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4. General Information

(a) Contract Clauses View Entire Section

(xvii) Financing Information
(1) Pre-Approved Financing

As part of the process of purchasing real estate, many buyers are being pre-approved for financing prior to making an offer. This usually entails a financial institution agreeing that the buyer qualifies for a mortgage up to a maximum amount. However, licensees need to be aware that while the financial institution may have pre-approved the amount of money it is prepared to lend a buyer, it retains the right to also approve the property used as security for the financing. This will often include approving the appraised value of the property to ensure an acceptable loan/value ratio, as well as the physical condition of the property.

**Alert**

Council is of the view that a subject to financing clause, such as the New First Mortgage Clause found below, should be included in Contracts of Purchase and Sale even where the buyer has been pre-approved for financing.

(2) New First Mortgage Clause

New First Mortgage Clause

Subject to a new first mortgage being made available to the Buyer on or before (date) , in the amount of $ (amount) at an interest rate not to exceed ___ % per annum calculated (select either half-yearly or monthly) , not in advance, with a ____- year amortization period, ____- year term and repayable in blended payments of approximately $ (amount) per month including principal and interest (plus 1/12 of the annual taxes, if required by the mortgagee).

This condition is for the sole benefit of the Buyer.

NOTE: This clause must not be used for a Seller-take-back mortgage.

While the standard ‘‘New First Mortgage Clause’’ can be applied to nearly every residential contract, there will be occasions when the buyer will be applying for unconventional financing (e.g., land assembly, shopping centres, high-rise buildings or warehouse purchases). Licensees must be aware that courts have sometimes declared vague mortgage clauses to be unenforceable whim and fancy clauses.

Because the standard Contract of Purchase and Sale contains an option clause and is executed under seal, when using a standard Contract of Purchase and Sale, the seller is irrevocably bound by the contract even if the subject to financing clause is vague. See the section entitled ‘‘Option Clause’’ for more information.

(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.

(4) Assumption of Existing Mortgage Clause

Assumption of Existing Mortgage Clause

The sum of approximately $ (amount A) by way of cash down payment.

The Buyer will assume all obligations under the existing (rank)mortgage held by (name of lender) with an outstanding balance of approximately $ (amount B) at an interest rate of % per annum calculated (select either half-yearly or monthly)not in advance, with a ‘‘balance due’’ term date of (date)with blended payments of $ (payment amount)per month including principal and interest (plus 1/12 of the annual taxes, if required by mortgagee).

NOTE: Amounts (A) and (B) must equal total purchase price.

Subject to the mortgagee approving the Buyer in writing on or before (date), thereby releasing the Seller from liability under section 24 of the Property Law Act.

This condition is for the benefit of both the Buyer and the Seller.

(5) Refinance of Existing Mortgage

Under certain circumstances, a substantial payout penalty may be avoided by the buyer arranging a new mortgage through the existing mortgagee.

Refinancing with Existing Mortgagee Clause

Subject to the Buyer arranging financing with (name of existing mortgagee) and to (name of existing mortgagee) providing the Seller with written confirmation on or before (date), that upon completion the Seller shall be released, without penalty or cost, from its covenants under the existing mortgage.

This condition is for the benefit of the Seller and the Buyer.

CAUTION: This clause is to be used only in conjunction with the ‘‘New First Mortgage Clause’’ detailing the mortgage to be arranged by the Buyer.

Such a clause should be reviewed by the seller’s lawyer.

(6) Sale Price Insufficient To Cover Financial Encumbrances

Licensees should be aware that, in some instances, sellers may find themselves unable to clear title as their financial obligations are greater than they expected and exceed the proceeds of the sale. Examples of this might occur when penalties are applied for the early pay-out of a mortgage, interest has accumulated if mortgage payments have fallen into arrears, or if a lien against the property is unsatisfied. The amounts of these sorts of financial obligations can be very substantial and, when combined with commissions payable, may create a circumstance where the seller has no practical remedy and the transaction collapses, leaving the buyer, the seller and the licensees involved all in regrettable positions with potential legal implications.

At the time of listing a property, it is a prudent practice for licensees to discuss with a seller their obligation to clear title and the nature of the expenses they will face at closing. Licensees should advise their seller-clients to review the terms of their mortgage, as well as to seek written confirmation from their lending institution of the amount of any outstanding mortgage balances, accrued interest, or penalties. A seller who is planning on acquiring another property, based on the sale of an existing property, may also want to familiarize himself or herself as to the portability of his or her existing mortgage and any terms, conditions and time limitations that may apply.

