The Abstract Page • Volume 36, No. 2 • February 2010 1

Volume 36, No. 2 February/ Février 2010

Real Property Section Section du droit immobilier

In this Issue: Message From the Editor

Message From the Chair

Ontario Subdivision Control: A Way Forward

A Condominium Corporation’s Duty to Accommodate

Ontario’s New Harmonized Sales Tax and Real Estate – How It Will Work

Edward Sonshine Keynote Speaker at Annual Real Estate Section Gala

Gold in the Sunshine on Your Roof – Solar Facility Rooftop Leases

OBA Institute Is Almost Here!

Message From The Editor Ray Mikkola*

Welcome to the February 2010 Abstract page!

This edition features a cornucopia of interesting articles for the sophisticated and discerning real estate practitioner. For example:

• John Wood ruminates on the subdivision prohibitions of the Planning Act and the “safe” and, in his view, “proper” approaches to the statutory control of severances. (I must say that every time I read the Planning Act when it comes to its severance provisions, I see something I didn’t see before.)

• David Forgione writes about a Condominium Corporation’s duty to accommodate where the Human Rights Code is concerned, a matter of some considerable recent interest among Condominium Boards of Directors and owners. (For a lengthy but instructive decision of the Superior Court of Justice on the matter of the duty to accommodate by a Condominium Corporation to the point of “undue hardship”, see MTCC No. 946 v. M. (J.V.) (Litigation Guardian of) et al (2008) 79 RPR (4th) 20)).

• David’s enthusiasm for contributing to the Abstract Page running amok, David also provides a handy memo that alerts us to the wonders of the Harmonized Sales Tax regime in Ontario as it applies to real property.

• Dennis Daoust writes about solar rooftop leases and the feed in tariff (FIT) program. (I am reminded about the spate of rooftop easements, licenses, “rights to use”, “easements in gross” (don’t get me started) from the late 90’s when rooftop antennae agreements of a bewildering description and frequently of questionable legal effectiveness were being proffered to landowners of tall buildings, all to be sifted through by lawyers attempting to characterize them in some even remotely recognizable legal basis). Dennis’ article once again shows us that what might be considered to be simple documents in one context

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can have serious and long term unintended consequences in another. So it’s like Dean Martin said in “Robin and the 7 Hoods” (a great movie – you should see it): “If ya read, ya loin [learn]”.

I look forward to seeing you at the OBA Institute.

Meanwhile, please do carry on.

Ray *Ray Mikkola, Partner, Pallett Valo LLP

Message From the Chair Jeffrey Schwartz* As we watch the snow melt away and the temperature slowly rise (we likely still have a bit of winter kick on the way), I’m sure you will agree with me, a year has made a great deal of difference. Everyone I speak with is feeling more positive. A real sense of having turned the proverbial corner pervades our practice area. Lawyers are finding themselves busier than they have been in awhile. All good.

It’s when we get busier that we have to be more vigilant about what is going on out on the street. Our clients, our lenders, and the whole related real estate industry with whom we deal need to be reminded of our role and importance in the transaction. Your OBA Real Property Executive is part of the team working on your behalf to continue to promote our importance to all parties involved. We have been very busy on many fronts. Continuing Legal Education programs are constantly being planned that are both timely and informative. They are designed to inform and keep you current. Members of our executive sit on various committees involved in a wide spectrum of topics that touch upon our practice area and their goal is to keep our role relevant and integral to the real estate and mortgage transaction.

This year, the Real Property program at the annual OBA Institute (‘Closing The Deal’) promises to be a great day of very timely and critically important topics. A lot of work and time goes into planning this program, starting way back last summer. Speakers spend a considerable amount of time preparing their papers and presentations and the Chairs work tirelessly to ensure the day ahead is a wonderful opportunity to learn and network.

We are already well underway planning this year’s Annual Real Property evening. More details inside. Last year was a great start to what promises to be a greatly anticipated annual event for our section.

Kudos again to Ray Mikkola, our newsletter editor for his efforts in putting this issue together quickly so we can give you both articles and reflections and details of upcoming events and programs.

