Buyers and Landlords Beware! A Discussion on Defects on Title and Mixed-Use Properties

Despite the COVID-19 pandemic, the Toronto Regional Real Estate Board reported that over 11,000 homes were sold in Toronto during the month of September. That’s 42.3 per cent more sales closing than last September 2019! As such, purchasers should be aware of their responsibility to discover defects in a property prior to signing the Agreement of Purchase and Sale. The failure discover defect in a timely manner and then refusing to move forward with the sale may result in a breach of contract and loss of deposit.

In addition, on October 1, 2020, the Ontario government passed Bill 204, Helping Tenants and Small Businesses Act that prevents landlords who qualify for the Canadian Emergency Commercial Rent Assistance (CECRA) program from engaging in certain actions such as evicting a tenant and exercising a right of re-entry until October 30, 2020. If a right of re-entry is exercised by a landlord during the non-enforcement period, the landlord must restore possession of the premises to the tenant or the landlord must compensate the tenant. It is imperative that landlords who lease mix-used properties know whether the property is governed by the Commercial Tenancies Act or the Residential Tenancies Act, especially when looking to evict a tenant.

On October 5, Walker Law presented a webinar with Sotheby’s International Canada Realty on real estate transaction issues. The webinar provides informative insight on relevant COVID-19 case law and offers tips on how to avoid litigation in the future. Click here to watch the webinar. This article will aim to provide you with the top highlights from the webinar.

DEFECTS ON TITLE

Since purchasing homes is steadily increasing, buyers should be aware of their duty to make inquiries about the property to discover patent defects. A patent defect is one that can be reasonably discovered through inspection prior to the sale. The other type of defect, a latent defect, is not the responsibility of the purchaser but places a duty on the seller to disclose any known defects that are not readily discoverable if the seller has knowledge of it.

In 567 College Street Inc. v. 2329005 Ontario Inc., the buyer discovered that the third floor residential units in the multicomplex building were illegally converted by a previous owner. The main issue in this case was whether the buyer had raised sufficient issue and made inquiries about the third-floor units prior to signing the Agreement of Purchase of Sale. The seller argued that he did not make any inquiries about the third floor’s illegal use and, based on the evidence, the Judge agreed. As a result, the Judge ordered that the buyer was in breach of the Agreement of Purchase and Sale and must forfeit his deposit in the amount of $250,000 to the seller.

LESSONS GOING FORWARD

Going forward, buyers should always make appropriate inquiries to satisfy themselves on all aspects of the home prior to close. As a further protection, buyers may want to include a clause in the Agreement of Purchase and Sale that states:

The Seller warrants that there are no outstanding work orders or deficiency notices affecting the property and that its presence use is lawful.

This paragraph puts the onus on the Seller to confirm that there are no outstanding work orders or deficiencies affecting the property prior to close and that all aspects of the home are lawful.

MIXED-USE PROPERTIES

What happens when tenants start using their homes for commercial use? It’s not uncommon to see mixed-use properties throughout the city, where the tenant rents the bottom unit for commercial use and then lives in the residential unit upstairs under one lease. It is important to determine whether the unit is governed by residential or commercial law because each act offers various protections. For example, the Residential Tenancies Act offers tenants security of tenure, whereas the Commercial Tenancies Act permits a landlord to terminate a monthly tenancy without reason.  

In OnTheGoShipping Inc. et. al. v. G. Khan Medicine Professional Corporation, the tenant leased a two-story heritage house from the landlord. The property was zoned as a rural residential housing but a business office was expressly permitted in the commercial lease. The tenant lived in the house from the outset but also ran his business in a home office on the first floor. A week after the State of Emergency was announced, the landlord locked out the tenant for non-payment of rent in accordance with the Commercial Tenancies Act since a commercial lease was signed. In this case, the Judge found that the property was governed by residential law.

To determine whether a tenancy is governed by commercial law or residential law, the parties should look towards the dominant purpose of the use of the premises. If all else fails, enter into a commercial lease for the commercial portion of the property and a residential lease for where the tenant resides.

In Toronto Community Housing v. Bryant Didier, the landlord, Toronto Community Housing (TCH), sought to remove a tenant who leased an apartment and a windowless room in the basement that he used for storage and music rehearsals. The tenant eventually moved from the residential unit, but continued to rent the unit in the basement for his music studio. In this case, the court found that the basement unit was governed by the Commercial Tenancies Act because it fell within an exception of the Residential Tenancies Act being that it was a premise occupied for business purposes under a single lease.

REDUCE YOUR CHANCES OF GOING TO COURT

To reduce your chances of going to court in the future, landlords can include a term in the lease similar to the following:

The Tenant will carry on business activity (ensure “business activity” is defined) on the premises within a certain time failing which the landlord may submit appropriate application to evict.

In conclusion, purchasers should be aware of their responsibility to discover defects in the property prior to signing the Agreement of Purchase and Sale by making proper requisitions with the seller. Landlords should take care where the property is mixed-use to distinguish whether it is governed by commercial or residential law.

If you have any further questions, please feel free to contact us. Please note that this article is intended for educational purposes only. It contains general information about legal matters and should not be considered legal advice.

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