Canada: Preparing The Property For Sale – Financing Considerations

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Commercial Real Estate, September 2009

Market Considerations

With recent dramatic changes in the lending market and lending criteria, the purchaser's ability to finance the transaction has taken on heightened importance and may require greater creativity on the part of both the vendor and the purchaser. In terms of the purchaser's ability to assume existing mortgage financing, the consent of the mortgage lender may no longer be automatic, the time required to obtain such consent may be longer (particularly when a servicer under a conduit is involved), the release of the vendor is unlikely, and additional guarantees or changes to certain covenants may be requested by the mortgage lender.

Existing Mortgage Financing

In preparing the property for sale and the possible assumption of existing mortgage financing, the vendor should review the existing mortgage documentation carefully and, in particular, identify any due on sale provisions, consent requirements, provisions dealing with fees payable upon assumption and prepayment provisions. Any cross-default or cross-collateralization provisions would have to be negotiated out or replaced with other forms of security. If the existing mortgage is to be prepaid, the vendor should consider whether any prepayment penalty can be factored into the purchase price. If the prepayment penalty is too high, the vendor should consider offering the mortgage lender replacement security on another property or properties in exchange for a discharge. As the process of putting in place replacement security requires considerable lead time, a temporary cash escrow arrangement could also be considered. If the existing mortgage is to be assumed but carries a high interest rate, the vendor could consider an interest rate buy-down with the mortgage lender (or factor the economic effect of such a buy-down into a purchase price adjustment with the purchaser).

Vendor Take-Back Mortgage

The vendor may also wish to consider creative financing techniques that could allow the purchaser to complete the transaction notwithstanding that loan-to-value ratios create a gap between the amount of the purchaser's equity and its available financing. One of the scenarios that could be considered is having payment of some or all of the balance of sale proceeds secured by a mortgage on the property given by the purchaser in favour of the vendor. Where there is already existing mortgage financing on the property that is to be assumed by the purchaser, the existing mortgage documents must be examined to ascertain whether second-ranking security is prohibited and whether there are any conditions relating to the granting of such security. The vendor must also consider the elements of any inter-creditor or subordination agreement that may be required by the existing mortgage lender or otherwise entered into.

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.