Buying a Commercial Building in Quebec: The Due Diligence

A retail space on the ground floor, two dwellings above, a posted income that seems to hold up. Here the real risk is neither the roof nor the price: it sits on paper, in leases, a soil history and an assessment roll that do not follow residential rules. Here is the order of the checks, and where a specialist has to take over.

General information, not legal, tax or environmental advice.

Buying a commercial building: the broker’s licence gets checked first

A real estate broker licence does not authorize everything. The OACIQ (Quebec’s real estate regulator) grants separate rights to practise. The residential right, defined at article 3 of the Règlement sur les permis de courtier et d’agence (the brokerage and agency licence regulation), covers a mainly residential building of fewer than 5 dwellings, vacant land intended for residential use, and a fraction of a residential building. The commercial right, at article 4, covers the commercial building, vacant land intended for commercial use, the enterprise whose assets are mainly immovables, and commercial leasing. Fewer than 5 dwellings, residential; 5 and more, commercial. For a mixed building, the main use decides.

A broker restricted to residential cannot handle a commercial transaction, and the OACIQ specifies that this holds true even in a co-listing. Article 73 of the Règlement sur les conditions d’exercice d’une opération de courtage (the regulation on the conditions for carrying out a brokerage transaction) adds that no broker may accept a transaction outside their field of competence without the necessary assistance.

Another surprise: the OACIQ’s mandatory forms are not required in commercial matters, and neither is the Déclarations du vendeur sur l’immeuble form (the seller’s declarations on the immovable), even though the OACIQ strongly recommends it. See also realtor, broker, agent.

The leases: they are what you are buying

The sale does not put an end to the leases. Article 1886 of the Code civil is blunt: alienation of the leased property does not by itself terminate the lease. You inherit the tenants, the rents and the lessor’s obligations.

Article 1887 frames the only way out. If a fixed-term immovable lease has more than 12 months left to run, the acquirer may terminate it at the end of those 12 months, with six months’ written notice. But not if the lease was registered in the registry office before the deed of sale: publication in the Registre foncier (Quebec’s land register) decides whether a tenant is there for the duration. Article 1879 adds tacit renewal, meaning ten days of occupancy past the expiry date without opposition from the lessor, which renews the lease for one year.

The dwelling above the store is not always a dwelling. Article 1892 sets aside the rules on the lease of a dwelling, and therefore the oversight of the Tribunal administratif du logement (Quebec’s rental board), when more than one third of the total area of the dwelling serves a purpose other than habitation. To be settled with a lawyer or a notary.

Audit the rent roll instead of believing it

The seller’s rent roll is a sales document, not proof. Require, as a condition of your promise to purchase:

• Every signed lease, its schedules and its amendments, not a summary.
• The remaining term, the renewal options and the indexation.
• The additional rent: taxes, insurance, maintenance of the common areas.
• Twelve months of bank statements, to compare what was collected with what was declared.
• The suretyships, the arrears, and written confirmation from each tenant.

The soil: phase I, phase II and phase III characterization study

This is the check that costs the most when you skip it. The Guide de caractérisation des terrains (the land characterization guide) published by the ministère de l’Environnement describes three phases. Phase I is the review of existing information and the history of the activities carried on the land; the Guide notes that it may be required by a financial institution or by a new owner. Phase II follows when phase I has flagged at least one area of risk: sampling and laboratory analysis to confirm the presence or absence of contamination. Phase III comes if phase II found some, to establish its nature, its extent and the volumes to be managed.

The Loi sur la qualité de l’environnement (LQE, Quebec’s environment quality act) also imposes two obligations:

• Cessation of activity, article 31.51. Whoever permanently ceases an industrial or commercial activity of a category designated by regulation must send the minister and the owner a characterization study within 12 months. Where the regulatory limit values are exceeded, a rehabilitation plan follows within three months.
• Change of use, article 31.53. Whoever plans to change the use of such land must send a characterization study beforehand. Article 31.54 makes that change conditional on the minister approving a rehabilitation plan where the limits are exceeded.

A change of use includes any activity different from the previous one, residential included: converting a garage into dwellings is not only an architect’s project.

The study has to be signed by a professional within the meaning of article 31.42, meaning either a professional under the Code des professions (Quebec’s professional code) or a person accredited under standard ISO 17024. Also check the contamination notice of article 31.58, in the Registre foncier, and the public list of contaminated land that every municipality keeps under article 31.68.

