Legal Tips for Multi-Residential Properties

Investing in a multi-unit residential properties can be a lucrative venture, offering steady rental income and passive property appreciation. However, navigating the legal landscape is crucial to ensure a smooth transaction and long-term success.

Here are a few essential legal considerations to keep in mind when purchasing such properties.​

1. Zoning and Legal Use Verification

Before finalizing a purchase, and preferably before waiving any conditions or submitting a firm offer, confirm that the property’s current and intended use complies with local zoning bylaws. Municipal zoning regulations dictate the permissible number of units, property use, and any restrictions. Failing to verify zoning compliance can lead to legal complications, including orders to reduce the number of units or cease certain uses. This could lead to liability to tenants if you are required to evict them in order to comply with the zoning requirements. Engage with municipal planning departments or consult a real estate lawyer to conduct thorough due diligence on zoning matters.​

2. Understanding Legal Non-Conforming Uses

Some properties may have a “legal non-conforming” status, meaning they were legally established under previous zoning bylaws but don’t comply with current regulations. While these uses are typically grandfathered, any changes or expansions in uses may require compliance with current bylaws. Understanding this status is crucial to avoid unintended violations. ​

3. Building Code and Fire Safety Compliance

Multi-unit properties must adhere to building codes and fire safety regulations. This includes requirements for fire separations between units, proper egress routes, smoke and carbon monoxide detectors, and more. Non-compliance can result in fines, mandatory renovations, or even evacuation orders. It’s advisable to have a qualified inspector assess the property for compliance and identify any necessary upgrades. ​

4. Title and Off-Title Searches

Conducting comprehensive title and off-title searches is vital to uncover any encumbrances, easements, or restrictions on the property. Off-title searches may reveal issues such as outstanding work orders, heritage designations, or environmental concerns. These searches provide a clearer picture of the property’s legal standing and any obligations you may inherit. Certain searches take longer to obtain; you should inquire with your real estate lawyer to ensure that you will have sufficient time to obtain the response prior to your offer becoming firm and binding.

5. Tenant Rights and Lease Agreements

If the property has existing tenants, familiarize yourself with the applicable provincial residential tenancy legislation. Different provinces have different rules and may not operate the way you are used to. Review all existing lease agreements to understand terms, rent amounts, and any clauses that may affect your ownership. Note that you may not be permitted to evict tenants simply because of a change in ownership; specific legal grounds and proper notice are required in certain instances. ​

6. Inclusion of Protective Clauses and Language in Agreements

When drafting the Agreement of Purchase and Sale (APS), include clauses and proper language that protect your interests. Consider conditions such as satisfactory inspection results, confirmation of zoning compliance, and review of existing leases. As a Buyer, it is always important to list the current use of the property under the title search/requisition provision(s) in the agreement. For example, if a Buyer is looking to acquire a three-unit/triplex, that is how the property should be listed. It should not simply be shown as “residential” or “multi-residential”. These clauses provide an exit strategy if due diligence uncovers significant issues, allowing you to withdraw without penalties. ​

7. Property Management Obligations

Owning a multi-unit property entails ongoing management responsibilities, including maintenance, rent collection, and addressing tenant concerns. Consider whether you’ll manage the property yourself or hire a professional property manager. Professional managers can be helpful in navigating legal requirements, handle tenant relations, and ensure compliance with applicable laws. ​

8. Tax Implications & Structuring

Be aware of the tax implications associated with owning a multi-unit property. This includes property taxes, income taxes on rental income, and potential capital gains taxes upon sale. Consult with you real estate lawyer and tax professionals to understand your obligations and explore strategies for tax efficiency. ​

Conclusion

Purchasing a multi-unit residential properties offer significant investment opportunities but come with a complex legal landscape. Thorough due diligence, understanding of applicable laws, and professional guidance are essential to navigate this process successfully. Early engagement with real estate lawyers, tax accountants, inspectors, and financial advisors can help ensure your investment is sound and compliant with all legal requirements.

The first point of contact for all Keyspire members at McKenzie Lake Lawyers LLP is Kyle Hampson. Having been with McKenzie Lake since 2022, Kyle has been advising Keyspire members for over a decade. He can be reached either by email, [email protected], or by phone, 519.826.4333, ext. 7601.

McKenzie Lake Lawyers LLP is a full service Ontario law firm, with all the requisite experience to assist Keyspire members in their journey to become real estate investors. We assist Keyspire members with legal services for real estate transactions & financings, incorporations & investment structuring, investment documentation review (ie. Greybrook, limited partnerships, REITs, etc.), estate planning and various other services. For any members who are conducting transactions outside of Ontario, McKenzie Lake has developed relationships with other law firms that we refer our Keyspire clients to, so please contact us for more information if you are located in those areas.

-Kyle Hampson, McKenzie Lake Lawyers LLP – Guelph, ON

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