Assumption or Assignment of Lease

By Brian Madigan LL.B.

These two terms essentially mean the same thing. The assumption of a lease is the agreement by a new tenant to take over the rights and obligations of the former tenant under the terms of an existing lease.

The assignment of a lease is the transfer of a lease by the existing tenant to the new tenant.

In essence, they are simply two ways of looking at the same legal transaction:

1) from the perspective of the new tenant, the assumption of the lease, and
2) from the perspective of the former tenant, the assignment of the lease.

It should be noted that these are not the only methods available whereby a new tenant, will takeover premises formerly occupied by another tenant.

Let’s assume that Bob is the first tenant and he secures favourable premises at a good rate from Bill, the landlord. He’s paying $2,500.00 per month for 5 years. Jim comes along and wants to occupy the premises. The market value has now reached $3,000.00, and it’s Bob’s view that the good deal was his, and he should keep the profit. So, Bob leases it out to Jim at $3,000.00 per month, the current going rate. The deal would be structured with Jim signing a sublease with Bob, who will collect $3,000.00 monthly and remit $2,500.00 monthly to Bill. While this is something of a hassle, Bill figures that it’s worth $500.00 a month to him.

Now, let’s assume the current rent is just what Bob is paying, namely $2,500.00. there’s nothing in this deal for Bob, so Bill may agree to permit Bob to surrender the old lease and issue a new lease directly in Jim’s favour. This assumes that Jim is a good tenant and is just as likely as Bob to be able to pay.

The next situation assumes a slight drop in the market. Now, the going rate is $2,000.00 per month. Bob is overpaying at $2,500.00 per month. There’s a $500.00 monthly deficit that Bob has to make up. This transaction can be structured in several ways. First, Jim pays Bob, and Bob adds $500.00 and pays Bill. If Bob wants out of his obligations he could set up an arrangement to pay $500.00 monthly for the remainder of the lease. This could be an annuity, or it could be a letter of credit from a bank. This might encourage Bill to agree to a surrender of the lease.

What if Bob doesn’t pay? If that happens, Jim is the one who gets kicked out. Jim’s concern is a very real one. How can he get rid of this risk? He can ensure that Bob makes the payment up front or there is proper security for the payment. The next issue would be to have Bob off the lease. This means a surrender of the original, and the issuance of a new lease in Jim’s favour. If Bill is insistent that the market is going down, and he wants both of them responsible, then this would be accomplished by an assignment of the existing lease, followed by a provision whereby Bob directs Jim to pay Bill directly. This way when the $2,000.00 payment is made by Jim, it goes direct, and Jim does not have to worry whether Bill ever received the money. So, he won’t be concerned about being kicked out for non-payment.

Generally, here’s what works best. Bob generally wants out of the lease in its entirety. So a surrender is best. If Bill will not agree, then an assignment followed with a reasonable degree of supervision, since Bob is still responsible if Jim defaults.

Bill generally wants as many people responsible for the lease as possible. So, that means no surrender, the assignment is the preferred solution. The exception would be if Bob is a deadbeat, in which case his name on the lease has no value anyway, and since he might be entitled to notice of any legal proceedings, this would simply delay things without an upside.

From Jim’s perspective, the best way is to have a direct lease with Bill, no third parties. Pay the rent to Bill, and be sure that it’s paid. Again, the surrender route is preferable.

So, who decides all this? Actually, it depends on current market forces and both the landlord and the first tenant will control or at least influence the decision. Ultimately, the landlord must agree, or there simply is no deal. When it comes to Jim, he must simply follow along with whatever decision has be reached by the others. In these cases, it is very important to structure the documents to minimize the risks to the new tenant.


Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,
Coldwell Banker Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

False and Misleading Statements ~ Agents

By Brian Madigan

We are all aware that sales agents like to pump their products, merchandise and services. That has been going on for years and the public who be naïve to think that there is never any “puffery” involved. However, there are times when it simply goes too far!

The Consumer Protection Act offers somewhat of a solution to this problem. The former Business Practices Act has been transferred to the CPA.There are two types of representations that are prohibited under the Act:

1) false, misleading or deceptive statements, and

2) unconscionable statements.

First of all, the Act does not apply to real estate transactions as such. They are exempt. It does apply to many of the services that are provided in connection with a transaction. Here, the old common law prevails. There are a significant number of legal precedents concerning real estate.

