Power Negotiating for Realtors

By Brian Madigan LL.B.

Sometimes, too much is too much! A realtor’s ability to negotiate a particular transaction is often based upon the client’s bargaining position. Often, this is overlooked.

Naturally, if the client is in a very strong position, then few, if any, concessions will be granted. A client in a weaker position will have to offer some concessions in order to get the deal done.

The problem most commonly encountered is the failure on the part of the negotiator to realize and appreciate their own client’s bargaining position.

Let’s assume that the client wishes to rent a small storefront of about 300 square feet in a good location in a rather large and thriving commercial plaza to sell newspapers and various confectionary items.

The location is right across the hall from one of the anchor tenants, so traffic is virtually guaranteed. The landlord, a major owner of commercial retail space has a standard form lease which has been drafted to suit its circumstances.

The difficulty from the perspective of the newspaper stand operator will be to have any serious changes made to the landlord’s standard form lease. Possibly, an anchor tenant might be able to negotiate, but not someone looking for 300 square feet.

However, day after day, agents will seek to negotiate substantial terms contained in the standard lease form. This is usually undertaken recognizing that some of the provisions are rather one sided, which is of course true. But, it’s still not negotiable. It’s not in the best interest of the landlord, and it’s often foolhardy. It would be far better to review the document carefully, and determine whether the document in its entirety is acceptable.

So, what happens? The agent spends countless hours drafting significant concessions. Finally, the offer is submitted. Time passes and the agent inquires about the status. Actually, there is no status. The landlord will not sign it back. The landlord will not even incur the expense of having their lawyer’s look at it.

The deal dies! It didn’t have to, but the newsstand operator is now off to another location. Facing similar circumstances, the client will likely have similar results. No deal.

Finally, the client either fires the agent, or they both “give in” and sign something that a landlord will accept.

The problem at the outset was an inability to determine the client’s bargaining position. This happens to many new agents who are inexperienced. Rarely, does it happen to a seasoned professional. And while they may get good marks on an exam, they are not getting good marks from their clients.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Coldwell Banker Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

Resolving Matrimonial Disputes

By Brian Madigan LL.B.

Gas Shortage again!

By Brian Madigan LL.B.

What is that going to mean for real estate?

As this is published thousands of motorists in the GTA line up for gas. They are the lucky ones, others just stay home. They likely passed several stations that had closed because they ran dry.

Briefly, there is a concerning that hurricane IKE may damage some oil refineries, or keep them closed for a few days.

What is that going to mean for real estate?

In the very short term, probably nothing. It’s just a small inconvenience. Longer term, it will definitely have an impact.The question however is where? The most vulnerable segment of the market is recreational properties within reasonable commuting distance of major urban areas. Basically, that means downtown Toronto.

The time limit for travel seems to be about 3 hours. Beyond that, most people are prepared to reconsider the issue of ownership. Sure, they’ll visit friends on a long weekend, but they won’t buy themselves.The recreational market is vulnerable since it is a luxury, and in bad times, that’s the first thing to go.

Let’s assume that gas prices are still within reach of the average consumer. At the moment, that will take us up to about $1.35/litre. Beyond that, consumers will balk, and defer driving to distant locations. Work comes first, and there’s not a lot of money leftover.The next issue is availability. If there are substantial shortages, it is going to be difficult to get people to line up for an hour or so before they embark on their 3 hour journey.

Once they are on the highway they’ll all be going at the limit of 100 km/hour or less. It will simply to too expensive, and use up far too much gas to travel any faster. This will add another 30 minutes to 45 minutes to the 3 hour trip. Now, we are pushing close to 5 hours from the time you left your house.However, we didn’t talk about traffic congestion. If we simply have the same number of cars heading out of the City at about the same time, we are going to add to the congestion.

The reason is that on a Friday afternoon, many people leave at about 3 o’clock in the afternoon. That really won’t get any earlier. They still have to get their work done. It will simply mean that fewer people will be able to “get away early”, basically adding to the already overloaded streets and highways.

Then, the PROMBLEM: that past weekend wasn’t fun! Five hours to get to the cottage battling traffic with everyone going 85 km/hr, and 5 hours back on Sunday. But the saving grace on Sunday was that you left first thing on Sunday morning to avoid the rush.

So, now the question: is it worthwhile to own a cottage or should you just visit some friends? The more people who say “No” to that question, the worse it becomes for the recreational property market which depends so much upon:

• Cheap gas

• 3 hour commutes

• moderate traffic

If that changes, so will the market! And, that will be good for some, and not so good for others.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

Air Rights

By Brian Madigan LL.B.

There are “air rights” and then again there are “air rights”, and of course they are two completely different things.

So, let’s deal with the two concepts:

1) common law air rights, and
2) zoning air rights.

Common Law Air Rights

Actually, these are probably the types of rights that would easily come to mind. They involve your rights as a property owner to use, have, or restrict the use of the air that is above your property. It is easy to understand your property rights at surface level, but what happens when you go higher and higher?

There would appear to be several matters to take into consideration, and you have the right at common law to:

1) build or construct buildings above the surface of your property,
2) restrict others from building above the surface of your property,
3) receive and breathe fresh air that is not polluted,
4) view the sunlight in an unobstructed fashion,
5) receive transmission by various wavelength varieties (radio, television, satellite, x-ray, infared, sound etc.)
6) prevent others from travelling in the air space (well, not too low) above your property,
7) remove limbs from trees that enter into your air space,
8) attend to the removal of limbs of your trees encroaching the air space of neighbours,
9) require the removal of an eavestrough or other encroachment that might exist above the surface of your property.

The above matters are not intended to be an exhaustive list. There still may be other rights because the common law is always evolving.

Zoning Air Rights

When you hear discussion about “air rights”, these types of rights are commonly the subject. In fact, they are not “air rights” at all. They represent the transfer of an entitlement to construct a building in accordance with the provisions of the local zoning by-law.

So, here’s how they work. Let’s assume a developer wishes to construct a substantial office building. The local zoning by-law permits 12 times coverage. That means that if the developer buys a property which has 10,000 square feet of space, he could then build an office building that was 120,000 square feet. Naturally, he would still have to comply with the appropriate height and setback requirements.

What happens to the neighbourhood? All the short buildings get torn down and replaced with new taller buildings. Skyscrapers are incompatible with old historic buildings! That happened in the ‘50’s and ‘60’s. But, that just isn’t good town planning.

The result was a rather innovative approach that was used to help preserve the older historic buildings in downtown urban areas. The 10,000 square foot lot that is immediately adjacent to the potential skyscraper now has value. If you tore it down, you could build a 120,000 square foot building on site. Let’s assume that there is already a 10,000 square foot historically and architecturally significant building in place. This leaves 110,000 square feet of undeveloped potential leftover.

Now, the trick is to sell that 110,000 square feet of potential building entitlement (pursuant to the zoning by-laws), to the developer of the office building. He can build 12 floors on his own. Now, he can build another 11 floors, so that he has a 23 storey building. Due to setback requirements, he might only use one half of the land footprint, and provided he does not exceed the maximum height limitation, he would then be able to construct a 46 storey office building. Perhaps, it’s not quite a skyscraper by today’s standards, but that’s the way the scheme goes.

The “air rights” (in this context) are really “unused development potential”. They are transferred from one property owner to another. The historic property is then “downzoned”, so that the air rights cannot be sold again. In many municipalities, the building to be preserved is provided with an “historic designation”. This restricts the use of the property in the future. The intent is to preserve historic buildings in downtown areas, and provide for their increase in market value.

A case in point, would be the National Club on Bay Street in the heart of Toronto’s financial district. The air rights were transferred to Scotiabank so that it could build a bigger and better Scotia Plaza.

