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There is no cooling-off period and no statutory warranty on a commercial purchase. The agreement you sign and the searches you run are the only protection you get, so both need to be right.
Arrange a Call →Caveat emptor governs commercial purchases in Ontario. A vendor is generally under no duty to disclose zoning problems, open permits, work orders or contamination. Your due diligence condition is the entire safety net.
A commercial agreement should include a due diligence condition exercisable in the buyer’s sole discretion with a clear deposit-return mechanic, vendor representations and warranties with a defined survival period, the HST treatment and self-assessment certification, a title requisition deadline, adjustments, and remedies if title defects cannot be cleared. On leased properties it should also require delivery of all leases, the rent roll and tenant estoppel certificates.
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A commercial agreement of purchase and sale is a drafted document, not a form with blanks. Brokers frequently start from a standard commercial APS, but on any transaction of substance that document is amended heavily by schedule. What actually decides whether you are protected is a small number of clauses: the scope and length of the due diligence condition, the representations and warranties given by the vendor and how long they survive closing, the treatment of HST, the deposit terms, the title requisition deadline, and what happens if the vendor cannot clear a title defect.
The single most valuable clause is a due diligence condition drafted for the buyer's sole and absolute discretion. Conditions worded around the buyer being "satisfied acting reasonably" invite argument about whether the buyer was entitled to walk away and whether the deposit is forfeited. A sole-discretion condition, with a clear waiver mechanic and an unambiguous statement that the deposit is returned on termination without deduction, converts the conditional period into a genuine option to inspect.
Representations and warranties do real work in commercial deals because caveat emptor otherwise leaves the buyer exposed. On an income property we press for representations about the rent roll, that the leases delivered are complete and unamended, that no tenant is in default, that no tenant has been given free rent or inducements not disclosed, that there are no outstanding work orders or environmental orders, and that the vendor has received no notice of expropriation. Equally important is the survival clause: a representation that dies on closing is of limited value when the problem surfaces three months later.
During the conditional period the file runs on several parallel tracks. Legal due diligence covers title, off-title and tenancy matters. Technical due diligence, run by your consultants, covers environmental site assessment, building condition, roof and mechanical systems, structural review, and where relevant a survey or building location certificate. Financial due diligence covers the rent roll, operating cost reconciliations, realty tax history and the lender's appraisal requirements.
On the legal side, the searches begin with the parcel register and every registered instrument affecting the PIN, then extend off title: a zoning and building compliance letter from the municipality, an open permits and work orders search, fire department records, realty tax certificates, utility arrears, conservation authority regulation where the site is near a watercourse or valley, Ontario Heritage Act designation or listing, Ministry of the Environment, Conservation and Parks records, execution searches against the registered owner, corporate profile and status searches, and Personal Property Security Act searches against chattels and fixtures included in the sale.
Zoning deserves particular attention because it is the issue most likely to make a building unusable for the buyer's intended purpose. In Toronto, City-wide Zoning By-law 569-2013 applies to most of the city, but portions of the former municipalities remain governed by older by-laws and some sites are subject to site-specific exceptions, holding provisions or minister's zoning orders. A building that is legally non-conforming may lose that status if the use is discontinued or the building is substantially altered. Confirming permitted use, parking and loading standards, and outside storage rights in writing before waiving conditions is not optional.
A Phase One Environmental Site Assessment is a records and site reconnaissance review. It does not involve sampling. If it identifies areas of potential environmental concern, a Phase Two involving intrusive sampling is required, and a Phase Two takes weeks, not days. Build enough time into the conditional period for the possibility that Phase One escalates.
Where the property is held in a single-purpose corporation, the parties often consider buying the shares of that corporation rather than the land itself. The structure has real consequences on both sides, and the decision belongs at the letter of intent stage with input from your accountant, because it drives the tax outcome, the diligence scope and the form of the agreement.
| Issue | Asset purchase (buying the land) | Share purchase (buying the company) |
|---|---|---|
| Land transfer tax | Payable on the value of the consideration, provincial and Toronto municipal | Generally not triggered by a share transfer, subject to anti-avoidance and beneficial ownership rules |
| HST | Taxable supply of real property; purchaser normally self-assesses | Sale of shares is generally exempt |
| Liabilities acquired | Buyer takes the land, not the company's other obligations | Buyer inherits the corporation, including tax, employment and contingent liabilities |
| Due diligence scope | Property-focused | Property plus corporate, tax, employment and litigation diligence |
| Cost base | Buyer's cost base reset to purchase price | Corporation retains its existing cost base and accrued recapture exposure |
| Typical outcome | Preferred by buyers | Preferred by vendors; usually reflected in the price |
A share deal is not a way of avoiding land transfer tax in every case. The Land Transfer Tax Act reaches unregistered dispositions of a beneficial interest in land under section 3, and arrangements engineered principally to move beneficial ownership while nominally transferring shares attract scrutiny. Where a share structure is genuinely appropriate, the buyer's protection comes from indemnities, holdbacks and escrow rather than from a clean asset transfer, and those provisions have to be negotiated with care.
The sale of commercial real property is a taxable supply under the federal Excise Tax Act, currently 13 per cent HST in Ontario. In practice most commercial closings use the self-assessment mechanism: the purchaser certifies that it is registered for GST/HST, provides its registration number and an indemnity, and accounts for the tax directly to the Canada Revenue Agency rather than paying it to the vendor on closing, usually claiming an offsetting input tax credit in the same reporting period. The vendor's solicitor will insist on verifying the registration number, because an invalid number leaves the vendor liable for the tax.
