The purchase and mortgage of property is the "flip side of the coin" to the sale in a residential real property transaction. Just as the seller must retain a lawyer to close their part of the transaction, the standard real estate contract requires that the buyer also retain a lawyer to assist with their closing. Similar to the sale of property, there is often a wide variation in the cost of hiring a lawyer to conduct a purchase and mortgage. As such, knowing what happens on the purchase side of a transaction helps a client to understand what that lawyer does to earn their fee.
As I explained in the first part of this series, one cannot judge legal fees based merely on the time spent signing papers. The actual purchase documents execution represent only the tip of the iceberg for all of the work done.
In this Part Two of the "Legal Fees Explained" series, I will explain the basic stages involved in the purchase and mortgage of property and the minimum practice standards that, in my opinion, a lawyer must adhere to - regardless of the fee they charge - in order to properly complete the file.
As with the sale of property, a client will retain a lawyer once the offer on the home becomes unconditional. The lawyer will open a file in their internal office admin/accounting system and have a legal assistant begin to gather up all of the preliminary information.
The lawyer will need a copy of the offer, any applicable waivers and other conveyancing information (usually supplied by the listing realtor's office). Again, it is absolutely essential for the lawyer to have this paperwork at the earliest possible stage in order to review the contract and look for any additional terms and addendums that are potentially relevant. Just as on a sale file, if the realtor or the client are not clear on any relevant terms, they should ask the lawyer directly at this stage.
The lawyer will also need to know the contact information for the mortgage broker or lender and, more importantly, the mortgage lender will need to know the contact information of the lawyer. The lender will need to forward mortgage instructions for the buyer directly to the lawyer in order for the lawyer to complete the purchase. Unfortunately, the lender often does not forward mortgage instructions until a few days before the closing date, so if this information is not secured at the earliest possible time, it could result in delays in closing and cause undue stress and expense for the buyer.
Where applicable, if the buyer is simultaneously selling an existing home with their purchase, the lender will need to confirm that they have set up interim/bridge financing to ensure that the balance of down payment is available on closing along with the mortgage funds.
Also where applicable, (i.e. single family home or bareland condo unit) the buyer's lawyer will need to inquire with the seller's lawyer as to the status of the Land Surveyor's Real Property Report. Under the standard contract terms the RPR must be provided to the buyer as part of the closing documents. If the RPR is not accurate or legible or if there are any compliance or encroachment issues shown on the report, the buyer's lawyer will need to insist that the seller deal with any defects prior to closing.
In the case of a condo unit, the buyer's lawyer should inquire as to the contact information for the management company to determine the monthly condo fee contributions and whether there are any outstanding arrears of condo fees or special assessments. In doing this, the buyer's lawyer will be able to ensure that the seller's lawyer gives the proper undertakings to pay any outstanding financial obligations on closing.
The lawyer will need to conduct a tax and title search on the property, exactly the same as a sale file. In the case of condo units, a copy of the condominium plan will need to be ordered. The tax, title and condo searches need to be reviewed to determine if there are any taxes owing on the property or any other liens, mortgages or other financial encumbrances (such as lake fees or home owner association fees) that need to be paid out and discharged from the title.
Again, as with the sale file, the buyer's lawyer may also need to review other non-financial encumbrances registered on title such as encroachment agreements, restrictive covenants or caveats on a case by case basis.
The lawyer will need to obtain contact information (phone numbers and an e-mail address) from the client. At this stage it is also essential to confirm with the client how they wish to have their name described on the title - the lawyer needs to know the following information:
It is very important for the buyer to confirm if they will be out of town prior to the closing because, in almost every case (and unlike signing sale documents), most mortgage lenders will absolutely not allow a buyer to sign their mortgage forms by power of attorney.
The lawyer will also need to confirm which insurance broker will be setting up property insurance for the buyer on the property. It will be a condition of closing and mortgage funding that the buyer have insurance in place on the possession date.
As discussed in the previous paper on sale of property, I will repeat again that it is absolutely essential to pull this information together at the outset of the file opening so the lawyer may properly organize the file.
