Negligence Act and Real Estate

(Ontario Real Estate Source)

By Brian Madigan LL.B.

The Negligence Act deals with several aspects of negligence, liability and apportionment, including

1) liability,

2) apportionment between joint tortfeasors,

3) apportionment to plaintiff,

4) no determination of apportionment, and

5) procedural matters.

The difficulty arises in cases where there are several parties who might be liable for the damages including the plaintiff himself. The Act specifies the law, the presumptions of law, apportionment and subsequent contribution as between the parties liable.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Negligence Act ~ Purpose

(Ontario Real Estate Source)

The Negligence Act deals with the matter of apportionment in the field of torts.

Tort law considers the liability of a party to another for wrongdoing whether intentional or not, where the injured party has suffered a measurable loss either physically or to their property. Examples of torts include assault and battery, libel and slander, defamation, negligence, nuisance and the economic interference with contractual relationships. In addition, there are statutory torts and economic torts. Nevertheless, they all involve the breach of a duty or obligation owed to third parties.

One category of torts is the law of negligence, and it is by far the most common. Car accidents would be the dominant example. An activity is considered to be negligent if

1) there is a duty of care that is owed,

2) the person has fallen below the appropriate standard of care, and

3) the activity results in some harm to a third party.

There is no such thing as "negligence in the air". Bad driving itself may be punishable under the provincial Highway Traffic Act and the Criminal Code, but it is not a "tort" until someone is injured or their property is damaged.

The Supreme Court of Canada has permitted tort claims and contract claims arising out of the same matter to be consolidated and litigated in one action. The plaintiff is not required to elect as between tort or contractual damages until the end of trial.

This makes the Negligence Act quite relevant for the purposes of real estate issues. It is often overlooked.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Escalation Clauses in Ontario Real Estate Transactions

(Ontario Real Estate Source)

By Brian Madigan LL.B.

This is an interesting clause. It's the one that says that Buyer A will pay $1,000 more than the Seller's highest offer. So, you can appreciate that it would be a good clause to have in a multiple offer situation.

The difficulty in Ontario is the restriction placed upon registrants falling under the Real Estate and Business Brokers Act, 2002. They really can't use it.

It doesn't matter much whether some people consider it to be immoral, unethical or illegal; it just cannot be utilized effectively.

Here is the relevant provision under the Code of Ethics:

Competing offers

26. (1) If a brokerage that has a seller as a client receives a competing written offer, the brokerage shall disclose the number of competing written offers to every person who is making one of the competing offers, but shall not disclose the substance of the competing offers.

(2) Subsection (1) applies, with necessary modifications, to a brokerage that has a seller as a customer, if the brokerage and the seller have an agreement that provides for the brokerage to receive written offers to buy.

Any disclosure would be an offence under the Code of Ethics. If such a clause were either permitted or encouraged, such a clause would be circulated as a precedent clause suitable for inclusion in an Offer. And, it is not.

The Real Estate Council of Ontario (RECO) considers it inappropriate, as do the participating boards and associations.

Since the clause is effective in some instances, it is noteworthy that it can be used by buyers who are unrepresented, or buyers who are represented by solicitors. The preclusion in terms of its usage seems to be confined to registrants under the Real Estate and Business Brokers Act, 2002.

Anyone else seems to be free to use the clause. The restrictions appear to be confined to handling multiple offers by the listing brokerage.

FSBO's and lawyers can have all the fun they want with this sort of clause, since they are not regulated. In many states in the United States, this sort of clause is quite popular.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

How St. Patrick Discovered the Americas

(Ontario Real Estate Source)

By Brian Madigan LL.B.

The Irish have for centuries been grouped together in large families known as clans. When one group gets too large there may be a splinter group. The son of someone named Neill would start a new family called MacNeill. The word "Mac" means "son of", and a grandson would start the O'Neill clan since the "O" is short for "grandson of".

Some Famous Irish Characters from History

You might find it a somewhat interesting history. Much of that which is written about Ireland is simply folklore and largely untrue, yet it makes an interesting story.