Land transfer tax is calculated on the value of the consideration, which includes cash, assumed mortgages and certain non-cash consideration. In Toronto both the provincial tax under the Land Transfer Tax Act and the municipal tax imposed under the City of Toronto Act, 2006 are payable, and for commercial property the municipal tiers currently mirror the provincial ones. The practical planning point is that transfer tax on a Toronto commercial purchase should be modelled at roughly double the Ontario-only figure, plus the City's administration fee.
Where the vendor is a non-resident of Canada, section 116 of the Income Tax Act obliges the purchaser to withhold and remit a prescribed percentage of the purchase price unless the vendor delivers a clearance certificate. The standard withholding is twenty-five per cent of the gross proceeds for capital property, with a higher rate applying to certain categories including depreciable property. Clearance certificates take time to obtain, so the agreement should require the vendor to apply early and should provide for a holdback in trust if the certificate has not arrived by closing. A purchaser who closes without withholding becomes personally liable for the tax.
Commercial mortgage lenders impose their own diligence layer, and their requirements frequently determine the closing timetable. Expect a charge registered against the PIN, a general security agreement with PPSA registration over the borrower's personal property, a general assignment of leases and rents, an environmental indemnity from the borrower and often from the principals, an insurance certificate naming the lender as mortgagee and loss payee, and a solicitor's opinion on corporate capacity, authority and enforceability.
On leased properties the lender will usually require estoppel certificates from major tenants and subordination, non-disturbance and attornment agreements. An SNDA does two things at once: it subordinates the lease to the mortgage, and it protects the tenant by confirming that if the lender enforces its security the lease will not be disturbed so long as the tenant is not in default. Collecting these from tenants takes real time, and leases sometimes contain no obligation on the tenant to sign one, so the requirement should be identified as early as possible.
Title insurance is standard on commercial acquisitions and commercial policies are underwritten differently from residential ones. A commercial policy can be extended by endorsement to cover matters such as zoning compliance, survey and encroachment risk, access, and contiguity where multiple parcels are being assembled. Title insurance is not a substitute for searching. It prices risk, it does not tell you whether the building can be used for your business, but it is an efficient way to close over certain historical title irregularities that would otherwise require a court application.
Title defects are the most common source of late-stage friction. Old mortgages that were paid but never discharged, easements in favour of a utility that runs directly under the footprint of a planned addition, restrictive covenants imposed decades ago by a developer that prohibit a use the zoning permits, and unregistered rights of way that everyone has relied on for thirty years all appear regularly on Toronto commercial parcels. Each is addressed differently: some by requisition and discharge before closing, some by title insurance endorsement, and some by an adjustment to price where the defect genuinely limits what can be done with the land.
Survey issues run a close second. Where no up-to-date reference plan or survey exists, encroachments are discovered only when one is commissioned, and older industrial and retail buildings in the former municipalities frequently encroach onto neighbouring land or laneways, or have neighbouring structures encroaching onto them. Loading areas that have been used for decades sometimes sit partly on adjacent property with no registered right. These are solved by encroachment agreements, by acquiring the affected strip, or by insuring the risk, but only if they are found while the condition is outstanding.
On leased properties the recurring problem is a mismatch between the rent roll and the leases. Rent charged at a different rate from the document, renewals exercised but never papered, abatements granted informally, deposits the vendor cannot substantiate, and unpaid tenant improvement allowances or leasing commissions all turn up when leases are abstracted and estoppel certificates come back. The agreement should therefore require delivery of every lease, amendment, side letter and indemnity, and should treat the rent roll as a representation rather than as background information.
Finally, corporate authority. Where the vendor is a corporation, partnership, trust or estate, the purchaser must confirm that the entity exists, is in good standing, has the capacity to convey, and that the individuals signing are authorised to do so. Where the vendor is an estate, a certificate of appointment of estate trustee may be required before title can be conveyed. These are simple checks that stop a closing dead when they are left to the final week.
The statement of adjustments allocates the running costs of the property between vendor and purchaser as of the closing date. On a commercial income property the adjustments are more involved than on a house: realty taxes, prepaid and arrears rent, security and last-month deposits held by the vendor, prepaid insurance where policies are assumed, utility readings, the current year's operating cost estimates and any reconciliation owing to or from tenants, unearned percentage rent, and any leasing commissions or tenant inducements the parties have agreed to share.
Registration is completed electronically through Teraview. The transfer and any charge are registered, both land transfer taxes are paid on registration, and funds are released in accordance with the closing arrangements. Immediately after closing, notices are sent to every tenant directing that rent be paid to the new landlord and confirming the transfer of deposits, utilities and services are transferred into the purchaser's name, and insurance is bound effective the closing date rather than the following business day.
You should receive a reporting letter that includes the registered transfer and charge, the final subsearch confirming no intervening registrations, the title insurance policy, copies of all leases and estoppel certificates, the statement of adjustments, and a schedule of the matters that survive closing, surviving representations and their expiry dates, holdbacks and their release conditions, and any obligations you have assumed under registered site plan or development agreements. If you are contemplating a commercial acquisition in Toronto or elsewhere in Ontario, contact Lexaltico LLP before the offer is signed.
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