What must be disclosed and what may be withheld. These are matters that affect vendors and purchasers and fall within the purview of real estate law. Agents are obligated to follow those same laws. In part, they are somewhat consumer protection legislation since they righted wrongs in real property conveyancing hundreds of years ago.It should also be pointed out that the Act contains a definition of “consumer” that excludes someone buying something for their business.

In addition any transaction related to residential tenancies is not covered by the Act.Nevertheless, agents are also affected by the new age of consumerism and the laws which protect all consumers. In this regard, the ancillary “services” that agents provide fall within the purview of the Act. This includes listing agreements, buyer agency agreements and all the many representations that an agent may offer as reasons or inducements to sign such agreements.

An agent might for example say “if you list with me, I’ll sell your house in 2 weeks for $300,000.00". The problem with this statement is that it is intended to serve as an inducement. It is likely that only another agent would be able to determine the truth of the statement. The market is such that probably no house could be marketed and sold within 3 weeks, let alone one that sought a price at the upper end of the market range.

Another service that is frequently provided by an agent is the location of financing. An agent might make statements to the effect that financing will be easy to obtain. This is a “service” that falls under the Act. It is not an activity related to the purchase and sale of real property.An unconscionable representation is one that demands, forces or takes advantage of a vulnerable individual.

However, the definition is somewhat broader and includes statements that seek to take advantage of the consumer and are known to be untrue to the sales person (or their employer) including any one of the following:

• price grossly exceeds the competive price

• consumer is unable to receive a substantial benefit

• no reasonable probability of payment in full by the consumer;

• transaction is excessively one-sided

• terms are so adverse to the consumer as to be inequitable

• statement of opinion is misleading and detrimental to the consumer.

Some examples of possible unfair practices might include the following statements:

• “List with me, I have a buyer for your house.’

• “I charge the lowest commission of any agent in this area.”

• “The Board requires the listing to be at least 6 months.”

All of the above statements are either untrue, or they are made carelessly without regard to their truthfulness, and if that is the case, then that’s “unfair”What is the result? The consumer can cancel the agreement (listing or buyer agency) and if he feels sufficiently aggrieved may report the matter, and this might result in a conviction under the Act.

Further, such a conviction would need to be reported to the Registrar of the Real Estate Council of Ontario (RECO) and that might affect the registration status of the agent.Specifically, the Act provides:

18. (1) Any agreement, whether written, oral or implied, entered into by a consumer after or while a person has engaged in an unfair practice may be rescinded by the consumer and the consumer is entitled to any remedy that is available in law, including damages.

The Act further provides that the consumer may seek exemplary or punitive damages. The defendants will include both the person who made the unfair statement as well as the person who benefitted from the satement (contracting party). So, this would include both the agent and the principal (broker).

Before we simply leave the Act, we should consider the particular provisions related to the regulation of real estate advertising:

“False, misleading or deceptive representation

109. (1) If the Director believes on reasonable grounds that any person is making a false, misleading or deceptive representation in respect of any consumer transaction in an advertisement, circular, pamphlet or material published by any means, the Director may,(a) order the person to cease making the representation; and(b) order the person to retract the representation or publish a correction of equal prominence to the original publication. 2002, c. 30, Sched. A, s. 109 (1).

Real property

(2) Despite clause 2 (2) (f), this section applies to any representations involving real property. 2002, c. 30, Sched. A, s. 109 (2).

”The above provsion is very important. It is only the actual real estate agreement and conveyancing that is exempt from the Act. When it simply comes to advertising, well false advertising is still false advertisng!So, real estate ads are subject to the Act and the Director may issue a cease order or require a retraction. An individual has the right to appeal the decision to the Licence Appeal Tribunal.

All in all, this legislation is significant and consumers who feel aggrieved should take advantage of the opportunities the Act provides rather than simply view themselves as victims without a proper remedy.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

Debt Service Ratios

By Brian Madigan

Before you can buy property, you will need to qualify for a mortgage. There are, of course, exceptions: you could win the money in a lottery, receive it from an inheritance or have it loaned to you by a friend (when I say friend, I really mean parents, nobody has friends like this).

However, if you are like most people, then you will have to qualify for a mortgage. This means having a good credit rating and having a good income.When it comes to income a financial institution (like a Bank) will have some internal rules or policies that it will apply in most cases.

Gross Debt Service Ratio:

This is the maximum amount of a borrower’s income that may be directed to the mortgage payment (principal and interest) and taxes. Sometimes, it will also include heating costs and some lenders include 50% of the condominium fees.This GDS is usually in the range of about 27% to 32% of a borrower’s gross income, that is the income before taxes. In the case of the self-employed it will be net income (after expenses) but again before taxes.

