In commercial real estate, the biggest risks are not always obvious at the start of a deal.
This article outlines the practical considerations buyers should focus on when purchasing commercial property, including how risk is allocated in the Agreement of Purchase and Sale, and the most common issues that can affect value, use and the buyer’s overall investment.
APS: The primary risk allocation tool
At the centre of every commercial transaction is the Agreement of Purchase and Sale (“APS”). It is not simply a roadmap to closing; it is the legal instrument that allocates risk between the parties and determines who bears responsibility when issues arise. More often than not, the APS will shift responsibility to the buyer, making careful review and clear, precise drafting critical. Understanding the nature and complexity of the transaction along with the parties’ respective bargaining power is necessary to securing representations and warranties that offer real protection to the buyer.
For buyers, some of the most important safeguards are the conditions precedent. Common conditions include: due diligence, financing, zoning verification and environmental review. If drafted properly, these conditions give the buyer an opportunity to confirm that the property can legally and practically support the intended use, before the buyer is bound to complete the purchase.
Tip: Lenders may require additional investigations or reports. Engaging your lender early to identify these requirements allows your solicitor to build them into your conditions and avoid delays or amendments.
Due diligence: beyond title and zoning
A common misconception is that a clean title search and confirmation of zoning is sufficient to proceed with confidence. In reality, thorough due diligence involves various off-title searches, such as zoning compliance, outstanding work orders, reviewing the status and terms of any existing leases and conducting corporate searches to confirm the vendor’s standing.
In transactions involving redevelopment, additional considerations such as planning approvals, site constraints and servicing capacity become essential. Zoning compliance alone does not guarantee that a proposed development will be approved or economically viable in practice.
Tip: If a buyer is concerned about a particular aspect of the property, its solicitor can conduct certain searches before the APS is signed to rule out initial deal-breakers or inform any necessary renegotiation.
Environmental liability: Ownership carries risk
Environmental exposure remains one of the most significant and often underestimated risks in commercial real estate acquisitions. In Ontario, liability may attach to a property owner even where that owner did not cause or contribute to the contamination. As a result, Phase I Environmental Site Assessments are commonly treated as a baseline requirement in commercial transactions, with Phase II testing undertaken where concerns are identified.
Failing to address environmental risk at the due diligence stage can result in significant remediation costs and regulatory exposure after closing, often without recourse against prior owners.
Tip: Understanding what existing reports and studies may be available from the seller and seeking reliance letters for such may expedite the diligence process. Seeking environmental indemnities from the seller can provide additional comfort.
Income-producing properties: The lease drives value
Where a property generates rental income, the transaction becomes as much about contractual rights as it is about physical land. The value of the asset is directly tied to the strength and stability of its lease structure.
Buyers (or their solicitors) should carefully review lease terms, including expiry dates, renewal rights, rent structures, early termination rights, escalation clauses, tenant inducements and any side agreements that may affect cash flow. Existing arrears or disputes should also be identified and assessed for potential impact on post-closing operations.
Tenant estoppel certificates remain an important tool in confirming lease terms directly with tenants and reducing the risk of post-closing disputes arising from discrepancies in documentation.
Tip: If tenant estoppel certificates are not available for all tenants, the buyer may ask the vendor to provide a certificate in their place. In fact, lenders will often require these and may have a preferred form.
Conclusion
Purchasing commercial property in Ontario is not simply a matter of identifying a promising asset. It is a legal process grounded in the careful identification, analysis and allocation of risk across a range of known and unknown factors.
A well-structured transaction depends on disciplined due diligence, clear contractual protections and early identification of issues that may not be apparent on title or at the outset of negotiations.
If you are considering a purchase, involving legal and planning professionals early in the process is one of the most effective ways to protect your investment and position your project for success. The real estate team at Perley-Robertson, Hill & McDougall LLP/s.r.l. would be pleased to assist you.
About the Author
Megan Carbonette is a Real Estate Lawyer at Perley-Robertson, Hill & McDougall LLP, advising clients on a wide range of commercial real estate matters including acquisitions, dispositions, development, financing, and leasing. She works with developers, investors, lenders, landlords, and tenants across sectors such as mixed-use, office, retail, and industrial, bringing experience in complex transaction management. Called to the Ontario Bar in 2022, Megan combines a strong academic background from the University of Ottawa with a practical, client-focused approach and is fluent in both English and French.
