To avoid real estate claims: take instructions from the party with value at risk
If you’ve read even just the title of today’s risk management post, you’re on your way to avoiding a real estate claim.
For seasoned real estate lawyers, the process of taking instructions, formulating or answering requisitions, and closing the deal can become, to a large extent, routine. An “ordinary” set of instructions with respect to an “ordinary” property may result in what appears to be a smooth and ordinary closing. But sometimes dangers lurk beneath the surface.
One such danger arises where the lawyer deals, for the purpose of the transaction, with someone other than the party who will be on the hook for the mortgage loan. While there can be legitimate reasons for taking instructions from a third party – for example, a language barrier, or a power of attorney – the insertion of an intermediary into a deal opens the door to fraud and to a potential claim against the lawyer by the person who is bound by the loan.
Regardless of the reasons proffered, when asked to act on instructions from an intermediary, lawyers should proceed with extreme caution and should be on the alert for the red flags of fraud. Whenever possible, the lawyer should take steps to confirm the instructions directly with the proposed borrower. If this is not possible, the lawyer should personally investigate the reasons for the use of an intermediary, and obtain written documentation of the borrower’s grant of authority to that person (for example, a copy of the power of attorney; or a document, signed by the borrower, authorizing the third party to act as agent or translator). A power of attorney relied upon in a real estate transaction must be registered on title. Where the third party is not the borrower’s attorney, the lawyer should personally witness the borrower’s signature of mortgage and title documents.
Want to learn more about how to avoid a real estate claim? Here are some useful resources:
- The Law Society of Upper Canada Guidelines on Powers of Attorney in Real Estate Transactions
- LAWPRO CEO: Six things I hate to read in a real estate claim file by Kathleen Waters
- Steer clear of real estate claims by asking these five questions on every deal by Tim Lemieux
- The five faces of real estate fraud by Kathleen Waters
- practicePRO’s Fraud Fact Sheet
- The Law Society of Upper Canada guidelines for Identifying Clients and Third Parties