I had a flashback recently of that iconic scene from Austin Powers in which Dr. Evil is threatening to hold the world hostage for - wait for this - $1 million only to be reminded that inflation and the passage of time have conspired to make everything much more expensive.
Triggering the memory was last month’s announcement by the Ontario government that it had negotiated the principal business terms of its renewal of the Teranet franchise to provide electronic land registration services in Ontario.
Under the proposed deal, Teranet’s owner, Borealis Infrastructure Management Inc., would give the province an upfront payment of $1 billion for an additional 50 years of the monopoly.
But that’s not all. In addition to the initial lump-sum amount, there will also be future annual royalty payments beginning in 2017, starting at approximately $50 million annually, and growing in future years thereafter.
Not much appears to be different in terms of the arrangement between Teranet and the Ministry of Government Services, with the province maintaining ultimate oversight of the electronic land registration system, as it currently does.
Of specific importance to Ontario’s real estate lawyers is the provincial control over any Teranet fee increases for statutory services.
The proposed agreement provides for a fee freeze at current levels for five years. In 2015, certain fees would increase to equalize charges for searches done in land registration offices and those done remotely.
Thereafter, certain fees would rise annually by not more than 50 per cent of the corresponding increase in the consumer price index over the same period.
In theory, since the annual permitted increases after the initial five-year moratorium could never exceed 50 per cent of inflation, it follows that the fees would always decline in real terms over the course of the renewal term.
Apparently, there are also provisions ensuring the province has the ability to share in potential windfall profits that might result from a sale or exceptional business performance, as well as commitments to continually upgrade the infrastructure as technologies change.
But the parties have yet to draft the final documentation on how this upside participation kicker or technology innovation covenant might work. In the meantime, the deal isn’t expected to close until the end of the year.
Teranet began in 1991 as a so-called public-private partnership between the province and the private sector to create an electronic land registration system for Ontario.
In August 2003, the government sold its 50-per-cent interest in Teranet to Teramira Holdings Inc. (the then other owner of Teranet) for $370 million. In June 2006, the initial public offering of the Teranet Income Fund netted the province additional proceeds of approximately $573 million.
Then in November 2008, Borealis Infrastructure announced its successful takeover bid for the fund, ultimately making it the sole owner of the Teranet system.
Under existing agreements with the province, Teranet’s exclusive franchise to operate Ontario’s electronic land registration system wasn’t going to expire until 2017, with the government having until 2014 to decide on renewal.
It revealed its decision to renew the franchise a bit earlier than the 2014 deadline on March 25 when, as part of one of its budgetary bills, it passed the Electronic Land Registration Services Act giving it the authority to enter into such a long-term deal.
The act received Royal assent on May 18 and came into effect shortly thereafter.
Before the announcement of the proposed renewal, some of the most senior and well-respected members of the real estate bar had criticized the fact that, by introducing the legislation through one of the government’s budgetary bills, the act passed through the legislature without any real public knowledge or input.
Ontario Bar Association real property section executive member Maurizio Romanin, in a powerful speech delivered at this year’s Six-Minute Real Estate Lawyer conference at the Law Society of Upper Canada, queried how, given that it has secured a monopoly extending out 50 more years, Teranet would ever have any incentive to innovate technologically.
While there remain, as one might expect, concerns and speculation about the future of Ontario’s electronic land registration system under an extended monopoly, that shouldn’t deflect from the sheer enormity of the task already accomplished by Teranet and the ministry in migrating a centuries-old paper-based system into one of the, if not the, most sophisticated digitized land-recording databases in the world.
In 1999, the first electronic transaction took place in Middlesex County in southwestern Ontario. Since then, volumes have exceeded two million registrations per year.
Furthermore, the long process of converting Registry Act titles into land titles conversion qualified title is now all but complete.
As a result, the province’s entire stock of Registry Act properties are now converted except for approximately 50,000 titles, all of which didn’t fit the risk-tolerance conversion protocols then in existence.
Adjusting to more current risk-tolerance conversion protocols might convert another 50 per cent of those titles, whittling down the orphaned Registry Act titles to about 25,000.
That’s a pretty impressive conversion rate given that there are more than five million discrete titles in Ontario.
It’s an accomplishment for which we should congratulate both the ministry and Teranet.
Jeffrey W. Lem is a partner in the real estate group at Davies Ward Phillips & Vineberg LLP. His e-mail address is [email protected].
