Acting for Private Lenders: Considerations for Conveyancers Preparing Their Mortgages and Representing Their Interests

Transcription

1 CONVEYANCING FOR LEGAL SUPPORT STAFF: ADVANCED ISSUES 2011 UPDATE PAPER 5.1 Acting for Private Lenders: Considerations for Conveyancers Preparing Their Mortgages and Representing Their Interests These materials were prepared by Kim A. Karras of Brawn Karras & Sanderson, White Rock, BC, for the Continuing Legal Education Society of British Columbia, October Updated by Mary-Jane Wilson of Greig Wilson & Rasmussen LLP, Surrey, BC, June Reviewed and updated May 2011 by Kim A. Karras, with the assistance of Kirsten Wharton, both of Brawn Karras & Sanderson, Surrey, BC. Kim A. Karras and Mary-Jane Wilson

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3 5.1.1 ACTING FOR PRIVATE LENDERS: CONSIDERATIONS FOR CONVEYANCERS PREPARING THEIR MORTGAGES AND REPRESENTING THEIR INTERESTS I. Introduction...2 II. III. IV. Starting Out...3 A. Conflicts...3 B. The Instructions...3 C. Searches and Investigations Gathering Information The Borrower/Mortgagor The Covenantor/Guarantor The Lender The Property The Terms of the Loan Additional Security Priority of the Mortgage The Second Mortgage Insurance...7 Security Requirements Preparing the Documentation...8 A. The Form B Mortgage...8 B. The Prescribed Mortgage Terms Prepayment Rights Post-Dated Cheques and NSF Provisions Priority Clauses Due on Sale, Transfer or Mortgage Discharge of Mortgage Foreclosure Venue Post Judgment Provision Payment of Costs Renewal Inspections A Provision Waiving Section 31 Property Law Act A Provision Providing for Further Events of Default Environmental Clauses C. Interest Rates Canada Interest Act Considerations Criminal Code Considerations D. Other Documents Acknowledgement of Receipt of Mortgage Terms Direction to Pay Corporate Resolutions and Solicitor s Opinion Client Identification and Verification Rules Opinion or Report to Private Lender Discharging Private Lender Mortgages...16

4 5.1.2 V. Conclusion...16 VI. Appendix A Preliminary Report to Private Lender [FP 48]...17 VII. Appendix B Final Report to Private Lender [FP 49]...20 VIII. Appendix C Interest Act, R.S.C., 1985, c. I IX. Appendix D Client Identification and Verification Rules...24 X. Appendix E Client Identification and Verification Checklist...36 I. Introduction A successful real estate practice depends upon the strengths and skills of senior conveyancers. As the firm s clients, a set of private lenders, or mortgage brokers acting for private lenders, will come to rely upon these conveyancers to quickly and efficiently prepare and process the mortgages they finance from time to time. It is not unusual for these clients to go directly to the conveyancers. Over time, relationships are built between the client and the conveyancer whom they rely upon to do their work. Due to the nature of the business, instructions are usually provided with little time before funding is required. In order to properly represent the client, and in order to ensure that both the client s interests and the interests of the law firm are protected, it is necessary for the busy conveyancer to be organized and to be able to recognize the issues. In 2006, it was written in a Law Society newsletter, Insurance Issues Risk Management, that residential deals now move at a furious pace and BC real estate lawyers work ever harder to complete transactions properly and on time. It is in this heated environment as lenders make new demands and parties are less tolerant of accommodations that lawyers are exposed to greater risk of claims. 1 This statement is equally true in 2011; conveyancers must be equipped to assist in not just minimizing, but eliminating this risk. The purpose of this paper is to provide an overview of the steps which should be undertaken when representing private lenders and preparing their mortgages, and to review some of the issues that the conveyancer faces from time to time. 1 Law Society of British Columbia, Insurance Issues Risk Management No. 2 (March April 2006).

5 5.1.3 II. Starting Out A. Conflicts Who are you representing? Being on the front line, it is critical that the conveyancer clearly understands the conflict rules which govern the practice of law. The rules of the BC Law Society provide that a lawyer is prohibited from acting for two parties in a transaction unless that lawyer takes certain steps and the transaction meets certain requirements as set out in the Professional Conduct Handbook, Chapter 6, Rule 10. These rules provide that a lawyer is prohibited from acting for both the lender and the borrower in a conveyancing transaction unless the lawyer recommends in writing that each party obtain independent legal representation and the transaction is a simple conveyance. Paragraph 4 of Appendix 3 of Chapter 6, Rule 10, lists examples of what may be considered a simple conveyance. A simple conveyance includes a mortgage that does not contain any commercial element, given by a mortgagor to an institutional lender to be registered against the mortgagor s residence. 2 Although institutional lender is not defined, it is generally understood to mean banks, trust companies, and credit unions, but not other types of corporate lenders and certainly not individual lenders. 3 The writers are of the opinion that institutional lender does not include individual or private lenders. Following your receipt of instructions from a private lender, one of the first steps is to ascertain who is representing the borrower. B. The Instructions When dealing with institutional lenders, these lenders will usually provide a standard form set of instructions, together with various enclosures, including a copy of the loan application or the mortgage commitment issued by the lender, a copy of the mortgage forms and other lenders forms to be used, and the form of report or opinion that the lender expects to receive from its solicitor. 4 The instructions will usually state the institutional lender s requirements with respect to a survey certificate, title insurance and insurance, and will often set out in detail the searches and investigations that are the responsibility of the lawyer. Instructions from private lenders are rarely as comprehensive. More often, the private lender relies on its solicitor to provide the appropriate documentation and the appropriate investigations. It is important to recognize that the same issues arise for the private lender as for the institutional lender; however, unlike the institutional lender, the law firm may be called upon to guide the private lender and to review and consider the lender s requirements. It is important that even the experienced conveyancer must recognize that the lawyer for whom the conveyancer works, is ultimately responsible for ensuring the file is properly managed. Even highly experienced staff cannot be relied on or expected to bring a lawyer s expertise to every issue Staff should also be trained to red flag issues for the lawyer, rather than simply dealing with the issues themselves. 5 2 Professional Conduct Handbook Chapter 6, Rule 10, Appendix 3, para. 4(d). 3 BC Mortgages Practice Manual (CLE of BC) (hereinafter Mortgages Practice Manual ), at para Mortgages Practice Manual, at para Law Society of BC Alert No. 1 March, Risk Management in Real Estate Conveyancing Practice.