Licensees who advise and assist their clients in obtaining clear and certain information as to their financial obligations at the time of listing a property, place their clients in a position of being able to make informed decisions when considering any offers. This ultimately sets the stage for a smooth completion without surprises.

In the event there is any question whether the sale price is sufficient to cover financial encumbrances and real estate commission, licensees should protect the seller (and themselves) by use of the following clause in the contract:

Financial Obligations Exceed Sale Price Clause

Subject to the Seller’s confirmation and satisfaction with the arrangement of financial affairs, on or before (date), which enable the Seller to proceed with this sale.

This condition is for the sole benefit of the Seller.

Ω If not using the standard form Contract of Purchase and Sale, refer to ‘‘Contracts under Seal’’.

(7) Seller To Take Back First Mortgage

It is recommended that preparation of all seller-take-back mortgages be referred to the seller’s lawyer.

Seller To Take Back First Mortgage Clause

The Seller will take back a first mortgage, in a form acceptable to the Seller (which form will be provided by the Seller on or before (date) and approved by the Buyer on or before (date) , in the amount of $ (amount) at an interest rate of % per annum calculated (select either half-yearly or monthly) , not in advance, with a ___-year amortization period and ___-year term and repayable in blended payments of $ (amount) per month including principal and interest (plus 1/12 of the annual taxes, if required by the Seller).

The mortgage will provide that if the Buyer disposes of or agrees to dispose of the property, the full balance will immediately become due and payable at the Seller’s option. The Seller will draw and register the mortgage at the Buyer’s cost.

The Buyer hereby consents to the Seller obtaining a credit report on the Buyer. Subject to the Seller approving the Buyer’s credit report on or before (date).

This condition is for the sole benefit of the Seller.

NOTE: If the seller is being asked to carry a second mortgage, it is important that the listing agent find out the terms and amount of the first mortgage the buyer is contemplating. The licensee must disclose the amount of the first mortgage when writing subject clauses regarding seller-take-back mortgages. See also ‘‘Additional Mortgage/Agreement for Sale Clauses.’’ Otherwise, the seller may be inadequately secured.

Ω If not using the standard form Contract of Purchase and Sale, refer to ‘‘Contracts under Seal’’.

If the seller has not sought legal advice before signing the offer, a subject clause such as the one found below should be added allowing him or her to obtain such advice.

Lawyer’s Approval of Financing Terms Clause

Subject to the Seller’s lawyer approving the financing terms and conditions on or before (date)

This condition is for the sole benefit of the Seller.

(8) Second Mortgages

The term of the second mortgage should be concurrent with and not exceed the term of the first mortgage.

Ω If not using the standard form Contract of Purchase and Sale, refer to ‘‘Contracts under Seal’’.

New Second Mortgage Clause

Subject to a new second mortgage being made available to the Buyer on or before (date), in the amount of (amount) at an interest rate not to exceed ___ % per annum calculated (select either half-yearly or monthly), not in advance, with a ___-year amortization period, ___-year term and repayable in blended payments of approximately $(amount) per month including principal and interest (plus 1/12 of the annual taxes, if required by the mortgagee).

This condition is for the sole benefit of the Buyer.

(9) Seller Taking Back Second Mortgage

It is absolutely imperative to state the exact amount and details of any first-mortgage financing ranking ahead of the second mortgage to be carried by the seller. Failure to do so could result in a buyer being able to finance a property via the first mortgage in excess of its value, leaving the seller in the bad position of having little or no equity left in the property to protect the seller’s second mortgage.

It is customary for mortgagees to stipulate that mortgage documents will be prepared by their conveyancer at the expense of the mortgagor. It is recommended that this provision be included in the Contract of Purchase and Sale whenever the seller and/or a private investor will be carrying or advancing mortgage money.

**Alert**

Some mortgages may contain a term that provides that the mortgage secures all amounts that the borrower may owe to the financial institution. If the first mortgagor initiates foreclosure, the amount secured by the mortgage may be the amount of the first mortgage as well as any other borrowings, including amounts owed on personal loans or credit cards.

Sellers willing to take back a second mortgage should consider inserting a term in the contract that prohibits the buyer from entering into a mortgage which contains such terms.