Once the preliminary information is organized, the lawyer's assistant will normally start to prepare the buyer's documents a week or ten days prior to the possession date. If the lender has not yet instructed on the mortgage, the assistant will prepare as many documents as possible in any event and, if the mortgage instructions arrive late, they will be prepared as soon as possible in order to try and close on time.
There are two main groups of documents for a purchase and mortgage of property - the Purchase Closing Papers and the Mortgage Papers.
As a point of fact, there are usually four to five times the number of documents that are prepared for the buyer to review and sign compared to the documents required to be reviewed/signed by the seller. Accordingly, I apologize for the length of this section of the paper.
The first document prepared by the assistant is a "draft" Statement of Adjustments, which states the purchase price, deposits paid and adjustments for taxes and other applicable items such as condo fees as per the contract and the closing date. A draft statement is recommended in order to prepare in advance for receipt and proof reading of closing documents sent by the seller's lawyer (in case the seller's lawyer makes any error in the papers they prepare).
The second document is a buyer's "net cash to close" statement, which is an estimate of the funds that the buyer needs to provide by way of bank draft to cover the balance of down payment, legal fees and other closing adjustments such as property taxes, condo fees, wire transfer fees, CMHC fees, and estimated interest adjustments.
The lawyer's assistant will also put additional notes on the cash to close sheet that need to be discussed with the client, such as insurance binder letter particulars. Where applicable, the lawyer's assistant will also attach for signing and review the lender ID verification forms, lender pre-authorized debit forms for the mortgage payments, property tax/tax instalment plan reminder forms, GST (new home purchase) forms and any other miscellaneous forms that may be relevant at this stage.
The next document (again, where applicable) is a statutory declaration attached to the Real Property Report, to be signed by the buyer, indicating that the RPR is accurate and that there are no additional buildings or other improvements that are not shown on the report. This is a standard form which is often required by the mortgage lender and also assists the lawyer in determining whether the seller has potentially made a false declaration when they forward the RPR with their closing documents.
The fourth set of documents are usually three Letters of Direction - first, one signed by the client, giving the lawyer the legal authorization to pay out the cash to close in accordance with the cash to close statement; secondly, a letter to the lender authorizing them to forward the funds to the lawyer's office on the closing date; thirdly, an Assignment of Mortgage Proceeds authorizing the buyer's lawyer to transfer the mortgage funds immediately on receipt of the mortgage funds to the seller's lawyer on the closing date. As with sale files, it is very important for a lawyer to have these documents signed because all funds are handled "in trust" on behalf of the client and the lender and authorization is mandated by our trust accounting rules.
The fifth document prepared is a Tenancy at Will Agreement, which the buyer signs in the event the cash to close is not released on the closing/possession date. The contract basically provides that, where the buyer is ready, willing and able to close and the seller may have not given sufficient time for the buyer to close, the buyer may obtain possession by signing the Tenancy Agreement. Similarly, where the buyer may have had some administrative delay in closing due to a courier or lender delay, the seller will normally allow possession if the cash to close is not released. The rationale here is that the buyer is not intentionally refusing to close and, by signing a Tenancy Agreement, the buyer is assuring the seller that they will pay the cash to close as soon as the funds are made available to close. In consideration of possession under the Tenancy Agreement, the buyer will usually pay the seller a small daily rental rate based on a formula set out in the contract.
The final purchase closing document is the Transfer Back, which is essentially a reverse document of the original Transfer of Land executed by the seller. The purpose of the Transfer Back is to enable the buyer's lawyer to convey title back into the seller's name in the event that the transaction falls through and the cash to close is not paid by the buyer.
Although it would be extremely rare that a Transfer Back would ever be used, it is necessary because of the way the closing progresses. The original Transfer of Land is almost always registered prior to the closing/possession date, and often the title has already conveyed to the buyer before keys and money are exchanged. In the unlikely event that the property is destroyed or severely damaged (fire, hail, flood, vandalism) the buyer is entitled to refuse possession of the property and can hold up payment of the cash to close. The deal may collapse, in which case the Transfer Back would then be registered to restore title to the seller. There is also a small risk that the buyer's lender may not fund a mortgage at the last minute, resulting in failure of payment of the cash to close, which may also trigger use of the Transfer Back.