Just remember, when you are walking along Bay Street that buying the National Club, only to tear it down and build your own skyscraper won’t work.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

Legal Non-Conforming Use

By Brian Madigan LL.B.

This is an issue under the zoning by-laws. It is important to note that all zoning by-laws are forward looking. They speak to the future and not the past. They regulate future uses of a property not existing ones. They are prospective not retrospective in nature. They are not retroactive.So, if you have a present use which is legal, then it may continue forever. But, that entitlement applies to that property and that property alone, no others.

If a new zoning by-law is enacted, it will apply only to other properties which do not have the existing and now prohibited use.Let’s say that the municipality does not want a parking lot in the area. It will first have to designate the area to which the new zoning will apply. Once the by-law is enacted, it will apply to every property in the area.

If any property had a parking lot in use at the time of passage of the by-law, then the owner will be able to demonstrate that this use is a “legal non-conforming” use. The activity predates the by-law. The use was a legal use at that time, and that same use has continued in an uninterrupted fashion since the by-law. It’s not enough simply to show the start date, there must also be evidence that this particular use has not been abandoned. It has been continuous.This continuous and uninterrupted use is at times difficult to prove.

Let’s take the example of a restaurant which is the only restaurant in an area that now excludes restaurants. What if the property closed down? What if the property were sold? How long can the property not be open to the public? What if it had a sign: “closed for renovations”? In all such cases, this is ultimately a matter for the Courts. For a vendor who wishes to ensure that such a use may continue, then legal advice should be sought in order to document the continuance of the use, particularly during lengthy periods of renovation and repair.

Property owners should not assume that the municipality will not seek to enforce its by-law. They have a very specific by-law BECAUSE they want to enforce it. There’s no free ride here. Document the continued use! The lack of documentation is the precise reason why the legal non-conforming status is lost in most cases.

The building structure may no longer comply with the area requirements or the minimum setbacks. Generally, these properties may be repaired so long as the new structure complies with the existing use, and the legal non-conformity is not extended.You will often see a number of buildings with modest setbacks from the sidewalk, perhaps they abut the sidewalk or may be set back just a foot or two.

You will often find a row of commercial stores constructed in the early part of the 20th century that follow this alignment. Then, every so often you will find one brand new store set back from the street line, on its own, by about 20 feet. Why is this? The reason is that the new setback requirement under the current by-law calls for 20 feet from the sidewalk. The prior building was probably demolished and then the owners submitted an application for a building permit. These buildings are typically 30 to 40 years old.

Since that time, builders have become a little smarter. They repair and renovate. They never demolish and reconstruct. No matter how bad the structure might be, it is always improved or shored up. It is never torn down and replaced. This allows the “new” building to be reconstructed over the old building and retain its right to abut the sidewalk.This is a very valuable right and should not be lost through oversight. If you own a legal non-conforming property, be sure to document its start date, and its continuous use.

Would you have the evidence available if the municipality claimed that the use was lost? It’s up to you to prove the legal non-conforming status. All the municipality needs to do is prove its current by-law. The onus to prove the right to non-compliance is upon the property owner. Paper the file!

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

Ignore the Landlord at your Own Risk!

By Brian Madigan LL.B.

From time to time, tenants will wish to take advantage of the favourable lease rates under a long term lease.For one reason or another, the property is no longer suitable for them to continue to occupy the premises.

So, they decide to sublet. Only one little problem: they forget to notify the landlord. And, the reason is quite simple, the landlord would probably say “no”.

After a 15 year initial term, and a 5 year renewal, the landlord is anxious to see the lease come to an end so that he can raise the rates to market levels.At one time, the courts would come to the tenant’s assistance and relieve the tenant from the forfeiture provisions contained in the Lease. This was relatively commonplace. There appeared to be a predisposition on the part of the judicial system to err on the side of the tenant. (Barrow vs. Isaacs, England, Court of Appeal, 1891). That proposition was commented upon with approval recently by the English House of Lords in Shiloh vs. Harding.

However, as time went by, tenants became larger and in many cases far more sophisticated than the landlords. So, there was no longer a compelling reason to assist tenants to the ultimate disadvantage of the landlords.Today, both sides are on equal footing. Basically, this means that the courts, notwithstanding a long line of cases to the contrary are likely to prefer the interests of the tenant. Accordingly, tenants who fail to seek the approval of the landlord to the new sub-tenant, do so at their own peril. No longer can a tenant simply come to court and confess that he forgot to obtain the landlord’s consent.

There are provisions for relief from forfeiture contained in the Commercial Tenancies Act:

"Relief against re-entry or forfeiture

20. (1) Where a lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture, whether for non-payment of rent or for other cause, the lessee may, in the lessor’s action, if any, or if there is no such action pending, then in an action or application in the Superior Court of Justice brought by the lessee, apply to the court for relief, and the court may grant such relief as, having regard to the proceeding and conduct of the parties under section 19 and to all the other circumstances, the court thinks fit, and on such terms as to payment of rent, costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future as the court considers just.

Exceptions

(7) This section does not extend,

(a) to a covenant or condition against the assigning, underletting, parting with the possession, or disposing of the land leased; or to a condition for forfeiture on the bankruptcy of the lessee, or on the lessee making an assignment for the benefit of creditors under the Assignments and Preferences Act, or on the taking in execution of the lessee’s interest; or

(b) in the case of a mining lease, to a covenant or condition for allowing the lessor to have access to or inspect books, accounts, records, weighing machines or other things, or to enter or inspect the mine or the workings thereof."

The Ontario Court of Appeal in Leon’s Furniture v. 1497777 Ontario Inc. (2003) that:

• The prohibition under s. 20(7) does not oust the general equitable jurisdiction of the courts

• s. 98 of the Courts of Justice Act provides that a court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.

• Section 98 supercedes s20(7)

One issue is now quite clear the Court will examine both the conduct of the landlord and the conduct of the tenant in determining the result of a relief from forfeiture application.The Court also quoted with approval the following decision of Justice Donnelly of the Supreme Court of Ontario (now the Superior Court of Justice and upheld by the Court of Appeal) in Federal Business Development Bank vs. Starr (1988):

“These cases illustrate that the test of a landlord’s reasonableness extends beyond and is moving away from the restrictive two-part test based on the personality of the proposed assignee or the intended use of the premises as established in the early English authorities.The more liberal approach, close to the “reasonable man” standard, is to consider the surrounding circumstances, the commercial realities of the market-place and the economic impact of an assignment on the landlord.”

This means that courts will view the conduct of a landlord who wishes to bring to an end a long term lease with options as being reasonable in the circumstances. Tenants no longer should ignore their landlord’s right to approve their su-tenants. Or, they do so at their own peril!

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Coldwell Banker Innovators Realty

905-796-8888

www.OntarioRealEstateSource.com

Terminating Residential Tenants Prior to Sale

By Brian Madigan LL.B.

This is not going to be the easiest thing to do, but it can be done. Sometimes, tenants are simply a liability. They are rude and objectionable and nobody wants them. And, what’s more, no one wants your building with these undesirable tenants.

So, the question is how do you get rid of them?The best solution is probably to sell the building to a new owner who will arrange to terminate the tenancies. This is a reasonable course of action and makes a great deal of sense. In fact, it’s often wise to suffer a little depreciation on the purchase price if your purchaser is willing to assume them.

There are some special rules relating to small landlords who have 5 or fewer residential tenants. This applies to a great number of small plazas, strip malls, four-plexes and the like.The first item to be considered is the applicable legislation. The Residential Tenancies Act replaced the Tenant Protection Act in January 2006. By now, it is expected that most residential landlords will be aware of its existence and will be complying with the new legislation. The Act applies to all matters relating to a residential tenancy. The parties cannot opt out of the protections offered by the Act. Any such provision is void as against public policy and will not be enforced by the Courts. The Act applies, and that’s it. There’s no way around it.So, you had better become familiar with the rules.