Total Debt Service Ratio:

This is the total amount of all outstanding debt obligations together with the GDS. The usual range here is about 37% to 40%. So, if you have existing credit card debt, bank loans, investment loans, and car loans they will have to be considered in the calculation. The theory here is that at least 30% of your gross income went in income taxes. Another 5% goes in other taxes. And, if you pay 40% of your remaining income on the mortgage, the property and your other debts, then this leaves you with just 25% for all the rest.

In the Bank’s experience, this is getting a little tight. They do appreciate that you have to live.So, if you want to qualify for a larger mortgage, then reduce your debt ahead of time. A helpful banker might suggest that you consolidate some of your loans, namely the credit cards so that you will qualify for the mortgage. Overall, this might be a good strategy. It reduces the interest you are paying on your cards. The savings could be substantial. However, it hides the real cost of the debt, and this could be a serious mistake.

If it allows you to qualify, by bringing your TDS ratio into the right line, then that’s fine. Otherwise, you couldn’t buy the property!But, if you still qualify and there is a little extra room in your GDS ratio and TDS ratio, then, you should be a little cautious. The trick here is to know what you bought. Let’s say you bought a new $ 5,000.00 plasma TV. It will last for 10 years and after that it will be rubbish. If you simply add it to your mortgage and you have a 25 year amortization you will be paying for it (both principal and interest) for 15 years after you threw it out. This doesn’t make any sense at all.

So, be careful when it comes to your finances. Don’t pay too much interest. Even if you are paying a lower rate; if you pay for 25 years rather than 10 years, then you are really paying far too much.When you are shopping for a mortgage, the lenders’ GDS and TDS ratios are very important considerations. You might qualify at one institution and not at another. If you are seeking the maximum mortgage that you can afford (which most people are), this could make a real difference.

If you are concerned and would like some assistance, or a referral to a mortgage broker or lender, please give me a call.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

www.OntarioRealEstateSource.com

Oklahoma Offer

By Brian Madigan

What is an Oklahoma Offer!

Actually, it’s a simple form of real estate fraud. There are variations depending upon how many parties are involved and who is the intended victim.So, let’s look at two examples, in the first the victim is the vendor and in the second, the mortgage company is the intended victim.

Vendor as Victim

In this case, the purchaser and his agent seek to defraud the vendor. An Oklahoma Offer may be defined briefly as any Offer whereby the vendor takes back a mortgage that is unsecured by the value of the property.Let’s assume Bill wants to purchase Dominic’s house which is valued at $250,000. The problem is that Bill doesn’t have any money.Bill intends a first going on at $200,000 and expects Dominic to take back a $50,000 second. The problem is that the vendor doesn’t really realize how large the first is going to be.The usual and correct words in an Offer should be "the purchaser agrees to arrange a first mortgage of not more than $200,000".

However, in the Oklahoma Offer it says "the purchaser agrees to arrange a first mortgage of not less than $200,000".The trick is to catch the unsuspecting vendor who is not paying attention. Here, the purchaser might arrange a $225,000 first. The vendor, Dominic takes back a $50,000 second, but really needs the property to be worth $275,000 if his mortgage is to be secured.

In all situations, the first and the second will add up to more than the value of the property.So, if the purchaser defaults, the first mortgagee is OK, but the vendor, Dominic (second mortgagee) is not.

Mortgage Company as Victim

This next situation is a slight variation on the same scheme. This time, Bill needs to work along with Dominic. They agree to say that the sale price is higher than the actual sale price. So, the mortgage company will lend more money at favourable rates. In the case of a standard first mortgage, the mortgage would not exceed 75% of the value of the property. Or, they might try to simply circumvent the CMHC high ratio insurance fees.

In any event, the intended victim would be the mortgage company.The Criminal Code Section 362 of the Criminal Code makes it an offence punishable by up to 10 years in prison to obtain credit by a false pretence or fraud. A mortgage is considered as credit under the Criminal Code. Anyone who knowingly assists in the misrepresentation is a party to the offence and subject to the same penalty. So, in the latter case, both Bill and Dominic (and their agents) would be liable.

In the first case, just Bill and his agent would be liable. Dominic was just an innocent party.The RealityIn my experience, the Oklahoma Offer is a thing of the past. I have been involved in thousands of real estate transactions and the last actual Oklahoma Offer (subject to litigation in the late 1970’s) was negotiated between the parties in 1972. Since then, too many professional are aware of the scam, and none of these deals actually close.

