Undertakings 101: Manage your risk
There is often some confusion around the purpose of undertakings and how they should be structured. Be the lawyer who solves closing problems without taking on risks.
Undertakings are essential elements in real estate transactions. They are commonly given by one party to another to avoid delays in closings, or as a courtesy to the other party for a matter which cannot be attended to by the closing date.
They are either given on behalf of a client or personally by the lawyer acting on the deal.
Typically, in a real estate transaction there are four types of undertakings that may be given or accepted on closing:
- A client’s undertaking on his or her own behalf: this is the most frequently used undertaking, for example, a vendor’s undertaking to readjust the statement of adjustments.
- A solicitor’s undertaking on behalf of his or her client: often this is used because the client is unavailable to execute an undertaking on his or her own behalf. Do not accept or give such an undertaking without clear instructions from your client (confirmed in writing), and expressly state that such an undertaking is given without personal liability.
- A solicitor’s personal undertaking: the most common kind is an undertaking to discharge an institutional mortgage. Before giving such an undertaking, ensure that you are able to fulfill it; and, before accepting such an undertaking, ensure that the lawyer giving it has the power to fulfill it.
- A solicitor’s “best efforts” undertaking: this is usually given when the matter is beyond the lawyer’s control and the other side is asking the lawyer to do his or her best; for example, where a Committee of Adjustment, municipal council or a private party must decide to approve or agree to something. A “best efforts” undertaking is the riskiest type of undertaking and you should exercise caution when giving or accepting it.
Most law societies have specific rules around giving and accepting an undertaking. The Law Society of Upper Canada has codified rules concerning undertakings in the Rules of Professional Conduct. Under Rule 7.2-11, a lawyer shall not give an undertaking that cannot be fulfilled and shall fulfill every undertaking given. The commentary to the rule provides the following guidance:
- undertakings should be in writing;
- the wording of undertakings should be clear and unambiguous;
- using “on behalf of my client” does not release the lawyer from the obligation of honouring the undertaking; and
- if the lawyer does not intend to take personal responsibility, then this should be clearly stated in the undertaking.
- it is good practice to include a time period within which undertakings should be fulfilled;
- in some cases, providing for contingencies may be appropriate, for example in situations where the completion of an undertaking depends on certain events taking place – provide a course of action if the events do not take place;
- the word “undertaking” does not need to be used by a lawyer to create an obligation;
- non-lawyers should not be permitted to give or accept undertakings on behalf of a lawyer or client unless they have been directly instructed to do so. Any undertaking given or accepted by a non-lawyer is the responsibility of the supervising lawyer;
- do not give or accept personal undertakings to discharge private mortgages; this type of mortgage should be discharged on or prior to closing; and
- do not accept a “best efforts” undertaking unless you have explained the risk to your client (that the other lawyer’s best efforts may not result in the matter being resolved) and he or she instructs you to go ahead. Confirm the instructions in writing.
Manage your risk by analyzing when to give and accept undertakings. Consider the following three concepts: first, the lawyer should have control over the completion of the undertaking; second, the lawyer must be able to complete the task; and third, the undertaking must be clearly communicated in unambiguous terms. When the elements of competence, control, and clarity are missing – giving and accepting an undertaking can be risky.
Make clients aware of all undertakings relating to their transactions; make sure they understand the risks associated with giving or accepting each undertaking.
Finally, simply giving an undertaking does not replace the completion of the action required. Implement a system to ensure every undertaking that you give or accept is recorded in a tickler system and satisfied in accordance to its terms (and any applicable law society requirements) – in a timely fashion.
This article is by Mahwash Khan, Communications Specialist at LAWPRO.