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Edge News

January 2009

Family business also LTT exempt
Fewer new homes built in November
Forum offers leasing lessons in a slow economy
The REALTOR® EDGE gets a new look
Sub-prime mortgages not responsible for world recession
RECO decision: Disclose nature of interest
RECO Real Estate Update is going green
LEGALBEAT: Check ownership thoroughly
OREA Annual Meeting forum for trade issues
OREA, TREB work on Teranet deal
New forms available

Family business also LTT exempt
The Government of Ontario land transfer tax exemptions also include transfer of land to a family business corporation. An exemption from tax may apply where: an individual or a related individual(s) carried on an active business on land; the individual transfers that land and the business to a family business corporation; the shareholders of the family business corporation are members of the family of the individual who transferred the land; and the family business corporation will continue to carry on such active business on that land. This exemption applies to both registered and unregistered transfers of land.

For more information see http://www.rev.gov.on.ca/english/notices/ltt/index.html.

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Fewer new homes built in November
Construction of new homes dropped to 172,000 units in November, down from 211,800 units in October, according to Canada Mortgage and Housing Corporation (CMHC). The seasonally adjusted annual rate of urban starts decreased 21.6 per cent to 144,800 units in November. Urban multiple starts moderated 29.1 per cent to 81,700 units, while urban single starts eased 9.0 per cent to 63,100 units in November. Urban starts declined54, 700 units in Ontario.

For more information, call 1-800-668-2642.

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Forum offers leasing lessons in a slow economy
The slowing economy has commercial real estate professionals anticipating various scenarios. What do you need to do to look out for your client? Can a tenant restructure his business without paying a penalty? Are landlords prepared to deal with a potential increase in tenant defaults and restructuring requests? What steps can be taken to anticipate default and minimize risk?

These are legal issues and brokers should stay away from them with their clients. Leave that to the lawyers. But it doesn’t hurt to have some sense of which issues in the leasing document may become increasingly relevant with a recession looming.

A legal roundtable at the recent Real Leasing conference in Toronto addressed an assortment of issues that people often don’t understand.

What is in the lease?
While the legal experts covered some issues in a standard lease document that perhaps only other lawyers might understand, one theme reoccurred: what is in the lease and what if one party needs out. Here is a sample of the topics covered.

Subleasing: Why do some leases allow landlords to terminate in lieu of consenting to a sublease, or an assignment, while others do not?

On the office side, a lot of it depends on two things: bargaining power, and who’s paying for the improvements. If the tenant is investing significant amounts of money in the premises, the tenant will want the right to at least recover some of that cost. If the tenant needs an exit strategy to get out, it may look to another tenant to whom to assign or sublet the space.

If on the other hand the landlord has paid for improvements, and it is all built into the rent, then the tenant has less of an argument about whether or not the landlord should have the right to terminate the lease.

Subletting part of the premises is a different scenario. Most tenants, especially office tenants, want the right to downsize, especially if they are in a 10- or 20-year lease.

Lender/ owner/ tenant relations: What are Non-disturbance, Subordination, Attornment?

A non-disturbance agreement is an agreement between the landlord’s lender and the tenant under which the lender agrees that if it enforces on its mortgage and either takes over the property or sells the property under power of sale, that it will honour the tenant’s lease.

It’s necessary in a case where the tenant’s lease is subordinate to the landlord’s mortgage. Ontario’s registry system recognizes priorities. If you register your notice of lease on title before the landlord’s lender registers its mortgage, then your lease has priority over the mortgage. If the mortgage has priority over the lease and the lender enforces on the mortgage the lease will be no good. The tenant’s gone.

Tenants should be looking to protect themselves from that. Lenders can ask the tenant specifically to agree that their lease is subordinate. Under those circumstances the tenant can say fine, as long as you give me a non disturbance agreement.

That brings us to attornment. Attornment is the agreement by the tenant to recognize the lender as the new landlord if the lender takes over the property or to recognize the person to whom the lender sells the property as the new landlord. These things all come together as packages in what people typically refer to as SNDAs or Subordination, Non-disturbance and Attornment agreements.

Forfeiture: What is forfeiture? What is a waiver of forfeiture?
In simple terms it really just means a termination by the landlord because of default.