6 5.1.4 Upon receipt of instructions, it is critical that the conveyancer examine the instructions carefully and bring to the attention of the responsible lawyer anything unusual or missing. Is there anything that needs clarification? Is there anything out of the ordinary? What does the client want? You want to ensure that you have all the necessary information before proceeding. 6 Confirm all conditions precedent have been satisfied prior to the advancement of funds. Unless you receive detailed instructions from the private lender, your instructions should be confirmed by the lawyer in a letter to the client. An example of such a letter is provided in CLE s BC Mortgages Practice Manual. A copy of this letter is included in Appendix A to this paper. 7 C. Searches and Investigations Gathering Information Before preparing the documentation, you will need to obtain and review all requisite searches: Land Title Office property search; obtain and review charges and encumbrances on title where necessary; property tax searches; corporate registry searches; check zoning and bylaw compliance, if required; obtain and review Form B information certificate from strata corporation if applicable; builders lien issues. You will need to ensure that you have all the requisite information and details regarding the loan: 1. The Borrower/Mortgagor Clearly identify who the borrowers are. Verify that every person who is, or will be, a registered owner of the property at the time of registration of the mortgage is included in the mortgage as a borrower. Ensure that the names of the borrowers conform exactly with that on the title to the property. If the mortgage is to be registered concurrently with the transfer of the property to the mortgagors, request a copy of the Form A Freehold Transfer from the conveyancing law firm to confirm names and addresses of the transferees to be shown on the mortgage. If the borrower is a company, obtain a company search from the corporate registry to confirm the company exists and is in good standing- confirm names of directors for preparation of Director s Resolutions. Where information is provided that a mortgagor will not be benefiting from the loan, address the issue as to whether independent legal advice for that mortgagor is required separate and apart from the other mortgagors. 6 A good reference is The Law Society of BC, Practice Checklist Manual, Mortgage Procedure and Mortgage Drafting. 7 Mortgages Practice Manual, FP48.

7 5.1.5 If title is in the name of a nominee bare trustee, the true beneficial owner should charge the beneficial interest preparation of additional documentation (i.e., a Beneficiary Authorization and Charge Agreement). Is there any possibility of an unregistered interest pursuant to s. 56 Family Relations Act, R.S.B.C. 1996, c. 128 if so, consider getting a waiver from non-owning spouse or a statutory declaration from mortgagor. 2. The Covenantor/Guarantor 3. The Lender 4. The Property Confirm with your lender as to whether any person other than the registered owner of the property is to be liable for the repayment of the mortgage loan as covenantor. Note covenantor provisions are included in s.15 of the prescribed standard mortgage terms. Land Title Transfer Form Guidebook states that a covenantor may sign the Form B Mortgage in Item 12. Covenantor s name is to be typed or printed below the signature. Indicate in Item 12 that the person is signing as covenantor. Confirm with client the exact name and address of the lender. If lender is a company, obtain a company search obtain and verify incorporation number. Note, it is no longer necessary for a lender incorporated outside BC to be registered in BC in order for it to hold an interest in land in this province. It is important to consider whether the lender is require by the BC Mortgage Brokers Act to be registered. A company that carries on business in BC must be extra-provincially registered (Business Corporation Act s. 375). A federal corporation not registered extra provincially under the Business Corporations Act must provide the registrar with proof of incorporation and proof of current existence. The registrar requires a certificate of status of proof of the existence of the federal or foreign corporation. 8 Mortgage instructions will often provide an incomplete legal description of the property to be mortgaged or misstate the legal description. It is critical to ensure that the legal description is correct. It is prudent to forward the subdivision or strata plan to the lender so that lender may verify that the appropriate property is being mortgaged. 5. The Terms of the Loan It is not unusual for instructions to be provided that are incomplete. You will need to confirm with the lender all the terms of the loan, including: 8 Mortgages Practice Manual, at 5-7.

8 5.1.6 the principal amount; the interest rate and the interest calculation period (i.e., monthly, annually); the terms of repayment; interest adjustment date; the amount and frequency of payments; the maturity date; prepayment rights; the deductions, if any, that are to be made from the loan proceeds advanced to be set out in the Direction to Pay. 6. Additional Security If additional security is required, it should be specified in the lender s instructions. If it is not clearly specified, you should confirm this with the lender. Additional security may include an assignment of rents in respect of the mortgaged property or a security interest in personal property under the Personal Property Security Act. It is important to note that the prescribed mortgage terms do not include an assignment of rents. Either a separate document with a Form C or additional clauses to item 10 of the Form B Mortgage should be utilized. 7. Priority of the Mortgage The lender s instructions should clearly state what priority the mortgage is to have (i.e., first, second). As to the mortgage document itself, there is little difference between a first mortgage, a second mortgage and so on. If the instructions provide for a mortgage that is in a second or lower ranking position, the instructions should state what the principal amount of each permitted prior mortgage can be. If this is not included in the instructions, you should confirm these details with your client. In some circumstances, the lender will require the consent of the first mortgagee. A general mortgage term provides that it is a default under the mortgage if the borrower grants another mortgage of the property to someone without the prior written consent of the mortgagor. Is this a concern for your client? Certain existing non-financial encumbrances may rank in priority ahead of the mortgage. Unless the instructions indicate that certain kinds of encumbrances are acceptable to the lender, the previous encumbrances must be brought to the attention of the lender for approval The Second Mortgage There are certain risks to a lender under a second or subsequent mortgage. When the prior registered mortgage secures a running account there are additional problems. 10 Under certain circumstances, a prior lender may make further advances of money after registration of a second mortgage and still have priority for repayment of that money. One should obtain and review the prior registered mortgage. 9 Mortgages Practice Manual, para Mortgage Practice Manual, para. 7.3; see also Law Reform Commission of BC s Report on Mortgages of Land: The Priority of Further Advances.