Assuming that you wish to sell your small building, and the purchaser does not wish to assume your tenants, what do you do?

Let’s also assume that your tenants have no leases, they are there simply on a month to month basis. If they do have leases, then there are some ways mentioned later to terminate prior to expiration of the term. Or, you can always buy them out.

Here is a customary termination provision at the end of the lease term:

Notice, landlord personally, etc., requires unit

48. (1) A landlord may, by notice, terminate a tenancy if the landlord in good faith requires possession of the rental unit for the purpose of residential occupation by,

(a) the landlord;

(b) the landlord’s spouse;

(c) a child or parent of the landlord or the landlord’s spouse; or

(d) a person who provides or will provide care services to the landlord, the landlord’s spouse, or a child or parent of the landlord or the landlord’s spouse, if the person receiving the care services resides or will reside in the building, related group of buildings, mobile home park or land lease community in which the rental unit is located. You will notice that it is somewhat restrictive.

Personal occupancy is a requirement. It is a must. And, it has to be a close relative or a caregiver.The notice must provide at least 60 days to vacate. This means that a notice for the end of June must be given before May. There are special provisions to treat February as a full 30 day month, whether it actually be 28 or 29 days. Thus, a notice to vacate by the end of February must be given on or before 1 January.

Once the tenant receives the notice, the tenant may give notice to leave after 10 days. So, the landlord who might ordinarily expect to receive two full months rent, may only get 10 days of rent. But, that’s the law, and one thing that you might have imagined is that the legislation is very pro-tenant.In our case, the building is to be sold.

Let’s have a look at another similar provision:

Notice, purchaser personally requires unit

49. (1) A landlord of a residential complex that contains no more than three residential units who has entered into an agreement of purchase and sale of the residential complex may, on behalf of the purchaser, give the tenant of a unit in the residential complex a notice terminating the tenancy, if the purchaser in good faith requires possession of the residential complex or the unit for the purpose of residential occupation by,

(a) the purchaser;

(b) the purchaser’s spouse;

(c) a child or parent of the purchaser or the purchaser’s spouse; or

(d) a person who provides or will provide care services to the purchaser, the purchaser’s spouse, or a child or parent of the purchaser or the purchaser’s spouse, if the person receiving the care services resides or will reside in the building, related group of buildings, mobile home park or land lease community in which the rental unit is located.

This time, the complex must be small containing no more than 3 residential units. It could have 10 commercial tenancies but that doesn’t matter. It’s only the number of residential units that counts.Here, the present owner can give notice on behalf of the new owner. However, examine the requirements closely, the notice is restricted to good faith residential occupancy. The conversion of the unit to other purposes does not count.Again, 60 days notice must be given by the present owner and the tenant automatically acquires the right to leave (provided he gives proper notice) after 10 days.

It is noteworthy that there is no definition of a small building. So, you will see different rules from clause to clause. Sometimes a small building will be 3 or fewer, sometimes 4, and sometimes 5. You will have to look at the particular paragraph.Not all new purchasers will have an instant family that is desirous of moving into the premises. Maybe they would like to use it for another purpose.

They may wish to convert the residential premises into retail, commercial, office or industrial uses that might otherwise be compatible with the remainder of the building.The applicable section of the Act is:

Notice, demolition, conversion or repairs

50. (1) A landlord may give notice of termination of a tenancy if the landlord requires possession of the rental unit in order to,

(a) demolish it;

(b) convert it to use for a purpose other than residential premises; or

(c) do repairs or renovations to it that are so extensive that they require a building permit and vacant possession of the rental unit.

The owner of the facility may give notice of demolition, conversion or extensive repairs. These reasons will justify a termination of the tenancy. The notice period in these circumstances moves up to 120 days or four full months. Again, the tenant acquires the right to vacate on 10 days notice at anytime throughout this 120 day period.Also, it should be noted that if extensive repairs are being undertaken to the premises, then the tenant has the right of first refusal to occupy the premises once again.

The landlord is obligated to inform the tenant of this fact.This provision applies to all residential complexes, not just small ones.

There are a few more rules that you need to consider in such circumstances:

Compensation, demolition or conversion

52. A landlord shall compensate a tenant in an amount equal to three months rent or offer the tenant another rental unit acceptable to the tenant if,

(a) the tenant receives notice of termination of the tenancy for the purposes of demolition or conversion to non-residential use;

(b) the residential complex in which the rental unit is located contains at least five residential units; and

(c) in the case of a demolition, it was not ordered to be carried out under the authority of any other Act.Yes, you actually read this quite correctly. If the landlord wants to improve his building in any way, he must provide compensation to the tenants, equal to 3 months rent. So, tearing it down or converting it to a commercial use requires payment of the 3 month penalty.

The only saving grace this time is that the number of residential units must be 5 or more. If, the landlord has another unit in the same complex that is available, that unit could be offered in lieu of compensation.The corollary of this proposition is that a landlord of a small building, (in this paragraph meaning 4 or fewer residential units) does not have to pay any compensation by way of penalty.

There is also a similar provision concerning extensive repairs:

Tenant’s right to compensation, repair or renovation

54. (1) A landlord shall compensate a tenant who receives notice of termination of a tenancy under section 50 for the purpose of repairs or renovations in an amount equal to three months rent or shall offer the tenant another rental unit acceptable to the tenant if,(a) the tenant does not give the landlord notice under subsection 53 (2) with respect to the rental unit;

(b) the residential complex in which the rental unit is located contains at least five residential units; and

(c) the repair or renovation was not ordered to be carried out under the authority of this or any other Act.

Again, you will notice similar provisions. Five or more units, and the tenants gets at least 120 days notice and 3 months compensation. You might wonder who really owns the building. If this potential liability were to be assessed against the value of the building it could make a rather substantial dent in the equity.At the end of the term of any lease, or in the case of a monthly tenancy, the landlord can give notice of termination upon 60 days notice for the following reasons:

1) the tenant persistently failed to pay the rent on time,

2) misrepresentation of income by tenant (ie. qualifying for low rental housing),

3) illegal acts, trade or business being conducted on premises,

4) wilfully or negligently causes undue damage to the premises,(10 days notice is sufficient),

5) conduct by the tenant that substantially interferes with the reasonable enjoyment of the residential complex for all usual purposes by the landlord or another tenant,

6) conduct of the tenant, another occupant of the rental unit or a person permitted in the building by the tenant is such that it substantially interferes with the reasonable enjoyment of the building for all usual purposes by the landlord (applies only to small buildings of 3 or fewer residential units, and 10 days notice is sufficient),

7) an act or omission of the tenant, another occupant of the rental unit or a person permitted in the residential complex by the tenant seriously impairs or has seriously impaired the safety of any person, (10 days),

8) if the number of persons occupying the rental unit on a continuing basis results in a contravention of health, safety or housing standards required by law, (20 days),

9) within six months after the notice was given to the tenant, (and the termination cancelled) an activity takes place, conduct occurs or a situation arises that constitutes grounds for a notice of termination (this time 14 days).

Accordingly, any of the above matters will also constitute grounds for the termination of the tenancy.But, before we leave entirely the sale issues what if the tenant simply won’t leave. Then, the landlord has to bring an application under the Act to terminate the tenancy and evict the tenant.

Landlord or purchaser personally requires premises

72. (1) The Board shall not make an order terminating a tenancy and evicting the tenant in an application under section 69 based on a notice of termination under section 48 or 49 unless the landlord has filed with the Board an affidavit sworn by the person who personally requires the rental unit certifying that the person in good faith requires the rental unit for his or her own personal use.