Waiver of forfeiture describes a legal principal whereby a landlord, by his actions, loses the right to terminate the lease because of a default.

How does a landlord lose his right to terminate? This occurs when the landlord commits an undeniable act confirming the existence of the lease. The best example is taking rent from a tenant after you are aware of a breach.

The waiver or forfeiture can occur any time the landlord is aware of the fault, whether or not a notice of forfeiture has been issued.

Practically speaking it is nearly impossible for the landlord to avoid having contact with the tenants after the landlord is aware of default. The landlord usually wants to talk to them to see if they can sort it out. It’s hard to do without waiving the right to terminate. When landlords meet with tenants in this circumstance they must be very up front that they are meeting without prejudice to their right to terminate. Make sure it is in writing.

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The REALTOR® EDGE gets a new look
Welcome to the new look of the REALTOR® EDGE. This year as the whole organization looked to refresh OREA’s look, we took the opportunity to talk to members to see if there were any changes that they would like to see.

Our feedback showed some members wanted more market information. In response, we have added a section called On the Markets which will focus on trends and forecasts for Ontario and Canada. We debut our first article this month with comments from a well-respected economist. On the Markets will share space with Wired Office, running in alternate months.

Market information will also be updated regularly at www.orea.com on the MEMBERS ONLY page.

Our focus groups also told us that they don’t always make it to the OREA NEWS section, and so while we still have OREA NEWS, we have given ourselves some flexibility to use the space if we need to, to flesh out feature stories a little more.

Members wanted more examples of how a deal could go wrong so they could avoid the same mistakes, and so our very popular LEGALBEAT will not be changing in content, though it will have a new look. We will, however, regularly run RECO Decisions for more legal feedback.

So, while the content changes are few, the look is very new. We are using an intro format for the features articles to add visual interest. We’ve introduced our new corporate colours and design elements that will make all OREA communications instantly recognizable as OREA materials. And we’ve tried to make the EDGE easily readable. We hope you like it.

Joan Bailey, Editor
REALTOR® EDGE

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Sub-prime mortgages not responsible for world recession
The world economy is going down the drain because of some repossessed, boarded up, unsellable homes in Cleveland.

If you believe a lot of what you hear and read in the financial media that’s what you’d think, according Jeff Rubin, Chief Economist, Chief Strategist and Managing Director CIBC World Markets, speaking at the Real Estate Forum in Toronto in December.

“We all understand how those mortgages were securitized” said Rubin, “and we all understand that when people send in the keys instead of a mortgage cheque those (mortgage-backed securities) couldn’t make the coupon payments that they said they were going to make. The value of those instruments fell. There were massive write offs in the financial sector. That is very clear…. But how does that bring down a 60 or 70 trillion dollar world economy is a whole other story.”

Rubin blames the global recession on the skyrocketing oil prices earlier in the year.

“Four of the last five recessions were caused by huge increases in oil prices,” said Rubin, precipitated in 1973 by the War in the Middle East, in 1979 by the Iranian Revolution, in 1991 by the first Iraqi War and today.

“In fact the 1998 Asian Meltdown is the only real global recession that didn’t have oil’s fingerprint all over it.”

First the good news
Rubin says the real oil story out there is supply destruction. Even before prices collapsed, oil supply had not grown from 2005 to 2008, he said.

“We may have a one- or two- or three-quarter decline in oil demand but in any economic recovery what we are really going to see is the supply destruction and that’s why I think oil prices are going to come back rapidly with any pick up in economic activity. We are looking to oil prices going back to $100 per barrel range within 12 months.”

And rising oil prices, says Rubin, is a good news story for Canada in the long run.

Now the bad news
Rubin expects the US housing crisis to moderate with housing prices there to stabilize by the end of the first quarter of 2009.

Where the US economy will have to deal with recession in 2009 is in vehicle sales, which will fall to 1982 sales levels, he predicts. Ninety per cent of all automobile sales have been financed and that financing has become increasingly problematic.

“The problem facing GM, Chrysler, Ford isn’t so much whether they are competitive with Honda or Toyota; the more fundamental problem is that the industry can build 15 to 20 million vehicle units a year in a market that will only be buying eight to 10 million units. And that is not a cyclical change. That is going to be a secular change, and one that is going to leave a huge imprint on the North American economy – on both sides of the border.”