I look forward to seeing you at one of our many events.

*Jeffrey Schwartz, Schwartz & Schwartz

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Ontario Subdivision Control: A Way Forward Using a Proper Interpretation with Compliance Statements

John R. Wood *

As Ontario real estate lawyers, we know when a change in title contravenes subdivision control it can undermine title. We wisely avoid risk to our clients and ourselves by following safer interpretations of the Planning Act.

But, if there was no risk to title, could there be a "proper" interpretation that differed from the safer one? For example, do compliance statements in a registered transfer allow this by removing the risk?

The writer's recent article in Carswell's Real Property Reports discusses these matters more fully.1

In Acchione, an owner got a consent to transfer a part. Before the consent would have lapsed, the owner transferred the consented to part to herself. Then she transferred the remaining part to someone else, also before the consent would have lapsed. In 2000, the Ontario Superior Court of Justice decided to bless this harmless transfer. In 2002, the Ontario Court of Appeal mistakenly used a literal interpretation to strike down the harmless transfer. The court decided that it couldn't "ignore the plain meaning of an ordinary English word ["before"] and interpret it as if it means the opposite of what it says."2

We didn't need the Ontario Court of Appeal to give us the dictionary meaning of one word. We needed the court to make overall sense of the subdivision control provisions.

However, we couldn't have had a clearer warning to follow safer interpretations where there's a risk to title. We must therefore continue to study Troister and Waters' bible on subdivision control to know the risks.3

We know the basic rule that an Act must be interpreted as being remedial and must be given such fair, large and liberal interpretation as best ensures the attainment of its objects. We must accept that, in practice, we can't apply this to the Planning Act where there's a risk to title. We like the idea where the purpose of a provision is to control a change in title, a court should require plain words to do that. We may accept the reverse as a necessary evil; the plain words still govern even where the purpose of a provision is not to control a change in title.

But a safer interpretation needn't be a proper one. We may need to distinguish between proper and safer interpretations. A court should always use the proper interpretation.

For a proper interpretation, there are the two main factors: purpose and words. The basic purpose is to prevent a true division of land unless a body has approved it. A provision usually also has a specific purpose. We need the courage to find principles that reflect the purposes. Where the purpose is not to control a change in title, the meaning of the words must, if possible, be interpreted not to do so. But, if it can't, the purpose must govern, despite the words. And, where the purpose of a provision is only to control a change in title, Forfar needn't mean that a court won't require plain words.

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The article then shows the proper principles for a severance consent. The purpose of subdivision control is to control a transaction that divides land by changing the title in a certain way. This is a way that could materially affect the future use of the land. It's hard to say clearly this happens. The over-severe punishment calls for simple and certain words. Obviously most transfers or mortgages of ownership can divide land and need a severance consent. But the words also require a severance consent where a transaction gives a right over ownership for 21 years or more, going well beyond the purpose. Then, the words allow several unduly narrow exceptions. The scheme ends by allowing several retroactive cures. In every way, the words are extreme and don't hit the mark. They cry for proper interpretation.

The proper interpretation (but maybe not the safer where there's a risk to title) for a severance consent must be as follows:

1. A consent can approve either a division, or merely formally allow a transaction, or both.

2. Where the consent is to a division, it approves a division of the remaining part after the consent. Each approved part should be treated in the same way, except that the consent doesn't lapse for either approved part if it's acted upon for one part before the consent lapses.

3. Where the consent is to a division, it allows future dealings with the whole of the approved parts, and isn't spent (or exhausted) after a transaction is carried out. When a body merely consents to a part being added to abutting land to change a boundary, as far as the consent is to the division, it's to the division of the part being added plus the part to which it is being added.

4. Where a consent doesn't approve a division, a consent shouldn't be required. For example, a consent shouldn't be required for an easement, or some leases, for 21 years or more.

5. Where a consent is only to a transaction it formally confirms that the transaction complies but isn't a consent to a division.