And, if the building is to be demolished, converted or extensively repaired:

Demolition, conversion, repairs

73. The Board shall not make an order terminating a tenancy and evicting the tenant in an application under section 69 based on a notice of termination under section 50 unless it is satisfied that,(a) the landlord intends in good faith to carry out the activity on which the notice of termination was based; and(b) the landlord has,(i) obtained all necessary permits or other authority that may be required to carry out the activity on which the notice of termination was based, or(ii) has taken all reasonable steps to obtain all necessary permits or other authority that may be required to carry out the activity on which the notice of termination was based, if it is not possible to obtain the permits or other authority until the rental unit is vacant.

You will appreciate that it is not quite so easy to prove all this. In most cases, the building permits for the work will be required. At the very least, the co-operation of the municipality would have to be sought so as to encourage the Landlord and Tenant Board that the work is to be legitimately undertaken.

That brings us back to the basic question. What do you do, if the purchaser will not accept your tenants and insists upon vacant possession?Here are your options:

1) have the tenant agree to leave prior to closing,

2) if necessary, offer the tenant some monetary inducement to leave,

3) give 60 days notice requiring possession for occupancy by your family,

4) give 60 days notice requiring possession for occupancy by the purchaser’s family,

5) give 120 days notice requiring possession for demolition, extensive repairs, or conversion to non-residential uses,

6) pay compensation (if required), namely 3 months rent provided total number of units is equal to five or more.

Unquestionably, if there are unruly and undesirable tenants, let the other party deal with them. That’s probably the simplest advice that can be given to both vendors and purchasers. However, fundamentally, the tenants belong to the owner, and they are the owner’s responsibility. Rather than being an asset, they are really a liability, and the property is worth less with them in it.

So, the easiest and quickest way would be to reoccupy the premises yourself with your family. At the same time, be aware that a reasonable amount of compensation might have to be offered to the tenants in order to induce them to move. But, it should be worth it. The building gets sold at a higher price without the tenants.

Note: a number of the paragraphs are direct quotes from the Residential Tenancies Act, please refer directly to the Act.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

Unfair Business Practices

By Brian Madigan LL.B.

The Business Practices Act was a very good piece of legislation, but not too many people knew about it, so last year the Ontario Government replaced it with the Consumer Protection Act.

When it comes to real estate there are some important provisions. While the conveyance of real estate is exempt from the Act, advertising, the conveyance of chattels and agreements with realtors are all affected.No one is allowed to engage in an “unfair practice” with a consumer, and specifically it is an unfair practice for a person to make a false, misleading or deceptive representation.

These will include the following:

1. A representation that the goods or services have sponsorship, approval, performance characteristics, accessories, uses, ingredients, benefits or qualities they do not have.

2. A representation that the person who is to supply the goods or services has sponsorship, approval, status, affiliation or connection the person does not have.

3. A representation that the goods or services are of a particular standard, quality, grade, style or model, if they are not.

4. A representation that the goods are new, or unused, if they are not or are reconditioned or reclaimed, but the reasonable use of goods to enable the person to service, prepare, test and deliver the goods does not result in the goods being deemed to be used for the purposes of this paragraph.

5. A representation that the goods have been used to an extent that is materially different from the fact.

6. A representation that the goods or services are available for a reason that does not exist.

7. A representation that the goods or services have been supplied in accordance with a previous representation, if they have not.

8. A representation that the goods or services or any part of them are available or can be delivered or performed when the person making the representation knows or ought to know they are not available or cannot be delivered or performed.

9. A representation that the goods or services or any part of them will be available or can be delivered or performed by a specified time when the person making the representation knows or ought to know they will not be available or cannot be delivered or performed by the specified time.

10. A representation that a service, part, replacement or repair is needed or advisable, if it is not.

11. A representation that a specific price advantage exists, if it does not.

12. A representation that misrepresents the authority of a salesperson, representative, employee or agent to negotiate the final terms of the agreement.

13. A representation that the transaction involves or does not involve rights, remedies or obligations if the representation is false, misleading or deceptive.

14. A representation using exaggeration, innuendo or ambiguity as to a material fact or failing to state a material fact if such use or failure deceives or tends to deceive.

15. A representation that misrepresents the purpose or intent of any solicitation of or any communication with a consumer.

16. A representation that misrepresents the purpose of any charge or proposed charge.

17. A representation that misrepresents or exaggerates the benefits that are likely to flow to a consumer if the consumer helps a person obtain new or potential customers. (s. 14 (2))

It is also an unfair practice to make an unconscionable representation, and there are some “rules” which will help determine if this is the case.A Court may take into that the person making the representation or the person’s employer or principal knows or ought to know,

(a) that the consumer is not reasonably able to protect his or her interests because of disability, ignorance, illiteracy, inability to understand the language of an agreement or similar factors;

(b) that the price grossly exceeds the price at which similar goods or services are readily available to like consumers;

(c) that the consumer is unable to receive a substantial benefit from the subject-matter of the representation;

(d) that there is no reasonable probability of payment of the obligation in full by the consumer

(e) that the consumer transaction is excessively one-sided in favour of someone other than the consumer;

(f) that the terms of the consumer transaction are so adverse to the consumer as to be inequitable;

(g) that a statement of opinion is misleading and the consumer is likely to rely on it to his or her detriment; or

(h) that the consumer is being subjected to undue pressure to enter into a consumer transaction. (s.15(2))

Section 18 provides that “any agreement, whether written, oral or implied, entered into by a consumer after or while a person has engaged in an unfair practice may be rescinded by the consumer and the consumer is entitled to any remedy that is available in law, including damages.”

These common law remedies are available in addition to the opportunity to report the matter to the Director and have the dispute investigated and resolved under the Act. The Director has been given rather broad powers by the legislation.And further, “each person who engaged in an unfair practice is liable jointly and severally with the person who entered into the agreement with the consumer for any amount to which the consumer is entitled under this section.”

So, this means that the particular salesperson is responsible as well as the company.Although, the actual “conveyance” of real property is not subjecty to the provisions of the Act, the matter of advertising is specifically noted as an included matter.Under section 109 of the Act, “if the Director believes on reasonable grounds that any person is making a false, misleading or deceptive representation in respect of any consumer transaction in an advertisement, circular, pamphlet or material published by any means, the Director may order the person to cease making the representation; and further order the person to retract the representation or publish a correction of equal prominence to the original publication”.

This section applies to any representations involving residential real property. If the purchaser cannot be described as a “consumer”, then the Act will not apply. So, commercial transactions are not affected. Houses, and vacation properties are included. There is a real grey area when it comes to farms. Large commercial operating farms would not be included, but a hobby farm might.

You will recall earlier that both principals and agents were jointly and severally responsible. This means that a vendor who provides false and misleading information to his realtor is jointly and severally responsible to the purchaser.All in all, the new Consumer Protection Act should be quite helpful to purchasers and consumers in Ontario.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Coldwell Banker Innovators Realty, Brokerage 905-796-8888http://www.ontariorealestatesource.com/

The Role of a Business Broker

By Brian Madigan LL.B.

A business broker is regulated in Ontario under the same legislation that applies to real estate agents, namely the Real Estate and Business Brokers Act. In fact, under the Act a business is considered to be real estate.

There is considerably more negotiating when it comes to buying and selling a business than an ordinary real estate transaction, and it requires specialized expertise.

