Promise to purchase and financing of an immovable: The importance of the section relating to new hypothecary loan
Financing can make or break a real estate transaction. Therefore, in order to properly advise his clients, it is important that a real estate broker fully understand the obligations relating to new hypothecary loan. These obligations can be found under section 6 of various mandatory Promises to purchase forms of the OACIQ, namely:
- Promise to purchase – Chiefly residential immovable containing less than five dwellings excluding co-ownership (PP)
- Promise to purchase – Divided co-ownership – Fraction of a chiefly residential immovable held in divided co-ownership (PPD)
- Promise to purchase – Undivided co-ownership – Share of a chiefly residential immovable held in undivided co-ownership (PPU)
Here are the major points to keep in mind.
Clause 6.1: Terms and conditions of the new hypothecary loan
The buyer undertakes to take in good faith, as soon as possible and at his expense, all steps necessary to obtain a loan secured by immovable hypothec.(1)
But what good faith means? Although it must be analyzed in each situation, good faith is generally defined as the behaviour of a person acting with sincerity, honesty and loyalty in performing an obligation he entered into.(2)
Regardless of the amount of the loan, the broker must always clearly indicate under clause 6.1 of the Promise to purchase all the elements of the scenario of financing sought by the buyer, namely: the amount of the loan, the maximum interest rate not to be exceeded, the maximum period of amortization and the minimum term required by the buyer. In the case of an undivided co-ownership, it is necessary to indicate as well the name of the financial institution to which the financing application must be made in order to meet clause 4.3 of the form Exclusive brokerage contract – Undivided co-ownership – Share of a chiefly residential immovable held in undivided co-ownership.
An interest rate must be indicated. The practice of not entering a “current rate”, drawing a line through the space or leaving it blank should be banished in order to protect the buyer from being obligated to a hypothecary lender at an interest rate he is unable to pay. In order to protect the interests of the party he represents, the buyer’s broker must indicate the maximum real rate that his client is willing to pay in order for the latter not to be obligated to borrow at a higher rate.(3)
Clause 6.1 requires obtaining a hypothecary loan in accordance with the terms and conditions stated.
Clause 6.2: Supply of a copy of the lender's undertaking by the buyer within the specified time period
For the lender’s undertaking to be valid, it must confirm that a loan in the amount indicated under clause 6.1 or in a higher amount is granted to the buyer, without any conditions.
In addition, it is important to remember that a mortgage pre-approval does not meet the conditions provided and, therefore, is not an evidence showing the lender’s undertaking to grant the buyer the loan requested.
The buyer must supply a copy of the hypothecary lender's undertaking to grant the loan within the time period specified in clause 6.2.
It is important to allow a sufficient time period for obtaining the financing, especially when the loan must be secured. This will help the buyer avoid asking for an extension of the time period, which can be refused by the seller, or allowing the 5-day time period under clause 6.3 to pass while continuing to look for a loan and, consequently, risking the cancellation of the Promise to purchase by the seller
The number of days allowed for the condition to be satisfied must refer to consecutive days, without exception. (The deadlines included in the promise to purchase mandatory forms concerning financing are always calculated in consecutive calendar days, i.e. periods of twenty-four hours, from midnight to midnight. Saturdays and Sundays as well as statutory holidays are counted as calendar days. The day marking the starting point, i.e. the date the promise to purchase is accepted, is not counted, but that of the deadline is.)
Do not write in "working days" or "legal days" as these expressions may create ambiguities in interpretation. This time period begins to run the day following the signing of the Promise to Purchase acceptance, but it is not a strict time frame since extending it does not automatically void the Promise to purchase. However, the seller could render the Promise to purchase null and void as of the expiry of the deadline, in accordance with the provisions of clause 6.3.
Receipt of undertaking
As stipulated in clause 6.2, the simple receipt by the seller of a copy of the hypothecary lender's undertaking within the stated deadline will satisfy this condition. The recommended form Notice of and follow-up on fulfilment of Conditions (NF) does not have to be used to indicate that the financing condition is satisfied. Nonetheless, it is preferable that the real estate broker keep a proof of receipt by the seller of the hypothecary lender's response, within the deadline stated in Clause 6.2. The best way to do this is to give the seller two copies of the hypothecary lender's response and to have him acknowledge receipt of and date the receipt. This document must be kept on transaction record.