 

Seller To Take Back Second Mortgage Clause

The Seller will take back a second mortgage, in a form acceptable to the Seller (which form will be provided by the Seller on or before (date), and approved by the Buyer on or before (date), in the amount of (amount) at an interest rate of __ % per annum, calculated (select either half-yearly or monthly)not in advance, with a ___-year amortization period, ___ -year term and repayable in blended payments of $ (payment) per month, including principal and interest (plus 1/12 of the annual taxes if required by the Seller, if not already being collected by the first mortgagee). Such second mortgage will provide that if the Buyer disposes or agrees to dispose of the property, the full balance will immediately become due and payable at the Seller’s option.

The Seller will draw and register the mortgage at the Buyer’s cost. This condition is for the sole benefit of the Seller.

The Buyer hereby consents to the Seller obtaining a credit report on the Buyer. Subject to the Seller approving the Buyer’s credit report on or before (date)This condition is for the sole benefit of the Seller.

The Seller’s second mortgage is to rank after the (select either new or existing) first mortgage of no more than $(amount) at ___% interest with a term due date of (date) .

Ω If not using the standard form Contract of Purchase and Sale, refer to ‘‘Contracts under Seal’’.

If the seller has not sought legal advice before signing the offer, a subject clause such as the one here should be added allowing him or her to obtain such advice.

(10) Buy-Down of New First Mortgage

Where the seller is buying down a new first mortgage arranged by the buyer, it is recommended that the buy down clause follow the subject to first mortgage clause.

NOTE: This technique is used in periods of high interest rates when the buyer wants a more attractive mortgage rate. The seller is willing to accept a reduction by paying a sum to the mortgagee/broker to accomplish this end. The mortgagee receives a better ‘‘yield’’ on the mortgage. The net result to the buyer is less interest to pay over the term of the mortgage.

Seller To Pay Discount To Buy-Down Rate for Buyer Clause

Subject to a (select either first or second) mortgage being made available to the Buyer on or before (date) , in the amount of $ (amount) at an interest rate not to exceed %per annum, calculated (select either half-yearly or monthly)not in advance, with a ___-year amortization period, ___-year term, and repayable in blended payments of approximately $ (payment) per month, including principal and interest (plus 1/12 of the annual taxes, if required by the mortgagee).

The Seller will pay a discount to the (select either mortgagee or broker) on the  (select either first or second) mortgage arranged by the Buyer, sufficient to yield the mortgagee an interest rate of ___ %** per annum, calculated (select either half-yearly or monthly)not in advance, for a term of  ___ years, but the amount of discount and buy-down costs may not exceed $(amount) in total and will be deducted from the proceeds of sale due to the Seller on completion.

This condition is for the sole benefit of the Buyer.

 

* This is the ‘‘bought-down’’ rate (i.e., what the Buyer wants).

** This is the ‘‘market ’ rate (i.e., what the Lender wants).

Ω If the seller has not sought legal advice before signing the offer, a subject clause similar to the one here should be added allowing him or her to obtain such advice.

(11) Agreement for Sale (Right To Purchase)

Although not in common use, an agreement for sale is a contract for the sale of an interest in land under which the buyer agrees to pay the purchase price, over a period of time and, on full payment, the seller is obliged to convey title to the buyer.

Licensees should note that, when performing title searches, they may discover the notation ‘‘RP’’ or Right to Purchase. This is what the Land Title Office uses to denote an agreement for sale. Agreement for Sale is the term used in the real estate industry to denote a Right to Purchase. Licensees should also note that only one RP can be registered on a title.

The time period involved in an agreement for sale, whereby a seller can take action against a buyer who is in arrears on payments in an agreement for sale, is now the same as that for a mortgage.

Agreements for sale may still be advantageous in certain circumstances, for example, where the seller has an existing mortgage at an interest rate which is lower than current market rate. In that case, the interest rate on the agreement for sale would be at least either the current interest rate or a higher rate than the seller has on the current mortgage. In this case, the clause for an agreement for sale with an underlying mortgage would be the appropriate clause to use. The term of the agreement for sale should be concurrent with and not exceed the term of the first mortgage.

Some lenders do not allow assumption of an agreement for sale. It is important to ensure that the clients have confirmation in writing from either the mortgagee or the mortgagee’s lawyer.

When proposing agreements for sale, licensees should keep in mind the particular requirements of the seller and the buyer. The most important concerns will be the interest rate to be charged, the payments on the agreement for sale and the term of the agreement for sale. The terms of the underlying first mortgage will influence the position of the principals to the agreement for sale.

Agreement for Sale (With No Underlying Mortgage Which Allows Resale) Clause

The Seller will carry the remaining balance of $ (amount) by way of an Agreement for Sale, in a form acceptable to the Seller (which form will be provided by the Seller on or before (date) and approved by the Buyer on or before (date) ), at an interest rate of % per annum, calculated (frequency) not in advance, with a _____-year amortization period, ______-year term and repayable in blended payments of $ (payment) per month, including principal and interest (plus 1/12 of the annual taxes, if required by the Seller).