St. Patrick

St. Patrick is among the first of the Irish legends. Actually, he was an Englishman who was captured as a young boy and held as a slave in Ireland until he escaped. Years later he returned as a monk and because he knew the language was able to convert large numbers to Christianity. It is often said that he rid Ireland of snakes, but there were no snakes in Ireland. The only real possibility is that this was a metaphor for the "evil spirits" of the Druids who were previously the religious leaders in Ireland.

There is a great deal of folklore associated with St. Patrick who due to the continued writings of the monastery in Armagh which held his relics became the patron Saint of Ireland in the 8th century some 300 years after he built up the religion.

St. Brendan

St. Brendan the Navigator was a contemporary of St. Patrick and he was more of a sailor than a Christian monk converting the masses to Christianity. In the latter part of the 5th century he built a small boat out of animal skins called a curragh and set sail with 17 men. They returned seven years later with strange tales of sea monsters, crystal palaces, saber-toothed water cats and little furry men. Later, it became clear that they probably witnessed whales, icebergs, walruses and Eskimos.

To add some credence to the story, the Vikings used Irish navigators enroute to Vinland, and spoke of Irish monks in Iceland in their 10th century writings.


So, did St. Brendan arrive in Newfoundland 500 years before the Vikings?

Tim Severin certainly thought so. In 1976, he built the same type of boat and crossed the Atlantic from Ireland in several months (actually, the second part of the journey was only 51 days from Iceland). While he doesn't prove that St. Brendan was there, it definitely proves that it could be done.

And, was St. Brendan the first? Interestingly, he didn't claim to be at the time. In fact, legend describes St. Mernoc to be among the first. The legend of St. Brendan was not recorded until the 9th and 10th centuries when it became one of the most popular medieval legends.


The Last Emperor of Ireland

In search of an Emperor or a King to acclaim, the Irish developed the story of Brian Boru. He is said to be the first King and led the Irish to oust the Vikings from the lands and re-establish Irish rule. Just a couple of problems: the Vikings never really occupied Ireland to a major extent and Brian Boru's leadership was challenged shortly after he pronounced himself King. He was the self-declared Emperor of Ireland in 1011, but by 1012 his subjects had risen against him in rebellion. The great stories of his many accomplishments were recorded and popularized two hundred years later, and by then who could prove whether they were right or wrong.

Recorded History

Now, the interesting thing about history is that it is always written by the victors. The vanquished really have no storytellers. So, let's think about this! What you really need is a good "publicist". If there's no one to tell your story you're not going to be famous. In fact, I could say that Brion O'Madigan was the first Irish sailor to arrive in Canada, many years before St. Brendan and St. Mernoc. And, the only reason why you haven't heard of him is that he was not a saint, didn't convert anybody to Christianity and didn't have a "publicist".

However, one thing that we do know to be true is that some nameless Irish sailor was the first, since both St. Brendan and St. Mernoc were following in his footsteps. So, I'm simply giving the poor nameless chap a name for all his efforts: Brion O'Madigan.

St. Patrick and the Discovery of America

Since this is a column about real estate how does this tie in with St. Patrick?

Well, it may be a little of a stretch but here it goes. St. Patrick introduced the Roman alphabet to Ireland. This allowed many writers of the time to learn Latin and transcribe their thoughts in a manner in which they could be understood by others. Latin was the universal language of the scholars. It could be transcribed and read at all the universities in the middle ages. Largely, this would be the monasteries and other institutions related to the church. St. Brendan's voyage was written down and transcribed many times over. You cannot say published because this was centuries before the invention of the printing press.

The Latin Version called "Navigatio Sancti Brendani Abbatis" was read by hundreds of scholars throughout Europe. It chronicled the voyage of St. Brendan to the Americas and was well known to Christopher Columbus and Queen Isabella when they were planning the 1492 voyage. About 125 copies, all of course, original manuscripts copied from the first transcription or later versions survive today.

So, although there is no actual evidence that St. Patrick influenced St. Brendan to sail to the Americas, there are at least 125 copies of the Navagatio text that influenced the travels of Christopher Columbus. So, had St. Patrick not introduced Latin to Ireland, this story would not likely have been told and made its way to Spain.

So, that's how St. Patrick discovered America. Perhaps a few pints of green beer today will help you understand. It's either blarney or it's true, and your challenge today will be to see how many green beers you have to consume before you absolutely know that it's true.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Beware of the Ides of March!

