H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  Environmental Risk  Redemption Right  Unitholder Liability Impact of Adoption of IFRS  RELATED PARTY TRANSACTIONS  The REIT is subject to various Canadian and U.S. laws, which could cause the REIT, as an owner and operator of real property, to  become liable for the costs of removal or remediation of certain hazardous or toxic substances released on or in its properties or  disposed of at other locations. The failure to remediate any environmental issue may affect the REIT’s ability to sell or finance the  affected asset and could potentially also result in claims against the REIT.  The REIT has formal environmental policies in place to manage any exposure. The REIT’s investment guidelines mandate the  carrying out of environmental audits and inspections before a property is purchased. Also, the majority of its leases specify that  tenants will conduct their businesses in accordance with environmental regulations and be responsible for liabilities arising out of any  infractions. In support thereof, tenants’ premises are periodically inspected for environmental issues, among other things, to ensure  adherence where applicable. Finally, the REIT carries appropriate insurance coverage to cover any environmental mishaps.  Unitholders are entitled to have their Stapled Units redeemed at any time on demand. It is anticipated that this redemption right will  not be the primary mechanism for unitholders to liquidate their investments. The aggregate redemption price payable by the Trusts is  subject to limitations. In certain circumstances, the REIT’s Declaration of Trust provides for the  in specie  distributions of notes of  H&R Portfolio LP Trust in the event of redemption of REIT units that are part of Stapled Units. The notes which may be distributed  in  specie  to unitholders in connection with a redemption will not be listed on any stock exchange, no established market is expected to  develop for such notes and they may be subject to resale restrictions under applicable securities laws.  The Trusts’ Declarations of Trusts provide that unitholders will have no personal liability for actions of the Trusts and no recourse will  be available to the private property of any unitholder for satisfaction of any obligation or claims arising out of a contract or obligation  of the Trusts. The Declarations of Trusts further provide that this lack of unitholder liability, where possible, must be provided for in  certain written instruments signed by the Trusts. In addition, legislation has been enacted in the Provinces of Ontario and certain  other provinces that is intended to provide unitholders in those provinces with limited liability. However, there remains a risk, which  the Trusts consider to be remote in the circumstances, that a unitholder could be held personally liable for the Trusts’ obligations to  the extent that claims are not satisfied out of the Trusts’ assets. It is intended that the Trusts’ affairs will be conducted to seek to  minimize such risk wherever possible.  IFRS will replace current Canadian GAAP for publicly accountable enterprises beginning in 2011. For the Trusts, IFRS will be  effective for interim and annual periods commencing January 1, 2011, including the preparation and reporting of comparative figures  for 2010. The impact of IFRS on the Trusts’ consolidated financial results at the time of transition is dependent upon prevailing  business circumstances, market factors and economic conditions at that time, as well as the accounting elections made. As a result,  any transition impact disclosed by the Trusts are subject to change.  The Property Manager, a company partially owned by family members of the Chief Executive Officer, provides property management  services, pursuant to a property management agreement, for substantially all properties owned by the REIT, including leasing  services, for a fee of 2% of gross revenue. The Property Manager also provides support services in connection with the acquisition,  disposition and development activities of the REIT and is also entitled to an incentive fee. Acquisitions and development support  services are provided for a fee of 2/3 of 1% of total acquisition and development costs, as defined in the agreement. In addition, the  support services relating to dispositions of income properties provides for a fee of 10% of the gain on sale of income properties  adjusted for the add back of accumulated depreciation and amortization. The current agreement expires on January 1, 2015 and will  automatically be renewed for an additional five-year term. During the three months ended December 31, 2010, the REIT recorded fees pursuant to this agreement of $3.7 million (2009 - $3.5  million), of which $0.3 million (2009 - $nil) was capitalized to the cost of the income properties acquired, $0.4 million (2009 – $0.5  million) was capitalized to properties under development and $0.3 million (2009 - $0.8 million) was capitalized to leasing expenses. The REIT has also reimbursed the Property Manager for certain direct property operating costs and tenant construction costs. Page 43 of 45 