In Acchione, the Ontario Court of Appeal dealt with two exceptions. One was for a transfer of a part that would remain part after a consent to a division, as in 2 above. The other exception was for the rule in 3 above called "once a consent, always a consent." The above shows that these narrow exceptions were merely examples of the principles. Not only that, but it was also possible to interpret the words not to make the transfer contravene. A result is that "once a consent, always a consent" applies retroactively.

A proper interpretation (rather than the safer one) wouldn't help us if compliance statements in a registered transfer didn't remove the risk to title. Where they're completed, a contravention "does not have and shall be deemed never to have had the effect of preventing the conveyance of or creation of any interest" in the land. If the cure for past contravening changes in title weren't complete, the curative provisions couldn't in practice be relied on at all without risk. Ontario Court of Appeal decisions tend to confirm that compliance statements do completely cure contraventions.

The article concludes that compliance statements in a registered transfer cure a contravention in the transfer and any prior contravention. There's an exception for a prior court decision. The article contains a detailed discussion of these crucial provisions. Of course, a registered transfer with

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compliance statements shouldn't be used to cure what would, on a proper interpretation, be a contravention. And some people can't take the benefit of the cure if they're affected by fraud.

At first there seems to be a practical risk. This would occur where a contravention had been found before a cure. If so, the land might have been put back into the name of the original owner. Then, curing the contravention might seem to do the opposite of what we'd assume it did. The article concludes that the apparent practical risk isn't material. The article also comments on how the Ontario Land Titles Act might work in some cases of subdivision control.

Subdivision control still puts a burden on dealings with land. As Ontario tries to revive its economy, it should do more to lift this burden. Electronic registration has created new parcels. Couldn't we accept these as validly severed, and then use our electronic system to find and stop future breaches?

The article is detailed and covers many issues. The issues should be discussed and developed among lawyers. For this, lawyers might consider writing a letter to the editor of The Abstract Page, or contacting the author at john.wood@plainly-yours.com, or suggesting other ways to exchange views.

*John R. Wood, Lawyer _______________________________________________________________

1 John R. Wood, Ontario Subdivision Control: A Way Forward, Using a Proper Interpretation with Compliance Statements, (2009), 81 R.P.R. (4th) 16. The article appears in paper only in the bound copy of the reports.

2 1390957 Ontario Ltd. v. Acchione, (2002) 46 R.P.R. (3d) 163 (Ont. C.A.) and CanLII 23579 (ON C.A.); (2000) 38 R.P.R. (3d) 176 (Ont. S.C.J.) and 2000 CanLII 22720 (ON S.C.).

3 Troister and Waters, The Law of Subdivision Control in Ontario: A Practical Guide to Section 50 of the Planning Act, 2nd ed. (Scarborough, Ont., Carswell, 1994).

4 Section 64(1) of the Legislation Act, 2006.

A Condominium Corporation’s Duty to Accommodate David Forgione*

In DiSalvo v. Halton Condominium Corporation No. 186, the Human Rights Tribunal of Ontario dealt with the content of the duty to accommodate under the Human Rights Code, R.S.O. 1990, c. H.19, as amended, (the “Code”) and the consistency of that duty with the obligations of a condominium corporation under the Condominium Act, 1998, S.O. 1998, c. 19 (the “Act”).

The applicant, Mr. DiSalvo, owned and resided in a townhouse condominium unit. He suffered from muscular dystrophy and was confined to a wheelchair which significantly limited his ability to enter and exit his townhouse unit through the front door. The applicant advised the condominium’s board of directors that he would require accommodation in the form of a wheelchair ramp to the front door of his townhouse unit. Because the ramp would be constructed entirely on the common elements a dispute arose between unit owner and the condominium corporation as to who would responsible for the cost of the ramp.

