Five Critical Considerations in Real Estate Purchase Agreements

Recent trends in Canadian real estate transactions reveal evolving negotiation practices and shifting approaches to risk, regulation and due diligence.

Effective negotiations of real estate purchase agreements require focus on these five principal considerations:

1. Party Identification. Identifying and understanding the parties to a purchase agreement remains foundational. When beneficial ownership is separated from legal or registered ownership, the purchaser must confirm the true owner and consider, among other things, related tax withholdings and representations. Evaluating the strength of your counterparty’s covenant provides greater certainty when structuring risk in the transaction. Where the counterparty is a single-purpose entity, consider negotiating a parent guarantee or a holdback to provide security in the event of a misrepresentation or default on post-closing obligations.
2. Mortgage Assumptions. Significant diligence is required in transactions where the buyer assumes the vendor’s mortgage. Buyers must review all loan and security documentation and assess their exposure. The lender’s consent is typically required and entails a detailed approval process, including buyer credit assessment and legal review. Consent letters usually lead to an assumption agreement, possibly involving new guarantees or indemnities, and responsibility for the lender’s fees must be allocated between the parties.
3. Tenant Estoppels. Purchasers and lenders rely on estoppel certificates to confirm lease obligations, defaults, rent, term status and other key matters. The forms should be finalized early and cross-referenced with lease due diligence. While valuable, estoppels do not typically create new rights or amend the lease and may be unenforceable if discrepancies arise. Negotiating their role in closing and addressing tenant responses or refusals remains critical.
4. Representations and Warranties. Corporate/mergers and acquisitions-style provisions are becoming increasingly common in real property representations and warranties. Purchasers may encounter minimum claim thresholds and overall liability caps. Pro and anti-sandbagging clauses are gaining traction, with buyers generally preferring pro-sandbagging flexibility to preserve claims post-closing. These mechanisms reflect a shift toward increasingly nuanced, negotiated risk allocation frameworks in real estate agreements.
5. Regulatory Filings. Purchasers must assess whether the Competition Act or the Investment Canada Act (ICA) apply to a transaction (including minority acquisitions) to determine whether regulatory filings are required and to evaluate substantive risks. Under the Competition Act, parties should assess whether the transaction could prevent or lessen competition substantially for any relevant market, defined based on property type and geographic location. Under the ICA, non-Canadian purchasers should consider whether the transaction may be injurious to Canada’s national security, based on the purchaser profile, target property operations and property proximity to sensitive sites. Both regimes may materially affect closing timing and deal certainty, and should be integrated into early-stage deal structuring.

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