Canada: Assumption Of Mortgages

Copyright 2009, Blake, Cassels & Graydon LLP

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

Following is a review of certain specific provisions contained in agreements of purchase and sale for commercial properties.

Market Factors

If the property is subject to an existing mortgage that the purchaser is expected to assume, careful pre-planning and document drafting will be required. As noted earlier, mortgage lenders have become more conservative and careful in the current environment. The consent of the mortgage lender to the proposed sale can no longer be taken for granted and, if a consent is forthcoming, it may take longer and be subject to conditions. Mortgage lenders may require guarantees or other assurances from purchasers. The release of the vendor is unlikely to be available.


In the agreement of purchase and sale, it should be a condition in favour of both the vendor and the purchaser that the consent of the mortgage lender has been obtained to the sale of the property and the assumption of the mortgage by the purchaser. The vendor will require this so that, if the mortgage lender's consent is not obtained, the vendor will have the contractual right to terminate the transaction. The timing for mortgage lender approval conditions has in the past usually been tied to the purchaser's due diligence period. In the current climate, it is possible a longer period may be required to accommodate the more exacting requirements of mortgage lenders.

Purchaser's Concerns

In conjunction with its condition that the mortgage lender has consented to the sale and the assumption of the mortgage by the purchaser, the purchaser will also require a condition that the terms and conditions of the mortgage are satisfactory to it and that the purchaser has approved the form and content of any assumption and other closing documents required by the mortgage lender. The purchaser's approval of closing documents may take longer than the due diligence period because the mortgage lender may not be in a position to produce such documents until closer to the closing date.

Renegotiation Of Terms

As a practical matter, it will generally not be possible for the purchaser to renegotiate any of the terms of the assumed mortgage with the mortgage lender. The only exception to this might be certain practical requirements, such as the timing for the delivery of financial statements or the identity of the approved property manager, which are particular to the individual purchaser. On the other hand, it is now not uncommon for mortgage lenders to take the opportunity of a change of ownership to insist upon the insertion of upgraded security provisions. For example, mortgage lenders may require lengthier and more onerous environmental covenants and indemnities and enhanced requirements for the delivery of non-disturbance and attornment agreements from subsequent-ranking tenants.

Completing The Mortgage Assumption

The task of completing the mortgage assumption arrangements may be expensive and time-consuming for the purchaser. Mortgage lenders are likely to require some or all of the following, any of which may potentially delay closing:

  • Covenant protection will be critical for mortgage lenders and, if the purchaser is a limited purpose or other non-creditworthy vehicle, the mortgage lender may require a guarantee.
  • As noted above, the mortgage lender may wish to re-visit the form of its security documents and to augment certain provisions to "bring them to the standard of current documentation."
  • New collateral security may be required – for example, a new general security agreement or an assignment of any new leases.
  • The mortgage lender may require a title opinion and updated off-title searches.
  • The mortgage lender may require copies of the purchaser's environmental and other due diligence reports, together with reliance letters addressed to it.
  • Corporate and enforceability opinions will likely be required from the purchaser's lawyer.
  • Confirmation letters or discharges will be required from other creditors of the purchaser with potentially competing registrations under the Personal Property Security Act (Ontario) or similar legislation in other provinces.
  • The mortgage lender may require a large assumption fee.

Assumption Fees And Costs

Prior to 2008, the responsibility for payment of the mortgage lender's assumption fees and the costs of the mortgage lender's lawyers was almost inevitably borne by the purchaser. In today's environment, this is now often the subject of negotiation. It is now not uncommon for the vendor to split these fees and costs with the purchaser or to bear responsibility for them entirely.

Release Of The Vendor

In today's market environment, it may not be possible for the vendor to negotiate a release of its liability under the assumed mortgage with the mortgage lender. This means that the vendor remains legally responsible for payment of the mortgage debt until the debt has been discharged. Under these circumstances, it is critical for the vendor to obtain an indemnity from the purchaser and to ensure that the purchaser has the wherewithal to perform the indemnity or that adequate security is provided. If the mortgage lender has obtained a guarantee from the purchaser's parent or affiliate, the vendor should look to obtain a similar guarantee. The vendor may also consider taking second mortgage security on the property itself as security for the purchaser's indemnity with respect to the assumed mortgage. The consent of the mortgage lender may be required for the grant of such second mortgage security.

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.

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