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Law Times • November 12, 2018 Page 7 www.lawtimesnews.com Canadians a threat to U.S. real estate? BY JEFFREY LEM A s the Dec. 1 deadline for the signing of the U.S.-Mexico- Canada Trade Agreement looms, the discussion among Canadian political pundits revolves around the tariffs imposed by the Unit- ed States on, inter alia, Canadian steel and aluminum imports. These tariffs were imposed citing "national secu- rity" grounds even though Canada has been one of the United States' oldest and staunchest allies. Although the tariffs were blatant and seemingly effective ne- gotiating leverage tools in the talks to up- date NAFTA, they are also symptomatic of growing U.S. concerns over national security, which concerns have now mani- fested themselves in the real estate invest- ment space as well. The Committee on Foreign Invest- ment in the United States is an inter- agency, cabinet-level committee within the U.S. government chaired by the De- partment of the Treasury and tasked with examining the national security implica- tions of foreign direct investments in the United States. If CFIUS determines that a transaction may have negative nation- al security implications for the United States, CFIUS will refer such transaction to the president with a recommendation that the transaction be blocked (if the deal has not yet closed) or reversed through divestment after the fact (if the deal has already closed). U.S. President Donald Trump (almost surreptitiously in contrast to the high- profile steel and aluminum tariffs) recently passed the Foreign Investment Risk Re- view Modernization Act of 2018, materially expanding CFIUS' scope of authority and implementing administrative changes that give greater pow- ers to CFIUS in exercising such new-found authority. FIRRMA's most substan- tial reform is the extension and codification of CFIUS' jurisdiction to investments in real estate "near" U.S. gov- ernment "strategic locations." Prior to the enactment of FIRRMA, foreign investments in real estate near U.S. government strategic locations were within CFIUS' jurisdiction only if such investments coincidentally arose in the context of a corporate stock transaction resulting in a foreigner's control over a U.S. business. FIRRMA codifies CFIUS' jurisdiction to review a pure asset deal — any direct purchase, lease or concession by or to a foreigner of any real estate asset near a U.S. government strategic location. The definition for requisite proxim- ity is somewhat circular — a piece of real estate is "near" a strategic location if it is within whatever radius could pose a na- tional security risk! Furthermore, what constitutes a strategic location is equally vague — while airports, military bases and similar government installations are reasonably self-evident, the list of poten- tial strategic locations is neither finite nor terribly precise. FIRRMA also gives CFIUS authority over any invest- ments (that need not be con- trol blocks) in U.S. companies that deal in "critical infra- structure," "critical technol- ogy" and "sensitive personal data" — again, none of which is either finite or precise. As if that were not vague enough, FIRMMA gave CFIUS a new "general anti- avoidance" power to make any trans- action a "covered transaction" if such transaction was somehow intended to or has the effect of circumventing or evad- ing review by CFIUS. While the details of this general anti-avoidance power are expected to be set forth in enabling regulations due out soon, as FIRMMA is currently drafted, no transaction — no matter how seemingly removed it is from a bona fide national security con- cern — can safely be presumed to be ex- empt from CFIUS oversight. Administratively, FIRRMA also in- troduces aggressive new filing fees for the privilege of such CFIUS oversight and significantly extended timelines (up to almost four months) in which CFIUS can do its formal review. There is a bit of a silver lining to FIRRMA, however. As part of the re- forms, parties engaging in a transaction that they believe to be "less concerning" to CFIUS have the option to submit a "short-form declaration" outlining basic information regarding the transaction (essentially, a "light-filing" or "summary judgment" type of application not ex- ceeding five pages in length). The short- form declaration would not require pay- ment of any filing fees. CFIUS will have 30 days from the date the short-form dec- laration is filed to respond by clearing the transaction altogether or initiating a full CFIUS investigation in lieu of clearance. Canadians have always been big inves- tors in U.S. real estate. It is widely specu- lated that FIRRMA was passed to target high-risk investments by Chinese and Russian business interests (and not Cana- dian investors), so it is expected that most Canadian acquisitions are likely to pass harmlessly through the CFIUS system using the new short-form declarations. However, it is too early to tell what effect this new review process will present to Canadian acquisitions of typical U.S. real property assets. Much of the details will be set out in regulations yet to be promul- gated. At best, FIRRMA will prove to be a due diligence "red tape" irritant. At worst, if CFIUS becomes aggressive about what constitutes a national security risk, what distance makes something dangerously close to a strategic location and/or what is in fact a strategic location, then FIRRMA could be a fatal stranglehold on Canadian investment in U.S. real estate. LT uJeffrey Lem is the director of titles for the province of Ontario and an elected bencher for the Law Society of Ontario. This article ref lects the personal views of the author alone. Reform the Employment Standards Act BY ANDREW WINTON For Law