Real Estate Law and Secured Lending

Louis owns a very successful restaurant. Tired of paying rent, he wants to purchase his first commercial property to house his restaurant.

Little did he know, there are many due diligence checks that a lawyer must do during a commercial property purchase.

For instance, they must check whether the business purpose is allowed by the city – this place was used as a furniture store before, can it now be used as a restaurant? Were there illegal renovations (those done without a permit) by the previous owner?

As those checks were not performed well, Louis suffered greatly once the city came to do an inspection. City stated that due to ventilation and safety reasons, the property cannot be used as a restaurant. Further, all the illegal renovations that the seller did must be torn down, and the place must be restored to before the renovations took place to make it safe.

In contrast, if those checks were properly performed and those problems were fixed by the seller before closing, then Louis would have not suffered. If those problems couldn’t be fixed, then Louis could have purchased another property that is more suited for his business needs.

Casey wants to get into private lending investment because it is backed up by collateral (real estate).

She decided to lend out $500,000 and her lawyer registered this mortgage on title. There is still an RBC mortgage worth of $300,000 registered before her, and the property was worth around $1,000,000.

After 2 years, her mortgage term ended. However, the property owner/borrower did not have enough money to pay back the $500,000 principal owing. What’s more, the borrower also owed RBC money, so RBC began mortgage enforcement by selling the house. During this process, Casey found out that the borrower also owed $100,000 in taxes. As taxes have super priority, even though the borrower owed taxes after Casey lend out her money, taxes must still be paid first.

The economy was down, so the property only sold for $900,000. Casey did not manage to get all of her money back, as a bunch of creditors and fees must be paid out first: $900,000  – $100,000 taxes – $300,000 RBC loan – $100,000 legal and broker fees charged by RBC for the sale = $400,000.

Casey ends up losing $100 k plus any interest and services payments still owing from the borrower. This problem could have been avoided if:

• Casey kept the loan-to-value lower, such as 70% – and lend out only $400,000 to begin with;
• Casey would routinely ask her lawyer to check with RBC and CRA whether the borrower owed any money, and if the borrower does, then ask him to repay back her mortgage right away, otherwise she will begin mortgage enforcement – this way, she can avoid all the expensive legal and broker fees charged by the bank during their mortgage enforcement.