Riding the zoning roller-coaster

Grand plans to relocate or expand a business in Canada can grind to a halt if real estate transactions hit unexpected zoning obstacles.

In a case that could reach the Supreme Court of Canada, a company spent $14.7 million on land to build a big box department store and residential properties, but was thwarted by planning rules.

The vendor in 0759594 B.C. Ltd. V. 568295 B.C. Ltd. had reduced the sale price by $2 million as it wanted to buy back part of the land after two years.

Under the deal, the buy-back would go ahead only if the City of Salmon Arm, B.C., agreed to rezone the land for commercial and residential use.

The purchase and sale of the 60-acre land closed on Oct. 15, 2007.

Some of the land was within a flood plain and was crossed by the Salmon River. The authorities ruled a third of the land could not be developed, due to restrictions under the Riparian Areas Regulation.

There was also strong local opposition to the development of a large department store in the area, and the Salmon Arm planning department said rezoning would be deferred, pending the development of other areas in the municipality.

When the property was not rezoned within two years, the vendor demanded repayment of the outstanding $2 million and, on April 14, 2010, sued the buyer.

The vendor launched a counterclaim for $3.3 million, arguing the vendor had overstated the possibility of gaining approval for the rezoning.

It highlighted an e-mail sent from the vendor stating: “. . . In preliminary meetings with the Salmon Arm Planning Department, [the vendor] has received full support and approval in principle with having the lands rezoned for commercial/residential use.”

The agreement between the parties had contained a warranty that the vendor had disclosed “all material facts” to the buyer. However, the trial judge held that the vendor had not been aware of the limitations on development of the property, or the strong local opposition to the development of a big box store.

The statement of approval in principle was not material, he ruled.

The court also held it would be “extraordinary” for a party to warrant that it had disclosed all material facts — even those outside its knowledge — and concluded the warranty provision was “ambiguous.”

Judgment was awarded to the vendor, and the buyer’s counterclaim was dismissed. This was not the end of the story, as the buyer then successfully appealed the decision.

In a British Columbia Court of Appeal decision on Aug. 28, 2013, Justice Edward Chiasson concluded: “The warranty provision was not ambiguous.”

The vendor’s claim that the planning department had given “full support” to the rezoning was not correct, he stated.

Chiasson added: “I do not suggest dishonesty on the part of the vendor. “In my view, the vendor must have misinterpreted the position of the planning department.”

The case demonstrates the roller-coaster momentum that zoning issues can lend to real estate transactions.

George Cadman, a litigator specializing in corporate/commercial, securities, and real estate disputes at Vancouver firm Boughton Law Corp., represented the vendor. He has submitted an application for leave to appeal to the Supreme Court of Canada. The case “poses substantial issues for real estate professionals and for counsel advising others,” he says.

He adds: “The question really is how does this decision potentially alter the law of caveat emptor [buyer beware]? Wherever we go across the country what we find is that, in essence, buyers bear the burden of ensuring that the property they want to acquire is [actually] what they want to acquire.”

The decision is good news for buyers, but not sellers, of commercial property, he believes. His take away for counsel involved in buying or selling commercial properties? “I would recommend they look very closely at the warranty language and at due diligence provisions.”

Jason Park, a partner with Dentons Canada LLP’s municipal and property development group, says the first thing to check when buying commercial real estate in Canada is that the existing uses of the site are legal and conform with zoning rules.

If a prospective buyer wants to do something with the site that does not comply with current zoning rules, they can apply for rezoning approval, or a minor variance approval. This could be relatively simple. For example, a minor variance could be completed within three to six months.

However, a full rezoning might take between nine and 12 months and can be a “very public process,” says Park.

In Toronto, where he is based, there would typically be at least one community meeting, with time allowed for comments to be submitted. After the city writes its final report, there is normally a statutory public meeting before it is considered by city council. “With a lot of the downtown sites, it typically takes one to two years,” says Park.

The risk of failing to check whether the current use of the land complies with zoning rules is illustrated in an Ontario Court of Appeal decision from May 15, 2013.

In Lee v. 1435375 Ontario Ltd., the vendor and purchaser entered into an agreement for purchase and sale of the vendor’s dry cleaning business.

The agreement stated the parties should seek independent advice regarding zoning changes. The vendor did not realize that, under a bylaw amendment, the zoning had been changed two years beforehand to mixed-use commercial, which did not list a dry cleaning facility as a “permitted use.”

Justice George Strathy’s decision said: “There was no evidence of any communications between the parties, either during the negotiation of the agreement, or prior to closing, concerning the zoning of the premises.

“The parties admitted that they never turned their minds to the possibility that there was a zoning issue.”

After the execution of the purchase documents and delivery of funds, the buyer’s lawyer learned of the zoning change. The buyer said the transaction had not closed, and the vendor held onto the funds.