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While the condominium corporation agreed that the ramp was indeed an appropriate form of accommodation in the circumstances, it felt that it should not bear the full cost associated with the installation and maintenance of the ramp. The condominium corporation was concerned that there was a conflict between its obligations in complying with s. 98 of the Act and the obligation to accommodate the unit owner under the Code. In this regard, the condominium corporation asked the unit owner to sign an agreement pursuant to s. 98 on the basis that he would bear the cost and responsibility of maintaining the ramp. The condominium corporation took the position that the unit owner’s refusal to sign a s. 98 agreement placed the corporation in conflict with its obligations under the Act.

Section 98(1) of the Act provides, among other things, that an owner may make an addition, alteration or improvement to the common elements that is not contrary to the Act or the condominium’s declaration, if the condominium’s board of directors, by resolution, approves the addition, alteration or improvement to the common elements. This section of the Act further provides that the unit owner and the condominium corporation enter into an agreement that allocates the cost of the proposed addition, alteration or improvement and sets out the respective responsibilities for repair of damage as well as maintenance and insurance of the addition, alteration or improvement. It is noteworthy that the Act does not dictate who will bear the costs and responsibilities for any addition, alteration or improvement to the common elements. The entrance ramp that the unit owner had proposed was to be constructed entirely on the common element of the condominium.

In its submissions to the Tribunal, the condominium corporation agreed that it had a duty to accommodate under the Code, but argued that such duty did not include an obligation to assume the cost of providing the accommodation measures. Pursuant to the Code, where a duty to accommodate is found that duty is only negated where the obligated party can establish that its obligations under the Code impose an undue hardship given the circumstances.

The condominium corporation did not take the position that the cost of the ramp created an undue hardship on the corporation, but rather that the interests of unit owners in having the corporation’s funds used “only for the good of the majority” of unit owners inform the content of the corporation’s duty to accommodate under the Code. In determining the criteria of undue hardship, the Tribunal’s Vice-Chair, Michelle Flaherty, found that the interests of other unit owners were relevant in determining whether there was undue hardship. To the extent, however that the condominium corporation argued that some threshold other than undue hardship apply in the condominium context, the Vice-Chair disagreed. The Vice-Chair held that a consideration of the interests of other unit owners did not create a different threshold for condominium corporations under the Code, nor did it suggest that absent undue hardship the interest of other owners qualify the rights of another unit owner to accommodation.

In finding that the condominium corporation had a duty to accommodate, it was held that no inconsistency or conflict between the Act and the Code existed. In the end, the decision in DiSalvo stands for the proposition that in the event that a s. 98 agreement is entered into by a condominium corporation, that agreement must comply with the obligations of the condominium corporation under the Code. It would seem that this decision also stands for the proposition that where a duty to accommodate is found, regardless of the fact that the accommodating measure may only benefit an individual unit owner, unless undue hardship is established, the Code requires that the cost of reasonable accommodation be borne by the condominium corporation.

*David Forgione is an associate in the Commercial Real estate Group of Pallett Valo LLP

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Ontario’s New Harmonized Sales Tax and Real Estate – How It Will Work David Forgione*

The Ontario government has now passed legislation and signed a HST integration and coordination agreement with the Federal government that will harmonize the 8% provincial Retail Sales Tax (RST) with the 5% federal Goods and Services Tax (GST) to form a new 13% Harmonized Sales Tax (HST), effective July 1, 2010 (the “Implementation Date”).

The new HST will generally apply in the same manner as the GST to goods and services supplied in Ontario, including transactions involving the sale of new residential real property, commercial real property and lease payments under commercial leasing arrangements.

Application of the HST to Commercial Real Property

What is the Treatment of Commercial Real Property under the HST?

The definitions in the Excise Tax Act, R.S.C. 1985, c. E-15 (the “Excise Tax Act”) relating to real property and the Canada Revenue Agency’s (CRA’s) current policies regarding the application of the GST to sales of real property will apply under the HST. The HST at 13% will generally apply to the sale of commercial and other nonresidential real property, including retail and industrial properties, as well as vacant land for future development.

