Have you ever worked on a deal
where a party has come up on title as having a life interest in a property?
This doesn’t happen often but when it does it can stop a deal dead in its
tracks prompting us to write a blog on the topic.
Sometimes a non-disturbance
agreement can be in place in the case of tenants, which may or may not be
registered on title, or a life interest in the property which may be registered
on title, which is often the case with family members.
Why do the presence of either
squash many deals? Because the existence of same means that the person during
the time or under the terms specified cannot be removed from the property even
in the case of a foreclosure.
A non-disturbance agreement is
an agreement with a tenant and a landlord or homeowner’s lender that the tenant
will remain in possession of the property being leased even if foreclosure
takes place and in the case of foreclosure may legally begin making payments
directly to the lender. At first glance, you may wonder why would any lender
would agree to one of these? Often in the case of private mortgages where there
is good equity, these agreements take place because they actually give the
lender the ability to capitalize on income from the property when a default in
the mortgage takes place. Also, in the case of foreclosure, when a buyer is
pursuing an income property, with the numbers in line, many don’t mind buying a
property that already has a good tenant in it.
On the other hand, the presence
of a non-disturbance agreement is bad news for an unsuspecting second mortgage
lender, especially one who is unaware that there are tenants in the property.
Not only can they see the first lender snatch income from the property until
challenged, they can end up with limited recourse in the event of a default.
A life interest on the other
hand is actually registered on title and lasts for the lifetime of the person
benefiting from that right. We see this often in the case of seniors who
continue to live in a home while having transferred it to the name of a
beneficiary to streamline probate in the event that they pass away. The life
interest ends when the beneficiary dies.
Not every lender wants to be a
part of a transaction that involves tenants or someone with a lifetime right to
occupy a property. Knowing that a property is a rental property or not
owner-occupied is a form of fraud and if uncovered by a lender could lead to
the end of your relationship. Life interests will certainly come up if one
exists during the closing process once the lawyer begins performing their due
diligence. Deals that get this far along in the process and fail to close can
leave a lender wondering about your underwriting capability.
It is always important to
clearly ask your clients if a property has tenants, if there are any
non-disturbance agreements in place. It is also prudent to ask the client how
the property was acquired. If it was passed down by a loved one this can be a
sign that you may need to do extra due diligence to confirm that a life
interest hasn’t been registered.
Being as prepared as possible
only helps to streamline the process. Don’t get stuck with unknowns, or assume
that those unknowns will remain so - they likely will not. Get as much
information as possible and provide it upfront. Visit Purview For Mortgage
Brokers today at www.purviewforbrokers.ca.
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