At a meeting of the National Real Property Section Executive last fall, there was a meaningful discussion about residential mortgage lenders’ instructions to counsel. Lawyers from a number of jurisdictions across Canada expressed their concern that instructions were increasingly calling upon lawyers to provide assurances that were burdensome and inappropriate. As a result, lawyers are spending an inordinate amount of time addressing due diligence and closing tasks that lenders should be handling on their own. A related concern is that lawyers are probably spending too much time taking exceptions to instructions and obtaining lenders’ approval of the exceptions.[1]
At the conclusion of the discussion, the Real Property Section Executive agreed to establish a committee to evaluate instructions and ultimately issue a report with guidance and possibly a model form of instructions. Ideally, members of the committee will include lenders’ and borrowers’ counsel.
There is ample precedent for a standard or suggested response to mortgage lender closing requirements in the U.S. Similarly, although not right on point, lawyers practising in Alberta, British Columbia, Saskatchewan and Manitoba employ The Western Law Societies’ Conveyancing Protocol, as adopted in their respective provinces. The protocol has found general acceptance among lenders and provides for a standard form of opinion letter to a mortgage lender, confirming compliance with the protocol with provision for specified exceptions and modification. In the U.S., a multitude of national, state and local bar associations and organizations have issued reports and in a number of cases, model or alternative forms of opinion letters to a mortgage lender in commercial transactions. Although these have not resulted in a single form of opinion letter that is universally employed, these reports have significantly reduced the amount of time spent negotiating opinion letters and have promoted the recognition of customs and commonly employed text. In my own practice, I have found that the reports have shifted some of the leverage from lenders to the law firms providing the opinions.
I will include some specific aspects of the U.S. reports below, but I think it is important to consider the perspective underlying the U.S. reports and to contrast that perspective with the tenor of instructions. Canadian mortgage lenders seek to cast responsibility upon lawyers for due diligence and insurance services that the lenders can and probably should be handling on their own or through qualified third party service providers. A lender should, where applicable, rely upon its own due diligence and research, the representations and warranties of the borrower, the certification of the surveyor and the lender’s policy of title insurance. The role of the lawyer for the borrower should be circumscribed to those aspects of the transaction that the lawyer is qualified and in a position to provide.[2] When lawyers are willing to take on due diligence and insurance services that lenders can and should be handling, lawyers should not accept unqualified responsibility or liability.
Lawyers should also bear in mind that lawyers’ professional liability insurance coverage will typically only provide coverage for mistakes made by the lawyer in the rendition of services within the customary roles of a lawyer. A lawyer who provides a guaranty or an unequivocal assurance, may find his or her claim for professional liability coverage rejected if for example, the lawyer provides unequivocal assurance regarding water quality, water wells, or fire and other property insurance coverages.
In A Proposal for a National Real Estate Opinion Accord, presented to American College of Real Estate Lawyers, March 31, 2000, looking at the origins of real estate mortgage loan opinion letters and the conflict of interest presented, author Robert A. Thompson notes:
the basic justification is the same: the investor, whether a bond or securities purchaser or a commercial lender, has need to rely on information from the other party or its attorney that the investor [mortgage lender] is not well-situated or equipped to obtain (Id. at Page 2).
Experience in Canada reflects that “advice” being requested of Canadian lawyers by institutional residential mortgage lenders falls within the following general categories:
- Reporting on matters of fact from public records, public officials or another source that the lawyer reasonably believes to be reliable, such as the contents of public land registry offices and other public offices. When giving such a report, the lawyer is simply “relaying” information provided to the lawyer from another source the lawyer believes to be reliable, and not providing an opinion or advice of any kind.
- Advice as to the legal effect of an instrument or the likely result of a given or assumed state of facts. Advice of this nature is a proper subject for a lawyer’s opinion. An opinion is not a guarantee that if the issue is litigated, the outcome of the litigation will be consistent with the lawyer’s advice; nor is the lawyer providing assurance that the facts on which the opinion is based are accurate.
- An unequivocal assurance, or a guarantee from the lawyer, that is not in the nature of an undertaking that the lawyer has the unequivocal ability and authority to fulfil.
There follows below and in Schedule “A” of this article, a brief sampling of instructions that I recently downloaded, that give the author cause for concern and brief explanations why. I looked at instructions from a few major mortgage lenders, and found many of the same concerns with the instructions I quote from below and in Schedule “A.”