Corporations in the business of developing commercial properties and selling them in the course of commercial activities, that are registered for GST/HST purposes and claim input tax credits (ITCs) for the 5% GST that they pay on construction inputs, will be entitled to claim ITCs for the 13% HST payable on construction inputs. Under the new HST regime, developers will be entitled to claim ITCs to recover the 13% HST paid or payable on most purchases of construction inputs and operating expenses used to construct commercial properties. Many of these inputs are currently not taxable under the RST structure. For example, under the HST regime, a developer would claim ITCs for the HST paid or payable on:

• a lease of commercial real property for use as an office or storage; • building materials; • plumbing and electrical subcontracts; • inspection services; and • legal and accounting services.

How Soon Will the HST Apply to a Sale of Commercial Real Property?

Generally, the HST will apply to a taxable supply by way of sale of non-residential real property where both ownership and possession of the property are transferred to the purchaser on or after July 1, 2010. Where either ownership or possession of the real property transfers before July 2010, the HST would not apply to the sale. However, the GST at 5% would still apply to such a sale.

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For sales of non-residential real property, the date the agreement of purchase and sale is entered into does not affect the application of the HST. There is no grandparenting provision for sales of non-residential real property as there is for certain sales of new housing. For information on grandparenting in respect of housing, please see the section below on grandparented sales of new housing.

Application of the HST to New Residential Real Property

What is the Treatment of Sales of Residential Housing under the HST?

The HST will apply to a builder’s sale of a newly constructed or substantially renovated residential complex, including a multiple unit residential complex (e.g., an apartment building). The sale of housing that has been previously occupied by an individual as a place of residence and that is exempt from GST would also be exempt for purposes of the HST.

How soon will the HST Apply to a Sale of New Residential Real Property?

Generally, the HST will apply to a builder’s taxable supply by way of sale of a newly constructed or substantially renovated residential complex where both ownership and possession of the complex are transferred to the purchaser after June 2010. An exception exists if, among other conditions, a written agreement of purchase and sale was entered into on or before June 18, 2009.

When would the HST Not Apply to a Sale of New Residential Real Property?

The HST would not apply to a builder’s taxable supply by way of sale of a newly constructed or substantially renovated residential complex where either ownership or possession of the complex is transferred, under a written agreement of purchase and sale, to the purchaser before July 2010, regardless of when the parties entered into the agreement of purchase and sale. In this case, only GST at 5% would apply.

The HST would also not apply if the sale of the newly constructed or substantially renovated residential complex is grandparented (see the section below on grandparented houses). In this case, GST at 5% would apply to the sale of the residential complex.

What is a Grandparented Sale of a House?

Where a written agreement of purchase and sale for a newly constructed or substantially renovated detached house, semi-detached house, attached house, residential condominium unit or condominium complex was entered into on or before June 18, 2009, the sale would generally be grandparented if both ownership and possession of the housing is transferred to the purchaser, under the agreement, after June 2010. In this case, the provincial component of the HST (i.e. 8%) would not be payable on the sale. Only the federal component of the HST would apply (i.e. 5%). In the case of a detached house, semidetached house or attached house, residential condominium unit or condominium complex, the purchaser must be an individual in order for the grandparenting rule to apply.

While the grandparented sale of housing is not subject to the HST, the builder would be required to remit a transitional tax adjustment if the construction straddles the Implementation Date. This transitional tax adjustment is intended to approximate the amount of the RST that would have been paid in respect of the construction costs incurred after June 2010, unless the construction of the housing

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is 90% or more complete on July 1, 2010. The chart below provides a summary of the transitional rules and their applicable timeframes:

Date of Agreement of Purchase and Sale

Possession Transferred to

Purchaser

Ownership Transferred to

Purchaser

Applicable Tax

June 18, 2009 or earlier After June 2010 After June 2010 5% GST

(Grandfathered Sale)

June 19, 2009 or later After June 2010 After June 2010 13% HST

June 19, 2009 or later Before July 1, 2010 Before July 1, 2010 5% GST

June 19, 2009 or later Before July 1, 2010 After July 1, 2010 5% GST

What is the Ontario New Housing Rebate?