9 5.1.7 Section 28(2) of the Property Law Act sets out certain rules in respect to these matters and provides as follows: 28(1) In this section, further advance includes a first advance. (2) Despite the Land Title Act, after October 30, 1979, further advances made by a registered owner of a mortgage contemplated by and in accordance with the mortgage rank in priority to mortgages and judgments registered after his or her mortgage was registered if (a) the subsequent registered mortgagees or judgment holders agree in writing to the priority of the further advances, (b) at the time the further advances are made, he or she has not received notice in writing of the registration of the subsequent mortgage or judgment, from its owner or holder, (c) at the time the further advances are made, the subsequent mortgage or judgment has not been registered, or (d) the mortgage requires him or her to make the further advances. Accordingly, if the prior registered mortgage is re-advanceable, notice in writing should be given to the prior mortgagee of the registration of the subsequent mortgage. In addition, you will want to obtain written confirmation as to the balance owing under and the status of the mortgage and whether or not the prior mortgage has been fully advanced. Certain provisions should be included in any second mortgage to ensure the position of the second mortgagee is recognized and protected. The basic issue with any mortgage registered subsequent to a prior mortgage is that the interest created by the mortgage may terminate or be lost if the prior mortgagee terminates the interest of the mortgagor. In representing your client as a second mortgagee certain procedures should be adopted: obtain and review the prior charges; obtain written confirmation of the status of the prior charge from the prior mortgagee confirm balance owing and in good standing; inform client fully as to when prior charge is due and discuss all essential and unusual terms of the prior mortgage and the ramifications; add certain clauses to the mortgage document to identify it as a second mortgage and provide protective measures for client: provision for second mortgagee to cure defaults under the prior mortgage if mortgagor is in default, provision that default under the first mortgage is a default under the second mortgage, a priority clause. 9. Insurance Insurance is an important aspect of a lender s security where the lender is making the loan on the security of a mortgage of land with improvements and the improvements have been taken into consideration in determining whether the value of the property is sufficient to support the loan. It is unlikely, however, that a private lender will provide much in the way of detail with respect to its insurance requirements. It is important at the outset to confirm with the lender what its requirements are. The lender will be looking for confirmation that adequate insurance proceeds will be available to the lender as loss payee either to restore the improvements or to apply to the loan in the event of damage or destructions to the improvements Mortgages Practice Manual, para

10 5.1.8 Insurance is a specialized area. It is neither the conveyancer nor the lawyer s role to determine the adequacy of insurance. Provide the client with confirmation of the insurance and let the client determine whether or not it meets their requirements. A. The Form B Mortgage III. Security Requirements Preparing the Documentation Under the Land Title Act, R.S.B.C. 1996, c.250, and the Land Title (Transfer Forms) Regulation, BC Reg. 53/90, mortgages must consist of two parts: (1) the Form B Mortgage and (2) one of a set of prescribed mortgage terms, a set of mortgage terms filed by a lender, or express mortgage terms attached as Part 2 of the mortgage. The prescribed mortgage terms are suitable for use in the preparation of the private lender s mortgage, with the addition of additional provisions using item 10 (Additional or Modified Terms) on the Form B and/or a Form E Schedule. B. The Prescribed Mortgage Terms The use of the prescribed mortgage terms has assisted in the reduction of the flow of paper in the land title office and provides a readily available set of mortgage terms. 12 The Borrower must receive a copy of the terms and must acknowledge the receipt thereof. 13 Item 10 and/or a Form E Schedule are used to provide additional terms. Such additional terms may include, but are not limited to the following: 1. Prepayment Rights For example: The Mortgagor, when not in default, may pay the whole or any part of the Principal Amount hereby secured and then outstanding without notice, bonus or penalty upon payment of all interest accrued to the date of such prepayment. If only a partial prepayment of the Principal Amount outstanding is made, the remaining Payment Dates shall thereupon be accelerated so that the Mortgagor shall continue to pay on each and every Payment Date, commencing with the Payment Date immediately following the Payment Date on which such partial prepayment was made, the periodic payments specified in Item 5(g) on Page 1 herein until the Principal Amount, interest and any other monies owing hereunder are fully paid as set out in this Mortgage. A provision that states that interest is payable at the mortgage rate both before and after default, maturity, and judgment (although note that the latter may be subject to the Court Order Interest Act). For example: The Mortgagor hereby agrees to pay the Mortgagee interest on the Principal Amount secured by this Mortgage at the Interest Rate set out in Item 5(b) of this Mortgage. This Interest Rate is payable on the Principal Amount both before and after the Balance Due Date and both before and after default, maturity and judgment until the Principal Amount has been repaid in full. 12 Mortgages Practice Manual, para Land Title Act, R.S.B.C. 1996, c.250, s. 229.

