There are all sorts of issues that can pop up at the last minute with mortgage loans. Some issues can be cleared up before closing, but there may be others that cannot be dealt with in time. Examples include an outstanding bill to a utility, a work order on the property or some notification about a registered encumbrance. In some cases, though, the lender may consider that the issue is not important enough to lose the loan, and so the lender may proceed to closing and fund the loan based on a borrower’s undertaking. Before fulfillment, undertakings can cause frustration after closing. This article provides some advice to ensure the satisfaction of undertakings.
In some cases, the undertaking is positive, which means that the borrower promises to take a certain action; in others, the undertaking is negative, which means that the borrower promises to forgo a certain action. Obviously, it is easier to enforce positive undertakings when a deadline is involved. Each undertaking will contain a specific performance, or an action that either must take place or must not occur for satisfaction. When no undertaking can satisfy the problem, then damages can be appropriate, usually taking the form of a pre-agreed fee for terminating the loan application or the loan’s establishment fee.
Borrowers’ Undertakings: Keys for Successful Drafting
Issues that threaten mortgage closing tend to come up at the last minute, which often means that undertakings are drafted in a hurry. It is still important, though, to ensure that the text of the underwriting is clear. The best undertakings have the following:
- A specific time frame for satisfying the undertaking, reasonable to both the borrower and lender
- Clear text indicating that the undertaking is a “loan document” and that failure to satisfy the mortgage undertaking constitutes default under the contract
- Provision for a holdback from the advance of the mortgage to serve as security for the undertaking, with the stipulation that the lender may apply the holdback to satisfy the undertaking, as well as any related costs, when appropriate
- Use of expressions such as “use its commercially reasonable efforts” or “use its best efforts” as qualifications for the undertaking, when issues are somewhat beyond the control of the borrower, as in the issuance of a compliance letter from a public authority
Undertakings with respect to closing mortgage transactions are common for solicitors. In some cases, the undertaking is personal; in others, the undertaking is provided on behalf of a client. In either case, the undertaking may be qualified or unqualified, depending on the issue involved. Solicitors must take care to ensure that their clients have instructed them to execute and deliver an undertaking on their behalf.
Governance of undertakings varies by province; in Ontario, the Rules of Professional Conduct provide oversight of solicitors’ undertakings, and one specific provision requires that solicitors include written notice in undertakings if they do not plan to take personal responsibility for satisfying the terms. Without that direct notice, solicitors remain personally liable even if such phrases as “on behalf of my client” appear in the undertaking.
Enforcing Solicitors’ Undertakings
When a solicitors’ undertaking goes unsatisfied, the injured party can apply to court for undertakings that are given in a professional capacity, rather than simply as an agent’s capacity. This remedy exists to enforce high conduct standards for solicitors.
Enforcing Borrowers’ Undertakings
Ontario does not have case law governing enforcement of borrower undertakings by lenders, because in many situations, borrowers’ undertakings are simple to satisfy. Undertakings are more effective as a threat against borrowers than as an actual tool to push borrowers into default. Therefore, it is so important to draft the undertaking carefully. It is also important that before agreeing to an undertaking that Independent Legal Advice is obtained to ensure there is a full understanding.