Promise to purchase and financing of an immovable: the importance of the section relating to new hypothecary loan

Financing can make or break a real estate transaction. Therefore, to properly advise his clients, it is important that a real estate broker fully understand the obligations relating to new mortgage loan. These obligations can be found under section 6 of various mandatory promises to purchase forms of the OACIQ.

Here are the major points to keep in mind.

Clause 6.1: Terms and conditions of the mortgage loan to be obtained by the buyer

Clause 6.1 sets out the conditions that the mortgage loan must meet. In this regard, the buyer undertakes to take in good faith, as soon as possible and at his expense, all steps necessary to obtain a mortgage.

But what good faith means? Although it must be analyzed in each situation, good faith is generally defined as the behaviour of a person acting with sincerity, honesty and loyalty in performing an obligation he entered into.

Regardless of the amount of the loan, the buyer’s broker must always clearly indicate under clause 6.1 of the promise to purchase all the elements of the scenario of financing sought by the buyer, namely the amount of the loan, the maximum interest rate not to be exceeded, the maximum period of amortization and the minimum term required by the buyer. In the case of an undivided co-ownership, it is also necessary to indicate the name of the financial institution to which the financing application must be made to meet clause 4.3 of the form Exclusive brokerage contract – Undivided co-ownership – Share of a chiefly residential immovable held in undivided co-ownership.

An interest rate must be indicated. Real estate brokers must not enter “current rate”, draw a line or not indicate the interest rate when talking about a mortgage loan. These practices should be banished to protect the buyer against the risk of ending up with an interest rate charged by the lender that the buyer cannot afford to pay. Therefore, the broker must indicate the maximum real rate that the buyer is willing to pay to ensure that the buyer is not obligated to borrow at a higher rate.

Clause 6.2: Submission by the buyer of the copy of lender’s undertaking within the specified period

The buyer must supply a copy of the mortgage lender's undertaking to grant the loan within the time period specified in clause 6.2. For the lender’s undertaking to be valid, it must confirm in writing that a loan in the amount indicated under clause 6.1 or in a higher amount is granted to the buyer without any conditions. A mortgage pre-approval is not evidence showing the mortgage lender’s undertaking to grant the buyer the loan requested.

The real estate broker must allow a sufficient time period for obtaining the financing, especially when the loan must be secured. Usually, this period should be at least 14 days. This will help the buyer avoid asking for an extension of the time period, which can be refused by the seller, or allowing the 5-day time period under clause 6.3 to pass while continuing to look for a loan and, consequently, risking the cancellation of the promise to purchase by the seller.

The number of days allowed for the condition to be fulfilled must refer to consecutive days, without exception. (The deadlines included in the mandatory promise to purchase forms concerning financing are always calculated in consecutive calendar days, i.e. periods of twenty-four hours, from midnight to midnight. Saturdays and Sundays as well as statutory holidays are counted as calendar days. The day marking the starting point, i.e. the date the promise to purchase is accepted, is not counted, but that of the deadline is.)

The real estate broker must not write in "working days" or "legal days" as these expressions may create ambiguities in interpretation. This time period begins to run the day following the signing of the promise to purchase acceptance, but it is not a strict time frame since extending it does not automatically void the promise to purchase. However, the seller could render the promise to purchase null and void as of the expiry of the deadline, in accordance with the provisions of clause 6.3.

Receipt of undertaking

Under clause 6.2, the condition will be deemed fulfilled once the seller receives a copy of the mortgage lender's unconditional undertaking within the specified period. The buyer's broker must keep proof that the seller has received the mortgage lender's reply within the period stated in clause 6.2.

The mortgage approval must come from a lender, be real and unconditional, and contain at least the following information:

• The name and address of the lender;
• The name(s) of the borrower(s);
• The address of the immovable concerned by the application;
• The amount of the loan or the fact that the loan is approved for an amount equal to or higher than the amount indicated in the promise to purchase;
• The name of the loan officer and the financial institution’s contact information (no signature required).

Since the lender’s undertaking must be unconditional, under no circumstances can the document provided state that approval is subject to conditions that are specific to the buyer’s situation, for example:

• proof of employment;
• additional documents to be provided;
• repayment of a car loan;
• the condition of selling of the buyer’s property when such condition has not been included in the accepted promise to purchase;                 
• conditions imposed by the lending financial institution, such as a prior appraisal or inspection of the property that may affect the loan.

The document “Mortgage Undertaking” or the lender’s approval letter may, however, contain statements pertaining to the usual conditions of a mortgage approval, such as the absence of change in the buyer’s financial situation or in the condition of the immovable.

When all the pages of the document “Mortgage Undertaking” have been sent to the seller by the buyer and the file is deemed complete by the lender, there is no need for the real estate broker to require an additional approval letter from the financial institution, except under special circumstances.