CIBC instructions to solicitor/notary
Unless our Letter of Direction indicates that Vendor Take Back (VTB) or other secondary mortgage financing is permitted, it is your responsibility to ensure that there is no VTB or other mortgage financing. If you are aware or become aware of any VTB or other mortgage financing which security is to be registered either concurrently with our mortgage or at a time following registration of this mortgage, you are required to immediately advise CIBC.
The word “ensure” may mean “insure” (Regina v. Greening Industries Ltd., 1 O.R. 759-765 (1968)). It is entirely appropriate for lawyers to render opinions, as lawyers are qualified and licensed to exercise professional judgment. However, lawyers should not, except as authorized agents of title insurers, issue insurance policies, warranties or guaranties. A lawyer can confirm that the applicable public registry or recording office records do not disclose such a mortgage and that the lawyer has no actual knowledge of such a mortgage. Read literally, this instruction would require a lawyer to provide an assurance that at no time after the completion of the transaction, does the borrower or any subsequent owner of the mortgaged property ever grant a mortgage, recorded or unrecorded.
You must choose Option A, B or C as applicable.
Option A
It is your responsibility to ensure that:
- If the mortgagor's interest in the Property is leasehold, you thoroughly review the lease to ensure that the lease is binding between the landlord and tenant, the lease is in good standing and … that there are no unusual stipulations in the lease…
Lawyers are competent to review leases and render opinions that they are binding, but a blanket assurance that a lease is binding without qualification should never be given. For example, in the U.S. it is well beyond customary to exclude qualifications related to bankruptcy, principles of equity and various other exceptions.[3] A lawyer cannot discern from an examination of a lease that the lease is in good standing. In the case of a loan to a tenant, the status of the lease should be confirmed with an estoppel certificate from the landlord addressed to the lender. Except to prepare, request and review the estoppel certificate, the lawyer should play no role in ensuring the lease is in good standing. “There are no unusual stipulations in the lease.” I assume what the lender means is that the particular lease does not contain any provision that is unusual when compared with the standard form(s) of lease that the applicable government enters into as a lessor or landlord for residential use by a tenant/borrower. Even if the requested assurance were so limited, the standard forms change over time.
- [Ensure] Discrepancies in the legal description, title defects, reservations and restrictions, encroachments, encumbrances and easements (other than routine easements for public utilities provided no part of the building on the Property is affected) are referred to us with your opinion as to its/their effect on the marketability of title.
Lawyers are not surveyors. Lawyers should never provide an assurance that is outside the scope of their profession. The requested assurance is plainly the practise of surveying, not law.[4]
Furthermore, even the most comprehensive up-to-date land title as-built surveys do not ensure that the surveyed real property is free from encroachments. They simply confirm that in accordance with the requirements of applicable law and those governing the proposal or contract for the survey, the survey map depicts the results of the survey made on the ground. Easements may exist that are not disclosed by a survey and are not of record. Lawyers cannot ensure that such easements are referred to the lender, let alone opine on their effect.
- [Ensure] The building(s) and any ancillary building(s) or structure(s) do not, with respect to their location or use, violate any registered restrictions, statutes or regulations of any competent authority;
For the reasons set forth above, lawyers cannot provide assurances regarding location. For the same reasons lawyers cannot confirm that buildings do not violate height, bulk, setback or other restrictions. Lawyers should not provide opinions regarding matters of fact. A lawyer cannot reasonably be asked to determine or opine what an existing use is. With appropriate qualifications, a lawyer could provide an opinion that confirms that based on the zoning information provided by the applicable municipality and enumerated recorded restrictions, the statement of facts depicted on a complete current as-built and boundary survey map, a review of specified local bylaws or ordinances and restrictions, and an assumption that the real property is used as a ________: (i) the use of the real property as a _____ is a use permitted [outright/conditionally] in the zone identified by the municipality, and does not violate the enumerated restrictions; and the (ii) height, bulk and location of the buildings shown on the survey map do not violate any applicable height, bulk and setback requirements applicable to the zone in the bylaw or ordinance or enumerated restrictions.