11 2. Post-Dated Cheques and NSF Provisions For example: The Mortgagor agrees to provide to the Mortgagee, their heirs or assigns, twelve (12) post-dated cheques at the beginning of the first year of the term of this Mortgage, one such cheque being for each monthly payment during the first year of the term, and similarly further agrees to provide twelve (12) post-dated cheques at the beginning of each additional year of the term of this Mortgage or such lesser number of post-dated cheques, if the remainder of the term of this Mortgage is for less than one year. The Mortgagor agrees that in addition to the sum due for the principal and interest hereunder, he shall pay to the Mortgagee the sum of ** ($**) as liquidated damages and not as a penalty for each of the Mortgagor s post-dated cheques which are returned to the Mortgagee as non-negotiable after being presented for payment or for each late payment. Such sum shall be a charge upon the mortgaged lands and bear interest at the Interest Rate set out herein. 3. Priority Clauses For example: The Mortgagor covenants and agrees that if this Mortgage is subject to one or more prior mortgages, agreements for sale or other charges or encumbrances (herein collectively called the Prior Mortgage ), the Mortgagor shall pay, or cause to be paid as they become due, all payments, whether for principal, interest, taxes or otherwise, under or by virtue of the Prior Mortgage and will otherwise observe, perform and comply with the conditions, covenants, provisos or agreements therein contained; and that any default thereunder shall be deemed to be a default hereunder and entitle the Mortgagee to exercise any and all remedies available to the Mortgagee in the event of default hereunder; and that the Mortgagee may make any payment or cure any default under the Prior Mortgage and any amount or amounts so paid, together with all costs, charges, expenses and outlays of the Mortgagee thereby incurred, shall be added to the monies payable hereunder, bear interest at the mortgage rate from the date expended until paid, be payable with interest as aforesaid forthwith by the Mortgagor to the Mortgagee without demand and be a charge on the lands and the Mortgagee shall have the same rights and remedies to enforce payment thereof as the Mortgagee would have in the event of default in payment of any monies payable hereunder; and the Mortgagor agrees that any legal fees, costs, charges and expenses by the Mortgagee arising out of any proceedings commenced by the holder of the Prior Mortgage shall be calculated and allowed on no less than Scale Two of the Rules of Court. 4. Due on Sale, Transfer or Mortgage For example: The Mortgagor agrees that is will in no way further encumber the mortgaged land without the prior consent in writing of the Mortgagee. In the event of that the Mortgagor sells, conveys, transfers, or enters into an agreement of sale or transfer of title of the land to a purchaser, grantee or transferee not approved in writing by the Mortgagee then, at the option of the Mortgagee, all monies secured by this mortgage with accrued interest thereon shall become immediately due and payable. FURTHER, should a Purchaser, Grantee or Transferee fail to (i) apply for and receive the written consent of the Mortgagee; and (ii) personally assume all the obligations of the Mortgagor, then the Mortgagee may, at its option, demand repayment of the principal amount of the Mortgage with accrued interest thereon. Such approval and consent shall be at the absolute discretion of the Mortgagee.

12 Discharge of Mortgage For example: The Lender shall have a reasonable time after request by the Borrower to prepare the payout statement and attend to the execution of a discharge of mortgage. The Borrower agrees to pay to the Lender an administration fee of $75.00 for the preparation of a payout statement and execution of the discharge. The Borrower agrees to pay to the Lender the account of the solicitor for the Lender for services provided with respect to the receipt of payout funds, the preparation, execution, and delivery of the discharge of this mortgage and associated services. 6. Foreclosure Venue For example: The Mortgagor and the Mortgagee covenant and agree that should the Mortgagee allege a default on the part of the Mortgagor, the Mortgagee shall be entitled, at its option, to commence foreclosure proceedings in either the New Westminster Registry or Vancouver Registry of the Supreme Court of British Columbia, notwithstanding that the lands and premises which are the subject of the foreclosure proceedings are not situate in either of the Judicial Districts of Vancouver or New Westminster, respectively. The Mortgagor and Mortgagee further covenant and agree that this shall constitute an agreement pursuant to Section 21(5) of the Law and Equity Act, R.S.B.C. 1996, c Post Judgment Provision For example: If the Mortgagee obtains a judgment against the Mortgagor for failure to comply with any of the Mortgagor s covenants or obligations under this Mortgage, such judgment will not result in a merger of the terms of the judgment with the Mortgagee s other remedies or rights to enforce the other obligations of the Mortgagor under this Mortgage according to the terms hereof. The Mortgagee shall continue to be entitled to receive interest at the interest rate and any such judgment shall provide that interest thereon shall be computed at the interest rate until such judgment has been fully paid. 8. Payment of Costs For example: The Mortgagor will pay on demand the Mortgagee s reasonable administrative costs and charges arising out of or incurred by the Mortgagee in connection with its administration of this Mortgage and the review, execution and delivery of any documents which the Mortgagee is requested to prepare or execute in connection herewith. If any such amount is not paid on demand, it shall be added to the mortgage money and bear interest at the interest rate. The Mortgagee shall have the same right with respect to collection of any such amount as it does with respect to collection of the principal amount and interest under this Mortgage or in law or at equity. 9. Renewal For example: The Mortgagor shall have concluded arrangements to either repay or renew this mortgage loan thirty (30) days prior to the Balance Due Date specified n Item 5(l) on page 1 herein.

13 10. Inspections For example: The Mortgagee or the Mortgagee s agent may, whenever the Mortgagee deems it necessary to do so, enter upon and inspect the land and any building thereon and make any repairs that the Mortgagee considers are necessary. The costs of any such inspection and repairs will be payable immediately by the Mortgagor and until paid, such costs will be added to the monies secured by this Mortgage and will bear interest at the interest rate and shall be a charge upon the land prior to all claims thereon subsequent to this Mortgage. If the Mortgagor neglects to keep the buildings, erections and improvements in good condition and repair, or commits or permits any act of waste on the land (as to which the Mortgagee shall be sole judge) or make default as to any of the warranties or agreements contained in this Mortgage, all monies secured by this Mortgage shall, at the option of the Mortgagee, immediately become due and payable. 11. A Provision Waiving Section 31 Property Law Act Section 31 (Consolidation of mortgages) provides that subject to a contrary intention expressed in the mortgage, a borrower seeking to redeem a mortgage is entitled to do so without paying money due under a separate mortgage made by the mortgagor solely charging property not comprised in the mortgage the borrower is seeking to redeem. For example: Section 31 of the Property Law Act, R.S.B.C. 1996, c.377, is hereby expressly waived. 12. A Provision Providing for Further Events of Default For example: In addition to the Prescribed Standard Mortgage Terms the following additional events shall constitute a default under this Mortgage, namely if: (i) a receiver, receiver and manager or receiver manager of all or any part of the land is appointed; (ii) any representation or warranty, whether or not contained herein, made by or on behalf of the Mortgagor to the Mortgagee is untrue; (iii) without the prior written consent of the Mortgagee, the Mortgagor creates or permits to exist any mortgage, lien or charge on, or claim against the land which ranks or could in any event rank in priority to or pari passu with the charge created by this Mortgage; (iv) the holder of any other mortgage, lien or charge on, or any claim against, the land does anything to enforce or realize on such mortgage, lien, charge or claim; (v) the Mortgagor is a corporation, an order is made or a resolution is passed for the winding up of the Mortgagor; (vi) the Mortgagor is a corporation, the Mortgagor enters into an amalgamation, merger or other similar arrangement with any other person, without the prior written consent of the Mortgagee; (vii) the Mortgagor is a corporation, the Mortgagor ceases, or threatens to cease, to carry on its business; (viii) the Mortgagor is an individual, the Mortgagor dies or is declared incompetent to manage his or her own affairs;