(Ontario Real Estate Source)

By Brian Madigan LL.B.

That was good advice given by a soothsayer to Julius Caesar although he did not heed the warning.

The words were made popular by William Shakespeare in his play "Julius Caesar".

In real estate, it is significant because it is the beginning of the Spring market and generally as goes the Spring market, so does the rest of the year.

So, be alert to its meaning and heed the advice!

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Vacant Possession: The TIME to move on Moving Day

(Ontario Real Estate Source)

By Brian Madigan LL.B.

This is a simple question and sometimes gives rise to significant problems. The general advice given by lawyers traditionally has been that vacant possession must be given by the "actual time of closing".

The problem is that people just don't leave. They are often in the process of moving out, but they're not quite out. An experienced purchaser will know this, and leave a day's grace, so that there will be no conflict.

Commercially, this is never a problem, but residentially, it is a constant, continuous, every month issue across the city. Everyone seems to want to move on the 15th or the last day of the month. There's no real reason for this, other than it has become common practice. Movers are busy, banks are busy, lawyers are busy; so why pick these days?

Really, the only individual who needs to move in on one of these days would be a tenant who has vacated their premises. Other than those tenants, everyone else can choose their dates; only they don't. Someone, usually their real estate agent chooses the date for them.

This means that a lot of people are "mobile" on the same day of the month. They leave one place and have to be in another by the end of the same day.

The well organized vendor loads up and vacates early in the day. By the time his purchaser arrives, the house is vacant and there is no problem. The disorganized vendor, however, leaves a lot of matters to the very last moment. He's just not ready to move out early. He hasn't quite packed, he orders his movers to arrive in the early afternoon, and by 9 or 10 o'clock at night they leave.

Now, that's probably fine in most cases. The purchaser arrives a little later, unloads, and pays his movers overtime, since they have been ready to unload for hours. Typically, he is just upset, pays the extra money, but within a day or two the excitement of moving into the new house occupies his thoughts and he soon forgets the "moving in" issues.

However, not all the time is the law, just for "cocktail conversation". From time to time, people get sufficiently upset, that they sue. So, what can you do about this? When does the vendor have to be out of the house? If the vendor is still there after closing, can you rescind the transaction? Can you sue for damages?

Let's have a look at the standard form agreement in use in Ontario:

"2. COMPLETION DATE: This agreement shall be completed by no later than 6:00 pm on the 4th day of July 20xx. Upon completion, vacant possession of the property shall be given to the Buyer unless otherwise provided for in this Agreement."

So, there's a time and a date and in the second sentence there are consequences. The purchaser basically has until 6:00 pm to complete the deal. The electronic registration system is still open, and deals for that day can be completed up until then. After that, with a few phone calls, keys are released and the vendor and purchaser are notified. The "move-in" could take place after that. The risk to the purchaser is that by now his movers have been sitting in a local pub since 2:00 pm and they are now on time and a half.

You should note that from a legal perspective, there is nothing in the agreement which obligates the purchaser to close the deal any earlier than 6:00 pm.

The next matter to consider, is the early closing. Even though the deal could have been delayed until 6:00 pm, it was in fact closed at 2:00 pm. Now, we have to look at the obligations which arise under the second sentence. The consequence is that "upon completion" and that means 2:00 pm, "vacant possession shall be given". There is a further statement that says "..... unless otherwise provided....". Usually, this would mean that vacant possession was not intended at all. The property was occupied by a tenant, and the purchaser agreed to assume the tenant. Therefore, the premises were not going to be vacant, they were going to be occupied by a tenant, immediately before, at the time of, upon closing and after closing.

There are essentially two quick legal issues:

1) can the purchaser refuse to close if the premises have not been vacated at the time of closing?

To this question the answer is "no". The Ontario Court of Appeal ruled in Cooper v. Mysak (1986) 54 O.R. (2d) 346 that it was indeed a breach of contract, but only a fundamental breach of contract would entitle the purchaser to decline to proceed and rescind the contract.

2) if the vendor is still occupying the premises after closing, can the purchaser sue for damages?