In the U.S., zoning opinions are rarely provided and when they are provided, they are so qualified that commercial real estate mortgage lenders now prefer to rely upon (i) zoning reports from third party service providers that are typically elaborations on the zoning information provided by the municipality and the survey map; and (ii) where available, zoning endorsements to the lender’s title insurance policy.[5]
- [Ensure] Fire insurance with extended coverage and other insurance that may be specified in the Letter of Direction For Consumer General Collateral Charge/Mortgage is in force…
A lawyer will have no reluctance to confirm that what purports to be a certificate or declaration of insurance coverage has been delivered to the lawyer. Lawyers are not responsible for determining that the certificate or declaration of insurance is genuine, that the policy has not been terminated subsequent to the date of the certificate or declaration, that the insurance agent had the authority to issue the certificate, or that the premium has been paid (unless paid at closing).
- [Ensure] If the mortgagor is a corporation, it is valid and subsisting, a certificate of status of the corporation is obtained, it is incorporated with full power and authority to hold, mortgage and otherwise deal with the Property and all necessary corporate action has been taken to authorize the borrowing of the principal sum with interest as stated in the mortgage and the giving of the mortgage security;
Lawyers should not be asked to opine that a corporation is valid and subsisting. If a lawyer does provide such an opinion, the opinion should be limited to reflect that the opinion is based solely upon the certificate of status, as a lawyer cannot reasonably be expected to do more than obtain and review a certificate of status.
The balance of the assurances are invariably based on a variety of assumptions that need to be reflected to avoid unwarranted claims. For example, that the corporate records on which the lawyer is relying are true copies of the originals, that the factual statements made by the borrower are accurate (e.g.: the corporate resolution or consents have been revoked or modified) and that the signatures or exemplars are genuine.
- Our priority is maintained over any liens;
Lawyers are not title insurers. Even title insurers only insure title as of the time of closing, not thereafter. At a minimum, real estate taxes and in some jurisdictions, public utility charges and construction liens have priority over mortgage liens. A lawyer can confirm that the lawyer has satisfactory evidence that there are no real estate taxes then due and payable. Depending upon the jurisdiction, perhaps the lawyer can confirm he or she has satisfactory evidence that no public utility charges are then due and payable that if unpaid would constitute a lien.
- Where the Property is not connected to municipal services, certificates as follows are obtained, reviewed and retained by you prior to funds being advanced:
- A satisfactory certificate from the appropriate health authority indicating the well water is suitable for human consumption, and
- A satisfactory well driller's certificate, confirming that the water flow is adequate, if the property is a new construction.
There are literally thousands of potential water contaminants. Private wells are ordinarily tested for a very limited number of contaminants. When water test results are available from a government authority, the results typically list the levels of the applicable contaminants tested for, and the limit that the applicable governmental authority applies, if any. Well drillers’ certificates do reflect the flow of water, but there is no legally established standard for adequacy, and adequacy of flow will vary with a variety of circumstances including, use of water for irrigation and depth of the well.
- [Y]ou undertake to notify us immediately upon receiving any information alleging any discrepancy of title defect or any encumbrance loss of priority of the mortgage;
When a transaction has closed and all deliveries required in connection with the closing have been completed, including the fulfillment of any undertakings, the lawyer’s representation of the party[ies] typically ends. Certainly, no lawyer should be expected to assume any reporting obligation years after the closing.
HSBC Bank Canada solicitor’s responsibilities (Residential Mortgages – All Provinces except Quebec):
- Mortgage and Other Documents
You will ensure that the Mortgage and the Other Documents (if any) have been prepared in the form provided or specified by us and in accordance with all of the terms and conditions set out in the Loan Agreement, the Instructions, these Solicitor’s Responsibilities and the applicable mortgage completion guidelines provided to you by us or available on the Website. You must be satisfied that all security specified in the Loan Agreement (including the Mortgage and any other security such as assignments of rents, security agreements, guarantees, etc.) has been executed and delivered by the Mortgagor and Covenantor/Guarantor (if any) and is effective, valid, enforceable and legally binding…
A lawyer probably can never be satisfied that all of the lender’s loan documents are without equivocation, effective, valid, enforceable and legally binding.[6] Instructions should only require a borrower’s lawyer to provide opinions and perform specifically designated tasks that may appropriately be performed in his or her role as a lawyer. Lenders should perform their own due diligence and rely upon the representations and warranties of the borrowers and third-party reports and certificates for which the lenders should contract directly. To the extent lawyers do provide opinions or assurances, the assumptions underlying those opinions or assurances should also be provided.