The economic stimulus
Future taxpayers, says Rubin, will wish that we bit the bullet for two to three quarters, instead of “mortgaging their futures.” Rubin believes that Washington’s plan to stimulate the economy with an injection of hundreds of billions of dollars is an over-reaction, but added:

“Up here in Canada, that kind of response provides a unique opportunity for us to be freeloaders, because you cannot stimulate the US economy to that extent without that stimulus leaking into Canada,” particularly if that stimulus is going to be directed to integrated industries, like for example the auto industry, he said.

“If we were smart we would do nothing and let Washington do all the heavy lifting, and let US taxpayers pay for the stimulus in the future.”

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RECO decision: Disclose nature of interest
The following RECO Complaints, Compliance and Discipline Appeals decision has been condensed and can be viewed in its entirety on the RECO website at www.reco.on.ca.

The Case
This case involves violations of several rules regarding ethical behaviour, financial disclosure, obedience to law and competence under the RECO Code of Ethics.

Seller A and Seller B listed a property located at 1-AB Street for sale with Brokerage A. The listing salesperson was Seller Representative A. The sellers reduced the asking price from $349,995 to $337,995. Two days after the price reduction, an offer was received and presented by Seller Representative A under dual agency.

The buyer in the first offer was Buyer A, who is a relative of Seller Representative A. At no time did Seller Representative A provide the required disclosure under the REBBA and the RECO Code of Ethics, declaring his direct or indirect interest in the purchase of the property.

The price offered in the first offer was $323,000. The sellers made some changes to the offer and signed it back at $337,000. The first offer subsequently lapsed as the buyer did not accept the counter offer.

Shortly after, another offer was presented by Seller Representative A on behalf of his relative, Buyer A for $328,000. The second offer was signed back at $332,000 and accepted by the buyers.

Even with the second offer Seller Representative A did not disclose the nature of his interest in the purchase of 1-AB Street. The sellers only discovered the relationship between Seller Representative A and the buyer when the transaction was about to conclude.

The Findings
The RECO panel determined that the registrant acted in an unprofessional manner when he failed on two occasions, to provide to the Sellers with written statements and have the Sellers acknowledge in writing, his registration status and interest in the purchase of 1-AB Street.

The RECO Discipline Panel concluded that the registrant breached the following Rules of the RECO Code of Ethics:

Rule 1 (2) – Ethical Behaviour – A member shall endeavour to protect the public from fraud, misrepresentation or unethical practice in connection with real estate transactions.

Rule 5 – Financial Disclosure - A Member shall disclose the financial aspects of a Transaction and any personal interest of the Member in a matter to the Parties sufficient to enable them to make an informed decision.

Rule 23 – Obedience to Law - A Member shall practice in accordance with all federal, territorial or provincial law or municipal by-law relevant to the Member fitness to practice.
Real Estate and Business Brokers Act, R.S.O. 1990, chap. R. 4
Statement where broker or salesperson purchases for resale
31. (1) No broker or salesperson shall purchase, lease, exchange or otherwise acquire for himself, herself or itself or make an offer to purchase, lease, exchange or otherwise acquire for himself, herself or itself either directly or indirectly, any interest in real estate for the purpose of resale unless the broker or salesperson first delivers to the vendor a written statement that he, she or it is a broker or salesperson, as the case may be, and the vendor has acknowledged in writing that the vendor has received the statement.

Rule 42 Competence - A Member shall render conscientious service with the knowledge, skill, judgement and competence, in conformity with this Code of Ethics and the standards which are reasonably expected of Members. When the Member is unable to render such a service, either alone or with the aid of other Members, the Member shall decline to act.

Penalties and Costs
Seller representative A was ordered to pay a $5,000.00 penalty within 90 days of sending this decision of the Discipline Committee.

Discipline under REBBA 2002
This decision was rendered under the old RECO Code of Ethics, which has been replaced by the Code of Ethics under REBBA 2002. A majority of the rules under the old Code have equivalent sections in the new REBBA Code. Consult the explanatory notes for the provisions of the REBBA Code of Ethics in RECO’s Guide to REBBA 2002.