Clause 6.3: exercising of seller's options
In the absence of proof of undertaking by a hypothecary lender to grant the loan in accordance with clauses 6.1 and 6.2 of promises to purchase PP (Chiefly residential immovable containing less than five dwellings excluding co-ownership) and PPD (divided co-ownership), the seller can, within five days following the expiry of the period stated in 6.2 or following receipt of a notice of refusal from the hypothecary lender, exercise one of the two options outlined in Clause 6.3, namely:
- designate to the buyer a hypothecary lender of his choice with whom to file a new application for a hypothecary loan,
- or render the Promise to purchase null and void.
If the seller wishes to exercise the first option, the notice to be sent to the buyer shall specify the name of the hypothecary lender designated by the seller and a deadline, by which the buyer must obtain an undertaking by the lender to grant a loan in accordance with the conditions outlined in 6.1. For the notice, the broker may use the recommended form Notice of and follow-up on fulfilment of Conditions (NF) in which clause AV4.2 is specifically drafted to this effect. If the buyer cannot get the financing within the period specified in the seller's notice, the Promise to Purchase shall become null and void. However, receipt within that period of a written undertaking from the hypothecary lender designated by the seller shall have the effect of fully satisfying the condition.
Note that under clause 6.3a when the seller refers the buyer to a hypothecary lender, he may not designate himself as hypothecary lender. The Court of Appeal has concluded that according to the wording of the clause, the hypothecary lender had to be a third party to the transaction and that it was therefore impossible for a seller to also be the hypothecary lender.(4)
The five-day period is a strict deadline
Contrary to the deadline set out in clause 6.2, the five-day period stated in Clause 6.3 is considered a strict deadline since failure by the seller to take action during this period will automatically void the Promise to Purchase. Nevertheless, it is more prudent for a seller who does not wish to avail himself of the first option to send a notice to the buyer rendering the Promise to purchase null and void as soon as the period begins to run and before another Promise to purchase. This will enable the seller to avoid a situation where the buyer would give him a copy of an acceptable undertaking by a hypothecary lender within five days following the initial deadline. Moreover, even after the expiry of the five-day period, it would be preferable that the seller confirm the cancellation of the Promise to Purchase in writing to the buyer.
Undivided co-ownership: absence of an undertaking and seller’s options
If the Promise to purchase concerns an “undivided co-ownership” (PPU), the seller will not have the option to refer the buyer to another financial institution other than the one indicated in 6.1. At the very most, he can then ask the buyer for the refusal proof of the financial institution to grant him the amount indicated in clause 6.1 or a higher amount. At the end of the 5-day time frame indicated in clause 6.3, the Promise to purchase will become null and void.
“New hypothecary loan” section: obligations of parties
And last, it is important to mention that the obligations outlined in section 6 of promises to purchase PP, PPD and PPU concern only the buyer and the seller and not their respective representatives. Thus, the seller’s broker who receives for his client the notice of undertaking or of refusal from a hypothecary lender must transmit it to his client within the appropriate deadline so that the client may acknowledge receipt of it. If the notice has not been received or issued by the parties to the contract, the Promise to Purchase could become null and void. As well, a broker who prepares a notice for a selling client under Clause 6.3 must make sure the buyer receives it and acknowledges receipt of it within the deadline.
(1) Quebec Civil Code, S.Q.1991, c.64, article 1375.
(2) REID, H., Le dictionnaire de droit québécois et canadien, Éditions Wilson & Lafleur, Montréal, p. 63.
(3) Regulation respecting brokerage requirements, professional conduct of brokers and advertising, article 46: “A licence holder may offer to the party for whom the holder is acting as an intermediary only the immovables, enterprises or loan-related products that correspond to the party’s needs or criteria. The holder must also inform the party of the reasons for selecting the proposed immovables, enterprises or products.”
(4) Nguyen c. Eastveld, C.A., Montréal, 500-09-002046-910, March 12, 1996.