Zoning, permitted use and municipal taxation

The use has to be authorized, and attested

A building occupied by a business for 20 years does not prove the use is compliant. In Laval, a certificat d’occupation (occupancy certificate) is mandatory to validate that the use of a space complies, and a separate certificate is required for each use when the building holds several spaces. It stays valid as long as the use is not changed or interrupted for more than six months, which matters when you are buying a space that has sat vacant for a year. Budget $279 for the first 250 m2 of floor area of a new use, plus $196 per additional block.

Ask for written confirmation of the authorized use and of any acquired rights being invoked: a verbal answer at the counter cannot be pleaded. Detailed method in investing in Laval.

The non-residential rate changes the bill

Articles 244.29 and 244.30 of the Loi sur la fiscalité municipale (Quebec’s act respecting municipal taxation) allow several general property tax rates by category of assessment unit, and one unit can belong to several categories: a mixed building can carry two rates on the same account.

These rates apply per $100 of assessment: non-residential runs more than four times the base rate. Add the droits de mutation (transfer duties), which you can estimate with the welcome tax calculator, and review how the roll works in property taxes in Montreal and Laval.

Financing a commercial building: the lender looks at the building

Here it is no longer your salary that decides. CMHC’s standard rental housing product covers multi-unit buildings of at least five dwellings. Non-residential space must not exceed 30% of the gross floor area or 30% of the total lending value, and the loan attached to it is capped at 75% of its lending value. Beyond that, you step outside the insured framework and negotiate conventional commercial financing.

The maximum loan-to-value reaches 85% of lending value. The central criterion is the debt coverage ratio, meaning the ability of the building’s net income to pay the debt service: at least 1.10 on purchase and 1.20 on refinancing for the residential space of a 5 or 6 unit building, and 1.40 to 1.50 for non-residential space depending on the length of the term. Amortization can reach 40 years on an existing building, with a premium surcharge beyond 25 years.

For the contrast with a plex, see the first income property and the second building.

GST and QST: the rule flips compared with residential

The seller is not always the one who collects. Article 423 of the Loi sur la taxe de vente du Québec (LTVQ, Quebec’s sales tax act) provides that a supplier making a taxable supply of an immovable by way of sale is not required to collect the tax where the recipient is registered, except, for an individual, where it is a residential complex or a cemetery plot. The federal side follows the same logic: according to memorandum 19.1 of the Canada Revenue Agency, the registered purchaser accounts for the tax in their own return, and others use form GST60, no later than the last day of the month following the month in which the tax becomes payable.

In practice, a registered buyer does not advance the taxes to the seller at the notary: they self-assess, then claim their input tax credit. A buyer who is not registered pays them for good. The OACIQ points out that determining the taxable proportion is up to the seller, not the broker, with their accountant, a tax specialist or Revenu Québec.

The professionals to assemble before making an offer

• A broker holding the commercial right to practise, for the comparables and the promise to purchase.
• A notary or a commercial law lawyer, for the leases, the servitudes, the acquired rights and the titles.
• An accountant or a tax specialist, for the GST, the QST and the ownership structure.
• A professional within the meaning of article 31.42 of the LQE, for phase I and, if needed, phase II.
• A chartered appraiser, because value here is calculated on net income.
• An engineer or an inspector used to commercial work, for the structure, the systems and fire compliance.
• A commercial mortgage broker, to test the debt coverage ratio before setting a price.

My licence is residential: on a commercial building, my role stops where the role of a colleague holding the commercial right to practise begins.

Frequently asked questions

Can my residential broker represent me on a four-unit building with a convenience store on the ground floor? It depends on the main use. The OACIQ confirms that a residential broker may act in a building of fewer than 5 dwellings even if the area is split equally with the business, but article 73 obliges them to obtain the assistance required.

The seller says the land was never contaminated. Is that enough? No. The contamination notice of article 31.58 is registered in the Registre foncier, and the municipality keeps a public list of contaminated land under article 31.68.

Can I end a commercial tenant’s lease in order to occupy the space myself? Not freely. Article 1887 allows termination only if the fixed-term lease has more than 12 months left to run, with six months’ notice, and never if the lease was registered in the registry office before the deed of sale.

To go further, read the guide to a first income property and investing in Laval.

Looking at a commercial or mixed-use building? Write to me: I do the checks that fall within my licence and I connect you with a commercial broker for the rest.

Georges Matar

Residential Real Estate Broker · RE/MAX DU CARTIER INC.

Contact Georges