How do Private Mortgage Transactions Differ From Conventional Transactions?
How do Private Mortgage Transactions Differ , There are three (3) key distinctions between private mortgage transactions and mortgages with conventional lenders.
The first main distinction is that the lawyer involved in a private mortgage must identify their client. Is it the lender? Or the borrower? Unlike in a transaction with a typical lender, the lawyer cannot act for both the lender and the borrower, unless an exemption applies (i.e. the lawyer is practising in a remote location, the lender is a bank, trust company, insurance company or credit union or the consideration for the mortgage does not exceed $50,000. Meaning, the lawyers on the deal need to be very clear on who their client is.
Secondly, certain practices involved with conventional mortgages do not carry over to private mortgages. This different has to do with a lawyer’s undertakings. Where a property being acquired by a purchaser is subject to a mortgage in favour of an institutional lender, the purchaser’s lawyer can rely on an undertaking from the vendor’s lawyer to discharge that mortgage post-closing. This is common practice in order to help deals close.
However, where the mortgage on that same property is a private mortgage, lawyers cannot give or accept an undertaking from the vendor’s lawyer to discharge that mortgage post-closing. A private mortgage must be discharged on or before closing.
So, the purchaser’s lawyer will, therefore, be in a position where they cannot release funds to the lender’s lawyer to pay out the existing private mortgage (i.e., the new mortgage funds cannot be released until the private mortgage is discharged) and the lender’s lawyer will not discharge its mortgage until it receives closing funds. Typically, this challenge is dealt with on the basis of a tri-partite document registration agreement between the vendor’s lawyer, purchaser’s lawyer and lender’s lawyer. The DRA includes a discharge of the private mortgage by the private lender in the schedule of documents to be registered on closing. This way, payout funds can be paid to the lender’s lawyer in escrow pending registration of the discharge.
While not required, it is also recommended that a purchaser’s lawyer request, prior to closing, an acknowledgement and direction signed by the lender authorizing its lawyer to register a discharge of its mortgage on closing to ensure that the lender’s lawyer is in a position to register the discharge at the appropriate time.
The third challenge in private mortgages relates to title insurance and the private lender exception in such policies. Title insurance policies typically include coverage exceptions where funds from a private mortgage are paid to any other person other than the registered owner, the holder of a prior registered charge or encumbrance or certain other creditors. Certain title insurers, on this basis, have attempted to void the policy on this basis; however, this interpretation has largely been rejected by the courts.
This has encouraged title insurers to revise their private lending exceptions to allow payment by the lender’s lawyer to the borrower’s lawyer provided the borrower’s lawyer undertakes to pay the mortgage proceeds to the registered owner, prior encumbrances or other creditors described in the title insurance policy. So, as part of the lawyer’s role in the transaction, the lawyer should be reviewing the lender’s title insurance policies and discuss any issues with the private lender’s exception with the client, prior to advancing any funds under the deal.
