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Saturday, February 11, 2006

Assumable Mortgages

The Edmonton Real Estate Board recently published the following article on assumable mortgages. One thing is for certain, the days of assuming a mortgage without first qualifying are over...

A mortgage in Alberta is (as we lawyers say) a covenant that runs with the land. In other words, the mortgage attaches itself to the land and stays there even if the ownership of the land changes. In that sense, all mortgages are assumable. Anyone who purchases a piece of land is bound by the mortgage that stays on Title when the land is transferred to the new owner. A careful reading of most mortgages in Alberta whether conventional or high ratio,will reveal a paragraph that says something like the following: “Should the Mortgagor transfer the property to a new owner the Mortgagee has the right to require the new owner to qualify and has the right to declare the mortgage due in full.”

In 1974, the Royal Bank relied on a similar “due on sale” clause and commenced foreclosure proceedings against the new owner. The Court decided the clause was valid and enforceable. However, the purchaser asked the Court to exercise its discretion and provide relief from the enforcement of this clause. The Courts agreed with the homeowner and a stay of the bank’s foreclosure was ordered. That is where matters have remained since 1974. The clause is valid. However, the Courts in Alberta have yet to allow a foreclosure through to completion on the sole basis of the “due on sale” clause – until recently.

During the past year several lenders have been increasingly relying on the “due on sale” clause in their mortgage. They have been monitoring their mortgages and when they see a new owner they are stepping forward to force the new owner to qualify. And if the new owner does not qualify the lender will call the mortgage. In most cases, the lender is able to “convince” the borrower that their life will be pretty miserable if they do not pay off the mortgage.

In addition, with the recent cases of real estate fraud, the courts are willing to enforce the “due on sale” clause in the appropriate circumstances.

The bottom line is that mortgages in Alberta are all assumable. However, you may wish to caution every client they may have to apply to the Court and a decision from 1974 could, in different circumstances, be reversed. All in all, not a happy experience for anyone involved.

During the past year several lenders have been increasingly relying on the “due on sale” clause in their mortgage. They have been monitoring their mortgages and when they see a new owner they are stepping forward to force the new owner to qualify. And if the new owner does not qualify the lender will call the mortgage. In most cases, the lender is able to “convince” the borrower that their life will be pretty miserable if they do not pay off the mortgage.

In addition, with the recent cases of real estate fraud, the courts are willing to enforce the “due on sale” clause in the appropriate circumstances.

The bottom line is that mortgages in Alberta are all assumable. However, you may wish to caution every client they may have to apply to the Court and a decision from 1974 could, in different circumstances, be reversed. All in all, not a happy experience for anyone involved.

Stan Galbraith & Stacy Maurier
Galbraith Law
Fri, Feb 10, 2006 13:13

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