In my practice, I try to explain the Transfer Back to the buyer as a safety valve for the process. Although I have never once had to use a Transfer Back in my legal career, it is a risk that must be covered because the closing process conveys title to the buyer before possession is granted and before the cash to close is paid.
It is extremely important to note here that there is a great deal of variation in the number of forms and documents that lenders require the buyer/borrower to execute.
Most major chartered bank lenders will, prior to instructing the lawyer, book their own initial appointment with the borrower to sign off on the loan commitment/approval and loan disclosure forms, pre-authorized debit forms and other miscellaneous documents. In those cases, the lawyer may have minimal preparation, limited largely to the land titles mortgage security forms.
Most other lenders - those who approve loans through a network of independent mortgage brokers - will typically instruct the lawyer with an array of documents to prepare for the borrower that can vary anywhere from 10 to 40 required initials/signatures.
Next I will discuss the kinds of documents that are prepared in most cases:
Conflict of Interest letter - In almost every residential mortgage the lender does not retain their own solicitor. The lender simply confirms who the solicitor for the borrower will be and they directly communicate with that lawyer specific instructions to prepare the mortgage documents. Basically the lawyer is made to act for the lender upon receipt of the mortgage instructions.
The difficulty with this arrangement is that the lawyer already represents the borrower/buyer and the lawyer must possible conflicts if they are to look after the best interests of their client.
The Conflict Letter basically acts as a disclosure form to the borrower/buyer client that the lawyer is acting for both parties. It explains to the buyer that the lawyer has an obligation of mutual disclosure of information and that the lawyer must represent the best interest of the borrower AND the lender.
Luckily, conflict of interest is not usually a problem with mortgages. In the first place, the lawyer is not negotiating any terms between the lender and the borrower and, therefore is not favouring one party over the other - the loan terms are usually worked out prior to the involvement of the lawyer. Secondly, if the lender did retain its own solicitor, the lender would almost certainly pass the cost of that lawyer onto the buyer in the form of mortgage lender fees. Indeed, it might add up to an additional $2,000 to the cost of closing a transaction, therefore it is rare that the buyer/borrower would insist on independent advice.
Mortgage Commitment/Mortgage Disclosure - It is extremely important to review with the borrower the Commitment and Disclosure forms. Here the lender will confirm the loan amount, CMHC fees (where applicable), interest rates and term of the loan, mortgage amortization and payment schedule. It will usually indicate if the loan is open or closed, if the rates are fixed or variable and, in many cases, whether the loan is paid monthly, weekly or bi-weekly.
The lawyer will be very careful to review these terms because they are almost always the terms used to prepare the summary of information on the mortgage registration forms. If a discrepancy or error is identified at this point, it is extremely important to rectify the discrepancy prior to registering the mortgage and closing. Failure to do so could result in a breach of instructions from the lender, or a failure to protect the interest of the borrower.
At this time it is also prudent to review with the borrower any pre-payment privileges allowed by the lender and payout penalty provisions as well as the cost of borrowing disclosure documents that show the borrower the total cost of credit (interest and any other lender charges) for the term of the loan.
Supplementary Mortgage Documents - Depending on the specific lender there are many kinds of documents that the borrower may be required to review and sign. Listed below are the more common documents:
Land Titles Office Mortgage - no matter what kind of loan the borrower arranges with the lender - whether it is a fixed rate 5 year mortgage with set payments or a variable rate open line of credit - the loan is secured at the Land Titles Office by the mortgage document. It is the primary form of security for loans against land. The borrower will generally review with the lawyer a standard registration form that summarizes the terms of the mortgage commitment letter. In most cases the mortgage is a short, one page form with a supplemental reference copy of standard mortgage terms attached.
Standard mortgage terms usually state the specific rights and responsibilities of the borrower vis-a-vis the lender. On a day to day basis, the borrower is responsible to be a "good homeowner" in consideration of the loan given by the lender. The borrower basically agrees to: a) pay the loan back in accordance with the payment terms, b) ensure that they pay the property taxes and (where applicable) condo fees and homeowner association fees, c) keep the property insured and d) keep the property in good repair.