To this question the answer is "yes". Although it is only a Small Claims Court decision, the trial Judge followed the reasoning of the Court of Appeal, and concluded that even though it was not a fundamental breach, it was certainly a simple breach, and a simple breach of contract entitles the purchaser to damages. So, the purchaser was awarded his additional moving costs that were incurred by reason of the vendor's breach of contract. A claim for inconvenience and hotel expenses were not covered in the Judgment. See Foord v. Smith (1993) 33 R.P.R. 279.

The legal result of the two decisions:

· Failure to close by 6:00 pm is a simple breach of contract, provided vacant possession can be given later that day

· Failure to close by 6:00 pm is a fundamental breach of contract, provided vacant possession cannot be given later that day

· A vendor must vacate by no later than 11:59 pm on the day of closing

· Failure to vacate by the actual closing time is a simple breach of contract

· Failure to vacate by 6:00 pm is a simple breach provided the transaction closes that day

· A purchaser can rescind the agreement for a fundamental breach

· A purchaser cannot rescind the agreement for a simple breach of contract but is entitled to claim damages


What Changes would you want if you were a Purchaser?

All in all, if you're a purchaser and you have paid your money over at 2:00 pm and you don't get your house until midnight, that's not good. So, what could you do to make things a little better? Consider the following:

· A provision making the closing an earlier time in the day, and specifying that failure to complete by such time is a fundamental breach of the contract

· A provision specifying a certain hourly payment to you by the vendor if you don't have possession by a particular time of day


What Changes would you want if you were a Vendor?

Not every purchaser needs to be in the house on the day of closing. The mere fact that you need the purchaser's money to close your purchase, doesn't mean that you have to part with possession.

The basic rule of thumb for a vendor should be to arrange interim financing, even just for a day. Borrow the closing funds needed for your purchase from your bank. You pledge the funds arriving from your sale as security for repayment of the loan. The direction concerning the payment of the funds is all the security you provide. Now, you can close at 9:00 am. You probably only need the funds for a day, or perhaps 3 days if it's a long weekend. This cost is very small compared the aggravation you save. So, some good advice: separate the two deals. Don't make them dependent; make them independent of each other.

When you come back to the terms of the agreement, why not alter some of the standard terms and consider the following:

· A provision that the purchaser must close by 1:00 pm on the day of closing

· A provision that failure to close by 1:00 pm constitutes a fundamental breach by the purchaser

· A provision that failure to close by 1:00 pm constitutes a simple breach and entitles the vendor to damages of $100 per hour (or part thereof until closed)

· A provision that failure to close by 1:00 pm constitutes a simple breach and entitles the vendor to damages of $100 per hour (or part thereof until vacant)

· A provision that failure to close by 1:00 pm constitutes a simple breach and entitles the vendor to liquidated damages in the amount of $1,000

· A provision that failure to close by 1:00 pm constitutes a fundamental breach and entitles the vendor to rescind the transaction

· A provision that you are entitled to remain in the premises until 9:30 pm notwithstanding the actual time of closing

Amendments to the Standard Agreement

Right now, the standard form agreement says completion and possession are simultaneous. Why? No particular reason! Why not have two times, one for completion and one for possession? This could be undertaken easily. Just have a look at the provision that stated "unless otherwise provided. So, provide otherwise!

Another issue to consider, which appears not to have been raised in the litigation in either case is the timing of closing selected by the lawyers.

Traditionally, law firms just go about their own business and close the deals when it suits them. Now, if the vendor can stay until 6:00 pm without a problem, why would their own lawyer close at 1:00 pm, therefore placing their own client in technical breach of contract? At the very least, they should consult their client to determine when they will be out. Now, they probably need the closing funds for the vendor's purchase of another property, that's the problem. But, if that were not an issue, the vendor's lawyer should confirm in writing that "notwithstanding the earlier time of closing to suit the purchaser's convenience, possession will not be provided until the latest contractually agreed upon time, namely 6:00 pm.

If you are about to enter into an agreement to buy or sell residential property; consider agreeing both about:

1) the time for closing, and
2) the time for possession.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Selling a Business in Ontario (Minimum Required Documentation)

(Ontario Real Estate Source)

By Brian Madigan LL.B.

Many business owners like to keep information as confidential as possible. And, this particularly applies to their finances and their books.

So, what is the minimum that they can get away with?