14 (ix) (x) the Mortgagor is a corporation, and there is a change in registered owners of the shares of the Mortgagor or a change in the persons having effective voting control of the Mortgagor, without the prior written consent of the Mortgagee; there is default by any person or persons in the performance or observance of any provision or covenant under any other security or guarantee for the repayment of the monies hereby secured, or any covenantor of the monies hereby secured makes an assignment for the benefit of its creditors or is declared bankrupt or makes a proposal or otherwise takes advantage of the provision for relief under the Bankruptcy Act, the Companies Creditors Arrangement Act or similar legislation in any jurisdiction, or makes an authorized assignment or a receiver is appointed under the Bankruptcy Act or a receiver or receiver-manager of all or any part of the property of such covenantor or guarantor is appointed of if any such covenantor or guarantor should give notice under any right which may be contained in such security or guarantee to limit the continuing obligations of the covenantor or guarantor, or if such covenantor or guarantor is a corporation, an order is made or an effective resolution is passed for winding up the covenantor or guarantor or the covenantor or guarantor enters into an amalgamation, merger or other similar arrangement with any other person, without the prior written consent of the Mortgagee or the covenantor or guarantor ceases, or threatens to cease, to carry on its business, or, if the covenantor or guarantor is an individual, the covenantor or guarantor dies or is declared incompetent to manage his or her own affairs. 13. Environmental Clauses For example 14 : 1. Definitions For the purposes of this section: (a) Contaminants means any pollutants, contaminants, deleterious substances, underground or above-ground tanks, asbestos materials, hazardous, corrosive, or toxic substances, special waste or waste of any kind, or any other substance which is now or hereafter prohibited, controlled, or regulated under Environmental Law; and (b) Environmental Laws means any statutes, laws, regulations, orders, bylaw, standards, guidelines, permits, and other lawful requirements of any governmental authority having jurisdiction over the Land now or hereafter in force relating in any way to the environment, health, occupational health and safety, or transportation of dangerous goods, including the principles of common law and equity. 2. Borrower s Covenants and Indemnity The Borrower covenants and agrees as follows: (a) not to use or permit to be used all or any part of the Land for the sale, storage, manufacture, disposal, use, or any other dealing with any Contaminants; (b) to strictly comply, and cause any person for whom it is in law responsible to comply, with all Environmental Laws regarding the use and occupancy of the Land; (c) to indemnify the Lender and its directors, officers, employees, agents, successors, and assigns from any and all liabilities, acti0ons, damages, claims, losses, costs, fines, penalties, and expenses whatsoever (including all legal and consultants fees and expenses and the cost of remediation of the Land and any adjacent property) arising from or in connection with: 14 Mortgages Practice Manual, para. 2.19A.

15 (i) (ii) any breach of or non-compliance with the provisions of this section by the Borrower; or any release or alleges release of any Contaminants at or from the Land related to or as a result of the use and occupation of the Land or any act or omission of the Borrower or any person for whom it is in law responsible. 15 C. Interest Rates It is critical to confirm exactly what interest rate your lender wants to charge and from when and how is it to be calculated. The more frequently interest in calculated or compounded, the higher the effective annual rate will be. For example, if interest at 8% per annum is compounded monthly, the equivalent annual rate would be higher than if 8% per annum was compounded half-yearly. The Land Title Transfer Forms Guidebook, 3 rd ed. (2005) provides good instructions for completing the interest portions of Form B Mortgage. 1. Canada Interest Act Considerations Anyone preparing mortgages should be familiar with the provisions of the Interest Act, R.S. 1985, c. I-15 (the Act ). A copy of the Act is attached to this paper as Appendix C. Section 6 of the Act provides that when mortgage money is payable by blended payments of interest and principal, no interest is payable unless the mortgage contains a statement of the amount of principal money, and the rate of interest chargeable on that money, calculated yearly or half-yearly, not in advance. The purpose of the section is to protect a borrower from having concealed from him the true rate of interest which he is paying. Section 6 disclosure in item 5(h) of the Form B must be included any time payments in a mortgage contain a portion that is principal and a portion that is interest. Where the rate is variable and it floats (i.e., based upon a prime rate of a certain financial institution) and payments contain principal and interest, a statement should be contained in item 5(h) of the Form B or in Form E to give the half-yearly equivalents of the monthly rate of interest charge from time to time. Section 7 of the Act provides that no rate of interest is recoverable beyond that stated; that is, if the rate of interest set out in the statement required by s. 6 of the Act is less than the amount stipulated elsewhere in the mortgage, the amount of interest payable is limited to the rate shown in item 5(h) of the Form B mortgage. Finally, s. 8 of the Act provides that no greater rate of interest is payable on money in arrears than is payable on money not in arrears, but interest may continue to be payable at the mortgage rate on money in arrears. Accordingly, the compounding period for interest in arrears must remain the same as before, or an equivalent rate must be used. Section 8 also prohibits fines or penalties after the mortgage is due and has been demanded. Lenders have attempted to avoid this prohibition by providing for one interest rate to a certain date, usually shortly before maturity, and a higher rate thereafter. The purpose of this increase may be to encourage prompt payment on maturity, to persuade the borrower to arrange for renewal at maturity, 15 Mortgages Practice Manual, para. 2.19A.