In the case of condo units, the borrower is also obligated to follow the rules and by-laws of the condo corporation.
If the borrower defaults on their obligations, the lender may elect to use the standard mortgage term provisions to commence a foreclosure process to have the property sold by court order in order to get their money back.
As stated in the paper on selling a property, the tip of the iceberg is the actual meeting with the lawyer to review and sign all of the documents discussed in the previous sections.
Once the purchase and mortgage documents are prepared AND the transfer documents are received from the seller's lawyer, the legal assistant will usually contact the client to set up a suitable time to meet the lawyer and verify the office address for the appointment. In some cases, it is possible that the buyer will be booked for an appointment PRIOR to receipt of the closing documents from the seller's lawyer if the timing is tight for the closing, but it is preferable to have all documents assembled before meeting with the buyer.
The assistant will request that the client bring identification to comply with Land Titles and Law Society ID verification rules as well as a personalized void cheque for the PAD forms. The client will also be advised to obtain a bank draft payable to the law office in trust for the balance of the deposit and other closing costs as described above.
As with the sale transaction, the client will meet the lawyer in person. Again, it is strongly recommended that a lawyer actually meet with the client in order to ensure that the documents are properly signed and explained. The difficulty with a non-lawyer attending to document signing is the potential liability of a legal assistant giving improper advice or information. Only on rare occasions will a legal assistant in my office meet the client for execution of closing documents.
On the subject of Real Property Reports, it is very important to note that, if the RPR with compliance is NOT available for review, the lawyer must discuss with the buyer the risks of proceeding to close without it. On the one hand, the transaction may proceed if a copy of the RPR without compliance is available for review AND the seller's lawyer has given an adequate undertaking to obtain compliance or rectify compliance/encroachment problems if they arise. On the other hand, if the seller's lawyer cannot or will not give an adequate undertaking, it might be prudent to discuss whether it would be wise to close prior to receipt of the RPR with compliance. The risks are potentially problematic for the buyer if the cash to close is paid and the municipality subsequently requires non-compliant improvements on the property to be rectified after the fact.
In any event, the meeting for a purchase/mortgage may take anywhere from 30 to 60 minutes, depending on the issues. The client will be told about how the process works, how the title is transferred and how the money is paid on closing. The client is lastly instructed to call the realtor to arrange for handover of the keys to the property, at which point they can simply plan their moving arrangements.
Once the client has signed the purchase and mortgage documents, the buyer's lawyer will submit the Transfer of Land and the Mortgage to the Land Titles Office in accordance with the trust letter imposed by the seller's lawyer. The buyer's lawyer will confirm to the seller's lawyer that a) the down payment or "cash difference" has been paid by the buyer, b) the buyer has confirmed their home insurance and c) the buyer has signed all purchase and mortgage documents. The buyer's lawyer will requisition the mortgage funds from the lender for the day of possession.
On the possession/closing day, the real estate agents usually communicate that the keys to the property will be released to the buyer. The buyer's lawyer will obtain the mortgage funds from the lender and immediately forward the funds by courier/direct deposit to the seller's lawyer. Funds are typically forwarded in accordance with terms that they are releasable once possession of the property is made available to the buyer.
Co-ordinating the transfer of closing funds is usually not difficult for the buyer's lawyer but if there is any delay on the part of the lender funding the mortgage, it can sometimes back-up the transfer of funds to the seller's lawyer. This may also be exacerbated by road conditions for couriers delivering trust cheques or by the sheer volume of closings that may happen on a typical busy end of the week or month.
In these cases, just like on the sales, the legal assistants are often extremely busy confirming key releases and the disbursement of money, but once the cheque arrives at the seller's lawyer (and provided there is no issue with possession), the transaction is considered closed.
Once again it is extremely important to reiterate that a lawyer needs well trained and reliable assistants to do this work. Careless errors or lack of urgency to get funds paid by noon on the possession date will result in a late closing that can cost the client interest and generate bad will and frustration over what should have been an enjoyable experience for the buyer.
