The credit crunch has meant borrowers looking to purchase commercial real estate have to be creative to obtain financing to complete transactions when traditional methods are unavailable due to loan-to-value ratios.
A current trend being commonly used is for the purchaser/borrower to approach the vendor to provide a portion or all of the balance of the sale proceeds by way of a loan from the vendor to the purchaser/borrower. In return, a mortgage is given by the purchaser or borrower in favour of the vendor or lender and registered on title to the subject property.
This is a viable alternative financing arrangement; however, the Mortgage Brokerages, Lenders, and Administrators Act, in force since July 1, 2008, broadened the scope of the regulatory regime and set out new licensing requirements for those entities engaged in regulated activities, including in certain circumstances, lenders who lend by taking a vendor take-back mortgage as security.
Under the act, a person or entity is required to be licensed or must be exempt from the requirement to have such a licence if it “carries on business” in Ontario as a mortgage lender or carries on business in Ontario of dealing in mortgages, of trading in mortgages, or of administering mortgages. However, financial institutions are excluded from the licensing requirements. Under the act, a “mortgage lender” includes a person or entity engaged in lending money in Ontario on the security of real property. This broad definition will cover vendors acting as lenders by granting VTBs.
The act provides no definition on what it means to carry on business as a mortgage lender. Courts have generally accepted a single or isolated act does not constitute carrying on the business of an activity. Instead, carrying on business requires a succession, repetition, a series of acts, or a pattern of conduct normal for the business.
The definition of mortgage lender includes a person who holds himself, herself, or itself out as engaging in lending money in Ontario on the security of real property. This means a vendor who advertises as offering VTBs could be considered a mortgage lender even if the vendor has not yet actually completed a VTB transaction. Care should be taken, therefore, when listing or advertising the property for sale not to represent it is part of the vendor’s business to earn income from mortgage lending.
There are relevant considerations, but as of yet, there have been no significant cases to resolve the issues. Some consideration for the vendor includes whether the vendor has held itself out as a mortgage lender. What did the listing or any advertising say? Were there any written or oral representations or statements made to the purchaser or prospective purchasers? Considered fairly, did the listing, advertisement, representations, or statements give the impression the vendor was in the business of earning income from mortgage lending?
In addition, a vendor should assess whether it could be considered a mortgage lender based on its past conduct or future business plans. A vendor with a portfolio of properties, in which the vendor regularly trades and has in the past granted a VTB as part of its trading activities is much more likely to be considered to be carrying on business as a mortgage lender than a vendor who infrequently trades in property and has never before granted a VTB. A vendor whose business plan going forward includes provisions for VTBs as a means of earning income from the sale of properties is more likely to be considered to be carrying on business as a mortgage lender than a vendor who simply needed to give the VTB on a property in order to dispose of it under current market conditions.
Retaining a lawyer to negotiate, draft, and/or register its VTB is not sufficient to exempt the vendor from being licensed under the MBLAA. Lawyers are exempt only from the requirement to be licensed to deal, trade, or administer mortgages. For example, a lawyer is exempt from being licensed when negotiating or arranging a mortgage. However, this does not exempt a lender from the requirement to be licensed.
The Financial Services Commission of Ontario can enforce administrative penalties for non-compliance with the MBLAA. Fines, regulatory measures such as compliance orders, licence revocation, court-ordered restitution, or compensation can all be imposed. Specific penalties for non-compliance can be found in the act’s regulations.
Andrea L. Centa is a partner in the commercial real estate group of Fraser Milner Casgrain LLP in Toronto.