16 or to compensate lenders for the cost of foreclosure. The Supreme Court of BC has not been consistent in its decisions in this area. For a more detailed discussion of these issues see the CLE s BC Mortgages Practices Manual at paragraph Criminal Code Considerations Section 347 of the Criminal Code defines a criminal rate of interest as an effective annual rate of interest that exceeds 60% on credit advance under an agreement or arrangement. The section makes it an offence either to enter into an agreement or arrangement to receive interest at a criminal rate, or to receive a payment or partial payment of interest at a criminal rate. Interest is broadly defined and may include application fees, standby fees, brokerage, legal fees and disbursements, and other non-refundable charges. 16 When preparing a mortgage you may wish to consider including a severance clause stipulating that if any provision of the mortgage is found to be unenforceable (for example, the rate of interest), the balance of the mortgage terms will still be operative and binding upon the borrower. For example: If at any time any provision of this Mortgage in whole or in part is declared or held illegal, invalid or unenforceable under, or inconsistent with any applicable law or would by reason of any such law render the Mortgagee unable to collect the amount of any loss sustained by it as a result of making the loan secured by this Mortgage which it would otherwise be able to collect, then such provision shall not apply and shall be construed so as not to apply to the extent that it is so illegal, invalid, unenforceable or inconsistent or would so render the Mortgagee unable to collect any such loss, and this Mortgage will continue in full force and effect and be construed as if it had been executed without such illegal, invalid, unenforceable or inconsistent provision. D. Other Documents 1. Acknowledgement of Receipt of Mortgage Terms 2. Direction to Pay The purpose of the Direction to Pay is to establish that funds disbursed by the lender to its lawyer and then by the lender s lawyer as directed are fully advanced and secured by the mortgage. The Direction should be signed by all borrowers and guarantors/covenantors. A proper direction to pay will enable the lender s lawyer to deduct any moneys necessary to pay outstanding taxes, discharge prior financial encumbrances, if applicable, pay mortgage insurance, mortgage brokerage fees, and the lender s lawyers estimated legal fees and disbursements, and depending on the lender s policy, an interest adjustment In respect of a deduction for interest adjustment, the prescribed mortgage terms provides that interest accrues from the date of the advance of the money to the borrower. Section 3(4) of the prescribed terms provides that Interest payable on any part of the principal amount advanced before the interest adjustment date is due and payable to the lender on the interest adjustment date. Some lenders will request that you deduct from the advance of principal the interest accruing from the date of advance to (but not including) the interest adjustment date. This step is not in accordance with s. 3(4) of the prescribed terms. 16 Mortgages Practice Manual, para

17 Corporate Resolutions and Solicitor s Opinion Where the borrower is a corporate entity, you will need to prepare and forward for execution by the directors of the corporate borrower a directors resolution authorizing the borrowing and the granting, execution and delivery of the mortgage documentation, as well as a form of solicitor s opinion to be provided by the lawyer representing the borrower confirming that the company.has been duly incorporated, validly exists and is in good standing, has the corporate capacity to own its assets, carry on its business and to borrow money and grant the security being granted, and that the mortgage documentation has been duly authorized by all necessary corporate action and executed and delivered by the company. 4. Client Identification and Verification Rules As of December 31, 2008, the Law Society 17 requires lawyers to follow client identification and verification procedures when retained by a client to provide legal services. Identification and Verification are two distinct concepts in the Rules. Identification refers to the basic information you need to obtain and record about your client to know who they are when you are retained to provide legal services, including the client s name, address, telephone number, and occupation. You are required to make reasonable efforts to obtain a record this information. Verification refers to the information you need to obtain to confirm that your client is who or what they say they are. Verification is required only when you are acting for a client or giving instructions on behalf of a client regarding the receiving, payment, or transferring of money (i.e., financial transaction). Lawyers must keep a record of the information and documents obtained to identify and verify a client s identity. Lawyers must also retain a copy of every document used to verify the identity of any individual client or organizational client (including the instructing individual) when providing legal services in respect of a financial transaction. As a conveyancer and most often the first point of contact with the client, it will be your responsibility to make the client aware of the requirement and ensure they provide the necessary identification. 5. Opinion or Report to Private Lender The solicitor s report to a private lender has the same purpose as a report to an institutional lender. It should provide a report on the steps taken by the lawyer to protect the lender s interest in the mortgage transaction and to express a professional opinion about the extent to which the lender s interests have been protected. 18 You will want to ensure that the report provided in structured to reflect the instructions you have received from your client. A sample report to a private lender is included in CLE s BC Mortgages Practice Manual and is attached as Appendix B to this paper Law Society Rules 3-91 to Mortgage Practice Manual, para Mortgage Practice Manual, FP49.

18 CLE s BC Mortgages Practice Manual provides: IV. Discharging Private Lender Mortgages When dealing with a non-institutional lender, a lawyer should have the discharge of mortgage in hand before paying out the moneys secured by the mortgage; this may require undertakings to the lender not to deal with the discharge document until sufficient money is in trust to satisfy the mortgage. If the lender will not agree to this arrangement, a formal tender of the moneys should be made in exchange for a discharge of mortgage in registrable form. Where a non-institutional lender is unwilling initially to provide a discharge in advance of payment, if the lender can be persuaded to involve its own counsel in the transaction, undertakings may be concluded between counsel so that the required discharge is made available in advance of payment. 20 Sound practice would suggest that one follows this procedure. Part 5, Disclosure of the Cost of Consumer Credit, in the Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2, together with the related regulation was brought into force on July 1, Part 5 requires lenders to disclose all the fees they charge when they loan money or grant credit. It only applies to consumer credit, that is, credit to individuals for personal, family or household purposes, including mortgages and leasing consumer goods; it does not apply to commercial borrowers and private lending arrangements, except where a loan broker is involved. The provisions of this Act and its regulations provide that a lender is to make available mortgage discharges within 30 days of repayment of a mortgage loan, and that the maximum discharge fee to be charged is $ V. Conclusion Acting for private lenders in preparing mortgages and representing their interests is indeed a formidable task. The information, terms and rights conveyancers must take into consideration when preparing mortgages are many and therefore this responsibility must be approached with attention to the law and the lender s interests. In outlining the steps which should be undertaken when preparing private lender mortgages, the goal has been to assist you in protecting your clients interests, but equally as important in eliminating the risks of claims. 20 Mortgages Practice Manual, para Business Practices and Consumer Protection Act, s. 72; Disclosure of the Cost of Consumer Credit Regulation, s. 16.