On March 30, 2012, the buyer launched an action for, among other things, rescission, damages, and a mandatory injunction for the return of the purchase price. The vendor counterclaimed for damages for breach of contract.

Justice Carole Brown concluded it would not be fair to force the purchaser to proceed with the purchase where there was uncertainty regarding the property’s zoning and permitted use.

On appeal, Strathy found the buyer, by apparently ignoring the advice of his solicitor and signing the agreement without any condition as to zoning, had “implicitly assumed the risk that the zoning would not permit his contemplated use.”

In other words, the decision confirmed the caveat emptor principle that Cadman hopes to defend at the Supreme Court.

In a post on McCarthy Tétrault LLP’s blog Canadian Appeals Monitor, litigation lawyer Kate Findlay reflected on Lee and the Salmon Arm case. She wrote: “As a vendor, any representations made should be truthful and careful attention should be paid to any warranties provided. On the other hand, purchasers are not permitted to act blindly and should investigate a property fully before completing a transaction.”

If land contains rental properties, there may well be zoning or planning restrictions on future commercial or residential developments.

Under 2006 changes to s. 111 of the City of Toronto Act, any site with six or more rental units on the whole development site falls under a strict regime, partly aimed at preserving the rental housing stock.

The change, outlined in chapter 667 of the City of Toronto Municipal Code, allows the city to regulate residential housing demolition and conversion.

Landowners can be mandated to take certain actions, such as replacing all the rentals as part of any development. The rules can also force landowners to maintain “affordable” rents for a period of 10 years or more, or to sacrifice the right to convert those units to condos for 25 years.

“If the units were ever used as rental properties, if it’s there on historical record, they qualify,” says Park, adding there is no registry with which to verify the information. “You have to ask the [current] landowner,” he explains.

If a municipality refuses to issue a permit to demolish a residential unit, there’s no right of appeal to the Ontario Municipal Board.

In general, the OMB has vast powers over real estate transactions, including those involving zoning laws.

The controversial body hears applications and appeals in relation to municipal planning, financial, and land matters including official plans and zoning bylaws.

It has been heavily criticized for what detractors see as its nebulous accountability, unpredictable decisions, slow processes, and tendency to overturn decisions made by elected representatives.

The provincial government has pledged to reform the OMB, but concrete proposals have been slow to come forward. In the meantime, the potential for lengthy OMB appeals needs to be taken into account. The OMB is an entity unique to its eponymous province. Alberta has the Subdivision and Development Appeal Board, with more limited powers, while Nova Scotia and New Brunswick have tribunals that are very restricted in scope.

Across Canada, sometimes an apparently peripheral concern such as parking can become a zoning stumbling block. Buyers need to identify whether there is sufficient parking for existing uses and, if not, apply for a variance.

“Often it’s difficult to know who’s responsible for getting the variance,” says Park. “That needs to be identified in the purchase and sale agreement.”

It is also important to consider the zoning uses of neighbouring properties, says Stella Di Cresce, real estate lawyer at Osler Hoskin & Harcourt LLP. “Gas stations are the big issues,” she says. If chemicals have been used at nearby properties, there is a chance the surrounding land could be contaminated.

“You always want to make sure that the environmental surveys [have been carried out],” Di Cresce advises. She strongly recommends obtaining title insurance.
Zoning information, including all the potential uses of the land, can be found on building reports. Buyers who are considering constructing a highrise tower, or expanding upwards from an existing building, will also want to take account of density restrictions.

This is because, to comply with density bylaws, a new structure can only be built up to a certain size. “This is important for a purchaser who plans on expanding the building,” says Di Cresce. “They will have to check with the municipality in order to ensure that such expansion will not violate the density restrictions in place,” she adds. They may be restricted in the extent to which they can expand.

In-house counsel would do well to check whether a property has been designated as having heritage status.

Municipalities have powers to designate properties that provide architectural significance and merit, but be warned; the property doesn’t have to be old, or particularly beautiful.

Heritage policies are often enshrined in zoning bylaws, and even if a property is not currently a designated building, it could be on a list of “properties of interest.”

“That’s just one step from being designated,” says Park. “It will have an impact on the future development of that property.”

An aspect of Canadian real estate purchases that may come as a surprise to buyers south of the border is the cost of development charges.

These are fees charged by municipalities for hard and soft services, such as roads, which do not necessarily have to be within the development site, or even be located nearby.

“A lot of U.S. developers aren’t used to paying development charges,” says Park.

In Toronto, there are plans to raise these charges by 75 per cent.

Fees for a residential development are scheduled to increase by February 2014 to $21,582 per single unit from $12,366 in January 2009, according to a city council report dated June 18, 2013.

Non-residential charges are due to a rise in 2014 to $153.91 per ground floor square metre from $99.30 in 2009.

“Make sure it’s clear who’s responsible for that charge,” says Park. It can be either the owner’s or leaser’s duty to pay the fee, he warns.

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