Let's have a look at s. 21(4) of Regulation 567/05 under the Real Estate and Business Brokers Act, 2002:

(4) Paragraphs 1 and 2 of subsection (2) do not apply if a statement is signed by or on behalf of the purchaser and is delivered to the brokerage indicating that the purchaser has received and read a statement under oath or affirmation of the person disposing of the business that sets out the following:

1. The terms and conditions under which the person disposing of the business holds possession of the premises in which the business is being carried on.

2. The terms and conditions under which the person disposing of the business has sublet a part of the premises in which the business is being carried on.

3. All liabilities of the business.

4. A statement that the person disposing of the business has made available the books of account of the business that the person possesses for inspection by the purchaser, or that the person disposing of the business has refused to do so or has no books of account of the business, as the case may be.

Paragraphs 1 and 2 dealt with the financial statements, namely the profit and loss (income and expenses) and the balance sheet (assets and liabilities).

Therefore, we can assume that those documents are not available. So, what must you provide to the purchaser under all circumstances?

The minimum documents are:

•· The lease, or whatever document(s) might exist in lieu of the lease

•· Any sublets provided

•· All liabilities of the business

•· A statement concerning the financial operations

Now, when it comes to the financial statements, the person disposing of the business, and this could be either the owner, a secured creditor, an unsecured creditor or other party, must state the following:

•· The books of account have been available for inspection

•· The books of account are not available for inspection

•· There are no books of account

However, that is not the end of it. The purchaser must sign an Acknowledgment confirming that he has received and read the appropriate statements.

Assuming that items 1 and 2 are omitted, then that still leaves us with 3 and 4 setting out the liabilities and the financial reference statement.

The disposing party's document must be sworn under oath, and it must be delivered to the purchaser before the agreement becomes "binding".

In order to be on the "safe side", listing brokerages are cautioned to include a clause to the effect that the agreement is not binding until such document has been provided. Further such a provision could be extended to include the purchaser's statement. That will eliminate any disclosure problems that may arise.

Ordinarily, the agreement becomes "binding" upon acceptance. Creating a "legal fiction" to preclude this usual assessment would be worthwhile.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Selling a Business in Ontario (Expected Documents)

(Ontario Real Estate Source)

By Brian Madigan LL.B.


What documents can you expect to be delivered?

The Real Estate and Business Brokers Act, 2002 is quite clear about this. You can find the provisions relating to the purchase of a business in regulation 567/05.

Here it is:

Purchase of business: statements to be delivered

21. (1) The definitions of "buy" and "buyer" in section 2 do not apply to this section.

(2) If the purchase of a business is negotiated by a brokerage on behalf of the person disposing of the business, the brokerage shall provide to the purchaser, before a binding agreement of purchase and sale is entered into, the following statements signed by or on behalf of the person disposing of the business:

1. A profit and loss statement for the business for the preceding 12 months or since the acquisition of the business by the person disposing of it.

2. A statement of the assets and liabilities of the business.

3. A statement containing a list of all fixtures, goods, chattels, other assets and rights relating to or connected with the business that are not included in the trade.

At the outset, the definitions of buy and buyer were said not to apply. Why?

Here is the definition:

2. In this Regulation,

"buy" means acquire or seek to acquire an interest in real estate, and "buyer" has a corresponding meaning;

Essentially, that definition opens up the floodgates and extends the obligation, perhaps too much. So, you don't have to provide full financial information to your competitors just because he asked.

There are three financial statements to be provided:

1) profit and loss,

2) assets, and

3) liabilities.

In addition, there is to be an "excluded" list. If there is something that is not to be part of the transaction, then it is to be mentioned, otherwise, in accordance with the Act, it will be deemed to be included. And, that could be quite costly.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

When is an Agreement Binding?

(Ontario Real Estate Source)

By Brian Madigan LL.B.

Effectively, there are two choices:

1) as soon as the offer is formally accepted, as in "signed, sealed and delivered", and

2) when all the conditions are satisfied, waived or fulfilled.

Naturally, it makes a difference in terms of interpretation. Some people say 1) and other people say 2).

There are several essential elements of a contract:

1) Parties, (legal capacity)

2) Lawful object (not illegal)

3) Intention to create contract (consideration or seal)

4) Mutual agreement (offer and acceptance)

5) Agreement in respect to terms (genuine intention)

6) Agreement must be certain (definite and clear).