Over the past 25 years or so, the cumulative effect of the U.S. reports has been to blunt the demands made by U.S. mortgage lenders on opinions rendered by borrowers’ counsel, by publicizing issues, suggesting appropriate responses to lenders’ demands and offering alternative text. I am hopeful that the contemplated committee of the National Real Property Section will ultimately present the bar in Canada with similar analyses of instructions and at least one alternative form of instructions that will over time lead to a lessening of the demands made.
Some of the points I have tried to make may be so obvious that some practitioners may be inclined to ignore them when reviewing instructions. I think there is a real benefit to stating what may be in the obvious when accepting instructions.[7]
About the Author
Mark Tipperman is a lawyer in Wolfville, N.S., and is a member of the Bar by examination in New York, Oregon, Washington and Nova Scotia with a U.S. commercial real estate practice and over 40 years of experience. He is Chair of the Nova Scotia branch’s Real Property Section. This article represents only the individual view of the author and not the view or policy of the Real Property Section or the Canadian Bar Association.
End notes
[1] My first response to the concerns raised about the instructions was to suggest that the conflict of interest presented by representing a borrower and a lender should be treated in Canada the same way it is treated in the U.S., namely, an irreconcilable conflict that cannot be waived or cannot be waived without “informed consent” that includes advice of independent borrower’s counsel.
[2] See for example, the 1998 Mortgage Loan Opinion Report, Association of the Bar of the City of New York Committee on Real Property Law, Subcommittee on Mortgage Loan Opinions New York State Bar Association, Real Property Law Section, Attorney Opinion Letters Committee June 1, 1998 at Page 4.
[3] See for example, Real Estate Finance Opinion Report of 2012, a Report of: (1) the American Bar Association Section of Real Property, Trust and Estate Law, Committee on Legal Opinions in Real Estate Transactions; (2) the American College of Real Estate Lawyers, Attorneys’ Opinions Committee; and (3) the American College of Mortgage Attorneys, Opinions Committee, 47 Real Property, Trust And Estate Law Journal 213 (ABA Report) at Page at 251-253; 268-270.
[4] See for example, Ontario Surveyors Act, R.S.O. 1990, Chapter S.29, Section 1:
“practice of cadastral surveying” means advising on, reporting on, conducting or supervising the conducting of surveys to establish, locate, define or describe lines, boundaries or corners of parcels of land or land covered with water; (“exercice de la profession d’arpenteur cadastral”)
[5] The 1998 Mortgage Loan Opinion Report, Association of the Bar of the City of New York Committee on Real Property Law, Subcommittee on Mortgage Loan Opinions New York State Bar Association, Real Property Law Section, Attorney Opinion Letters Committee June 1, 1998 (NY Report) reflects the following position on zoning opinions:
Matters of local law (e.g., zoning and land use laws and building codes) are not covered by the opinion unless specifically requested. Opinions on such matters are not customary and, if requested, should be limited to specific issues of material importance to the transaction. TriBar II Report § 1.9(n). … compliance with such laws is usually determined by the opinion recipient as a part of its due diligence activities (with the assistance and cooperation of the Borrower and its counsel) and reliance is usually placed on representations and warranties from the Borrower, certificates and reports from architects, engineers, surveyors and other experts and letters from utility companies and local governmental officials. In some circumstances, it may be appropriate to request an opinion on a specific issue (e.g., the issuance of a permit or other entitlement) which is material to the transaction. (Id. footnote 18 at Pages 17-18)
[6] In the U.S., lawyers always qualify their opinions of validity and enforceability. The enforceability opinion is limited with respect to bankruptcy, equitable principles and material defaults, foreclosure and the like, and often excludes a laundry list of other exceptions. See ABA Report at 251-253; 268-270. In the U.S., opinion letters also universally exclude for example, the legal capacity of individuals, compliance by lender with all legal requirements applicable to lender. See for example, ABA Report at Page 263-264.