The Agreement for Sale will provide that if the Buyer disposes, or agrees to dispose of his or her interest in the property, the full amount then owing under the Agreement for Sale will immediately become due and payable at the Seller’s option.

The Seller will draw and register the Agreement for Sale at the Buyer’s cost.

The Buyer hereby consents to the Seller obtaining a credit report on the Buyer. Subject to the Seller approving the Buyer’s credit report on or before (date).

Ω If the seller has not sought legal advice before signing the offer, a subject clause similar to the one here should be added allowing him or her to obtain such advice.

Agreement for Sale (With Underlying Mortgage) Clause

The Seller will carry the balance of $ (amount) by way of an Agreement for Sale, in a form acceptable to the Seller (which form will be provided by the Seller on or before (date) and approved by the Buyer on or before (date) ), at an interest rate of %per annum calculated (frequency) , not in advance, with a (number)-year amortization period and a term to expire (date) ** and repayable in blended payments of $ (payment) *** per month including principal and interest (plus 1/12 of the annual taxes, if required by the Seller). The Seller covenants and agrees to pay the existing first mortgage in favour of according to the terms of the mortgage.

* Amount includes underlying mortgage.

** Term expiry date to correspond to underlying mortgage.

*** In order to protect the Buyer, this amount should be at least as large as monthly payments on the underlying mortgage.

Ω If the seller has not sought legal advice before signing the offer, a subject clause similar to the one here should be added allowing him or her to obtain such advice.

In most cases, the term expiry date of the agreement for sale will correspond with the underlying mortgage. In any event, the parties are advised to seek expert advice from a mortgage broker or accountant with regard to the terms.

Licensees must ensure that the parties are adequately informed regarding their risks if payments on the underlying mortgage are not made.

Licensees should also advise the buyer and seller to seek legal advice regarding their respective risks in this situation.

The Agreement for Sale Clause will contain the following additional provisions:

Agreement for Sale Clause

The Agreement for Sale is subject to an underlying mortgage held by (name) with an outstanding balance of approximately $ (amount) at an interest rate of % per annum calculated (frequency), not in advance, with a ‘‘balance due’’ term date of (date) , and with blended payments of $ (amount) per month including principal and interest.

The Seller covenants to maintain the underlying mortgage in good standing and to pay and satisfy in full when due or when the Agreement for Sale is paid off, and on any failure to do so, the Buyer may pay the underlying mortgage directly, and deduct such payment from amounts owing to the Seller under the Agreement for Sale.

If the Buyer disposes of or agrees to dispose of the property, the full amount then owing under the Agreement for Sale shall immediately become due and payable at the option of the Seller, and any penalty payable because of the resulting prepayment of the underlying mortgage will be paid by the Buyer.

The Seller will draw and register the Agreement for Sale at the Buyer’s expense. The Buyer hereby consents to the Seller obtaining a credit report on the Buyer. Subject to the Seller approving the Buyer’s credit report on or before (date).

This condition is for the sole benefit of the Seller.

Ω If the seller has not sought legal advice before signing the offer, a subject clause similar to the one here should be added allowing him or her to obtain such advice.

(12) Additional Mortgage/Agreement for Sale Clauses

Open (Prepayment in Part) Mortgage Clause

The principal balance may be paid at any time, in whole or in part, without notice, bonus, or penalty.

Open (Prepayment in Full) Mortgage Clause

The principal balance may be paid at any time, in full, without notice, bonus, or penalty.

Penalty (Prepayment in Part) Clause

The principal balance may be paid at any time, in whole or in part, upon payment of an additional (number of months) months’ interest as a penalty and by way of compensation for said prepayment.

Penalty (Prepayment in Full) Clause

The principal balance may be paid at any time, in full, upon payment of an additional (number of months) months’ interest as a penalty and by way of compensation for said prepayment.

Some lenders require an interest differential in lieu of or even in addition to a prepayment privilege commonly called a penalty. This amount is usually the loss of interest for the balance of the term. The licensee must confirm what is payable by a seller as it may affect his or her ability to clear title, pay a commission and/or buy again. A Mortgage Verification letter asking for details should be sent to the lender and kept on file for consultation during the offer presentation to ensure the seller’s status is protected.

A prepayment privilege is a designated amount of interest, usually three to six months, which is normally less onerous than the interest differential.