Under the HST, the Ontario government will provide a new housing rebate (the “NHR”) for the same types of new residential housing for which a rebate is available under the GST. As such, the NHR is available for new homes purchased as primary residences across all price ranges. However, the NHR is available only in respect of the provincial component of the HST paid on the purchase of a newly constructed or substantially renovated house. Such homes will qualify for a rebate of up to $24,000.

The effect of the NHR will be to apply the provincial component of the HST at a rate of two per cent on the first $400,000 of the purchase price of a new home and at a rate of eight percent on the portion of the purchase price above $400,000. The rebate will be calculated as 75 per cent of the provincial component of the HST payable on the purchase of a new home, up to a maximum rebate of $24,000.

What are the New Disclosure Requirements for Builders under the Transitional Rules for Sales of New or Substantially Renovated Housing in Ontario?

If a written agreement of purchase and sale for a newly constructed or substantially renovated home is entered into after June 18, 2009 and before July 1, 2010, the builder is required to disclose in the written agreement whether the provincial component of the HST would apply to the sale and, if so, whether the stated price in the agreement includes the applicable provincial component of the HST, net of the Ontario NHR. If the agreement does not do so, the builder cannot pass on to the purchaser the additional cost.

If the transaction would be subject to the provincial component of the HST and the builder did not make the disclosure as outlined above, the stated price in the written agreement would be deemed under the transitional rules to include the provincial component of the HST. In such a case, the purchaser would not be required to pay the provincial component of the HST in addition to the stated price in the agreement. This is required in addition to any current GST disclosures. As such, builders will want to ensure these disclosures are included in all their agreements going forward after June 18, 2009, unless the buyer will be taking legal ownership or possession before the Implementation Date.

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Leases** of Non-Residential Real Property

What is the Treatment of Leases of Non-Residential Real Property under the HST?

The GST currently applies to leases of non-residential real property, with few exceptions. Leases of non-residential real property are currently exempt from RST. Under the new HST regime, HST at 13% will generally apply to the lease of non-residential real property made by a GST/HST registrant. Leases of real property that are currently exempt under the GST rules would also be exempt under the HST. The definitions in the Excise Tax Act that relate to real property and the CRA’s current policies regarding the application of the GST to leases of real property leases would generally apply under the HST. Regardless of when the parties entered into the lease agreement and when possession is given, each lease payment that becomes due on or after July 1, 2010, and is wholly attributable to a period after June 2010, would be subject to the HST.

When Would the HST Apply to a Taxable Lease of Commercial Real Property?

The following rules apply based on the earlier of the date the consideration for the lease, licence or similar arrangement becomes due and the date the consideration is paid without having become due.

Lease Payment Due or Paid Without Having Become Due On or After July 1, 2010 Generally, the HST would apply to any lease payment that becomes due, or is paid without having become due, on or after July 1, 2010, to the extent that the lease payment is interval, that begins on or after July 1, 2010. However, the HST would not apply to a lease payment for a lease interval beginning before July 2010 and ends before July 31, 2010. Lease Payment Due or Paid Without Having Become Due On or After May 1, 2010 and Before July 2010 Generally, the HST would apply to any lease payment that becomes due, or is paid without having become due, during the period after April 2010 and before July 2010, to the extent the lease payment is attributable to a lease interval, or any part of a lease interval, that begins on or after July 1, 2010 (other than a lease interval that begins before July 2010 and ends before July 31, 2010). In these situations, a lessor would be required to account for the provincial component of the HST in its GST/HST return for the reporting period that includes July 1, 2010. If eligible, a lessee would be entitled to claim any corresponding ITC in its GST/HST return for the reporting period that includes July 1, 2010.