For a business broker to undertake the task of representing either the buyer or the seller, there are some additional considerations that are over and above the routine real estate deal:

Employees
Knowledge of employment laws (Employment Standards)
Knowledge of the common law of wrongful dismissal
Key employee agreements
Knowledge of collective agreements
Management agreements
Training agreements
Consulting and Supervisory agreements
Non-Competition agreements

Business Asset Contracts
Equipment and machinery leases
Equipment and machinery pledge agreements

Business Financing
Pledges of assets
Pledges of receivables
Fixed and floating charges

Taxes
Income tax implications (deferred and unpaid taxes)
GST implications
PST implications

Occupancy
The lease, (if premises rented) the right to remain
Chattels and fixtures that are part of the business
Termination rights

Key Contracts
Intellectual property
Maintenance agreements
Client and customer contracts

Insurance
General liability insurance
Environmental liability insurance
Property insurance
Vehicle insurance
Business Interruption insurance
Key-Man insurance
Buy-Sell agreement insurance

The above list is far from exhaustive. It is simply to illustrate that there are a number of new issues and considerations when a business is being bought or sold beyond the usual deal.

A business broker must know what is truly for sale. Will the employees stay with the company? Who should pay them during the transition period? Are there any guarantees on the equipment. Can it be sold? If it is to be sold, can the financing be assumed?

A business broker must understand and appreciate the financial statements concerning the operation. What if the profits fall short? What happens if a key employee or large customer leaves?

And, don’t forget about the taxes? The purchaser doesn’t want to assume the vendor’s tax liability. Should an asset purchase or share purchase be used? This varies from deal to deal. There is no standard rule of thumb.

Some businesses are successful because they have good employees, others are successful because they have good systems, good technology, or a strong customer base. The business broker should determine whether the whole is worth more than the sum of the parts. If not, maybe the business can be broken down and sold piece by piece?

Unless these solid assets of the business are transferred, the business will not likely be successful in the hands of a new owner. The business broker, first needs to determine the true value of the transferable business. Then, negotiations must take place with key employees, landlords, financial institutions and customers to ensure that they will be onside with the proposed transaction. It is only then, that an appropriate value might be established. The business broker unlike the ordinary real estate agent should be creating value at this point in the relationship.

Another interesting variation is the role of a business broker in a transaction. Usually, there is just one broker. Frequently, both parties will have the same agent. This occurs much more frequently in the sale of businesses than in ordinary real estate transactions.

So, what is the role? The Real Estate and Business Brokers Act sets out two separate and distinct roles. The buyer or seller can either be a customer or a client of the broker. The broker owes the common law duties of “fair and honest dealing to customers”. For clients, the broker owes certain special duties including the common law fiduciary duties and the statutory duties set forth in the Act.

The broker must act in the best interest of the client. That’s fine as long as only one party is a client. But, if both are clients, it’s impossible to place both of them first on every issue. There is an inherent conflict of interest that cannot be resolved! And, no amount of disclosure can solve it.

The solution adopted in some jurisdictions in the United States is transactional brokerage. It is a concept that is permitted, but not well-known in Ontario. Here, the broker is truly a broker in the common law sense of the term. The broker is not an agent but rather an “intermediary”. This reduces the potential liability for the broker. The broker works the deal, and attempts to negotiate a successful resolution. Both parties have their own independent legal, accounting and financial advice, so they are not alone, but they are not relying upon the broker. The role might also be compared with that of an arbitrator or mediator in union-management collective bargaining negotiations. Frequently, there is a far more successful outcome with someone in this type of role.

So, next time you want to buy or sell a business, consider an experienced and qualified business broker. And, maybe you want an “intermediary” rather than an “agent”.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

RECO ~ Multiple Offers and Real Estate Duties

By Brian Madigan LL.B.

This case is an interesting one. What is the duty of a real estate broker if the other sales representative thinks there is a competitive bid situation?What happens if the buyer thinks there is a competing offer, and there isn’t one?

If you are interested, have a look at the following decision made by RECO. The names have been changed, and there was an unsuccessful appeal, so from an educational perspective the relevant facts are set out by the Discipline Panel.I should point out that all the names are fictitious.

PANEL’S DECISION:

The Panel makes the following findings of fact:

1) to 6) intentionally omitted.

7.) Bill Holden was a potential purchaser who had established a relationship his own real estate representative Conrad Jones.

8.) In March of 2005, Conrad Jones showed Bill Holden a home located at 1-AB Street, City A, Ontario (the “Property”).

9.) The Property was listed for $449,000.00. Mr. Smith was the listing salesperson on the Property.

10.) On March 7, 2005, Bill Holden viewed the Property for a second time.

11.) That same day, Bill Holden decided that he wished to place an offer on the Property. Conrad Jones furnished Holden with comparable sales in the area before arriving at an offer price. Holden decided to make a conditional offer on the Property with a price in the low $400,000 range. The decision to offer less than the list price was based, in part, on the fact that the Property would need certain upgrades, and based on the fact that the property had been on the market for awhile.

12.) Subsequent to the preparation of the offer, Conrad Jones’ assistant received a call from Mr. Smith who advised that it was possible another offer would soon be received on the Property. This information was relayed to Jones by his assistant.

13.) There was a miscommunication between Mr. Smith and Jones’ assistant. Mr. Smith’s advice that there might be a competing offer forthcoming on the property was incorrectly relayed to Jones, and then to Holden, to the effect that there was to be a definite competing offer forthcoming.

14.) While Holden and Jones found the existence of a competing offer to be suspicious (given that the Property had been listed since September 2, 2004 without any other offers) Holden was very interested in the Property and did not want to lose it to a competing purchaser.

15.) Holden advised Jones that he was unable to meet to sign the documents until 8:00pm that evening. Accordingly, Jones’ colleague, Martha Williamson, contacted Mr. Smith to advise him that Holden would not be able to sign the Offer until approximately 8:00 pm that evening. Mr. Smith assured Williamson that he would wait for the Offer before presenting all offers to the sellers. At no time during Williamson’s conversation with Mr. Smith did he indicate to her that he was not in possession of a competing offer on the Property. At no time did Mr. Smith subsequently contact anyone on behalf of Holden to advise that there would be no competing offer.

16.) That evening, Holden met with Jones for the purposes of signing a significantly revised offer from the offer he had contemplated earlier that day.In light of the competing offer Holden decided to place an unconditional offer on the Property in the amount of $450,000.00.

17.) Jones met with Mr. Smith at the Property to give him the Offer. At the time Mr. Smith received the offer from Jones, Mr. Smith was aware that both Holden and Jones were under the mistaken belief that a competing offer was to be presented. Mr. Smith did nothing to dispel that belief.

18.) About forty-five minutes later, Mr. Smith emerged from the property, having presented the Offer to the vendors, and informed Jones that the Offer had been accepted.

19.) On March 13, 2004, Jones advised Holden that (based on a conversation that he recently had with Martha Williamson) no competing offer had been presented.

20.) Holden would not have tendered an unconditional increased offer on the property in the absence of an honest belief that a competing offer for the property was to be presented in competition with their Offer.

While the Panel is unable to conclude that Mr. Smith ever actually stated that there was another offer in existence, the Panel finds, as a fact, that prior to presenting Holden’s offer to the vendors, Mr. Smith knew that Jones (and therefore Holden) was acting under the mistaken belief that a competing offer was to be presented on the evening of the presentation.Indeed, for him not to know this could only have been as a result of wilful blindness on Mr. Smith’s part. Holden’s offer had all of the earmarks of an Offer designed to succeed in a competitive situation:The Offer contained:

1) a price in excess of the list price;

2) it met all of the vendor’s terms with the property inspection clause struckout – despite the fact that the property was clearly in need of cosmetic repair;

3) the property had been on the market 95 days in total, had been re-listed and reduced to compete in a hot market: and,

4) had been the subject of 25-30 showings with no offers.

These facts – coupled with the fact that Mr. Smith had earlier asked his assistant to contact Jones to advise him of a potential competing offer – were sufficient to put Mr. Smith – or any registrant exercising any reasonable judgment – on notice that a mistake had been made.

