As housing prices reach even greater heights, particularly in Toronto and Vancouver, many just starting out have found it difficult to access the home market on their own, frequently turning to family members to contribute to either the down payment or the financing of the home or both. A parent may even be on title to ensure the financial viability of the deal.
Housing debt has become a dominant force in Canada, increasing dramatically over the past 20 years. Statistics Canada reports that more than 70 per cent of our collective $1.874-trillion debt load is due to mortgages. A survey by the Canadian Association of Accredited Mortgage Professionals further found that over the past two years borrowed money represented more than a quarter of the $18.8 billion used toward the down payment of a home. It found family members provided a gift or a loan 18 per cent of the time to first-time homebuyers.
For lawyers, that means additional players to consider in the real estate transaction. And, in a role that is ever expanding, real estate lawyers must protect not just their clients but also themselves, particularly when more elements are added to the transaction.
When that couple decides to buy a home, they may not anticipate future eventualities, such as the loss of a job or the implosion of their relationship. And what happens to them may well impact those with whom they’ve had some sort of financial arrangement involving the house. “With increased property values and tighter lending restrictions, it is becoming more difficult for young couples to come up with the down payment to purchase a home. Sometimes, they turn to family members, most notably, parents. There’s a whole web of issues that come out of this,” says Andrew Fortis, a partner at Hummingbird Lawyers LLP in Concord, Ont., where he practises real estate and corporate and commercial law.
Ontario Superior Court Justice Sean F. Dunphy found himself deliberating over competing claims on a Toronto house last year in Lee v. Lee, in which there were “no villains or victors” only a “thorny problem” raised by doubtful denials that the house was a gift in light of a lack of documentary evidence.
At the core of the claim was a home purchased by a couple in the name of their son, who had nothing to do with the house, had never lived in it, and had severed ties with them. After many years of renting it out, it became the primary residence for the couple upon retirement when, at that point, the son, since married with two children and now divorced, failed to make equalization payments to his ex-wife based partly on the value of the house now occupied by his parents. Absent were documents outlining any agreement between the couple and the son in relation to the house. Dunphy ultimately decided the ex-wife was entitled to enforce the writ of seizure and sale against the house.
Lee demonstrates the need for a clear delineation of the intention of those involved in a real estate transaction at the time it is made. For the lawyer, any mention of financial aid beyond the traditional mortgage should trigger a series of questions. “The obligations of lawyers are forever expanding,” says Fortis, who wants to know if the contribution constitutes a gift or a loan and what the expectations of the family member are. If it’s a gift, he will ask the family to draft a letter. The lender providing the mortgage could also require the solicitor to confirm that the down payment is not borrowed money. Fortis may have the purchasers sign a statutory declaration that the money used for the down payment is not borrowed. “If I don’t ask the questions, I promise you this: the litigators will.”
The best source of protection for everyone involved, including the lawyers, is getting it in writing. Yens Pedersen, of Regina’s Pedersen Law PC, sees several possibilities where parents help their grown children buy a home. And although it may seem like a pain, the best approach is to anticipate what could happen. That could involve drafting out the nature of the agreement between the family and the purchaser. “I would suggest registering a mortgage on behalf of the parents (if they have loaned money) because the parents should probably protect themselves,” says Pedersen. “The parents should probably also include that in their wills.”
Parents may end up on the title because the child doesn’t have enough income to support the mortgage payments. A lender, which is financing a very high portion of the cost of the home, may demand that no other lenders be on title. That’s where the gift letter comes in that is signed by all parties. Or the lender might ask for an affidavit that no secondary financing is involved. That ensures they have legal recourse in the event of complications down the road. “The gift letter is usually done at the time that you’re getting the mortgage approval,” says Pedersen.
When possible, a family member lending money to someone buying a house should demand a secondary mortgage to protect himself or herself in case of financial difficulties or a change in circumstances, such as a divorce. “It’s not as convenient. If the child goes to sell the house, that’s one more set of signatures to get,” says Pedersen. But the child buying the home needs to acknowledge that situations may develop and not expose his or her family members to the possibility of losing their investment.
There are also tax implications for a family member going on title. In Ontario, a first-time homebuyer can skirt the land transfer tax, which can be eroded if a parent is on title, assuming they have their own home. In addition, they could be negatively affected by the capital gains tax when it comes time to sell. Fortis tries to minimize the impact of both by reducing the parent’s share of the home to two per cent, if possible.
Family members and the purchaser can plan for the possibility of divorce, death, default, and being on title by putting together a shareholders agreement, much like one that might be used when two or more people purchase a commercial or multi-residential building together. “You need to contemplate how to get out of the deal,” says Tony Spagnuolo of Spagnuolo & Co. in Coquitlam, B.C.
But even if all the possibilities are addressed in an agreement, the big question really is: What is the lending family member going to do about it? “The real complication is how to deal with problems,” says Spagnuolo. “How are you going to enforce these things against your son or daughter. . . . Are you really going to take steps to go after your child if there’s a default?”
The complexity and diversity of family structures can have an impact on a large proportion of real estate transactions, warns Lawyers’ Professional Indemnity Co. policy analyst Nora Rock.
What can be beneficial for a lawyer is to communicate clearly to the client about the limits of the real estate lawyer’s retainer. Those who require assistance with issues outside of that retainer should seek guidance from a lawyer practising in the area in which they need help. And other parties who have a stake in the transaction, even if they’re related, should be advised to seek independent legal advice.
“The core of all of that is the issue of conflict of interest,” says Rock. Two members of the same family could have differing and possibly competing interests. “If there’s not crystal clarity with that then you face problems down the road” and a lawyer could be held liable. But unless the lawyer asks the right questions, the potential for future problems may not become apparent.
A will can act as the great equalizer. Any amount outstanding for one child, be it a gift or an unpaid loan, can be deducted from his or her share of the parents’ estate if the other children didn’t receive the same. Any contributions, gifts, or loans can also be acknowledged in the will. And if the parents appear on the title of the child’s home, that needs to be addressed, particularly if there are other siblings. In the case of a forgivable loan, the will might specify that the child assumes title upon the death of the parents. That would avoid any unintended consequences, like the siblings ending up becoming co-owners of the house. “The rubber hits the road with the will. It can be a great way to privately address the loan,” says Toronto estates lawyer Ian Hull, of Hull and Hull LLP.
But even then, acknowledgement of the gift in life can eliminate questions that may arise upon death. “What I’ll say to the parents is: ‘Let’s document the gift through a deed of gift,’” adds Hull. “It is seldom used but it is incredibly effective.” He describes it as the most effective legal method to document a gift but it is underutilized. The deed of gift is a sealed precision tool that is enforceable and makes the intent clear: The money was a gift and needs no further acknowledgement and will eliminate any dispute between siblings.
The absence of clear intent could force others, many years later, to come to their own determination, no matter how tough the situation. In Lee, Dunphy concluded: “There have been no winners in a case such as this, regardless of the outcome.”