[7] In the ABA Report, the authors note:
The value of reciting what to experienced practitioners may seem obviously implicit is demonstrated by the decision of the New York Supreme Court Appellate Division, First Department in Fortress Credit Corp. v. Dechert LLP , 934 N.Y. S. 2d 119 (N.Y. App. Div. 2011). The court in Fortress ordered dismissal of the complaint, which alleged various breaches of duty arising from an opinion letter rendered by the Dechert LLP law firm in connection with a loan from Fortress Credit Corp. , which was guaranteed by Marc Dreier. Id. at 121–22. While the same outcome might well have resulted had there been a trial, with evidence of customary practice, the opinion language afforded an early advantage on the motion to dismiss, and trial was avoided. Among other grounds for dismissal, the court cited language in the opinion letter itself:
Moreover, the opinion, by its very terms, provided only legal conclusions upon which plaintiffs could rely. The opinion was clearly and unequivocally circumscribed by the qualifications that defendant assumed the genuineness of all signatures and the authenticity of the documents, made no independent inquiry into the accuracy of the factual representations or certificates, and undertook no independent investigation in ascertaining those facts. Thus, defendant’s statements as contained in the opinion were not misrepresentations (see Prudential Ins. Co., 80 N.Y. 2d at 386–387, 590 N.Y. s. 2d 831, 605 N.E. 2d 318). (Id. at footnote 14, Pages 222-223)
Schedule “A” : Other objectionable instructions
CIBC Instructions to Solicitor/Notary
Fire and Hazard Insurance
You must verify that fire insurance and extended coverage for not less than the full value, unless otherwise specified, is in force and that the mortgage clause of the Insurance Bureau of Canada is included in the policy, and arrange for loss to be payable to Canadian Imperial Bank of Commerce as first or second mortgagee (as instructed in the Letter of Direction For Consumer General Collateral Charge/Mortgage). We cannot accept a mortgage clause, or amendments to the mortgage clause, that would effectively extend less coverage to us than that provided by the standard mortgage clause of the Insurance Bureau of Canada. Unless specified in the Letter of Direction For Consumer General Collateral Charge/Mortgage, please advise the insurance company that we do not require a copy of the policy or renewals. For rental or income producing properties, we require “loss of rental income” to be included in the insurance coverage.
What is meant by full value? Is the lender asking the lawyer to confirm the fair market value, the replacement cost or something else? Regardless, this is not a lawyer’s role. Values are determined by appraisers. When appraising commercial property, appraisals will typically include replacement cost as one of three yardsticks of value. Residential appraisals generally reflect only market value. Market value has nothing to do with replacement cost. There are reference materials and services that provide general yardsticks. See for example, Marshall & Swift. Although a lawyer is competent to review an insurance policy to determine if the policy includes the “standard mortgage clause,” lawyers are typically not furnished policies and instead reasonably rely upon certificates or declarations of insurance coverage. Lawyers should not be arranging for insurance payable to anyone. Insurance should be arranged by the borrower with their insurance broker. Appraisers, particularly those with construction experience, are qualified to determine replacement cost. 265 Commercial Street Ltd. v. ING Insurance Company of Canada, 2010 NSSC 14 (CanLII). Replacement cost appraisals are obtained by mortgage lenders for the purpose of determining the appropriate limit of coverage for replacement cost. CIBC Mortgages Inc v Cable, 2007 NLTD 159 (CanLII). Typically, insurance brokers are responsible for determining replacement cost for purposes of property insurance. See for example, Evans v. State Farm Fire & Casualty Co. 15 O.R. (3d) 86 (1993); 232 Kennedy Street Ltd. v. King Insurance Brokers (2002) Ltd., 2007 MBQB 291 (CanLII). Rent loss insurance coverage is provided for a designated period of loss of rents arising from an insured casualty. To determine if rent loss coverage is in effect, the lawyer has to determine the rents and additional rents and the period of time for which coverage is required. 12 months would be typical in the U.S. The lawyer would have to review all of the leases to confirm the rents and additional rents. The lawyer would have to rely upon the borrower’s statements that all of the leases have been delivered and the copies delivered are true and complete copies of the originals.
Servus Credit Union General Instructions to Solicitor/Notary
Insurance
Prior to the disbursement of funds, fire hazard and extended coverage insurance … Coverage must be for full replacement value of the building(s) and for an amount not less than the amount of the mortgage.
In one respect, these insurance instructions are better than CIBC’s quoted above, because they specify full replacement value. This doesn’t resolve the other concerns I noted above about lawyers being called upon to ensure the adequacy of limits of coverage. The Servus instructions, however, present a problem not found in CIBC’s instructions: Replacement value is replacement cost, not market value. Residential mortgage loans are generally made based on a percentage of market value, not replacement cost. In a hot real estate market, the market values of residential real estate may easily bring about mortgage loans that are in excess of replacement cost.