In addition, the Panel heard evidence of a personal enmity between Mr. Smith and Conrad Jones.Under the circumstances, and based on the foregoing facts, the Panel must conclude that Mr. Smith is in violation the following rules of the RECO Code of Ethics:

Rule 1 – Ethical Behaviour – A Member shall:(2) endeavour to protect the public from fraud, misrepresentation or unethical practice in connection with real estate Transactions(5) deal fairly, honestly and with integrity with the public, other Members and third parties;(The Panel found no evidence of deliberate fraud in Mr. Smith’s conduct. However, the Panel finds that the offer would not have been made if the actual situation had been clearly represented as a single offer presentation. Mr. Smith should never have allowed the offer presentation to proceed without clarifying the situation.)

Rule 2 – Primary Duty to Client – A Member shall endeavour to protect and promote the best interests of the Member’s Client. This primary obligation does not relieve the Member of the responsibility of dealing fairly, honestly and with integrity with others involved in each transaction;(The Panel wishes to clearly state that a registrant cannot avoid his obligations under the rubric of: “but I was just getting the best deal for my Seller”. The Code is not one sided and it demands diligence and fair dealing for all parties.)

Rule 10 – Misrepresentation or Falsification – A Member shall not make any statement or participate in the creation of any document or statement that the Member knows or ought to know is false or misleading;(Mr. Smith knew that the offer was being presented under a false understanding of the situation by the purchasers and their agent).

Rule 46 – Unprofessional Conduct – A Member shall not engage in an act or omission relevant to the practice of the profession that, having regard to all the circumstances, would reasonably be regarded by Members or the public as disgraceful, dishonorable orunprofessional;(We are of the view that Mr. Smith’s conduct resulted in the treatment of the public in a disgraceful and dishonorable manner).

In the result, the Panel concurs with RECO’s request for an administrative penalty against Mr. Smith in the amount of $10,000 to be paid within 60 days.

COMMENT

You might wonder what all this means. Mr. Smith did appeal but that was not successful and therefore does not really have an impact on the conclusions one would draw from this case.Smith had some positive duties at law. If he thought that he might have misled the buyer or his agent he had a duty to inform them.In fact, even if they were under the mistaken belief themselves, totally without his involvement in any way, he still had a positive duty to assist them. That is what this case really stands for: the positive duty to be observant and intervene if the opposing parties are acting under a mistake.

In fact, failure to do so, can result in a $10,000.00 fine.This is often quoted as a case involving phantom offers, but really it’s not. The result would have been much worse for Mr. Smith had that been the case. This is simply a multiple offer situation. RECO points out the positive duty upon Smith in the circumstances to correct any mistake or misapprehension of either the purchaser or his agent.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

EBITDA

EBITDA

By Brian Madigan

Peculiar initials, but what do they mean? The definition of EBITDA is earnings before interest, taxes, depreciation and amortization.It is said to be a measure of the profitability of a business.

Frequently, a business will be prepared for sale. The business will be removed from the real estate it occupies. Separate financial statements will be prepared for each. The vendor’s objective is to make both aspects look good on paper. In many cases, there will be two different buyers, one for the business and another for the real estate.There is a real opportunity here for some creative accounting.

The real estate can probably stand on its own. Ultimately, the real estate should fetch a market price coincident with that otherwise found in the marketplace.The business is a little different. Most businesses are sold on the basis of a multiplier calculated on net profits. Small businesses will trade from one-half of one year’s earnings plus inventory up to three times in some cases. Medium sized companies will often trade in the range of three to seven times earnings (with or without inventory) and large companies will trade for seven to fourteen times earnings (inventory included).

This is the usual range for profitable companies listed on a major stock exchange. Obviously, the technology companies are an exception.This is where EBITDA comes in. Stockbrokers and particularly stock promoters wished to have their companies appear in a very good light. In fact, it can make capital intensive marginally profitable companies look quite good on paper. Market analysts over the past few years have criticized this approach pointing out that it does not truly represent real operating cash flow.

EBITDA omits to consider variations in accounting methods, cash required for working capital, debt payments and other fixed expenses, as well as capital expenditures. These issues are critical to every operating business, and it can be foolhardy to base an evaluation of a business on the earnings calculated in this manner. EBITDA has its place in a proper analysis, but don’t let the vendor establish a sale price using this method alone.

The Real Estate and Business Brokers Act governs the real estate profession in both matters: the property and the business. But it doesn’t say anything about how to undertake the math or which formulas to use. So, be careful and fully understand the accounting methods used to justify the sale price when you are considering purchasing an operating business.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

http://www.ontariorealestatesource.com/

Real Estate Council of Ontario ~ Discipline Role

By Brian Madigan

The Real Estate Council of Ontario (RECO) is charged with the administration of the Real Estate and Business Brokers Act (REBBA 2002). It supervises everyone in Ontario who trades in real estate as either a broker or as a sales representative.

There are some people who are exempt from the provisions of the Act, since their conduct is regulated under other legislation. An example would be solicitors who are governed by the Law Society of Upper Canada.So, when it comes to real estate trading, there are certain rules. These rules are set out in the Act and in the regulations published pursuant to the Act. The recent amendment to the Real Estate and Business Brokers Act in 2002 (not proclaimed in force until 2006) was the inclusion of a regulation that dealt specifically with ethics, namely the Code of Ethics.

The passage of this piece of legislation has added and increased the degree of professionalism within the entire real estate industry.Over the next few weeks we will review some of the discipline decisions of RECO. The decisions are published on the RECO website. I will provide a link to the website for the curious. However, in reviewing the cases, I will not mention any names, nor will I offer alternative explanations that might have been reviewed and rejected by the Discipline Panel. My objective is simply to review the decision made on the basis of the facts accepted as evidence with a view to offering some guidance in terms of future decisions that might be made by RECO.

So, if your case came before RECO, you will be pleased that I don’t mention your name; on the other hand, you’ll be disappointed that I don’t offer your version of the facts, if they were not accepted by the Discipline Panel. Generally, if your case is under appeal, I won’t be making mention of that fact until such time as a later decision were to either uphold or overturn the existing decision.

My sole perspective is to interpret RECO decisions and offer guidance to the real estate industry and the public.The Real Estate Council of Ontario maintains a website (RECO Website) at http://www.reco.on.ca/ which is available to the public. If you are a member of the public or a registrant and you wish to complain (or inquire) about the conduct of someone whose conduct is regulated by RECO, that is either brokers or sales representatives, then you may do so through this website, or by contacting RECO by telephone or in writing.

When you arrive at the RECO website you will find a button for “Complaints & Enforcement”, which if you click on it will produce a list of several items including:

• Registrar’s Proposals to revoke, refuse or suspend registrations

• Convictions

• Charges

• Discipline and Appeals decisions

These are the areas in which you can assess the performance of RECO in its role of protecting the public and monitoring the activities of brokers and sales representatives. The only category which sets out the reasons for the decisions is the Discipline and Appeals section. The others simply set out the actual result, without giving any real details. So, there’s not that much to be gained from reading them.

Accordingly, we’ll start with the Discipline and Appeals cases. It is important to note that under the Act, the first Discipline panel to hear the case will hold a hearing with all the various witnesses. Should the case be appealed, then it is heard by the Appeals Panel. This time, it is a paper review only. There are no witnesses. This Panel accepts the findings of fact made by the Discipline Panel and hears the arguments of the parties once again and makes a new decision.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

Who Signs the Lease Renewal?

By Brian Madigan LL.B.

From time to time, there will be a change of ownership in a company. Possibly it will be taken over by another company or maybe the owners will simply change during the period of occupation of the premises.

So, what happens when the lease comes up for renewal?

Most of the time, if the payments have been “on time”, the Landlord will simply agree. But, actually there has been a material change in the ownership. New people are in charge. The prior owners controlled the Tenant company and now they do not. What should the Landlord do?

