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Professional Standards Manual

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4. General Information

(a) Contract Clauses - View Entire Section

(XVII) Financing Information - View Subsection
(3) Mortgage Covenants Affected by Property Law Act

The Property Law Act significantly changed the law in British Columbia relating to the continued liability of a mortgagor on his or her personal covenant after his or her residential property had been sold.

It is necessary for all licensees to advise sellers and buyers regarding the effect of the amendments in transactions involving the assumption of a mortgage.

It is an advantage to the seller to be released from any further liability on a mortgage that is being assumed by the buyer. For this reason, it is recommended, in a residential transaction where the buyer will be assuming an existing mortgage, that a condition be inserted in the contract to ensure that the seller’s covenant on the mortgage is released. The Assumption of Existing Mortgage Clause set out below includes as a subject that the mortgagee release the seller from the seller’s covenant.

The amendments to the Property Law Actinclude the following provisions:

1. The changes relate only to a residential mortgage (which is defined as a mortgage or agreement for sale) registered against the residence where the borrower resides, and where the financing was entered into or assumed to permit the borrower to acquire the residence, make improvements to the residence or make expenditures for family or household purposes.

2. Where an original borrower sells the home and the buyer (new owner) has assumed the mortgage, the original borrower’s liability will be extinguished unless the lender demands payment in full within three months after the existing term of the mortgage has expired. As well, an original borrower will be able to extinguish his or her liability by having the lender approve the credit worthiness of a buyer or proposed buyer. The second alternative is more attractive to the seller, because the seller is released from liability on the mortgage at an earlier date.

3. When the lender specifically approves, in writing, the assumption of the mortgage or agreement for sale by the buyer, then the seller is released from the covenant. The lender may not unreasonably withhold approval. If the seller or the buyer feels that the lender is unreasonably withholding approval, he or she may apply to the Supreme Court of British Columbia for relief.