Where Do We Go From Here? Builders and developers who have not yet reviewed and amended the tax clauses of their residential agreements of purchase and sale should do so now to ensure that the clause adequately deals with the HST and properly reflects assignment of the rebate. All interested parties should be cognizant of the fact that the HST regime remains a work in progress and additional rules will be released in March which will undoubtedly impact the rules outlined above. **In this article, references to a lease include a licence or similar arrangement. *David Forgione is a member of the Commercial Real Estate Practice at Pallett Valo LLP in Mississauga. mailto:dforgione@pallettvalo.com / 905.273.3022 Ext. 291

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Edward Sonshine Keynote Speaker at Annual Real Estate Section Gala Sharon Landsman*

The annual OBA Real Property Gala will take place at the Vaughan Estate on the grounds of the Sunnybrook Health Sciences Centre (2075 Bayview Avenue, Toronto) on Thursday, June 10, 2010. We are thrilled to announce that Edward Sonshine, Q.C., President and Chief Operating Officer of Riocan REIT, one of the most dynamic leaders in the Canadian real estate community, will be our keynote speaker. The Award of Excellence in Real Estate, sponsored by Teranet, will also be awarded during the evening. Our Gala evening is an opportunity to honour our own, as we have done over the last many years. To nominate a colleague for this Award click here. We urge all members to save the date. This evening will be a great opportunity to hear a terrific speaker and reconnect with real estate colleagues. The formal invitation and registration information will be circulated in the next few weeks. *Sharon Landsman, Chair 2010 OBA Real Estate Gala

Gold in the Sunshine on Your Roof – Solar Facility Rooftop Leases Dennis Daoust*

Concern over greenhouse gas emissions (GHGs) has produced a new phenomenon – leases of rooftop space for the installation and operation of solar power facilities.

Last May Ontario passed the Green Energy Act. One of its main objectives was to establish a feed-in tariff program (a "FIT" Program) whereby the Ontario Power Authority (the "OPA") committed to purchase, at very favourable rates, all of the green energy produced in the Province. In response to this incentive, owners of buildings are likely to be approached by solar power companies wishing to lease rooftop space to install and operate green energy systems.

Pros and Cons

Once an application is approved by the OPA, the applicant must sign a power purchase contract with the OPA for a term of 20 years. An important component of that contract is the transfer to the OPA of all of the environmental attributes associated with the project. As a consequence, any carbon credits and renewable energy certificates belong to the OPA and not to the solar power company or the landlord of the property on which the solar power facility is installed.

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Carbon credits arise under "cap and trade" systems such as that which Ontario intends to impose. Under a cap and trade system, energy generating plants, commercial buildings, factories and other facilities are restricted to a prescribed annual allotment of permitted tonnes of GHGs emitted by their operations. If the annual allotment is exceeded, the facility owner must pay a fee or fine to the regulating authority unless it is able to purchase carbon credits. Carbon credits arise where a facility succeeds in keeping or reducing the GHGs that it emits below its allotment. Carbon credits can be bought and sold on a commodities market.

Renewable energy certificates can arise where an authority imposes a requirement that a stated percentage of energy must be provided by renewable energy sources such as solar power, wind power, biomass and similar renewable energy facilities. To meet annual targets, producers of energy can purchase renewable energy directly from a supplier or they can purchase certificates that are used to fund renewable energy projects. Twenty-nine U.S. states and the District of Columbia have established regulatory schemes mandating that a percentage of the energy production of the state must be from renewable energy. U.S. federal legislation is expected to establish a national program and it is predicted that Canada will follow suit.

At this time, environmental attributes do not have a large value, but it is anticipated that their value will increase (perhaps very dramatically) in the not too distant future. Accordingly, before leasing out a roof to a solar power company, consideration should be given to the potential value of those environmental attributes. In the absence of favourable tax treatment, government grants or other forms of incentive, the cost of installing a solar power facility on a roof might make the investment unfeasible. Typically, a building, even one with a large roof, would provide no more than 20% of its energy consumption through rooftop solar panels. Furthermore, at present, the cost of electricity purchased from the grid is still relatively low. However, as the volume of solar power facilities production increases and anticipated developments in technology take hold, it is expected that the cost of installing solar panels will reduce substantially. It may be in the interest of a building owner to hold off signing away the ability to install its own solar panels and to use its own electricity so that it can benefit directly from the carbon credits and renewable energy certificates that the project gives rise to.