It’s reasonable to request some information. Possibly a credit check is in order! What about the new parent company guaranteeing the terms of the lease? There are protections that are available, and rarely are they employed by Landlords at lease renewal times. They often think ….”same old… same old… what’s the difference”.

Truly, they are dealing with a brand new Tenant and they should treat the Tenant as such.

Let’s approach the question a little differently. Let’s assume that you were the Controller of a large multi-national company, ABC Mega Corporation. You just bought XYZ Mini Company and it’s really just too small to be profitable in its present location. Let’s assume further that there is one year to run on its lease. When you bought XYZ, you guaranteed to the owners that you would pay the balance of the lease. So, that brings you up to the renewal date. Now, you simply renew for 5 more years! But, if you wished, you might simply close down the XYZ business in the first year of the 5 year renewal term. Wind up the company. The XYZ name might have no future benefit to you, and ABC Mega Corporation is not liable on the lease. You would be a hero at ABC.

Now, let’s go back to our Landlord in this situation. Get XYZ to tell you that there has been a change in control. Get credit checks done on both ABC and XYZ. Get both to sign the lease, or simply ABC alone. This way, you’ll be protected in the future.

Maybe there’s nothing sinister about it. If ABC doesn’t have the liability on its books for this lease, then it has a better balance sheet, and if it has a better balance sheet, it can borrow more money. That makes things riskier and more likely to go in the wrong direction, should there be a problem with ABC’s industry in the future.

From the Landlord’s perspective, it’s better safe than sorry.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

Good Title and Better Title

By Brian Madigan

The traditional definition of good title in law, is a title without any qualifications, exceptions or explanations. A solicitor’s opinion on title would point out any matters that were relevant to the issue of ownership.

Such an opinion might read as follows: “you have a good and free, marketable title in fee simple, subject only to a first mortgage in favour of ABC Financial securing the principal sum of $100,000.00 together with interest at a rate of 5 and ½ % per annum, calculated semi-annually and not in advance….”.

You will notice that there are four distinct elements to the opinion.

First, the title is “good". That means that the conveyances from the previous owners of the property have been correctly registered.

Second, the title is “free”; that means that there are no encumbrances other than those which are specifically mentioned. Here, the opinion refers to a first mortgage.

Third, the title is “marketable”; that means it is acceptable in law, and should there be a dispute, Courts will force an unwilling purchaser to accept your title to the property. It may be freely conveyed in the future.

Fourth, the title is in “fee simple”. This is a reference to the nature of the actual ownership interest in the property. Fee simple is the highest form of ownership. A tenancy or life interest would be good examples of lesser interests in property.

So, what are some of the other qualifications that might be mentioned? And, do they make your title better or worse? Some obvious examples include the following: utility easements for telephone, hydro, water, sewers and gas. However, there are also mutual easements for support (where two properties share a common wall), maintenance (where the two walls are so close, that you must place the bottom of the ladder on your neighbour’s property to clean your eaves trough), ingress and egress (where you share a mutual driveway).

Truly, all these easements are necessitated in areas where the lots are quite small. So, that means the inner city where the property is expensive, and they are rarely found in the country. A mutual driveway in the inner city may be a great benefit, if the area generally has street parking. In other areas where everyone has their own driveway, a mutual driveway is a minus and not a plus. And in the country, you’re probably the only person with a mutual driveway.

So, it really depends upon the neighbourhood. Utility easements generally do not affect the market value of a property. Usually, they will be designated for underground services and they will be located around the perimeter of the lot. On occasion, they may run right through the middle of the backyard and in such a case, the owner might be prevented from installing a swimming pool.

However, there are title qualifications that are generally designed to increase the value of the property and to increase the corresponding value of the entire neighbourhood. They are called “restrictive covenants” and operate much like a municipal by-law that only applies to the developer’s properties. The restrictions may be imposed upon the builders, specifying that only houses of a certain size and quality of materials can be built. In some cases, chain-link fences are excluded and wood fences permitted. In others, wood fences are excluded and wrought iron fences permitted. There are often rules imposed upon the owners, for example not permitting large trucks or trailers to be parked upon the property. The general intention is to make the area more fashionable and highly desirable.

Technically, any qualification whatsoever detracts from what is referred to as “good title in law. However, in many cases these same qualifications add value to the property, so in effect; you have a “better title” than good title.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

8 More Principles of Value

By Brian Madigan LL.B.

There are eight more principles of value that are relatively widely accepted when it comes to real estate. They relate to some economic forces

Here are the Sshipers :

Substitution
Supply and Demand
Highest and Best Use
Increasing (decreasing) Returns
Progression
External factors
Regression
Surplus Productivity

Substitution ~ (looking for value)

Buyers will try to spend their money wisely and get the most for their money. A buyer will not pay more for something than the cost of obtaining an equally desirable alternative.

This particular principle is more of a principle in economic theory than real estate. It is a frequent guiding principle to buyers seeking appropriate choices. What can a buy? What does it cost? What else can I buy? How much extra does it cost? What do I give up if I want to save some money on the price? These are really just a simple set of choices facing every buyer. If there is better value elsewhere, the buyer will go elsewhere.

Supply and Demand ~ (primary market force)

If the product is in short supply, the price will go up. If the price goes up, demand will fall, since fewer buyers can afford the product. If the product is in abundant supply the price will fall, because there just aren’t enough buyers. If the price goes down, demand will increase, since more buyers can afford the product.

This market force has been at work in the early civilized market places and for thousands of years thereafter.


Highest and Best Use (houses not farms)

There is the current use of the property to consider and also its future or potential use. A 100 acre farm is a nice farm. It can be well equipped for faming operations and quite productive. Often the value will be estimated at around $10,000 an acre. This is good for a farm!

However, what if that same farm was right on the edge of a housing development. Now, it could easily be worth $200,000 per acre. That’s $20 million. You now know, that this farm is going to fall into disrepair. It will be sold to a developer for 20 times what a farmer would pay for it. By the way, there lots of land for farms but only a few properties along the edge of the expanding municipalities that can be converted into subdivisions.

Increasing/Decreasing Returns (just too many)

The plus factor slows down and might even turn negative. This concept in economics is the law of diminishing returns. Add a garage that cost $30,000, this may add $25,000 in value. Add a second one, and you may have little to no additional value. In fact, two separate buildings in the rear yard might be an eyesore. Add a third, an the property could actually be worth less. So, marble floors in the foyer are nice, marble floors in every room can detract value. Sometimes, wallpaper can feature a particular area. Today, if it’s throughout the house, buyers look to the cost of ripping it all out. The more you have the more it will cost to remove it.

Progression ~ (the cheapest house on the street)

Generally, you will find that properties are roughly similar in terms of value. However, the older the neighbourhood, the more likely you will find a significant disparity. In fact, someone may demolish a building and construct a new one. This new property with a market value substantially higher than the rest will start to pull up the values on the street. As the street gets better an better, there is a rather measurable benefit to the cheapest house. It goes up in value too. Because, people will pay a little more for this house on a good street than they will pay for this same house on a bad street.


External Factors ~ (airport and expressway)

Generally, there are some factors that are perceived to add value and others that will detract value. On the plus side:

A quiet neighbourhood
A court or cul-de-sac
Larger lots
Good setbacks from the road
Ravine and natural environments
Backing onto a golf course

On the negative side:

Noisy, too close to the airport or expressway
Lack of privacy
Too close to school
Too close to commercial plaza
Too close to hydro corridor
Too close to a dump or contaminated site

You have to remember when it comes to real estate: location, location, location. The property is in one spot and you can’t move it. So, if there’s and airport beside you, it’s going to get noisier in ten years. This is an undesirable influence. And, no matter what you do to the house, you can’t fix it.

