Real Estate Terms & Words 101
10. “Easements”, “Rights of Ways” and “Encroachments”
An easement or right-of-way permits one property owner to use the property of another for a specific purpose. This may include accessing a land-locked property over neighbouring land, using a footpath to reach the waterfront, permitting utilities or drainage ditches or allowing for the repair of fences and walls of buildings built on property lines.
If someone has an easement or right-of-way over your property, they have an interest in your land, but they do not own the land. The easement or right-of-way may limit or restrict your use of the property if the intended use conflicts with the easement or right-of-way. For example, a swimming pool could not be built on a right-of-way if it would block the neighbours’ access to their property.
The true legal boundaries of a property are not always visible. Is the tool shed or deck fully within the boundaries of the property to be purchased? Does a small portion of the neighbour’s driveway run across the property? If so, then your land may be subject to an encroachment. Whether by an inch or by feet, where a structure or improvement encroaches on another property without permission, issues may arise that could be costly, time consuming or difficult to rectify. Constructing a new driveway or moving an existing building may prove a financial burden on any landowner.
Best Practice: If you want to ensure that the current or future use of a property will be permitted, you should determine if there are any easements or rights-of-ways that affect the property prior to purchasing. Inquiries should be made as to the nature and scope of the easements and rights-of-ways and whether there are issues surrounding the maintenance and use of the easements and rights-of-ways. An up-to-date survey, if available, can confirm the location of existing buildings, decks and driveways. Alternatively, title insurance may be used to protect against the costs of an encroachment.
9. “Chattels and Fixtures”
In terms of a real estate transaction, a chattel is typically a piece of personal property that is not attached to a building and can be easily removed with minimal disturbance to the building. Chattels can include washers and dryers, furniture, lawn equipment, even boats and motors. Fixtures are items that are attached to the building or the land, the removal of which cannot be done easily. Light fixtures, built-in appliances and bathroom fixtures are all typically fixtures. Normally all “fixtures” remain with the home. Whether an item is a fixture or a chattel depends upon the degree of connection to the land or building.
Best Practice: If you want to make sure the washer and dryer are included or the dining room chandelier is excluded, have them listed and properly described as chattels or fixtures in the Agreement of Purchase and Sale and state clearly if these are included with the sale or excluded from the sale.
8. “Requisition Date”
After all conditions in an Agreement of Purchase and Sale have been waived, the purchaser is committed to complete the transaction. However, the Agreement permits the purchaser’s lawyer sufficient time to complete a full search of title to the property and request that the vendor’s lawyer remove any items discovered in the search that may affect the clear and marketable title to the property. These could include mortgages, construction liens, undisclosed easements or rights-of-way, restrictive covenants or other interests registered against the property. The purchaser’s lawyer must make the requests prior to the Requisition Date, or the purchaser is deemed to have accepted the property with these interests included.
Best Practice: Neither the purchaser nor the vendor wants fixable title issues to delay a closing, or worse, cause a deal to fall apart. A Requisition Date that allows sufficient time to discover and resolve items affecting title will help both purchaser and vendor to complete the transaction on time. A good rule of thumb is to allow at the very least two to three weeks between the requisition date and the closing date.
7. “Planning Act”
Land use planning in Ontario is regulated by the Planning Act. It is this legislation that ensures the orderly creation of property including the division of a property into separate lots for sale or development. The Planning Act applies to all interests in property such as transfers, mortgages, leases, easements and severances. Failing to comply with the Planning Act can result in transactions being voided and no interest in the property being created.
Best Practice: Discovering that a Planning Act violation has voided an interest in property after a transaction is complete is a significant and potentially costly oversight. Be sure that the Planning Act is fully adhered to whenever any interest in property is being conveyed.
What you wish to do with your property may not agree with what you are allowed to do with it. Each property is subject to a number of rules on how development may proceed ranging from local municipality zoning by-laws to constraints registered directly on title in the form of restrictive covenants. These rules set out how the property may be used, either as residential or commercial property, what may be built on the property, and when the property can be used.
Best Practice: Speak with your real estate agent and your lawyer about your planned future use of the property. Confirm any zoning, regulations or restrictions affecting the property to ensure that your intended use will be permitted.
5. “Amortization Period” and “Term of the Mortgage”
Most real property purchases are financed through a mortgage. The method used to determine the amount of each payment is calculated based on the amount borrowed, the interest rate and the number of years required to repay the loan. Each payment is applied first to the interest and then to the principal, meaning that the principal reduces slowly at the beginning and then rapidly later in the term of the loan. Changes to interest rates over the term of the loan could increase or decrease the amount of each payment.
