Covid-19 and Canadian real estate: where we are (at the moment)
The state of affairs of real estate development in Canada at the height of the pandemic
This article purports to present a snapshot of what is happening in Canadian real estate markets now, not what is going to happen after the pandemic lockdown is over. There will be plenty of time to speculate on what the post-Covid-19 landscape will look like, and there is no shortage of so-called “pundits” ready and willing to weigh-in on the subject, but for the time being, this snapshot will hopefully provide Building readers with the situation on the ground now.
Almost every province and territory in the country has invoked a “state of emergency” within the last few weeks (e.g., Québec on March 14, Ontario on March 17, and British Columbia on March 18). These “states of emergency” all vary slightly, but generally order the closure of all non-essential businesses and impose quarantine protocols mandating social isolation with fines and/or incarceration for non-compliance. The real estate purchase and sale sectors have been unaffected – realtors and land registrars have been deemed essential in every jurisdiction that has imposed a lockdown.
Financial institutions have been also been exempted from mandatory closure rules, although almost all branch networks are now operating on a restricted basis, with mortgages being funded only through large regional branches and during shortened business hours. Prior to the lockdown, most residential mortgages were funded though the physical delivery and deposit of bank drafts and certified cheques. Although there has been a pronounced shift towards wire funds transfer as a result of the lockdown, a good number of mortgage advances remain via bank drafts and certified cheques. There have been reports in Toronto of long line-ups at banks for the pick-up and depositing of mortgage funds, but there is no indication whatsoever that any financial institutions will stop lending.
Therefore, while it isn’t “business as usual,” the real estate and mortgage markets in Canada remain fully operational. In every jurisdiction that has declared a state of emergency, land registration and lawyers have been exempted from forced quarantine/closure rules. Almost all of Canada’s 10 provinces operate electronic land registration systems where deeds and mortgages are registered. In every province which runs an electronic land registration system, such systems remain operational notwithstanding declared states of emergency and in some cases, the closure of any corresponding physical land registry offices.
With almost every Canadian land registration system still up and running, it is no surprise that every jurisdiction reported strength in the closing of deals through to the end of March. Deals made in January and February of 2020 (and earlier) appear to have closed in March of 2020, with all land registration systems still operating. Indeed, several Canadian jurisdictions reported higher March closings (year-over-year), but anecdotal evidence suggests that such strength will not hold past the end of April.
American markets are probably a good proxy. It is widely believed that large American markets like New York City are about two weeks “ahead” of Canada in terms of where they are on the pandemic curve, and almost all U.S. markets showed decreased listings and cancelled listings in March, with an anticipated corresponding lack of closings in May 2020 and beyond. Likewise, almost all real estate lawyers are reporting that their purchaser clients are terminating conditional deals, ostensibly in the hope of re-purchasing the same properties at significantly reduced post-pandemic pricing. As aforesaid, this article will not speculate on the future, but it seems almost certain that real estate markets, at least as reflected in closings (completed purchase/sale/financing transactions), will come to a precipitous decline starting in May of this year.
Ontario, British Columbia, Québec, Nova Scotia and Alberta have temporarily banned residential evictions, and almost all jurisdictions have closed their courts, so residential landlords are at least temporarily bearing the brunt of the collapse of the working economy. That said, the arrears of rent still accrue, so residential landlords theoretically only have a cashflow problem. Commercial landlords are not subject to the same prohibitions against eviction (except those in New Brunswick), but share the same problems accessing courts to sue for any non-payment of rent. Several large national tenants, including iconic chains like Canadian Tire and Staples have declared an intention not to pay rent during the lockdown. The entire industry is waiting with bated breath for May 1st rent instalments.
Perhaps more importantly, no Canadian jurisdiction has yet banned mortgage enforcement or declared any sort of moratorium or relief on the payment of mortgage interest. The cascading effect is obvious. With an effectively stalled economy, tenants won’t be able to pay rent and landlords correspondingly won’t be able to pay mortgage interest. Since no government currently has the appetite to stop mortgage enforcement, many real estate lawyers are quickly brushing-up on foreclosure, power of sale, and other mortgage remedy disciplines in anticipation of widespread mortgage defaults.
Almost all lawyers are now working remotely from home, although, as aforesaid, some law firm staff continue to physically move closing funds in the form of bank drafts and certified cheques. Every Canadian jurisdiction has or is considering modifying client identification rules and remote notarization rules to allow virtual witnessing, virtual notarization, and virtual client identification protocols, all in order to permit real estate deals to continue to close without personal contact.
The Covid-19 pandemic is very real to these authors. Our son and brother is an emergency ward physician just east of Toronto. He is specifically assigned to Covid-19 assessment. The high rate of infection experienced by New York City frontline healthcare workers weighs heavily on us since there is no realistic expectation that Ontario will fare much better than New York. We are very proud of him.
Good luck everybody. See you all on the other side of this.
Jeffrey W. Lem is the Director of Titles for the Province of Ontario. Since land registration offices remain open in Ontario, Jeffrey continues to work every day from the land registration office.
Megan Lem is a corporate lawyer at Kirkland & Ellis LLP in New York. She is working from home.
The views set forth in this article are those of the authors alone.