Purchase of a commercial unit

Regardless of the type of project, the real estate broker must make sure to inform his client of the differences related to the purchase of a commercial space in a divided co-ownership property. 

 

Verification of documents and information

As with residential co-ownerships, the broker must ask the seller or the syndicate of co-owners for all documentation relevant to the buyer’s decision, such as the immovable’s by-laws, financial information (contingency fund, budget, self-insurance fund, etc.), the minutes of meetings of the board of directors and meetings of co-owners, etc.

Potential use of the commercial fraction

The broker must help his client determine if he can operate his business in the co-ownership.

A co-owner (commercial or not) has free use of his private portion and of the common portions, as long as he respects the by-laws of the immovable and that he does not infringe upon the rights of the other co-owners or the destination of the immovable.

The components of the destination of an immovable are defined by a clause in the constituting act of co-ownership, often entitled “Destination of the immovable.” This clause is a key factor in the analysis of the destination of the immovable. The destination of the immovable may impose on co-owners (and tenants) an exclusively residential, commercial, industrial or professional use, etc. If the building is exclusively for residential use, obviously no business can be established there. 

This being said, the fact that an immovable is for mixed use and a unit is authorized for “commercial” use does not mean that just any business can be established there. It is the whole of the declaration of co-ownership that defines the destination. The clauses determining the destination of the private and common portions contribute to this definition, as do the clauses of the declaration dealing with the conditions of enjoyment of the private portions, the common portions and the common portions for restricted use (which are found in the “by-laws of the immovable” section of the declaration of co-ownership). 

In addition, the destination includes elements specific to the immovable such as the character and location of the building. These are reflected in the quality of the construction and the materials used, in the harmony of the building complex, in the interior and exterior fittings, in the particular environment or the geographical location of the building (if it is located in an upscale or popular neighbourhood, etc.), or near a waterway, a ski hill, a golf course, a freeway or in the heart of a tourist town. For example, in an old building with poor soundproofing, it may not be possible to operate a gym with loud music and frequent impact noises. It is important to communicate with the syndicate of co-owners to avoid any ambiguity in this regard.

Many declarations include a clause that limits the use that can be made of the commercial private portions, such as: “Commercial use shall be limited to the following: office, florist, artist or craftsman’s studio, antiques, art objects and second-hand goods, specialized teaching school (except music), art gallery and bookshop.” Be sure to verify the existence of such a clause and inform your client accordingly. 

Allocation of expenses

As for residential units, common expenses (or “condo fees”) must be allocated among the co-owners (commercial as well as residential) according to the relative value of their fraction. No other method of allocation of common expenses is possible.

When a commercial space has little or no access to the interior portions of a residential building, it may come as a surprise to the co-owner of this space to be required to pay all the expenses related to these portions when he has no real access to them. 

The only exception to the allocation rule based on relative value relates to the common portions for restricted use. The co-owners who benefit from common portions for restricted use will alone pay the expenses for the current (non-major) maintenance and repairs of these portions. In the absence of a statement to the contrary in the declaration of co-ownership, the costs of major repairs and replacement of the common portions for restricted use will be part of the common expenses payable by all, even if they are for the exclusive use of certain co-owners. Only if expressly provided in the declaration of co-ownership will the co-owners alone be responsible for the expenses relating to major repair and replacement work on their common portions for restricted use. 

In mixed-use co-ownerships with a commercial first floor (with street frontage) and residential floors, it is common for the lobby, elevators, stairs, garbage chutes, passageways and interior hallways to be restricted common portions for the exclusive use of the residential fractions. This way, the co-owners of the commercial units, who often do not have access to these parts of the building, will not have to pay for their maintenance and minor repairs. Also, if the declaration so provides, they will not have to contribute to the expenses related to major repair or replacement work on these portions. 

Similarly, certain portions for exclusive use by the commercial fractions may be qualified as common portions for restricted use and, therefore, be the responsibility of the commercial co-owners (for example, an outdoor terrace, a separate entrance, etc.)

Note that in the case of co-ownerships that are solely commercial or industrial, it is not uncommon for certain portions of the building’s structure, normally a common portion owned and maintained by all co-owners, to be private portions. In this case, these private elements of the structure will be the responsibility of their respective owners. 

The broker must inform the commercial co-owner of what the latter owns and what portions he has for restricted use. This must be verified by the broker in order to adequately inform the co-owner of the financial obligations that will apply to him. 

Participation in decisions – mixed co-ownership

In the context of mixed co-ownership, the co-owners of commercial units often have priorities that are different from those of residential co-owners, whether it regards the co-ownership budget, the work to be done, or the by-laws to be adopted. 

Co-ownership decisions are made either by the board of directors or by the general meeting of co-owners. The decisions relating to the co-ownership budget and the work to be done are – in the vast majority of cases – the responsibility of the board of directors. 

It is relevant therefore to check whether the declaration provides that the commercial private portions will be able to appoint a director to the board of directors, in order to ensure that they have some representation on the board. Another way to ensure this representation is to provide in the declaration that the co-owners will have to elect at least one co-owner of a commercial unit as a director.

Let’s take the example of work performed on common portions, and common portions for restricted use, which, as mentioned, are under the decision-making control of the board of directors. If the deck of a restaurant operating in commercial premises is a common portion for restricted use, it will be up to the board of directors to decide when it needs to be repaired or replaced. While the expense is likely (depending on the terms of the declaration) to be borne entirely by the commercial co-owner, the work may be imposed on him unilaterally, hence the relevance of having a representative on the board of directors to look after the interests of commercial co-owners.

Work within a private portion usually requires approval by the board of directors. It is relevant to mention this to the prospective buyer of a commercial unit who intends to carry out important work in order to accommodate his business.

In addition, a broker should inform his client of the power of the general meeting of co-owners to amend the declaration of co-ownership, including the by-laws of the immovable. Changes may therefore be made to the rules relating to the enjoyment and use of the private portions, which may affect the activities of a commercial co-owner. In a context where the interests of the residential co-owners (who are often in the majority) may diverge from those of the commercial co-owners, it should be noted that:

• for a restriction of enjoyment or use adopted by the general meeting of co-owners to be valid, it must be justified by the immovable’s destination, character and location;
• for a decision of the syndicate to be valid (which includes amendments to the immovable’s by-laws), it must not impose a change in the destination of the private portion;
• for a decision of the syndicate to be valid (which includes amendments to the by-laws of the immovable), it must not be biased (it can be qualified as biased when it is not adopted in the collective interest of the co-owners, but rather to the benefit or detriment of some of them) nor taken with the intention of harming a co-owner or in disregard of his rights.

No preliminary contract, information memorandum and other related obligations

It is important to remember that the legislative provisions requiring the promoter to sign a preliminary contract with the prospective buyer, to send the buyer an information memorandum (including the provisional budget and all other mandatory information), or to protect the deposits paid by the buyer do not apply to the acquisition of a fraction of co-ownership that is not for residential use (such as a commercial space, office space, etc.) These obligations serve to protect buyers of residential units and do not apply to commercial premises, even if they are located in a mixed-use immovable comprised of a majority of residential units.