Our office will almost always close a purchase on time. If there is an unforeseen administrative delay or valid reason that the transaction does not close, both the client AND their real estate agent will be made aware and given proper advice on how it will be resolved. If the delay is the result of an internal problem from the law office, I ensure that the client does not pay any late closing costs.
As I explained on the paper for home sales, although the process looks reasonably straightforward, there is a tremendous amount of work and documentation to ensure a timely and proper closing. Keep in mind that funds are transferred from the lender to the buyer's lawyer to the seller's lawyer to the seller in a time frame of around 6 hours - it's indeed a miracle that most deals close on time.
Whether we act for a client on a sale or a purchase/mortgage, our office usually bills based on a flat-rate, all inclusive charge. In our experience, an all-inclusive fee provides the client with a clear picture of what they are paying for in advance. Many law offices charge a basic "fee" and add on additional disbursements and other charges such as the tax/title search, faxes, photocopies and couriers, postage and other miscellaneous fees plus GST.
At the end of the day, there is nothing wrong with a lawyer rendering their bill either way, but the main issue is that the client understands the overall picture of what work is involved from start to fmish AND the client is satisfied that the lawyer did a proper job for the fee they charged.
In addition to the lawyer's account, the client is entitled to a report letter which encloses a copy of the Statement of Trust Monies, which shows all funds received and disbursed by the lawyer on behalf of the client. The client should be given a copy of the new title, the mortgage registration form, the RPR with compliance (where applicable), and all relevant purchase and mortgage documents that the client will need to retain as a record of their purchase. Again, the client report ought to be summarized on a cover page and mailed to the buyer within one or two weeks of the closing date at the latest.
Once the client has received their report and title closing documents, they can basically file their papers and forget about the transaction. But for the buyer's lawyer, there is still much work to do.
In order for the lawyer to complete the file, they must ensure that the seller's lawyer completes their undertakings: a) to payout and discharge the seller's financial encumbrances and provide a final Certified Copy of Title to the buyer's lawyer; b) where applicable, to provide an estoppel certificate evidencing that the seller has no further financial obligations for a condo unit; c) also where applicable, to provide the RPR with compliance (when it is not provided prior to closing).
Normally these undertakings are fulfilled within 6 to 8 weeks of the closing date, at which point the lawyer will send the final title to the buyer (or other documents as the case may be). The lawyer will also prepare and submit a final report to the lender, and fulfill their trust obligations to ensure that the lender has a secured first financial charge on the title.
Although most files are routinely followed up and closed in this manner, regrettably there are a significant number of purchase transactions where the seller's lawyer does not or cannot comply with the undertakings in a reasonable period of time. It is not uncommon for it to take in excess of 4 or 5 or 6 months for the seller's lawyer to follow through on their undertakings.
The problem is that the lawyer has relied on these undertakings and have created subsequent trust obligations to their clients - both the buyer and the lender. If these obligations are not met, it can once again result in loss of good will with the client and a potential complaint to the law society by the lender and buyer for failing to provide the final title in a reasonable time.
In order to avoid this situation, the buyer's lawyer must often spend considerable time and effort following up with the seller's lawyer - in some cases, gently reminding them to be diligent to follow up on their undertakings, and in other cases, threatening legal action or law society complaints for failure to follow up.
Just as I explained in the paper on sale transactions, a law office that is weak on this follow-up can be broken. If a lawyer does not have adequate administrative staff and office procedures in place to deal with obtaining final copies of title and submitting final reports to lender and clients, the lawyer will not only lose future clients and business but also face conduct action with the Law Society.
Fortunately these are exceptional cases and most lawyers do not fall into these traps.
In summary, I want to reiterate that this second paper is a basic summary of the purchase/mortgage file. It is not a comprehensive list of all matters that may have to be dealt with on a closing and, as with the sale file transaction, it does not cover the scope of advice a lawyer may be asked to give at the stage where the offer is still being negotiated.
In any event, I hope that I have provided a fairly comprehensive explanation as to what our office does for the fees we charge and I also hope that I have given the reader a better understanding and appreciation of the due diligence required by a lawyer for the conduct of a purchase and mortgage.
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