Once those essential elements are all present, then we have a legally binding agreement. There may very well be conditions that need to be fulfilled, satisfied or waived as the contract proceeds, but at the outset, we still have a "binding agreement".

In dealing with the conditions, the contract itself may specify the consequences, but nevertheless, we started out with a legally binding agreement.

So, why all the problems? Apparently, many waivers, amendments, fulfillments etc. will include a phrase to the effect that "... this agreement is now firm and binding". That is just confusing. It was already "firm and binding". There just happened to be an outstanding condition that required resolution.

The result is that some practitioners have come to the conclusion that the contract was not "firm and binding" at the outset, but rather later, upon resolution of the condition. That view would be in error.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Landlord's Notice for Showings to New Tenants

(Ontario Real Estate Source)

By Brian Madigan LL.B.

If you want to know about the specific rules that apply, it's always best to look at the source.

In this case, it's the Residential Tenancies Act. The Act distinguishes the purposes of various inspections and showings and provides different rules.

Looking at summaries or short quotations can often lead to erroneous conclusions. So, you should look at the different rules that apply to purchasers, mortgagees and prospective tenants.

Here is s.26

Entry to show rental unit to prospective tenants

(3) A landlord may enter the rental unit without written notice to show the unit to prospective tenants if,

(a) the landlord and tenant have agreed that the tenancy will be terminated or one of them has given notice of termination to the other;

(b) the landlord enters the unit between the hours of 8 a.m. and 8 p.m.; and

(c) before entering, the landlord informs or makes a reasonable effort to inform the tenant of the intention to do so.
In this case, you may have:

1) both parties agree,

2) Landlord has given notice of termination, or

3) Tenant has given notice of termination.

Please note that there is still a requirement to "inform". While that may not be a formal written notice, it is still an obligation under the Act, which is imposed upon the Landlord prior to entry.

You will also want to read s.27 which sets out other entry rules, for other purposes and other parties.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Debt Service Ratios

(Ontario Real Estate Source)

By Brian Madigan LL.B.

Before you can buy property, you will need to qualify for a mortgage. There are, of course, exceptions: you could win the money in a lottery, receive it from an inheritance or have it loaned to you by a friend (when I say friend, I really mean parents, nobody has friends like that).

However, if you are like most people, then you will have to qualify for a mortgage. This means having a good credit rating and having a good income.

When it comes to income a financial institution (like a Bank) will have some internal rules or policies that it will apply in most cases.

Gross Debt Service Ratio:

This is the maximum amount of a borrower's income that may be directed to the mortgage payment (principal and interest) and taxes. Sometimes, it will also include heating costs and some lenders include 50% of the condominium fees.

This GDS is usually in the range of about 27% to 32% of a borrower's gross income, that is, the income before taxes. In the case of the self-employed it will be net income (after expenses) but again before taxes.

Total Debt Service Ratio:

This is the total amount of all outstanding debt obligations together with the GDS. The usual range here is about 37% to 40%. So, if you have existing credit card debt, bank loans, investment loans, and car loans they will have to be considered in the calculation. The theory here is that at least 30% of your gross income went in income taxes. Another 5% goes in other taxes. And, if you pay 40% of your remaining income on the mortgage, the property and your other debts, then this leaves you with just 25% for all the rest. In the Bank's experience, this is getting a little tight. They do appreciate that you have to live.

So, if you want to qualify for a larger mortgage, then reduce your debt ahead of time. A helpful banker might suggest that you consolidate some of your loans, namely the credit cards so that you will qualify for the mortgage. Overall, this might be a good strategy. It reduces the interest you are paying on your cards. The savings could be substantial. However, it hides the real cost of the debt, and this could be a serious mistake.

If it allows you to qualify, by bringing your TDS ratio into the right line, then that's fine. Otherwise, you couldn't buy the property!

But, if you still qualify and there is a little extra room in your GDS ratio and TDS ratio, then, you should be a little cautious. The trick here is to know what you bought. Let's say you bought a new $ 5,000.00 plasma TV. It will last for 10 years and after that it will be rubbish. If you simply add it to your mortgage and you have a 25 year amortization you will be paying for it (both principal and interest) for 15 years after you threw it out. This doesn't make any sense at all.

