The Mortgage Instructions Toolkit provides practical guidance for lawyers responding to lender requests in residential real estate transactions. This page addresses the discharge of a mortgage.

The situation

You have a duty to disclose a “material fact” that is “known to you” to a lender when completing a mortgage on its behalf.

What does “known to you” mean?  What is a “material fact”?

Sample lender instructions

You are to take all steps that would be taken by a careful and prudent lawyer on behalf of a client. This includes, without limitation, advising the Mortgagee of any material fact known to you that might affect its decision to advance the loan.

Practice guidance

“Known to you”

You are not required to conduct an investigation on the accuracy of information given to you by your borrower client.

1. Document your interaction with the borrower and the information the borrower gave.
2. Report to the lender that you have not made an independent investigation or inquiry of the borrower or the mortgaged property. Clarify that you are relying on:
   1. the accuracy of information given to you by the borrower and third persons with respect to representations and warranties in the mortgage loan documents and compliance with the lender’s instructions, and
   2. the content of documents delivered to you or otherwise reviewed by you in connection with the loan, which you have assumed to be genuine and, in the case of copies, you have assumed to be true and complete copies of the originals.

“Material fact”

3. Consider the facts that are known to you. A fact does not have to be so important that it would change the lender’s decision, only that it would be significant in the lender’s considerations. Would a reasonable lender, in all likelihood, find the fact significant to its decision making? Yes? Then the fact is “material” and you have a duty to disclose it to the lender.

   The court would consider the specific situation and review the information you gave to the lender and the information you omitted.

   A test for materiality was set out in a 2011 Supreme Court of Canada case involving investors in two airport hotel condominiums. Although the case involved individual investors, the test provides valuable guidance for lawyers acting for financial institutions.

   Note: The word “lender” was not in the decision and has been added to illustrate the relevance of the Supreme Court of Canada’s test to financial institutions in a mortgage situation.

   “In sum, the important aspects of the test for materiality are as follows:

   1. Materiality is a question of mixed law and fact, determined objectively, from the perspective of a reasonable investor [lender];
   2. An omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable investor [lender] in making his or her decision, rather than if the fact merely might have been considered important. In other words, an omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor [lender] as having significantly altered the total mix of information made available;
   3. The proof required is not that the material fact would have changed the decision, but that there was a substantial likelihood it would have assumed actual significance in a reasonable investor’s [lender’s] deliberations;
   4. Materiality involves the application of a legal standard to particular facts. It is a fact-specific inquiry, to be determined on a case-by-case basis in light of all of the relevant considerations and from the surrounding circumstances forming the total mix of information made available to investors [lenders]; and
   5. The materiality of a fact, statement or omission must be proven through evidence by the party alleging materiality, except in those cases where common sense inferences are sufficient. A court must first look at the disclosed information and the omitted information. A court may also consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information. As well, evidence of concurrent or subsequent conduct or events that would shed light on potential or actual behaviour of persons in the same or similar situations is relevant to the materiality assessment. However, the predominant focus must be on a contextual consideration of what information was disclosed, and what facts or information were omitted from the disclosure documents provided by the issuer.”
      Paragraph 61, Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23, [2011] 2 S.C.R. 175