The rules around registering additional loans differ from province to province. Here’s how to avoid trouble later
By Timothy Lack and Preston Walia
istockLoan transactions involving borrowers seeking financing through private lending or by way of a second mortgage tend to carry additional risk that is not present in a traditional first mortgage transaction, and require extra care for real estate practitioners such as mortgage brokers. There are a variety of legal and factual situations that make these mortgages more unique. Certain factors include:
- Less restrictive lending criteria and borrowers that are not eligible for bank financing;
- Dealing with borrowers with unstable forms of income (non-salary, fluctuating levels of income, self-employed, contract work);
- A sense of urgency to complete the transaction; and/or
- Borrowers with poor or no credit history.
Based upon these additional risk factors, it is clear you will be dealing with a diverse set of borrowers seeking private funds with varying levels of experience, sophistication and financial knowledge. In addition, you will be engaging with a broad range of private lenders with different levels of knowledge and experience. Be mindful that the private lenders may do very little, if any, real due diligence in these loan transactions and will look to the mortgage broker (or the lawyer) to “do it right” and “keep them safe.”
Knowing this, it is important to always remember that there are probably more risks in second and private lending that are not seen in a typical bank or credit union first-mortgage transaction. With these extra risks, and without the sophisticated due diligence that a bank performs in its loan transactions, the mortgage broker must remain vigilant.
A central area of concern for secondary mortgages is ensuring that the loan-to-value ratios do not negatively change as the term of the mortgage progresses. This requires protecting the priority position of the second mortgage transaction as against future advances secured by any pre-existing mortgage. In British Columbia, Alberta and Ontario, this priority issue is dealt with slightly differently. In B.C. and Ontario, generally, in order to protect said priority against further advances, the lender of the subsequent (second) mortgage must ensure that the prior lender (first or prior mortgagee) receives actual (as opposed to constructive) notice in writing of the registration of that subsequent mortgage. In Alberta, the first mortgage or revolving line of credit will take priority for all advances up to the registration amount, including subsequent advances. It does not seem that Alberta requires actual notice to be provided.
In B.C., it is prudent practice to send the first lender written notice of the subsequent mortgagee’s registration and state that this notice is being sent pursuant to section 28 of the British Columbia Property Law Act (PLA). This is the provincial legislation that provides the protection to the second mortgagee from losing priority over further (future) advances made under a prior (first) mortgage. However, the legislation and legal practice dictates that certain procedures be followed. Please note that the legislation is quite general and legal practice in this area has evolved but rarely been adjudicated by the courts. The notice to the first lender should request that receipt of the notice be acknowledged and returned to obtain (without uncertainty) confirmation in writing that notice under section 28 of the PLA was received. Although the additional step of having the notice acknowledged and returned by the prior lender is not a requirement under the PLA, should an issue arise regarding priority of re-advancement under the first mortgage, the certainty of this notice may resolve any dispute of “actual” or “formal” notice received by the first mortgagee. In practice, banks and credit unions can be reluctant to acknowledge the notice as they seem to regard such acknowledgement as prejudicial to their priority.
Some second mortgage lenders (or their lawyers) have started to give notice of the second mortgage registration as part of their initial request for information in respect of the first mortgage (that is, the request for the balance owed under the first mortgage). Having the first mortgagee respond to such a request helps the second mortgagee as an additional form of estoppel against any assertion that the second mortgagee failed in providing notice of its subsequent charge. Although giving both initial notice upon registration of the mortgage and further notice when the second mortgage is funded may seem to be going above and beyond the requirements of the PLA, it is important to realize how frequent priority issues are between first and second mortgages, and that proper notice can really be the deciding factor on how the first mortgagees respond.
Please note that our B.C. courts have ruled that an initial or preliminary request for information regarding the status of the first mortgage, but with a failure to give notice to the first mortgagee of the actual registration of the second mortgage, is not considered sufficient notice under the PLA. The courts outlined that the first mortgagee has no obligation to search the title every time it receives an inquiry or every time it advances funds. The onus is on the subsequent charge holder to provide actual notice of registration. Simply put, but nevertheless important, an enquiry of the balance and good-standing status of the prior mortgage is not enough to gain protection under section 28 of the PLA.
In Ontario, actual notice is required under section 73 of the Registry Act and section 93(4) of the Land Titles Act, which provide that monies advanced under the first or prior mortgage will rank in priority to a subsequent mortgage except for advances for which the first or prior mortgagee has received actual notice. Similar to B.C., Ontario legislation recognizes that registration itself is not enough to constitute actual notice. To gain protection under sections 73 and 93(4) against subsequent advances, the onus in Ontario is on the subsequent charge holder to provide actual notice of registration to the first or prior lender.
Conversely, section 104 of the Alberta Land Titles Act provides that a mortgage will rank in priority to a subsequent mortgage notwithstanding that the subsequent mortgage was registered. Although actual notice to a first or subsequent mortgagee may be grounds for an estoppel argument to gain priority over subsequent advances, Alberta courts have not yet ruled on this matter.
In light of the priority issues and the increased risks of private and/or subsequent mortgages, it is important to develop prudent practices as a mortgage broker. Here are some prudent steps you can take when you are confirming the details of the second mortgage.
1. Confirming the First Mortgage Information
As virtually all the banks and credit unions now use “all indebtedness mortgage”-type language to describe the principal amount owed under their first mortgages, you really need to pay attention when confirming the terms and detail of the first mortgage. Be sure to request each and all loan facilities secured by the registered mortgage.
2. Notice with the Request
As mentioned earlier, some second mortgage lenders, or their lawyers, will give notice of the second mortgage registration as part of their request for information (balance owed, arrears, etc.) in respect of the first mortgage; this practice is a helpful method for having estoppel if the first mortgagee asserts that the second mortgagee failed to provide notice of its subsequent charge. Due to the fact that priority disputes between first and second mortgagees are common, developing the prudent practice of sending out notice pursuant to section 28 in B.C. or sections 73 and 93(4) in Ontario with your requests of information can help mitigate potential issues in the future.
There are many different factors and characteristics that differentiate a private or second mortgage lending scenario from the “conventional” institutional first mortgage. This area of practice requires many different skill sets and a strong level of flexibility to tackle the diverse issues and challenges that may arise. Of course, this area also provides you with the opportunity to meet a true cross-section of people to work with. The time frame between receiving your first instructions to finalizing the transaction can be extremely short and requires any practitioner in this field to be able to act and react quickly for their client, take charge of the situation and provide top-shelf service.
Note: The above article is meant to summarize certain general issues surrounding second mortgages but the authors advise that the article is not a substitute for legal advice on a specific lending transaction. Each such transaction has its own particulars and you should seek appropriate professional and legal advice on each loan transaction.