Article by David O’Brien, ©2005 Blake, Cassels & Graydon LLP
This article was originally published in Blakes Bulletin on Real Estate & Mortgage Financing - March 2005
Last minute issues often arise on mortgage loans which cannot be completed before closing. A work order may be discovered, a utility account may be outstanding or a compliance letter confirming the status of a registered encumbrance may not be available. If the lender considers the issue to be relatively minor, the lender may elect to close the transaction and advance the loan on the basis of an undertaking from the borrower or its solicitor. Unfulfilled undertakings can be a source of irritation after closing. Following are some issues and pointers designed to ensure that undertakings are satisfied.
Borrowers’ Undertakings. The last minute circumstances giving rise to the necessity for an undertaking will invariably result in the undertaking being hastily drafted. Notwithstanding this, the lender and its solicitor should ensure that the drafting is as clear as possible. A well-drafted undertaking is the most effective assurance that the matter to be corrected will be addressed promptly and completely. In this regard,
- a specific (but reasonable) time frame should be set out for the satisfaction of the undertaking, rather than a vague period such as "as soon as possible" or "within a reasonable period of time".
- the undertaking should provide that it constitutes a "loan document" and that failure to satisfy the undertaking will constitute a default under the loan agreement or mortgage.
- consider providing for a holdback from the mortgage advance to secure the performance of the undertaking and stipulate that if the undertaking is not satisfied, the lender may utilize the holdback to satisfy the undertaking (and its costs in doing so).
- consider whether the undertaking should be unqualified or limited by expressions such as "use its best efforts" or "use its commercially reasonable efforts". For certain matters entirely within the borrower’s control, such as the payment of a utility account, the undertaking should be unqualified. Other matters, such as obtaining a minor variance or a compliance letter from a governmental authority, are beyond the borrower’s control and it is usually appropriate that the borrower’s obligation be qualified.
Solicitors’ Undertakings. Lawyers frequently give undertakings in connection with the completion of mortgage transactions. A solicitor’s undertaking may be either (i) personal, or (ii) given on behalf of the solicitor’s client. Either may be qualified or unqualified in nature, depending on the subject matter of the undertaking. Lawyers must be careful to ensure that they have their client’s instructions before executing and delivering an undertaking on behalf of clients. In Ontario, solicitors’ undertakings are governed by the Rules of Professional Conduct which provide that "a lawyer shall not give an undertaking that cannot be fulfilled and shall fulfill every undertaking given". The commentary to the Rules goes on to provide that "undertakings should be written or confirmed in writing and should be absolutely unambiguous in their terms. If a lawyer giving an undertaking does not intend to accept personal responsibility, this should be stated clearly in the undertaking itself. In the absence of such a statement, the person to whom the undertaking is given is entitled to expect that the lawyer giving the undertaking will honour it personally. The use of such words as ‘on behalf of my client’ or ‘on behalf of the vendor’ does not relieve the lawyer giving the undertaking of personal responsibility".
Enforcement of Solicitors’ Undertakings. A solicitor’s personal undertaking may be enforced summarily upon application to court, provided the undertaking was given in the solicitor’s professional capacity and not merely as an agent on behalf of the borrower. The court’s jurisdiction to enforce solicitors’ undertakings is based on the right of the court to require its officers to observe a high standard of conduct. To be enforceable, a solicitors’ undertaking must be "clear in its terms".
Enforcement of Borrowers’ Undertakings. In Ontario, there is no case law dealing with the enforcement of borrowers’ undertakings by mortgage lenders. This is perhaps not as surprising as it may first appear. The subject matter of most undertakings is relatively minor in the context of the loan transaction and relatively easy for borrowers to satisfy. Furthermore, although a well-drafted undertaking will contain the right to put the loan into default if the undertaking is not complied with, this device is more effective as a threat than as a practical remedy. In most cases, the key to ensuring the performance of borrowers’ undertakings is in the drafting. It is important to provide for clear, unambiguous obligations to be performed within a specific time frame coupled, where appropriate, with a holdback in a material but realistic amount.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.