19 VI. Appendix A Preliminary Report to Private Lender [FP 48] [month, day, year] [lender s name and address] Dear [lender]: Re: Mortgage over [address and legal description] (the Property ) to be granted by [borrower] (the Borrower ) We acknowledge receipt of your instructions with respect to this mortgage. We wish to provide you with our preliminary report on title and to confirm your instructions with respect to this transaction. Title to the Property The legal description of the Property is as follows: [legal description] We have conducted a search of the Property in the [location] land title office and now enclose a copy of Certificate of Title No. [number] for your reference. You will note that title to the Property is registered in the name of [name] subject to the following encumbrances: [list encumbrances] (collectively, the Permitted Encumbrances ); and [list any other encumbrances] The title to the Property is endorsed with the following legal notations: [list legal notations] (collectively, the Legal Notations ). We enclose for your information copies of the Permitted Encumbrances and Legal Notations, including any plans referred to above. Charge to be Created We confirm that you have requested that we prepare and register a first mortgage (the Mortgage ) in favour of [lender] (the Lender ). We will prepare the Mortgage to incorporate [the Prescribed Standard Mortgage Terms/the Standard Mortgage Terms filed in the land title office under No. MT [number]]. We enclose a copy of these Standard Mortgage Terms for your reference. We confirm your instructions that the Mortgage is to include the following terms: 1. Principal amount: $ [amount] 2. Interest: [percentage] % calculated semi-annually 3. Periodic Payments: monthly payments of principal and interest in the amount of $ [amount] 4. Maturity Date: [month, day, year] 5. Prepayment Provisions: [insert any prepayment provisions] 6. Mortgage to be due upon sale of the Property 7. [list any other terms].

20 Title Qualifications We will not advance the mortgage proceeds until we are satisfied that the Borrower is, or will upon completion of all registrations be, the registered owner of the Property, and that the Mortgage will upon completion of registration be a registered mortgage of the Property, subject only to: 1. the statutory reservations and exceptions to title set forth in s. 23(1)(a), (b), (c), (d), (e), (f), (i), and (j) of the Land Title Act; 2. any statutory lines or charges having priority; and 3. the Permitted Encumbrances and the Legal Notations. These qualifications will appear in the final report that will be forwarded to you upon completion of registration of the Mortgage. Statutory liens are charges in favour of the Crown that arise from the failure of present or past owners to pay amounts owing pursuant to various provincial statutes and may attach to the Property and be effective without registration against the title to the Property in the Land Title Office. Unless specifically advised otherwise, we do not conduct any investigations for the existence of statutory liens if the Borrower is an individual. If the borrower is a corporation: If the Borrower is a corporation, our investigation is limited to writing the appropriate government departments for information concerning the following: 1. Corporation Capital Tax [for amounts owing up to and including the corporation s 2002 fiscal year; these searches should be conducted for some time due to delays in reporting or assessing claims for these amounts]; 2. Social Service Tax; 3. Workers Compensation Board assessments and penalties; and 4. Employment Standards Branch unpaid wages and assessments. Please contact us as soon as possible if you wish to discuss these proposed title qualifications. Survey Certificate We confirm that you require a survey certificate for the Property. We have obtained a copy of a survey certificate dated [month, day, year] and enclose a copy for your information. OR We confirm that you require a survey certificate for the Property. We will advise the Borrower of this requirement. OR We confirm that you do not require a survey certificate for the Property, since the Property is stratified. Taxes and Utilities We will ensure that payment of any outstanding property taxes, utilities, penalties, and interest affecting the Property will be made before or concurrently with the closing.

21 Compliance with Zoning We have written to the [city/municipality] of [name of city/ municipality] to inquire as to the status of compliance of the Property with existing zoning and other by-laws. We enclose a letter that we received from the [city/municipality] in response to our request. You will note that the [city/municipality] purports to take no responsibility if the contents of its letter are incorrect. Please review this letter carefully, since we will not investigate these matters further unless so instructed by you. OR We have written to the [city/municipality] to inquire as to the status of compliance of the Property with existing zoning and other bylaws and will provide you with a copy of the response. However, the [city/municipality] will most likely purport to take no responsibility if the contents of its letter are incorrect. Once you receive this letter, please review it carefully, since we will not investigate those matters further unless so instructed by you. Insurance We will obtain confirmation that the improvements on the Property are insured against fire and extended risks, with the Lender as first loss payable, and that the insurance policy contains the IBC Standard Mortgage Clause. We will provide a copy of the insurance cover note to you before the advance of the mortgage proceeds and will ask you to confirm that the insurance coverage is satisfactory. You may wish to consult your insurance advisor regarding this matter. Funding The closing date for this transaction is scheduled for [month, day, year]. We will require receipt of the proceeds of the Mortgage in our trust account before the closing date or early on the closing date. Please contact us to discuss your funding requirements. Fees and Disbursements We confirm that our fees and disbursements for this transaction are to be paid by the Borrower out of the mortgage proceeds and we will obtain an appropriate direction for this from the Borrower. We further confirm your advice that if mortgage proceeds are not advanced and we cannot recover our fees and disbursements from the Borrower, you will be responsible for our account. After you have had a chance to review the foregoing and the enclosed, please contact us to discuss this mortgage transaction further.

22 VII. Appendix B Final Report to Private Lender [FP 49] [month, day, year] [lender s name and address] Dear [name]: Re: Mortgage over [address] (the Property ) granted by [borrower] (the Borrower ) We are pleased to advise that the above-noted matter has now been substantially completed. We wish to report as follows: Title The mortgage (the Mortgage ) granted by the Borrower in favour of [lender] (the Lender ) was submitted for registration in the Land Title Office on [month, day, year] under No. [number]. Based on our searches in the Land Title Office on [month, day, year], we expect that, upon completion of all registrations, you will have a valid first mortgage charge against the Property free and clear of all charges, encumbrances, and legal notations, save and except for the statutory reservations and exceptions to title set forth in s. 23(2)(a), (b), (c), (d), (e), (f), (h), (i), and (j) of the Land Title Act, any statutory liens or charges having priority, and the Permitted Encumbrances and Legal Notations described in our preliminary report to you dated [month, day, year]. We have previously provided you with photocopies of the Permitted Encumbrances and Legal Notations and you have instructed us that the presence of those charges and notations on the title to the Property is satisfactory to you. Mortgage The Mortgage secures the principal sum of $ [amount] with interest thereon at the rate of [percentage] % per annum calculated half-yearly not in advance. Under the terms of the Mortgage, monthly payments of principal and interest in the amount of $ [amount] are payable on the first day of each and every month commencing on [month, day, year] and continuing until [month, day, year] when the total amount of principal and interest then outstanding will be due and payable. The Mortgage also includes the other terms described in our preliminary report to you. Funds We acknowledge receipt of the sum of $ [amount] from you representing the net proceeds of the Mortgage and confirm that those funds were disbursed by us in accordance with the Direction to Pay approved by the Borrower. Realty Taxes We have been advised by the [city/municipality] of [name of city/ municipality] that the taxes for the Property have been paid in full to [month, day, year]. OR We have paid the [year] outstanding real property taxes for the Property such that taxes for the Property have been paid in full to December 31, [year].

