Three Tips To Consider In Real Estate Transactions

Commercial real estate transactions involve important legal nuances that can affect a buyer's rights and responsibilities. Here are three essential considerations to protect your interests and ensure the success of your investment.

1. Avoiding Obstacles Related to Intervening Adverse Entries in the Land Register

In Quebec, property rights are generally based on a strict first-come, first-served basis. The chronological order of registration in the land register—down to the minute—governs the rights of the parties. While a signed deed of sale is sufficient to transfer property rights from seller to buyer, it becomes enforceable against third parties only upon publication in the land register. Conversely, previously published rights to the property become enforceable against the new buyer.

Why it matters: Imagine signing a deed of sale, confident that you have secured the ideal property for your commercial project. However, before the deed is recorded, a legal construction hypothec is published, or worse, the seller mortgages the property in favour of a third party. What happens then? You could end up with a property riddled with unforeseen expenses, or even lose priority if another sale is published before yours.

To avoid such situations, consider including a clause in the offer to purchase requiring the purchase price to be held in escrow until the sale has been recorded without adverse entries. This strategy offers two layers of protection:

• The buyer is guaranteed a clear title with no unexpected complications post transaction.
• The seller, who will not receive the funds until everything is settled, is incentivized to meet their obligations in full.

2. Understanding the Importance of the Legal Warranty

The legal warranty outlined in the Civil Code of Québec is more than just a technical clause. It is automatically included in every real estate sale unless expressly excluded, and consists of two main components:

• The warranty of ownership, which ensures, among other things, that the property is free from title defects and public law violations, except those disclosed by the seller.
• The warranty of quality, which protects against hidden defects: serious issues unknown to the buyer that existed at the time of the sale.

For example, a fire in a building's attic, concealed by cosmetic repairs, which can be traced back several owners. Thanks to the warranty of quality, the current buyer can not only take legal action against the seller, but also trace the chain of ownership back to previous owners involved at the time of the incident. A valuable protection, wouldn't you agree?

But there is a catch, especially in commercial real estate. Properties are increasingly sold “at your own risk,” without these warranties. It may seem trivial, but the recent Court of Appeal decision in Blais v. Laforce highlights serious consequences: accepting the exclusion breaks the chain of transmission of the warranty of quality. Not only will the buyer not be able to sue the seller, but any legal action against previous owners will also be barred.

This is critical for two reasons:

1. If due diligence reveals that the building was sold without warranty at any point in the chain of title, your legal recourse may be limited even if the current seller offers warranties.
2. Buying without a warranty often means selling under the same terms, which could affect the marketability and value of the property.

You must not only consider the warranties offered, but also understand the implications for the chain of transmission. Sales without legal warranty are now commonplace, but the property must be sufficiently attractive to justify these limitations.

3. Managing Tenants

In Quebec, tenants have the right to register their lease in the land register, and landlords cannot oppose it. Landlords may, however, choose between a full registration or a simple notice of lease, which does not disclose financial details. If the lease has been registered, you will automatically be bound by it upon acquiring the property. This registration protects tenants and obliges the new owner to honor the lease, including its term and rent.

If the lease is not registered and has more than 12 months remaining, the law provides a loophole. As the new owner, you can terminate the lease by sending the tenant a written notice six months in advance, within six months of the acquisition.

Review the lease's clauses for special terms, such as right of first refusal, security deposit, lump-sum allowance or rent-free months. Additionally, verify the payment history and confirm that there are no ongoing disputes.

In summary, a thorough analysis of land rights, legal warranties, and tenant agreements is critical to avoiding legal complications and ensuring a successful investment. For further insights on key legal documents and considerations in real estate transactions, refer to our three previous articles.

This article was published in Les Affaires on 8 January 2025.

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.