Commercial Property Acquisition: Due Diligence, Title, and Closing

How Commercial Differs from Residential

Residential real estate transactions have a relatively standardized process OREA forms, defined conditions, a relatively compact closing period. Commercial transactions are bespoke: every agreement is negotiated from scratch, conditions and due diligence periods are tailored to the complexity of the property and the deal, and the range of issues that must be addressed is far broader.

There is no "standard form" commercial APS the way there is an OREA form for residential. The terms, conditions, representations, and warranties are all negotiated. Both sides are presumed to be sophisticated parties, and the duty of caveat emptor ("buyer beware") is applied more strictly than in residential transactions.

The Letter of Intent (LOI)

Most commercial real estate transactions begin with a Letter of Intent a non-binding (or partially binding) document that sets out the key commercial terms before the parties invest in negotiating a full Agreement of Purchase and Sale:

• Purchase price and any earnest money deposit
• Due diligence period duration
• Financing conditions (if any)
• Proposed closing date
• Any significant conditions or representations required
• Whether the LOI creates exclusivity (seller agrees not to deal with others during the due diligence period)

The Due Diligence Period

Commercial real estate due diligence is comprehensive. A buyer and their lawyer will typically review:

Title and Off-Title Searches

Full title search including all registered encumbrances, plus: PPSA search, writ search, Bank Act search, tax certificate, zoning compliance letter, and corporate authority review of the seller. See our article on Title Searches and Off-Title Inquiries for the full breakdown.

Environmental Due Diligence

For any property with potential environmental exposure (industrial, commercial, former gas stations, dry cleaners, manufacturing), a Phase I Environmental Site Assessment (ESA) is standard. A Phase I involves a records review, site inspection, and interviews it does not involve soil or groundwater sampling. If the Phase I identifies "Recognized Environmental Conditions," a Phase II ESA (which does involve sampling) may be recommended.

Environmental liability in Ontario attaches to current owners. A buyer who knowingly or unknowingly purchases a contaminated property becomes responsible for remediation. Environmental issues are deal-breakers or significant price reduction events.

Tenancy Review

If the property is income-producing (has tenants), the buyer reviews all existing leases, rent rolls, and operating statements. Key questions: Are leases assignable to the buyer? Are there renewal options that must be honoured? Are there any outstanding disputes with tenants? Are there any co-tenancy or exclusivity provisions that bind the buyer?

Zoning and Land Use

Confirm that the property's zoning permits the buyer's intended use. Review any minor variances, zoning by-law amendments, or site plan agreements that affect the property. Check whether the existing buildings conform to current by-laws (non-conforming uses may have restrictions on rebuilding after destruction).

Building Condition

A Building Condition Assessment (BCA) similar to a home inspection but for commercial properties reviews the physical condition of the structure, mechanical systems, roofing, electrical, plumbing, and HVAC. Capital repair requirements identified in the BCA affect pricing and the buyer's business plan.

The Agreement of Purchase and Sale

Unlike residential transactions, commercial APSs are heavily negotiated. Key provisions specific to commercial deals:

Representations and Warranties

The seller makes representations about the state of the property no outstanding work orders, no material defects, no outstanding environmental issues, title is free and clear of encumbrances beyond those disclosed. These reps survive closing for a negotiated period and give the buyer a claim if they prove false.

Environmental Indemnity

In transactions where any environmental risk exists, the parties negotiate environmental indemnity provisions who bears the cost of any contamination discovered after closing that relates to pre-closing conditions.

Adjustment for Income Properties

For income-producing properties, closing adjustments include prepaid rents, security deposits held by the seller (which are transferred to the buyer), prepaid property taxes, and apportionment of operating costs.

Financing the Commercial Acquisition

Commercial financing is more complex than residential mortgages. Lenders scrutinize the property's income, the borrower's creditworthiness, and the property's value independently. See our article on Loan and Security Documents for the full breakdown of what a commercial lending package contains.

Conditions to financing advance typically include: satisfactory appraisal; satisfactory environmental review; clean title confirmation; evidence of insurance; and executed lease assignments if the property has tenants.

Closing a Commercial Transaction

Commercial closings involve a detailed closing agenda prepared by one of the lawyers a checklist of every document that must be executed, every condition that must be satisfied, and every deliverable that must be exchanged before funds are released and title transfers. Closings are coordinated among the buyer's lawyer, seller's lawyer, and lender's lawyer.

Conditions precedent must all be satisfied or waived in writing. Funds are advanced into trust, documents are executed and exchanged, and the transfer and mortgage are registered on title through Teraview. The closing agenda is confirmed complete before funds are released.