The lender client: not just a third wheel in a purchase transaction
It isn’t uncommon for real estate lawyers to be retained to act for both the purchaser of a property and the mortgage lender that is financing the purchase. However, a review of lender claims against lawyers for negligence suggests a misconception by some lawyers who believe that their only obligation to the lender client is to register the mortgage. The reality is that unless the lawyer’s retainer is explicitly limited to registering the mortgage (which should be confirmed in writing where possible), the solicitor should always be mindful of the additional responsibilities that are owed to the lender leading up to the advancement of funds and registration of the mortgage.
Throughout the course of the transaction, solicitors should always consider whether information received from any party, a title search, or other due diligence may be considered information material to the lender’s decision to advance funds under the mortgage. This includes information that may suggest that the property is being purchased at an inflated price. As well, information that suggests that the purchaser is misrepresenting the true circumstances of the purchase should be reported to the lender before the solicitor proceeds to close the transaction and advance funds under the mortgage.
In the case of the institutional lender client, the lawyer does not usually meet with the client prior to the closing but instead may have some exchange of written correspondence with the client. Typically, institutional lenders post their instructions on a website. It is up to the solicitor to check to see if there have been any changes to the standard instructions since the last time the solicitor acted for that lender.
The solicitor must comply with any specific written instructions from the lender to the extent possible and advise the lender of any limitations in the solicitor’s ability to do so. For example, some lenders will require a solicitor to ensure that a particular mortgage payee clause is included in the fire insurance policy for the property. However, given that the solicitor will only have access to an insurance binder prior to closing (which does not include the terms of the policy), it would be prudent for the solicitor to advise the lender client about the limitation on the solicitor’s ability to ensure that the requested mortgage clause is included in the policy prior to closing.
When institutional lenders sell a property under power of sale and suffer a shortfall on the mortgage, the real estate transaction is often reviewed by the lender to determine whether the solicitor that acted was somehow negligent. It is common for LAWPRO to see these types of claims. Therefore, it is especially important for solicitors to be diligent about ensuring that lenders are made aware of all material information prior to advancing funds under the mortgage.
In addition, in many cases, the mortgage lender is not necessarily an institutional lender such as a bank. In light of the commonly held view that real estate is a safe investment, many private individuals use mortgage investments as a means of saving for retirement. Private lenders often engage the assistance of mortgage brokers or trust companies in securing a mortgage investment. These intermediaries are often entrusted by the private lender to provide instructions to the solicitor. However, such retainers can be a minefield if the solicitor is not careful to confirm the identity of the client with the parties and the person from whom the solicitor is taking instructions. It is vital that the solicitor communicate with the “true” (i.e., beneficial) client with respect to all material information. In addition, of course, the solicitor must comply with the Law Society of Upper Canada obligations regarding the completion of documentation (typically a Form 9) which establishes that the scope of the solicitor’s retainer does not include providing advice regarding the value of the investment.
Furthermore, private mortgage investments tend to be higher risk than those entered into by institutional lenders such as banks. Therefore, it is important for solicitors to advise private lenders of information material to the decision to advance funds even if the private lender may be considered a sophisticated client. Such information may include arrears in a prior mortgage or tax arrears on the property. It is also important to ensure that the solicitor follows up with the client regarding all the necessary documentation required in the transaction such as investment authority forms. Once the solicitor’s duty to the client is discharged, the most prudent way to ensure protection from any eventual claim is to confirm all instructions in writing.
Always remember that solicitors owe a duty to protect the interests of lender clients in addition to the interests of purchaser clients.