Different types of documents can be provided

1. A “Mortgage Undertaking” generated via the Finastra (Expert Filogix) application

   1. Example of an unconditional mortgage approval letter produced by “Finastra (Expert Filogix)”

2. Approval letter from a financial institution or virtual lender

   1. Samples of unconditional mortgage approval letters.

    

3. A letter of approval from a private lender

   1. Clause 6.1 of the promise to purchase deals with a "loan secured by immovable hypothec" and clause 6.2 indicates "copy of a mortgage lender's undertaking." The section is therefore adequate for all lenders, including private lenders. However, you need to be careful with private lenders. The real estate broker will be able to check that the appropriate rate is indicated in clause 6.1 and that the undertaking complies in all respects. The OACIQ recommends that the mortgage undertaking be accompanied by a letter from the private lender’s financial institution certifying that the lender has the necessary funds for the loan.

Clause 6.3: exercising of seller's options

This clause allows the seller to take action if the buyer cannot prove that he has obtained an undertaking from a mortgage lender in accordance with clauses 6.1 and 6.2 of the promises to purchase PP (Chiefly residential immovable containing less than five dwellings excluding co-ownership) and PPD (divided co-ownership). The seller may then, within five days of the expiry of the time period specified in 6.2 or following receipt of a notice of refusal from the mortgage lender, exercise one of the two options mentioned in clause 6.3:

• Option (a) Designating to the buyer a mortgage lender of his choice with whom the buyer will have to apply for a new loan.

• Option (b)Making the promise to purchase null and void.

If the seller chooses to designate a lender to the buyer, he must inform the buyer in writing, stating the lender's name and the deadline for obtaining a new loan undertaking in accordance with clause 6.1. To send the notice, the broker can use the recommended form Notice and follow-up on fulfilment of conditions (NF). If the buyer cannot get the financing within the period specified in the seller's notice, the promise to purchase shall become null and void. However, receipt within that period of a written undertaking from the mortgage lender designated by the seller shall have the effect of fully satisfying the condition.

Note that under clause 6.3a when the seller refers the buyer to a mortgage lender, he may not designate himself as mortgage lender. The Court of Appeal, the highest court in Québec, has concluded that according to the wording of the clause, the mortgage lender had to be a third party to the transaction and that it was therefore impossible for a seller to also be the mortgage lender.

The five-day period is a strict deadline

Contrary to the deadline set out in clause 6.2, the five-day period stated in clause 6.3 is considered a strict deadline since failure by the seller to take action during this period will automatically void the promise to purchase. It would nevertheless be more prudent for a seller who does not wish to avail himself of the first option to send a notice to the buyer rendering the promise to purchase null and void as soon as the five-day period begins, and before accepting another promise to purchase. This action will allow the seller to avoid the situation where the buyer gives him a copy of a valid mortgage lender’s undertaking within five days following the initial deadline. Moreover, even after the expiry of the five-day period, it would be preferable for the seller to confirm the cancellation of the promise to purchase by sending a written notice to the buyer.

Undivided co-ownership: absence of an undertaking and seller’s options

If the promise to purchase concerns an “undivided co-ownership” (PPU), the seller will not have the option to refer the buyer to another financial institution other than the one indicated in 6.1. He can ask the buyer for the refusal proof of the financial institution to grant him the amount indicated in clause 6.1 or a higher amount. At the end of the 5-day time frame indicated in clause 6.3, the promise to purchase will become null and void.

Obligations of the parties

And last, it is important to mention that the obligations outlined in section 6 of promises to purchase PP, PPD and PPU concern only the buyer and the seller and not their brokers. Therefore, if the notice has not been received or issued by the parties to the contract, the promise to purchase could become null and void. A broker who prepares a notice for a selling client under clause 6.3 must make sure the buyer receives it and acknowledges its receipt within the deadline.

Can the seller accept a promise to purchase presented by another buyer within the period specified in clause 6.3?

Yes, by placing it in 2nd place and making it conditional upon the cancellation of the first promise to purchase (using Annex R – Residential immovable form). If the seller wishes to render the first promise to purchase null and void upon expiry of the period set out in clause 6.2, it is preferable that he confirm this cancellation in writing to the first buyer, notably to avoid selling the property twice.

In this regard, the broker could use the Notice and follow-up on fulfilment of conditions form, even after the expiry of the deadline indicated in clause 6.3.

If, upon the expiry of the time periods for obtaining financing and before the seller applies the mechanism set out in clause 6.3, the buyer provides a mortgage undertaking with a loan amount greater than the one specified in clause 6.1, can the seller refuse it?

No.  Clause 6.2 states that the mortgage lender’s undertaking must be equal to or greater than the amount set out in clause 6.1. Receipt of such an undertaking would therefore satisfy the conditions specified in clause 6.1. In addition, it is important to point out that the time period indicated in clause 6.2 is not a strict deadline and that failure to comply with it does not automatically render the promise null and void.