A private mortgage is a loan by a private entity (individual, corporation, partnership, etc.) that is secured by real property. Private mortgages may be used to secure existing debts, or they may be security for new loans being advanced.
Institutional lenders are deemed to be sophisticated, as one of their primary business models is the borrowing and lending of monies. There are a series of checks and balances in place to protect borrowers in the case of a standard institutional mortgage transaction. Private lenders on the other hand generally do not lend in the ordinary course of business, and as such often require additional advice with respect to such matters as appropriate disclosure to borrowers and due diligence matters.
It is important to note that the role of your lawyer, who will be involved in the transaction, is not to provide business advice (ie. is the loan a ‘sound investment’?). Business decisions are to be made by the lender.
In 2008, the Province of Ontario passed the Mortgage Brokerages, Lenders and Administrators Act (the “Act”). The Act came into force on July 1, 2008 and it represents a major overhaul of the Mortgage Brokers Act. The Act added a new licencing and regulatory regime for mortgage agents, brokers, brokerages and administrators who act as mortgage brokers in Ontario. The objective of the government of Ontario in passing this Act was to increase consumer protection and help reduce mortgage fraud. It provided a series of new protections for borrowers. Section 4 of the Act requires private entities that carry on business as mortgage lenders to be registered under the Act and to hold a valid brokerage licence. The courts have not yet considered the formal wording of the section (ie. in the business of mortgage lending).
Below I have outlined issues that all lenders should address in every case where monies are secured by a charge on real property. This list is not comprehensive, and it is advisable to consult with a legal professional to obtain advice on each specific transaction:
- Loan/Mortgage documentation – having a solid loan agreement is of paramount importance. This document will detail the business terms of the lending (ie. interest rate, term, maturity date…), the security to be provided, representations and warranties of the parties and so on. This is always the first step in the process.
- Additional covenants – are you satisfied with the borrower’s covenant to repay the loan? What steps have you taken to investigate the borrower’s covenant? Do you require any other parties to guarantee the loan?
- Value of the assets – you must satisfy yourself on the value of the secured asset. This is normally done by way of an appraisal. The ratio of loan to value is important. It will provide the lender with some protection in the event market values decline during the term of the loan. It will also provide some room for the accumulation of costs and interest if the borrower defaults on his or her obligations under the mortgage and enforcement proceedings are undertaken. Other considerations here are reviewing and approving leases if the asset is an income producing property.
- Due diligence on physical nature of the assets – this would include such investigations as building condition reports, inspection reports, environmental studies, fire code compliance, etc…
- Title and off-title due diligence matters – your solicitor will guide you on the process and necessity of conducting various searches specific to your transaction to ensure that you have a valid mortgage and that the property can be legally used for the purpose intended. These investigations typically include title searches, zoning inquires, work order searches, tax certificates, electrical safety authority compliance, etc…
Any party involved in private mortgage lending should ensure they obtain the appropriate advice before entering into any agreements to lend money to ensure that their interests are protected.
For more information on this subject matter, please contact a member of our Real Estate group or call 613-238-8080.