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By Andrew L. Jeanrie The risks of mortgage assumption mortgage removed but there may be valid business reasons for the purchaser to assume the mortgage. However, what are the legal risks? On the flipside, what risks does a vendor take on when sell- ing a property subject to an existing mortgage? I Purchaser's considerations There are a number of factors to consider, as the purchaser, on whether or not to assume an existing mortgage. These factors include: • Market conditions may dictate whether it is wise for a purchaser to assume a mortgage. If mortgage lending is conservative at a particular point in time, assuming a mortgage may make practical sense. • The purchaser should carefully review all the mortgage documentation and provide for a condition in the purchase agreement to ensure the mortgage documentation is satisfactory to the purchaser, the lender provides a mortgage assumption statement to the purchaser and vendor, and the lender provides its consent to the assumption of the mortgage by the purchaser. It is common to include this type of condition as part of the due diligence conditions in a purchase agreement. •The purchaser may want to consider whether it is likely that the vendor will be released from all of its liabilities under the assumed mortgage. If the market conditions are such that lenders are acting more conservatively, then this t is very common for a purchas- er to be buying a property with an existing mortgage registered against its title. In most cases, the purchaser will want to have the could delay the purchase insofar as ensuring adequate time for the lender to be comfortable with providing a release to the vendor. Further, the lenders may not grant a release at all, in which case the vendor may decide not to proceed with the transaction. As such, a purchaser should ask a vendor before proceeding too far into the due diligence as to whether the vendor has inquired about the likelihood of a release from the lender, and/or provide for a short conditional period in favour of the vendor to obtain such release so that the purchaser is aware up front whether this is a deal breaker to the vendor. • Customarily, the purchaser will assume the exact documentation which has already been agreed to by the previous vendor, since the lender is unlikely to allow revisions to mortgage documents or amendments to material terms. However, the purchaser should be aware the lender may, and often does, require additional items to satisfy the lender to grant its consent, including any or all of the following: a) additional security may be required, such as guarantees, if the purchaser's covenant is not strong enough, and specific assignments of leases if there are additional leases; b) an environmental indemnity if there are any environmental issues; c) amending the documents to address any concerns, incorporate new laws or amendments to laws since the time of the original borrowing; d) amending the documents to include more onerous requirements in terms of financial reporting; e) a "bring-down" certificate to bring down any representations and warranties that were in the original loan package; f) additional due diligence materials, such as updated appraisals, building condition reports, environmental reports, etc.; g) insurance coverage satisfactory to the lender; h) opinions from the purchaser's lawyer with respect to corporate enforceability; i) opinions from the purchaser's lawyer with respect to an update of title since the original borrowing and/or requiring the purchaser to pay a fee and obtain title insurance; and j) payment by the purchaser of an assumption fee. Vendor's risks From the vendor's perspective, there are two primary issues to consider: • One of the greatest risks to a vendor in contemplating selling a property subject to a mortgage is whether the lender will release the vendor from its liabilities for payment of the debt. Increasingly, lenders are not as willing to let the vendor off the hook and shift the risk to the purchaser. The vendor has to weigh remaining legally responsible for payment of the debt until the debt is discharged against the sale of the property. If the lender is unwilling to release the vendor, the vendor should look to obtain an indemnity from the purchaser and consider taking security from the purchaser, which will likely require the lender's consent. • Increasingly, purchasers are asking vendors to split the assumption fees with them. Depending on market conditions, a vendor may consider taking on such costs to encourage a purchaser to purchase the property and assume the mortgage. IH Andrew L. Jeanrie is a lawyer in the commercial real estate group at Fraser Milner Casgrain LLP's Toronto office. INHOUSE JUNE 2010 • 11