Regression ~ (the most expensive house on the street)

This is the exact opposite of progression. If you have the best house on the street, its value will come down closer to the average street value. Basically, if you have $700,000 to spend, you want to be on a $700,000 street, not a $400,000 street. The higher priced house will be negatively impacted.


Surplus Productivity ~ (income is attributed to the land)

This is at first a somewhat difficult concept. The principle is this: once all cost have been satisfied, in a project, the net income flows to the land. Here. Think of location. So, if you have two identical farms, with the exact same costs. Once, you have some extra profit, that extra profit is attributable to the land (or the location). The superior farm had better soil, better sunlight, better growing conditions etc.

Let’s try one more example. Two identical buildings constructed by the same builder. They each cost $2 million to build. But, one is sitting on land that’s worth $2 million and the other is sitting on land that’s worth $500,000. Which property do you think is downtown? Which property will have the higher rents? And, which property will make the most profit. When you are figuring out the costs, once they have all be paid and satisfied the net income or the profit is then attributable to the location. So, when you are said and done, it could be that the suburban building provides more profit since its operating costs might be lower (decreased municipal taxes). Nevertheless, the point here, is that the net income is to be attributed to the land, and land in this context simply means location.

If you need to remember these eight principles of value, why not try the acronym “Sshipers”: short for Subsitution, Supply and Demand, Highest and Best Use, Increasing (decreasing) Returns, Progression, External factors, Regression, and Surplus Productivity. It’s a good way to remember them.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

The ABC's of Value: The Principles

By Brian Madigan LL.B.

There are a number of basic principles that are relatively widely accepted when it comes to real estate.

Here are the ABC’s:

1) Anticipation
2) Balance
3) Change
4) Competition
5) Conformity
6) Consistent Use
7) Contribution

Anticipation ~ The 3 Car Garage

How much would you pay for a garage? A double garage? A three car garage? Well, it all depends where the property is located. On small lots in the downtown areas of the City, a single car garage is at a premium. That is well worth having and something that you would pay for. What about the double car garage? In some upscale downtown areas, this is expected. In suburban areas it is commonplace. So, what about the three car garage? By the time you have a three car garage in downtown areas, buyers are valuing the potential of an additional lot, not the place for the third car. In the country, with significant distances to travel, it can be commonplace.

Let’s look at a quick example of an area in the suburbs that has houses with both single and double car garages. There is a certain benefit to the double car garage. It will house an additional car, it will provide storage space and it could serve as a workshop. So, there is a certain utility to it. In addition, it often provides a higher profile to the house and makes the entire building look bigger. You might find than houses with a single car garage trade in the $300,000 range and those with two car garages trade in the $320,000 range. In the same neighbourhood, a house with a 3 car garage might only trade for $325,000. All things being equal, reasonably speaking we could conclude that a single car garage is expected. A double car garage adds $20,000 in value and the three car garage, only an additional $5,000. Most buyers are likely to find only marginal additional utility associated with the additional garage.

The factors that buyers will consider are:

The additional potential resale value
The additional space
The improved appearance of the house

Buyers essentially anticipate the benefits that they will have in the future, if they purchase the property now.

Balance ~ (the house with a lobby)

Proportion is something well known to the Greeks and the Romans. It is very evident in their architecture. A large stately house with ascending columns to the second story will be very appealing in its appearance. Georgian and Colonial architectural continued to use these stately columns that you can still see today in the Greek Parthenon. However, large towering columns on a small narrow house just won’t work. In the first case, the columns added value and in the second, they did not.

Or, consider the case of a mini-mansion of 7,000 square feet. You cannot have a 3,000 square foot front hall. That’s a lobby, and should go with a hotel. And, if you just have a single car garage, that won’t work either. You need to consider both proportion and balance.

Change ~ (Today only)

No one can tell the future! Things change, and so do real estate values. If there are significant changes in the economy, then the value may change too. This can be either positive or negative news. The fact that a new manufacturing plant is coming to town, can be a real plus to a small area with limited housing stock. How many new people will require houses. The existing housing market can shoot up overnight. Look at Vancouver in anticipation of the Olympics coming to town. And, also think about small resort communities like Whistler.

Then, there could be plant closings. Think about Brampton losing 900 positions at the Chrysler plant. But, Brampton has a population of about 500,000 people. So, 900 positions really isn’t that much! According to Statistics Canada, all those job losses in the manufacturing sector have been made up in the construction sector.

In addition, to the local area, there are other factors that affect the entire economy including mortgage rates, the stock market, the level of employment, inflation etc. A very significant change could influence the housing market in relative short order.

So, the simple point here, is that value is a value for today, and tomorrow is tomorrow.


Competition ~ (one more builder)

Once you have a profitable opportunity to build and sell houses, you are likely to see more builders attracted to the business. At the outset and in a rising market both builders will do well. They will both be able to raise their prices and make a profit. Oddly enough, the mere fact that they are able to raise their prices will attract more business. Buyers will perceive that the area is “hot” and that prices are going up. If the values rise faster than inflation, then the cycle continues.

However, the third builder just cannot sit on the sidelines forever. As soon as he enters the marketplace, there is more competition. The prices cannot continue to rise as fast, due to the potential increased supply. But, this concept is slightly different than supply and demand. It’s just about more competition. A third builder will force all three builders to sharpen their pencils to attract business. Profit margins will decrease somewhat with competition.

Conformity ~ (residences away from industry)

Buyers like to see that an area is relatively stable and similar for a significant distance. You come to expect that Dofasco and Stelco will have fairly industrial areas surrounding them. If you had a heavy industry, it would be safe to locate around them. How messy can your business be? But, your heavy industry will not fit well in picturesque equestrian areas in Caledon and King that are subject to the Oak Ridges Morraine, various Conservation authorities and the Niagara Escarpment Commission.

So, most municipalities zone areas to have similar types of uses, and buyers often prefer to be in the centre and not along the edge. If you have an commercial area abutting a residential area, the preferred residential lots will be a considerable distance from the commercial plaza.

Consistent Use ~ (residential OR commercial)

The value of a property is to be calculated using one method and one method alone. Often you will come across a redevelopment area. Three houses all in a row on 50 foot lots are relatively similar but over the years, the owners have maintained them somewhat differently and improved, renovated and added-on. Today, they are now worth $500,000, $550,000 and $600,000. Those valuations are all based upon the houses as houses.

However, let’s consider the developer. He wants the three houses because he plans to tear them down and build a high rise condominium apartment. He is not interested in who has the nicest kitchen, or that someone added a sunroom. He wants the 50 by 150 foot lots. Furthermore, he is prepared to pay $1.5 million for each property. So, if you were planning to value these properties based on their commercial development potential, you would assess them all at $1.5 million.

What you can’t do, is value them at $1.5 million for commercial purposes and then come back and add an additional $50,000 or $100,000 in residential improvements. It’s one method, or the other, not both.

Contribution ~ (the added value)

Kitchens, bathrooms, sunrooms, swimming pools and tennis courts…. what are they worth? Well, if you don’t have one, they are worth what they cost to construct. Safely, kitchens and bathrooms seem to add about 70% of their cost to the value of the home. This means that a $30,000 kitchen renovation might only add $21,000 to the house value.
Sunrooms and swimming pools add about 50% and tennis courts add very little. So, when you come to think about it, all these “improvements” are poor financial investments, although some are better than others. Actually, the only improvement that adds value over its cost is landscaping, as long as the money is spent on trees.

The important issue here is to separate the objective value of the kitchen ($30,000) from its subjective value ($21,000) which is of course the additional amount that a buyer will pay for the house.

That’s seven, and there are eight additional principles to consider that affect value. The first seven are the ABC’s of value.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/