Times A recent case illustrates to Ontario lawyers the need to overhaul the Employment Standards Act to improve access to justice. Why? Because the current legal landscape creates economic incentives to pursue costly litigation. Take a recent case, Burton v. Aronovitch McCau- ley Rollo LLP, before the Ontario Superior Court of Justice. The ruling details how a 37-year-old woman, known as A.B., was dismissed from her job without cause. She was a front-line worker with almost 13 years' tenure at her place of employment, with extensive re-employment opportunities for her position. At common law, apply- ing the Bardal factors, A.B. would have been entitled to nine months' notice or pay in lieu thereof. However, A.B.'s employment contract provided that notice for a without-cause termination was limited to her entitlements under the Employment Standards Act, 2001. Upon termination, her combined notice and severance pay totalled approximately four months' no- tice. In other words, she received about half of what she would have recovered at common law. A.B. did what most employees do in the circum- stances — she sued, claiming that the clause in her em- ployment agreement that limited her to her ESA mini- mums was null and void because the wording did not strictly comply with the requirements of the act. This is, sadly, the economically rational thing to do, because, for many people, the difference between common law notice and statutory notice is vast, and recent cases in- terpreting notice period clauses are, with respect, all over the map. Realistically, there is little we can do about the case law. The interpretation of contracts is a case-specific exercise depending on the wording in a specific agree- ment. There is no standard clause that, by statute, ap- plies to every employee — but there should be. The unusual thing about the ESA is that the statute imposes minimum standards that are, without a doubt, quite minimal. A hypothetical long-tenured employee at a business with a total payroll of less than $2.5 mil- lion is entitled to a maximum notice of eight weeks. It doesn't matter whether they worked at the same place of business for 10, 15 or 25 years. Eight weeks. That is, in my view, draconian. It also leads to unnecessary lawsuits. At common law, the same employee would undoubtedly be entitled to much more. But the only way to claim for common law notice in our hypothetical situation is if the clause in the employee's contract limiting them to their ESA minimums is void. So, there is an economic incentive for an employee in this situation to start an action for wrongful dismissal in which they seek, among other things, to invalidate the termination clause in their agreement. Of course, most people can't afford to retain counsel on an hourly basis for such claims. Instead, they retain a lawyer on contingency, often at a rate of 20 to 30 per cent of any recovery. That means that even if our hypothetical employee is successful, they won't recover the full amount owed to them. It is virtually impossible to fix this situation if we continue to let the common law be the default rule in Ontario employment law. The economic incentives en- courage lawsuits, brought on contingency, to try to void any contractual provision limiting an employee to their ESA minimums. But what if we f lipped the script? What if, instead of making the common law the default and the ESA an opt-in regime, the ESA became the default and parties had to opt in to the common law? Under the current ESA regime, employees would lose out, because the standards are so low. But if the standards were doubled, then the gap between the ESA and the common law closes. And after accounting for the fact that common law notice is often only re- solved with the assistance of lawyers, both sides benefit via lower transactional costs if there is a fair, fixed standard for compensating employees termi- nated without notice. There is a lot of talk in our profession about access to justice. The discussion often centres around hourly rates or alternative billing practices or pro bono ser- vices. But the best form of access to justice is a legal sys- tem where lawyers do not have to become involved in common, ordinary occurrences in commercial life, such as the termination of an employee without cause. If the employer and the employee know for certain how much notice or pay in lieu thereof is owed and there is no incentive on either side to fight for more, then nei- ther side has to involve a lawyer. Assuming the ESA minimums are "just," that is the best access to justice I can think of, not to mention the effect fair standardiza- tion would have on the courts. Imagine if we could wipe out hundreds or maybe thousands of cases every year by making lawsuits for without notice dismissals a rarity. Some of our col- leagues at the bar would have to find a new business model, but, overall, we'd all be better off. Back to the woman involved in the case. Her em- ployment agreement was not void. After a two-day tri- al, she lost her case and was responsible for paying her former employer approximately $54,000 in costs on a partial indemnity basis (see 2018 ONSC 5030). If A.B.'s ESA minimums were more generous, she would have no reason to take a chance via a lawsuit seeking com- mon law notice. And her employer, who likely paid tens of thousands more in actual costs than it recovered, would also be better off. It's time to improve the ESA and make it the default. That will lead to true access to justice for thousands of employees and employers in Ontario every year. LT uAndrew Winton is a partner at Lax O'Sullivan Lisus Gottlieb LLP. The views expressed in this column are his own and not the views of the firm. u SPEAKER'S CORNER COMMENT The Dirt Je rey W. Lem Je rey W. Lem