On the other hand, the time frame during which environmental attributes are likely to become valuable, and the extent to which they become valuable, is uncertain. It may take several years before the markets mature and trading produces substantial benefits.

Also, at the end of the term of the rooftop lease (typically a 20 year period), a building owner may find that the ownership of an intact and functioning solar power facility represents a substantial benefit. The building owner can expect to acquire the facility at a very reasonable cost. Solar power facilities will normally have a useful life well in excess of 20 years. The building owner will be able to deal with the environmental attributes in whatever way it wishes at the end of the lease and at the same time will enjoy the benefit of an essentially free form of renewable energy on its roof. Alternatively, the building owner may choose to enter into a power purchase agreement with the OPA at the end of the term of the rooftop lease, assuming the FIT Program still exists.

A further benefit flows from the fact that the solar panels will normally reduce energy costs in the building due to the shading effect of the panels. Also, depending on the type of installation, the panels may extend the useful life of a roof by serving as a buffer from the elements.

Some Special Concerns

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Assuming a building owner has elected to lease its roof to a solar power company, several concerns must be addressed:

• Non-disturbance agreements, consents or acknowledgements may be needed from mortgagees of the building or from ground landlords.

• The solar equipment may be subject to a personal property security interest or lien in favour of a lender. The rooftop tenant's lender will seek agreements from the landlord and the owner of the building as well as the mortgagees of the building to the effect that the solar power facility will not be treated as a fixture and will remain the property of the rooftop tenant. The lender will also seek an opportunity to cure defaults of the rooftop tenant to avoid cancellation of the lease. A forbearance commitment and an opportunity to assign or transfer the rooftop lease to the purchaser of the solar power facility may also be required.

• The production, review and approval of detailed engineering drawings, inspection rights, supervision rights and adherence to approved plans as well as all governmental requirements will be important elements of the rooftop lease, particularly with regard to the integrity of the roof and structure of the building.

• Alteration rights will also be contentious. The tenant will need to limit changes to the landlord's property that would interfere with sunlight, while the landlord will be concerned about alterations that might affect its building.

• Particular attention to maintenance and repair obligations must be taken to ensure that the solar power facility is always maintained properly and safely. Solar power facilities will normally have a life expectancy well beyond the term of the lease and the landlord will be concerned about asset preservation.

• A sizeable deposit will be needed to protect against damage to the building, and possibly the cost of removing the solar panels and restoring the building at the end of the term.

• There are specific insurance requirements, such as environmental damage and environmental impairment coverages, as well as boiler and machinery insurance. Risk transfer clauses, such as releases and indemnities, must also be specifically tailored.

• The need to relocate the solar power facility, or components of it, in order to allow the landlord to maintain and repair the roof or to make alterations to the building must be negotiated.

• Snow removal and snow disposal will be a concern.

• Damage and destruction and rebuilding obligations associated with the building and the facility, and various other concerns need to be addressed.

These items represent a small sample of specific concerns related to this type of lease.

*Dennis Daoust is a partner in Daoust Vukovich LLP, 416.597.9339 / ddaoust@dv-law.com

The Abstract Page • Volume 36, No. 2 • February 2010 14

2010 OBA Institute is Almost Here! The most successful and respected continuing legal education event in Canada is less than a week away. Don't miss the Real Property Section's fantastic program at this year's OBA Institute:

Real Property Law: Closing The Deal Date: Tuesday, February 16th, 2010

Time: 10:00 am – 5pm Location: Fairmont Royal York, 100 Front Street West, Toronto

This powerful program will give you the tools to advise your clients during the most vulnerable time of the real estate transaction – just before closing. Do you have a “Tender Kit”? Do you have a “decision tree” to help you figure out whether it’s better to close and sue, or not to close at all? Are you up-to-date with changes in timing rules? What about remedies that can allow you to safely lead your client through a stressful closing situation?

Click here for detailed program information and to register.

Editor: Ray Mikkola OBA Editor: Cheryl Crocker