The emergence of ‘mixed-use’ buildings is presenting new challenges in commercial real estate law.
There was a time, not long ago, when a Canadian lawyer might have been able to “dabble” in real property law fairly easily — putting together occasional deals on the side, without actually specializing in real estate. But it seems those days are on their way out. “One of the trends I’ve seen over the last few years is a recognition inside the legal community that dabbling in real estate work does not work,” says Stan Galbraith, a lawyer with Galbraith Law in Edmonton. “Real estate is now recognized as a unique skill set.” Although Canada’s real property law hasn’t changed much in recent years, a number of other changes — from emerging trends in mixed-use properties, to side effects of market conditions, to vastly greater requirements from mortgage lenders — have made the day-to-day practices of real property lawyers increasingly complex. National spoke with six real property lawyers from across the country, who weighed in on some of the major issues and trends affecting the realm of residential, condominium and commercial property law as we head into 2015.
One of the more significant factors currently affecting residential real estate lawyers is the ever-increasing list of requirements that mortgage lenders now request from lawyers. “What used to be a two-page instruction sheet from a major lending institution is now six-to-10 pages long,” says Galbraith. “The lenders are, in my view, attempting to shift some of the risk in lending to the lawyer. They’re relying on you to do this huge laundry list of items, so if anything goes wrong, they’re going to come back and the lawyer’s insurance is going to have to answer for that.”
Joanna Wrzesniewski, a real estate lawyer with Kimmitt Wrzesniewski in Kelowna, B.C., believes many of these new requirements are simply unreasonable. “The lenders are trying to pass all the responsibility to solicitors for issues that solicitors have no knowledge or experience in,” she explains. “So, for instance, they expect us to give our opinion that the well water is potable. Obviously I can’t; it needs to be inspected by a well inspector. Or [they want us to assure them] that the electrical in a house is up to code. Well, I can look at title, but I’m not going to be crawling up in the attic to look at electrical; that needs to be done by an electrical inspector. So we constantly have to review those mortgage instructions, and have to push back on the lenders and say, ‘I can’t do that’.”
“We constantly have to review those mortgage instructions, and have to push back on the lenders and say, ‘I can’t do that’.” - Joanna Wrzesniewski
This change has been happening over the last couple of years, apparently a response to lenders’ post-recessionary fears of real estate fraud. It’s becoming extremely taxing on lawyers’ time, however, and in today’s competitive environment, most don’t feel they can raise their fees in accordance with all the extra work. “Five or six years ago, before we had to jump through all these hoops, a real estate deal didn’t take that long to do,” says Calgary real estate lawyer Tom Taylor, of Taylor Conway Barristers & Solicitors. “But now the new requirements are sometimes taking an extra three or four hours — and I can’t charge it out. It’s getting very difficult.”
Market conditions also shape a residential real estate lawyer’s day-to-day workload. In Toronto and its surrounding suburbs, for instance, the ongoing propensity for outrageous bidding wars has led to some tricky situations for buyers, which often lead them back to their lawyer for advice. “I’m finding more and more deals without conditions — no conditions on financing, and no conditions on inspection,” says Karina Frost, a residential real estate lawyer with Frost Law in Richmond Hill, near Toronto. This can result in unknown problems with the house coming to light after purchase; in terms of financing, “people are often very surprised that even though they had a preapproval for a mortgage, that doesn’t mean that the home itself is approved for that amount.” As an example, someone could be preapproved for a $700,000 mortgage, but if they get into a bidding war and overpay compared to what the bank deems that house to be worth, they still may not get the mortgage they had hoped for — even if the bid was for $700,000 or less. “Sometimes clients have to scramble to get secondary financing in these situations,” says Frost. “Or sometimes they have to take on mortgages with a much higher interest rate than they had originally hoped to get.”
Meanwhile, in Halifax, W. Richey Clarke of Boyne Clarke LLP points out a simple truth: if people just aren’t buying houses, business won’t boom for residential real estate lawyers. The residential real estate market isn’t as robust as it could be in Halifax right now, says Clarke, although he does expect things to heat up somewhat throughout 2015. “I think the biggest concern that lawyers have is the volume of work — the less work out there, the less work we have,” he says. “We share the same concerns as anyone in the economy: when things are up, we like it, and when things are down, we don’t.”
While condominiums are subject to many of the same issues as residential houses, they also come with their own unique concerns. “One of the trends I’m seeing is that some of the flaws in condo ownership are becoming more apparent,” says Galbraith, “especially as some of these projects get older and are now in need of major renovations.” Condo buyers have an expectation of a carefree lifestyle, “but then they learn that somebody has to run the thing. So somebody has to go on the board of directors, and then the owners of these condos who have essentially zero training in real estate law or management are now managing multimillion-dollar real estate projects. That’s leading to some issues for us [lawyers].” While mediation and arbitration are often employed to settle condo disputes, these issues can end up in court.
There is now, however, readily available information to give condo purchasers a fuller picture of specific condo buildings before they make their purchase, which is “good news for the potential buyers,” says Galbraith. In B.C., Wrzesniewski says the provincial government has pushed for additional disclosures for purchasers with amendments to the Strata Property Act that came into effect in 2011, which requires strata corporations to prepare depreciation reports every three years “unless they hold an annual three-quarters vote to waive the requirement or have four or fewer strata lots. In preparing the depreciation reports, the strata corporation is supposed to take physical inventory of the common property and assets, and anticipate maintenance repair and replacement costs projected over 30 years. So if someone is buying into a condo, or into a strata-type of structure, they can anticipate what their special levies may be, or what the cost of upgrading the roof may be in five or 10 years,” she says. “It’s additional protection for the consumer.”
The increasing emergence of “mixed-use” buildings — such as a building with condo units, office space and/or retail stores all housed in one structure — is presenting new challenges in commercial real estate law. “This trend makes the transactions and the structure of ownership much more complex because of the number of investors in one single project and the kinds of projects,” says Chantal Sylvestre, who leads the real estate group of Dentons Canada LLP’s Montreal office. “When you do a mixed-use development, you need to have expertise in several aspects — you need to know about condominium law, servitude, leasing, easement...and the people who are practising in municipal law are also very important to your project, because when you have several uses, you definitely need to abide by the zoning in place and very often you need to obtain zoning modifications.” Sylvestre finds being part of a large firm to be very beneficial in these types of cases, because she can rely on colleagues with various specialties to provide their expertise in the more complicated deals. “The team is very important,” she stresses.
“Commercial transactions have definitely become more complicated in terms of the security that the lender requires, the disclosures, and opinions that are required by the solicitor acting for the borrower,” adds Wrzesniewski, who practises primarily residential but does some commercial real estate as well. Overall, Wrzesniewski is finding that in both commercial and residential, “I need to do much more than I needed to do 10 or 12 years ago...it’s definitely hard to find a simple transaction these days.”