The Title Register

Ontario uses a system called the Land Registry to record all the rights held in land.  This includes ownership, but also includes other rights, such as easements (the right to cross over land, utilities have these to run wires and pipes) and charges (financial security against property, lenders register these to secure mortgage loans).  The title register can show if there are certain problems with the ownership of the property, or the financial situation of the seller, which might make you want to walk away from a property.

The Underwater Seller

Imagine a property which has multiple mortgages registered against it.  As a buyer, you will want the mortgages of the previous owner discharged as part of your purchase, since you don’t want any responsibility for the debts of the Seller.  This is normally fine, unless the purchase price doesn’t cover the cost of discharging the mortgages.  Now imagine we are coming up to the completion date for the transaction, and we hear from the Seller’s lawyer that there is not enough money to discharge the mortgages.  The two lenders are bickering amongst themselves as to who should accept less money, and by how much.  They then ask the Realtors to take less commission, because it’s either less, or none, if the deal does not complete.  If you are getting cashback from your Realtor as a buyer, this means you are effectively being asked to pay more for a property you’ve already agreed to buy for a set price.  The lenders may also directly ask you to just pay more for the property so their loans can be repair, which will really feel like robbery.

At this point you’re going to feel cheated by the situation, but are also trapped.  If you refuse to pay any more, the deal may not complete and the Seller will breach the contract, but we already know the Seller is effectively bankrupt, so with at least two lenders in line ahead of you, you will never see a penny of compensation for the failure of the transaction.  You may also incur considerable costs if the deal does not complete, such as being unable to sell your current property because you have nowhere to move, and so breaching your own sale agreement, or needing to suddenly move into a rental property, just to have somewhere to live.  All of these costs would be compensated by the Seller for breach, if the Seller had any money.  With the Seller having nothing to take, you would be left to bear all these costs alone.  The alternative is to agree to pay more for something you already agreed to buy, for no reason other than the financial foolishness of the person selling you the property whom you’ve never before met.

Avoiding the Trap

Searching the title for mortgages is a very good way of avoiding this problem, to see if there is more than one mortgage registered against the property.  This does not immediately provide you evidence that the Seller will be unable to complete, because the information on the Register is not the current state of the mortgages, but the amounts registered when the money was lent.  A lender will not lend someone more than can be secured, which means the amounts registered will seldom be more than the value of the property at the time the money is lent.  Sometimes lenders will register amounts greater than the value of the property in anticipation of the property increasing in value, but will lend the borrower less than the registered amount.  This usually takes the form of a line of credit which is unused at the time of purchase, such as registering $1,000,000 against a property purchased for $800,000, and lending the borrower $600,000, thus allowing the borrower to borrow more later, as the mortgage is paid down and the house value goes up.

The other reason the value of the registered amount could be greater than the current value of the property is if the value of the property has fallen.  This does not mean the outstanding amount of the mortgage is greater than the current value of the property, only that the registered amount is.  Herein lies the problem of information for the potential buyer: you cannot know for sure how much it will cost to discharge the mortgages without seeing discharge statements.  If you cannot see the discharge statements, you do not know how much the Seller needs to pay, and so will not know if they can complete or not.

So, what to do?  Always pulling the title register from OnLand.ca is a good start.  If the property has multiple mortgages, you can ask to see a mortgage statement, just to see how much is left on the mortgages.  This is not the same as a discharge statement, where the lender will add in all the costs of discharge, but it will give you a good idea how much the Seller will need to pay to discharge.  If the total of the mortgage statements is more than 90% of the offer price, you may want to consider walking away, because there are always additional fees and charges on discharge, and because someone whose mortgages take up 90% of the value of the property is likely to have other debts you cannot see on the title register.  This could include things like judgments registered against them, and writs.  There are also costs associated with moving, so if 90% of the purchase price is going to discharge the mortgage, that doesn’t cover the Realtor fees, the lawyer fees or the cost of actually moving.  Such a Seller may well also have substantial credit card of unsecured line of credit debt, and may very quickly run out of ability to pay these other expenses to complete the transaction.

Risk and Opportunity

Depending on what you want, there are also opportunities in cases like this.  Someone whose back is against the wall financially is not in a good position to negotiate the price of a property, and so you may wish to take the risk because you may be able to get a good price.  If you’re buying an investment property it may be more worth it to you than buying your own home, because you’re not taking the risk of needing to move out of your current property.  No matter what your intentions are, more information is better than less, and consulting with your lawyer on the risks is a good basis for strategy.