At the start of each mortgage the amount of the payment is based upon:
a) The amount borrowed.
b) The interest rate charged.
c) The amount of time it will take to repay the loan in full assuming the interest rate does not change. This period of time is called Amortization Period.
For example, if the mortgage amount borrowed is $300,000.00 and the interest rate is 5%, then the monthly payment will be $1,744.81 if the Amortization Period is 25 years. If the Amortization Period is 15 years, then the monthly payment would be $2,364.67. Although the monthly payment is higher, the loan could be paid off 10 years sooner saving you a great deal of interest.
While it may take 15 or 25 years to pay of your mortgage, you will not actually have just one mortgage over that time period. A mortgage with your bank is a contract where each party makes legal promises to the other. You promise to pay the mortgage and the bank promises to lend you the money for a certain period of time and to charge you a pre-determined interest rate. This contract will only run for a specific period of time. This period of time is called the “Term of the Mortgage.” The usual term for a mortgage can be anywhere from 6 months to 5 years. At the end of the term you will either have to pay the mortgage balance in full, or sign a new mortgage contract for a new period of time. When you sign a new mortgage contract, often called a mortgage renewal, you will be able to select the new term and will be able to negotiate a new interest rate, amortization period and monthly payment.
Best Practice: Consult with your mortgage advisor, financial planner and your lawyer and seek their advice as to what the best option is when securing a mortgage.
4. “Crown Lands”
Approximately 11% of all lands in Canada are privately owned. The remaining lands are controlled and owned by the federal and provincial governments as Crown Lands. Provincial Parks, Conservation Areas, lake beds, navigable waterways and wilderness lands account for the majority of the Province of Ontario’s Crown Lands. Any number of rules and regulations administered by the provincial agencies govern these Crown lands, and by extension may affect your abutting or adjoining lands.
Best Practice: Understanding how these regulations may affect your property, your access or your use of waterways is important when determining your current or future use and enjoyment of your property.
3. “Original Shore Road Allowance”
Owning a cottage may not be as relaxing if you later discover you do not own the waterfront. When lake and riverfront properties were originally surveyed, it was typical that a 66 foot allowance was reserved from the high water mark for a road. Although a road system may have developed far from the waterfront, ownership of the reserved lands remained with the government and is now mostly administered by the local municipality. Each municipality has different rules and regulations concerning the original shore road allowance and what the consequences may be if your cottage, dock or boathouse is located on it.
Best Practice: Confirm with your real estate agent or lawyer if your property includes the original shore road allowance. Your local municipality can advise as to whether the original shore road allowance may be purchased and added to your adjoining property.
2. “Capital Gains Tax”
One cost item that often is overlooked by a seller is the income tax they may have to pay when they sell a property. This tax is called the “Capital Gains Tax”. A capital gain is the “profit” a person makes when they sell a real property. The profit is determined by subtracting the cost base from the selling price. The selling price is the price the seller has agreed to accept for the transfer of the property. The cost base is made up of many different items which include what the seller paid for the property plus the costs incurred to make major improvements to the property, etc.
There are some properties that are not subject to capital gains tax when they are sold. These include a principal residence and, in some cases, properties used in farming activities. Second homes, commercial properties and vacant land are just some types of properties that when sold could create a tax bill in the form of a capital gain.
Best Practice: Keep good records of not only what you paid for your property, but also copies of the bills and receipts for the costs you have incurred to make major improvements to your property. Before selling, and most definitely before you spend the proceeds, make sure you understand if the sale will attract capital gains and, if so, how much capital gains tax you will need to pay.
1. “Joint Tenants” and “Tenants in Common”
Where two or more parties own property together, the manner in which their ownership is registered on title can have considerable consequences. Properties held “as joint tenants” means, in most cases, that on the death of one owner the other owner(s) automatically receive the interest of the deceased party. Each joint tenant has an identical share or interest in the property.
Ownership “as tenants in common” means on the death of one owner, the share of the property forms part of the deceased’s estate and shall be dealt with in accordance to the deceased person’s last will and testament. Knowing when to hold property as joint tenants and as tenants in commons can realize significant deferral of or savings in capital gains taxes, estate administration taxes and legal fees.
Best Practice: When purchasing property, review how ownership would be affected on the death of one or more owners and what steps may be taken to minimize expenses, taxes and costs in the future.
The foregoing is meant to provide information only and does not constitute legal advice. You should always consult with a lawyer prior to signing any contract.