The second variation, perhaps better known as an Oklahoma swindle is plain and simple mortgage fraud. And, it is as common today as it ever was. However, sophisticated mortgagees are increasingly using their own (and reliable) appraisal firms. This approach catches most cases ahead of time.The first situation is more important for real estate students and agents since it is always in the real estate courses, even if it doesn’t occur frequently in practice.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty
905-796-8888

www.OntarioRealEstateSource.com

Do You Need Title Insurance?

By Brian Madigan LL.B.

That’s a good question. Prior to 1997, there was no commonly available title insurance in Ontario and yet it was the norm in the United States.

Solicitor’s Opinion

Traditionally, purchasers sought a title opinion from a solicitor who undertook a search of the title to the property. This included checking the chain of title as well as completing searches to determine if there were any liens or whether the property complied with zoning and building by-laws. The solicitor would express an opinion as to whether the title was “good and marketable”.

A mortgagee in receipt of this opinion would advance the funds so that the purchase could be completed.If problems arose in the future with the title, liens, zoning or other matters, it would be necessary for the purchasers to sue their lawyer. First of all, most people are reluctant to sue their lawyers. While they may not like other people’s lawyers, they usually like their own.

So, if the claim is small, they are unlikely to pursue the matter.Let’s assume that it is a large enough claim to pursue. They will need to retain another lawyer. The second lawyer (a specialist in litigation) will have to establish that the first lawyer was negligent in completing the transaction. This is much easier said than done.

The first lawyer will be very reluctant to admit “negligence”, after all, one’s legal reputation is at stake. So, you will probably find that the matter of negligence is denied and that the claim is being vigorously defended. This time, the solicitors will be retained by the insurers for the Law Society (which provides malpractice insurance coverage). They will have a great deal of expertise in the field. So, the second lawyer will also have to retain a third lawyer as an expert witness, this time one who is a specialist in real estate. This case is not going to be simple!

You may indeed have an excellent case, but unless your case is the legal equivalent of being rear-ended in a car accident, you’re fighting an uphill battle. And, you’re financing all the costs in the meantime. Further, while all this litigation is going on, the title problem is still unresolved.

For example, if your house is too close to the lot line, you will still have to make application to the Committee of Adjustment for a minor variance. If your eavestrough overhangs your neighbour’s property, then you will either have to remove it, or obtain an encroachment agreement from your neighbour. This may cost some money.Ultimately, you will have to prove that your lawyer’s conduct in your case, fell below the proper and acceptable level of service. What if these problems were mentioned by your lawyer, but no one thought that anything would really ever go wrong?

The municipality and the neighbour just won’t notice. In this case, you’ve probably accepted the risk. Or, perhaps the lawyer properly explained it, but failed to really talk you into solving the problem at the time. If that “explanation” was the same explanation that is customary, then you are out of luck.

There is a problem, the lawyer met the appropriate standard of care, and unfortunately for you, the risk materialized.

Title Insurance

There is another entirely different approach to this same matter. It falls under the discipline of “risk management”. Just buy insurance! Whatever the problem, just figure out how likely it is, and pay the appropriate premium. Insurance will take care of the rest.The first issue is that it doesn’t matter whether your lawyer was negligent or not. So, please feel free to call, and both you and your lawyer will sigh in relief when it is determined that you purchased “title insurance”.

The next step is to report the claim. You can either do this directly or your lawyer will do so on your behalf. The insurer is looking to find a cost effective solution. If the setback was not sufficient, then they will retain your lawyer or another lawyer to proceed with an application for a minor variance. If it is an encroachment agreement that is required, they will negotiate with your neighbour, pay a sum necessary to secure your neighbour’s consent and attend to the payment of your neighbour’s legal fees.

Another solution may simply be to replace the eavestrough.You have to remember that your neighbour doesn’t have to agree, and the Courts will not force him. But, the insurer will have to offer sufficient funds as an inducement to make it worth his while. Possibly, in some cases, where there is no real solution available, you will be entitled to the difference in value between your property with the problem and your property without it.

Unlike the reaction of your solicitor to an accusation of professional negligence, the title insurer really needs some claims to pay. If nothing ever went wrong, who would buy insurance? So, they really do want to establish a reasonable track record of claims payments so that everyone will say “you should always buy title insurance”.Most of the time, nothing goes wrong, but in that less than 1% when it does, you are much better off with the insurance.

