Co-ownership by shares (securitization)
Co-ownership by shares, or securitization to use its technical term, is neither divided nor undivided, but rather a different type of ownership. It is important for the broker not to confuse this type of co-ownership with divided co-ownership, in order to avoid the buyer or seller falling into pitfalls that may result from the confusion.
Definition
Co-ownership by shares is a process whereby a buyer acquires, on the one hand, a number of shares of a corporation whose principal asset is a building and, on the other hand, by virtue of a rental agreement inseparable from the share acquisition agreement, the exclusive use of a particular apartment in that building. Since the shareholder has all the rights to use this apartment, he can, in principle, occupy or rent it. In this type of transaction, the acquisition of shares is therefore inseparable from the right to occupy an apartment specifically linked to the acquired shares.
The holding of shares with the right to use an apartment may, in practice, bear some similarities to divided co-ownership of an immovable. To add to the confusion, it is common for real estate brokers representing sellers of shares to describe the property being sold as an “undivided co-ownership.” The purchase of such shares should not be confused with the purchase of a dwelling bought in co-ownership, and it is important that a buyer understand what he is acquiring. As with any other transaction, the broker must always be able to demonstrate the accuracy of the information provided to the public. For instance he should never refer to a co-ownership by shares as a divided or undivided co-ownership property.
Comparison with divided co-ownership
To explain to the parties to a transaction the impacts of co-ownership by shares, it is relevant to compare this method of ownership to divided co-ownership.
Hypothec
The apartment cannot be encumbered by an immovable hypothec. The lender will require another type of guarantee from the buyer in order to ensure the repayment of the loan. If the property is movable, the broker can verify the information regarding this guarantee in the Registre des droits personnels et réels mobiliers (RDPRM).
Common expenses
Under the terms of the property lease, the owner of the shares periodically pays an amount in addition to his rent to cover maintenance costs. However, these amounts are not “condo fees” in the strict sense of the term and are not governed by article 1072 of the Civil Code of Québec.
Property transfer tax
The property transfer tax, commonly known as “welcome tax,” is an amount that a municipality collects when an immovable located on its territory is the object of a “transfer”, in the broad sense of the term, meaning a sale, transfer, gifting or exchange. However, this is not a transfer of real property, but rather a transfer of shares.
Taxes
The building has only one lot and property and school taxes are paid by the corporation that owns the immovable. Each shareholder pays a portion based on the number of shares held in the corporation. In this respect, co-ownership by shares is closer to undivided co-ownership than to divided co-ownership.
Online Land Register
In the case of a divided co-ownership, a declaration of co-ownership is published in the Land Register; in a co-ownership by shares, the administrative documents are not published. The broker will have to obtain the shareholders’ agreement and the by-laws governing the life of the immovable from the corporation or from the seller.
Right of ownership
What is being purchased are the shares of a company that owns an immovable to which is attached a property lease allowing the exclusive use of a dwelling in that immovable. The buyer does not become the owner of the apartment that he will be authorized to occupy, but rather a lessee who holds shares.
Shareholder/lessee status
Two decisions illustrate the particularities of this method of acquisition. The first concerns an appeal of a decision in which the Régie du logement, now the Administrative Housing Tribunal, declined jurisdiction over the payment of maintenance fees. The second concerns the application of the warranty of quality.
Decision 1: Jurisdiction of the Administrative Housing Tribunal
In a 2009 decision, a shareholder/lessee requested leave to appeal a decision by the Régie du logement (today the Administrative Housing Tribunal), in which the Régie had declined jurisdiction and rejected the application. The shareholder had challenged the legality of a special assessment voted by the meeting of shareholders, which he considered to be a rent adjustment during the course of the lease, prohibited under the Civil Code of Québec.
The court held that the special assessment did not originate from the relationship between the lessee and the lessor, but rather from the respective status of shareholder and corporation. Thus, the Régie du logement could decline jurisdiction.
Decision 2: Application of the legal warranty of quality
In another 2009 decision, the buyer of the shares sought to enforce the warranty of quality for hidden defects with respect to the fireplace in the unit he occupied.
Since the shares held were intangible property, the Court concluded that the warranty of quality did not apply, thus preventing the buyer from bringing such a recourse against the seller of the shares. However, the Court specified that the buyer’s status as lessee would allow him to apply to the corporation that owned and leased the immovable, on the basis of the rights conferred to him as lessee by the Civil Code of Québec. The broker must inform the buyer of a co-ownership by shares that he will not become the owner of the apartment which he may occupy, but rather a lessee who owns shares, which will have an impact on the remedies available to him.
Securities Act
A brokerage transaction involving the purchase or sale of shares of a co-ownership by shares is likely to be covered by both the Real Estate Brokerage Act and the Securities Act.
In addition to complying with OACIQ regulations, a brokerage contract concerning a co-ownership by shares must therefore comply with all other legislative requirements. It is recommended to consult a specialized lawyer when drafting the contract. The use of OACIQ forms is not advised, as they are not designed for this type of brokerage transaction. A brokerage contract concluded for the purchase of shares for exclusive use of a dwelling is covered by liability insurance. The most important condition for the FARCIQ is that the transaction or operation primarily concern immovable property, as stated in section 1 of the Real Estate Brokerage Act.
