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Risk Report · June 14, 2021

Pitfalls in transactions involving corporate parties

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Pitfalls in transactions involving corporate parties

By Oana Hyatt, Staff Lawyer

Oana Hyatt

Sophisticated parties dealing in real estate may wish to structure their transactions to minimize their potential tax liabilities and maximize their potential profits. As real estate licensees involved in such transactions, you should ensure you understand your clients’ situation and wishes.

You are also well advised to ensure that your clients obtain legal and tax advice early in the process, before entering into any type of binding agreement for the property. E&O has dealt with claims involving buyers who initially wished to structure a purchase of the property as an asset purchase, using a simple Contract of Purchase and Sale. In one claim, the buyers were then persuaded by the seller to restructure the transaction as a share purchase of the seller corporation instead.

The licensees involved attempted to document the restructured transaction themselves but allegedly did so poorly. This left the parties to the transaction with two different agreements for the purchase and sale of the property, and no agreement between them as to which of the two agreements governed.

It’s often to sellers’ advantage to structure transactions as share sales, but it can also be to the buyers’ advantage to do so to minimize tax payable, such as property transfer tax. A re-drafting of the deal as a share purchase is often possible, but can present significant risk if the parties don’t successfully conclude such re-negotiations. Share purchase agreements are typically drafted by lawyers, and careful consideration is given to, among other things, any existing or future liabilities of the company, including any contractual obligations it might have to third parties.

You may also wish to review the terms of your agency agreements to ensure that commissions will still be payable in the event the transaction is structured as a share purchase.

E&O has also dealt with claims where the person purporting to be authorized by the corporate seller to sell a property is not actually authorized to do so. Being a director or shareholder of a company does not necessarily mean the person can execute agreements on behalf of the company. Again, legal advice on this issue may be necessary early, before the parties enter into any type of binding agreement for the property.

As in every other real estate transaction, claims can also arise if there is insufficient clarity in the contract as to which party is to pay any applicable GST on the purchase price. For more information on GST claims, see Chris Johnston’s article “GST may bite you” in this issue of the Risk Report.

Transactions that involve corporate parties and non-straightforward contracts of purchase and sale can be excellent, rewarding, and interesting learning opportunities. However, they are not the type of transaction to dabble in. Know when to recommend that your clients get legal or tax advice.

Filed Under: Risk Report

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