Relating to this matter, see:

Section 4 – Best Interests
Section 5 – Conscientious and competent service etc.
Section 18 – Disclosure of Interest

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RECO Real Estate Update is going green
In an effort to reduce waste and help the environment, all Real Estate Update course materials will now be available in either an e-book format or a PDF version for download as of February 1, 2009.

As a result, OREA Real Estate College will be reducing the price of the course from $75.00 to $60.00.

Here is how the course is changing:

Online: If you are an online student, you will continue to participate in the interactive online course and still have access to the course materials in the new e-book format. The e-book will remain accessible for one year from the date of course completion.

Classroom: If you are a classroom student, an e-book version of the course content will be sent directly to your My Portfolio account upon completion of the course. The e-book will remain accessible for one year from the date of course completion.

Correspondence: If you are a correspondence student, a PDF of the workbook materials will be provided along side the Assignment Sheet. The Assignment Sheet must be completed and returned to the College within the given deadline. Upon successful completion of the assignment, you will be provided access to the e-book through your My Portfolio account. The e-book will remain accessible for one year from the date of course completion.

If you have any questions regarding these changes, please contact a customer service representative at the OREA Real Estate College at 416-391-6732 or toll free at 1-866-411-6732.

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LEGALBEAT: Check ownership thoroughly
The buyer signed an offer to buy a house in her own name but when the bank needed someone else on title, her mother was added to the Deed. Three years later she decided to sell the house and listed it with the same REALTOR® that helped in her purchase.

She was the only person signing the listing which had the usual clause: "6. Warranty: I represent and warrant that I have the exclusive authority and power to execute this Authority to offer the Property for sale or lease and that I have informed you of any third party interests or claims on the property which may affect the sale or lease of the Property".

The house did not sell and was relisted at $299,900. The buyers made an offer for $300,000 which she accepted. A few days later she changed her mind and told the REALTOR® that she was not going to close the deal because she was not happy with the price. She then saw a lawyer who told her that there was no deal because her mother had not signed the listing or the offer.

The buyers sued for specific performance and the court allowed that action. The evidence was that the mother was fully aware of the listing and the offer. She did not fully defend the proceedings. The court decided that the facts of this case clearly showed that the seller had her mother's authority to sign the listing and offer. On the facts the property is unique and the agreement can be specifically enforced.

McLeod v Schmidt 2007 CanLII 31753

MERV'S COMMENTS
Of course, there is more to the story. The seller is also suing her REALTOR®. She claims that he knew that her mother was a co-owner and that it was his job to add her as a seller on the listing and obtain her signature on the APS. He says he did not know that and was never told of the co-ownership.

This case shows why it is important to check ownership at the time of a listing. Ways to verify this include calling the sellers' lawyer, checking with MPAC, using GeoWarehouse or Teranet or looking at a tax bill. If you are the buyers' REALTOR® and want to protect them from unnecessary lawsuits, don’t rely on the listing - do some of these checks.

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OREA Annual Meeting forum for trade issues
All OREA members are invited to attend the Annual Meeting of the Assembly on Wednesday February 25, 2008 at the Sheraton Centre in Toronto, starting at 10:00 A.M.

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OREA, TREB work on Teranet deal
Representatives from the Toronto Real Estate Board and OREA met in November with Teranet to discuss providing member boards with low cost access to Teranet’s Geowarehouse service. Teranet has agreed to revamp their pricing schedule so that Ontario boards will pay the same cost to access the Geowarehouse service.

As part of the new pricing structure it has been agreed that there be one administrator for the contract. OREA has agreed to act as the collection/remittance body for Teranet fees.

The contract proposes each member board will pay OREA $14.75 per member per month (plus GST) for access to the Geowarehouse service.

The contract amount will increase annually by the amount of the Canadian Consumer Price Index starting January 1, 2010. TREB, OREA and Teranet are working to finalize the contract which would have a five-year term.

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New forms available
The 2009 version of Form 220, SPIS, is now available. Unlike the other forms, these no carbon required (NCR) forms are available in packages of 50 at a cost of $20 per package and have a 2009 copyright date. Other forms will continue to be sold in packages of 25. Any forms that did not need to be updated will continue to have the 2008 date.

Forms are available on the Web site at www.orea.com, through Web Forms and through our suppliers offering OREA forms software packages (Easy Offer, Filogix, Instanet Forms and Quick Offer). All have up-to-date forms.

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