So, be careful when it comes to your finances. Don't pay too much interest. Even if you are paying a lower rate; if you pay for 25 years rather than 10 years, then you are really paying far too much.

When you are shopping for a mortgage, the lenders' GDS and TDS ratios are very important considerations. You might qualify at one institution and not at another. If you are seeking the maximum mortgage that you can afford (which most people are), this could make a real difference.

If you are concerned and would like some assistance, or a referral to a mortgage broker or lender, please give me a call.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

The 5 Financial Reasons for Owning a Home

(Ontario Real Estate Source)

By Brian Madigan LL.B.

So, you think that you would like to buy some real estate! In particular, you would like to buy a house.

Let's summarize the principal financial advantages:

1) use of rental income
2) use of leverage
3) forced savings
4) appreciation in value
5) tax free capital gain

Use of Rental Income

Let's face it, you have to live somewhere. So, you will probably start out renting something. Here, you're just paying off someone else's mortgage. In the long run, they own the property, and you have nothing, but you paid for it. So, it makes sense to buy something, even if it's not quite as nice as what you could afford to rent. You just use the same money that you would otherwise have paid in rent.

This is basically free investment money, and it makes a lot of sense to use it.

If you're planning to rent, do so only over the short term, that's for a year or two. Clearly, if you plan to be in one place for three years or more then you should consider buying.

Use of Leverage

Here is an opportunity to use "other people's money". Donald Trump loves this approach. Assuming you plan to get into the market but you think that the prices are a little high. This is typical, your parents and grandparents thought the same thing. What is your real opportunity cost? You were planning to buy a $300,000 home. You have $15,000 saved, but you decide to wait one year. What happens? If the market goes up 5%, that same house is now worth $315,000 one year later. If you put your $15,000 into a high yielding bank account you received $750 in interest. And, it's fully taxable, so you only have $375. That means that you had to save another $14,625 somewhere else just to buy the same house.

However, if you bought the house last year, you would have used the bank's money to secure a first mortgage at favourable rates. This would enable you to participate in the increase in value and not fall behind Your profits are based on the total investment in the property, yours and the bank's. The increase is based on the full $300,000 asset.

One other way to look at it, is the ‘cash on cash" return. Here, you invested only $15,000 of your own money and you made an extra $15,000. So, that basically means that you doubled your own money in one year.

On the other hand, if you passed on the property and without the principal of leverage working for you, you would have made $750 on your money in the bank, and been left with $375 after tax.

So, what's the difference? Basically, $14,625 after one year, if you use leverage.

Forced Savings

If you have a mortgage, it will fundamentally operate as a forced savings plan. Assuming that you obtain a 25 year amortized mortgage, you will pay both principal and interest in your payments. After 25 years, it's paid for! No more payments, you own the property.

So, in our example, after 25 years, you were forced to save $285,000 just by having a mortgage. Remember, the first $15,000 was your money, and the bank financed the balance. Your new asset results from the principal paydown provisions contained in your mortgage.

Capital Appreciation

Property values go up over time, and so does everything else. Part is simply due to inflation and the devaluation of the dollar, and part is due to increased scarcity. Your plan by purchasing property is to:

1) keep up with inflation, and
2) participate in an equity increase due to the increased demand for your property in the future.

What might you expect? You know, there's 1,000 years of history to suggest that real estate values double every 20 years. That's about 5% every year. You have to remember that over a 20 year period, you will likely have at least 2 business cycles (maybe 3) and you will have experienced a boom, bust and recovery. However, all in all, you are still left with a doubling in value every 20 years.

While you really don't profit with the inflation protection, you can profit substantially if you purchase well-selected property. And, historically just about all properties seem to be in higher demand, not simply the very best ones. Unlike the stock market, it's hard to get a bad piece of property.

Tax Free Capital Gain

Our present system of taxation exempts a principal residence from the imposition of capital gains tax. So, our system is a little different from the United States where they can deduct mortgage interest yet they are taxable on the future gain. This is the system in place here for investment properties.

One of the most significant features and biggest advantages under our Canadian tax laws is the principal residence exemption. The moral here is that you should buy the biggest and best house that you can possibly afford.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com