reliance letters in favour of the purchaser are negotiated with the consultant, the availability of recent environmental, building condition and similar reports can significantly shorten due diligence periods and attract buyers who see the advantage of significantly reduced due diligence costs.

Other Potential Considerations

Some other potential pre-transaction planning considerations for the vendor are as follows:

  • If board of director or investor approvals are required, consider related documentation and timing requirements and whether pre-approval can be obtained based on sale terms within certain pre-approved parameters.
  • If the vendor is a non-resident, be mindful of the need to obtain a Section 116 clearance certificate under the Income Tax Act (Canada) and corresponding timing and tax considerations.
  • Evaluate whether there is a need for Planning Act (Ontario) consent if the vendor owns adjoining land. It is very important to identify this need at an early stage for a number of reasons. First, depending on the jurisdiction, it can take several months or longer to get a hearing date and this, along with the required appeal period and time required to satisfy conditions, will impact timing for the transaction. In addition, most jurisdictions now require that as part of the severance application, an environmental site screening questionnaire be completed and, if there has been any industrial or agricultural use or if there is any other reason to believe there is any contamination, the authority will require an environmental report and possibly filing of a record of site condition with the Ministry of the Environment.
  • Check to see whether there are any open work permits or any outstanding work orders and arrange to have them dealt with. Often work permits remain open simply because the final inspection has never been requested. In a tenanted building, these open items often relate to tenant work and will require the appropriate follow-up with the tenants.
  • Determine whether there are any zoning issues such as parking or set-back deficiencies which could be regularized with a variance application.
  • Seek tax advice to properly understand tax implications arising from the sale and consider the appropriate allocation of the purchase price between land, building and equipment so that an appropriate allocation can be proposed to a purchaser.
  • With regard to realty taxes, gather current information. If appeals have been initiated consider whether it is desirable to maintain carriage of those appeals after closing.


Although practical and cost considerations will, in large part, dictate the extent of pre-market due diligence which makes sense for a particular property or portfolio, a prudent vendor should consider what it can do, at what cost and with what upside, and then make an informed decision. If the vendor really "knows" its asset and can anticipate potential deal issues and is able to offer reasonable solutions or options, this will assist in smoothing the sale process while maximizing pricing potential.

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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