What’s Covered

Most title insurance policies cover:

1) title problems that could affect the marketability of the title, and

2) legal services provided by your lawyer in the transaction.

The policy is issued in the names of the purchasers and the mortgagees. They are all covered as their interests appear. The policy is issued for a one-time premium and affords protection not only to the original purchasers but also their heirs. New purchasers will have to obtain their own policy.

In addition, certain title related issues that are beyond the scope of the usual solicitor’s title opinion are also included, for example fraud, forgery, survey errors and errors made by municipalities and utilities in providing information to lawyers. Further, it covers work orders, access rights and conflicting interests in property.

Another very important feature is that the policy continues in effect. It is not a one-time opinion. If something goes wrong afterwards, you are still covered. What if your neighbour erects a fence over your property line, two years after you buy the property? You don’t have to look for your solicitor’s opinion! Of course, there was nothing there, but, you’re still covered under the title insurance policy. So, post closing events like fraud and new encroachments are covered. So too, are some construction liens. If you simply don’t pay one of your contractors and the contractor registers a lien, then that will not be covered, but if you pay the general contractor and he fails to pay one of his sub-contractors, then that lien will be covered.

The specific “title issues” that are covered would include the following:

1) defects in title,

2) conflicting interests or ownership of the land,

3) mortgages or other encumbrances affecting title,

4) the un-marketability of title,

5) lack of compliance with restrictive covenants,

6) the existence of work orders,

7) major encroachments,

8) access-related problems,

9) absence of a legal right of access,

10) errors in rights of way or easements, and

11) defects due to tenancies.

There are, of course, other title related matters that are not mentioned. In all cases, you should see the particular wording in the relevant policy.Aside from the “title issues”, the matter of “legal services” is also covered. This would include errors, omissions or negligence by your lawyer in respect to the following:

1) the manner of taking title,

2) the implications of taking title in the name of a particular person,

3) financial implications of the purchase,

4) financial implications of the mortgage,

5) Land Transfer tax implications (both its application and calculation),

6) Income Tax implications,

7) advice regarding the Agreement of Purchase and Sale,

8) advice regarding chattels with liens,

9) errors and omissions in the statement of adjustments, and

10) advice with respect to risks and proposed remedies.

So, just about everything that a lawyer could do wrong is covered. In fact, if there is legal liability at law, then you are covered. You don’t need to sue your own lawyer, you just present the claim to the insurer.The insurer will, in the event of a claim:

1) pay all the costs necessary to rectify the problem,

2) compensate the purchaser by paying up to the full amount of the insurance policy, and

3) pay all of the associated legal costs of defending the matter in Court.

What Is Not Covered

It would be reasonable to assume that some things are not covered. The standard exclusions would mention environmental risks, the purchaser’s right to change the use of the property, make certain renovations to the property, native land claims and the risks or problems that the purchaser agreed to assume in the agreement.These exclusions are reasonable.In fact, for an additional premium the insurer might be persuaded to underwrite some of these additional risks.

The point here, is that they will not be covered under the standard policy that it issued to everyone. That would be too expensive! So, delete those risks, and the particular purchasers who might face these specific issues will have to deal with them, either in the agreement, through a solicitor’s opinion or through a rider to the title policy.

Land Titles Assurance Fund

This is a fund underwritten by the Province to guarantee the titles to certain properties registered in the Land Titles system. There is a very narrow definition of title. At this moment, most properties are still registered under the Registry system (where no insurance program is in effect), but eventually that will change.

The advantage of the title insurance policy is that it provides an immediate solution and deals with all the associated costs. If at some point in the future, you are reimbursed through the Land Titles Assurance fund, then you would have to remit these funds to your title insurer. They paid you first, and waited months perhaps years for payment.

Premium

Generally, the premiums have been relatively low for the various coverages that are provided. In truth, most of the time nothing goes wrong. Almost all conveyances go through without a problem. But, the ones that have a problem, usually have a very expensive problem.The title insurers are professional title underwriters. They know how often things go wrong. Even if there is an identified risk, only rarely does that risk materialize. How often have you seen someone driving very carelessly, but they didn’t hit anybody. This basic insurance principle allows the underwriters to ascribe a relatively low premium to the transaction. Also, the acquisition of a policy may eliminate the need to incur certain disbursements, including a new survey. These savings can easily exceed the policy premium.

Recommendation

Buy it, it’s worth it! Even your lawyer will be happy. Now they know that you won’t ever sue them.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/