23 Insurance We previously provided to you a copy of the insurance binder for the Property evidencing the Borrower s insurance coverage and confirm your advice that this coverage is satisfactory. Survey Certificate We previously provided a survey certificate for the Property to you and confirm your advice that it is satisfactory. OR We confirm your advice that you do not require a survey certificate for the Property. Zoning We previously provided to you a copy of a letter dated [month, day, year] from the [city/municipality] of [name of city/municipality] with respect to zoning and bylaw compliance. We confirm your advice to us that this letter is satisfactory. OR We confirm that you did not require us to perform a zoning search. We therefore cannot advise you whether the Property complies with the applicable municipal bylaws. State of Title Certificate We have applied to the Land Title Office for a State of Title Certificate for the Property. The State of Title Certificate will show the state of title after completion of all registrations. Upon receipt of the State of Title Certificate, we will forward a copy to you for your records. Enclosures We enclose for your records copies of the following documents: 1. the Mortgage, bearing registration particulars; 2. the Acknowledgment of Receipt of Mortgage Terms; 3. the Direction to Pay; 4. [any other enclosures] Fees and Disbursements We confirm that our account for fees and disbursements has been paid by the Borrower. We have been pleased to assist you in this matter and trust that the mortgage transaction has been concluded to your satisfaction. If you have any questions or if you wish further information, please contact us. Yours truly,

24 VIII. Appendix C Interest Act, R.S.C., 1985, c. I-15 An Act respecting interest SHORT TITLE Short title 1. This Act may be cited as the Interest Act. No restriction except by statute RATE OF INTEREST 2. Except as otherwise provided by this Act or any other Act of Parliament, any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on. Interest rate when none provided 3. Whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum. When per annum rate not stipulated 4. Except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent. Recovery of sums paid otherwise 5. If any sum is paid on account of any interest not chargeable, payable or recoverable under section 4, the sum may be recovered back or deducted from any principal or interest payable under the contract. INTEREST ON MONEYS SECURED BY MORTGAGE ON REAL PROPERTY OR HYPOTHEC ON IMMOVABLES No interest recoverable in certain cases 6. Whenever any principal money or interest secured by mortgage on real property or hypothec on immovables is, by the mortgage or hypothec, made payable on a sinking fund plan, on any plan under which the payments of principal money and interest are blended or on any plan that involves an allowance of interest on stipulated repayments, no interest whatever shall be chargeable, payable or recoverable on any part of the principal money advanced, unless the mortgage or hypothec contains a statement showing the amount of the principal money and the rate of interest chargeable on that money, calculated yearly or half-yearly, not in advance. No rate recoverable beyond that so stated 7. Whenever the rate of interest shown in the statement mentioned in section 6 is less than the rate of interest that would be chargeable by virtue of any other provision, calculation or stipulation in the mortgage or hypothec, no greater rate of interest shall be chargeable, payable or recoverable, on the principal money advanced, than the rate shown in the statement.

25 No fine, etc., allowed on payments in arrears 8. (1) No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears. Interest on arrears (2) Nothing in this section has the effect of prohibiting a contract for the payment of interest on arrears of interest or principal at any rate not greater than the rate payable on principal money not in arrears. Overcharge may be recovered back 9. If any sum is paid on account of any interest, fine or penalty not chargeable, payable or recoverable under section 6, 7 or 8, the sum may be recovered back or deducted from any other interest, fine or penalty chargeable, payable or recoverable on the principal. When no further interest payable 10. (1) Whenever any principal money or interest secured by mortgage on real property or hypothec on immovables is not, under the terms of the mortgage or hypothec, payable until a time more than five years after the date of the mortgage or hypothec, then, if at any time after the expiration of the five years, any person liable to pay, or entitled to pay in order to redeem the mortgage, or to extinguish the hypothec, tenders or pays, to the person entitled to receive the money, the amount due for principal money and interest to the time of payment, as calculated under sections 6 to 9, together with three months further interest in lieu of notice, no further interest shall be chargeable, payable or recoverable at any time after the payment on the principal money or interest due under the mortgage or hypothec. Exception (2) Subsection (1) does not apply (a) to any mortgage on real property or hypothec on immovables given by a joint stock company or any other corporation, nor to any debenture issued by them, for the payment of which security has been given by way of mortgage on real property or hypothec on immovables; or (b) to any prescribed mortgage on real property or prescribed hypothec on immovables given by a prescribed entity, nor to any prescribed debenture issued by it, for the payment of which security has been given by way of mortgage on real property or hypothec on immovables. Regulations (3) For the purposes of paragraph (2)(b), the Governor in Council may, by regulation, (a) prescribe entities; and (b) prescribe classes of mortgages and hypothecs given by those entities and classes of debentures issued by them. 11. to 14. [Repealed, 1992, c. 1, s. 146]

26 IX. Appendix D Client Identification and Verification Rules

27 5.1.25

28 5.1.26

29 5.1.27

30 5.1.28

31 5.1.29

32 5.1.30

33 5.1.31

34 5.1.32

35 5.1.33

36 5.1.34

37 5.1.35

38 X. Appendix E Client Identification and Verification Checklist

39 5.1.37

40 5.1.38

41 5.1.39

42 5.1.40

43 5.1.41

44 5.1.42

45 5.1.43

46 5.1.44

47 5.1.45

48 5.1.46

49 5.1.47