Integrity in Real Estate

In response to various scandals and as part of a continued global anti-corruption effort, the Canadian federal government responded with a new set of rules around integrity in procurement practices as well as sanctions for breach including termination of supply agreements and banishment. 

shutterstock_231017992While no one can argue against virtue in governmental procurement practices, the application of these provisions in real estate particularly leases has not been without its unintended consequences and disruption.

While various industry groups have made and will continue to make representations for improvements, the introduction of the possibility of termination of a federal crown lease for breach of these provisions has imposed an important encumbrance on an otherwise highly desirable government covenant.

While these provisions are now the price of the government covenant and landlords should be held to the highest of standards in dealing with the crown, there can be an impact on financing of these properties and to a much lesser degree on their liquidity.

Lenders on these properties will be careful to assess the quality of the covenant and sponsor in responding to financing requests as well as the loan to value. Some may even require a springing non-recourse carve out guarantee in non-recourse loans. While quality institutional investors should remain unconcerned, other investors will need to consider the impact of these provisions in their transactions while the various interlocutor continue to seek a proper balance and application of these rules in commercial real estate transactions.

breach commercial encumbrances government covenant governmental procurement Landlord leases lender

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