The standard form residential Contract of Purchase and Sale requires sellers to “clear title”. This means that sellers are responsible for paying out and discharging any existing financial charges that are registered on the title to the subject property. Any prepayment penalties and discharge fees are also the responsibility of the sellers.
Practically speaking, the paying out and discharging of existing financial charges takes place after closing because most sellers rely on the proceeds from the sale to pay out the existing financial charges. This is permitted by section 14 of the standard form residential Contract of Purchase and Sale.
So, what is an “existing financial charge”? Generally, we are dealing with a charge identified as a “Mortgage” on the title to the subject property.
A mortgage is registered on title to secure repayment of debt or performance of related obligations by the borrower (Ex. paying property taxes, strata fees, etc.). By registering a mortgage, a lender gets “security” in the subject property and has access to faster and easier methods of collecting their money if the borrower fails to meet their obligations.
Under the Land Title Act of BC, a “Mortgage” is an interest in land that complies with Division 5 of the Act. Basically, a mortgage must include certain information and be filed on the approved form (a “Form B”). The Land Title Act does not distinguish between a traditional mortgage (ie. a long-term debt which is repaid using blended payments of principal and interest and generally subject to a prepayment penalty if paid out early) or a line of credit (ie. a financial product that provides flexibility with respect to when and how much a borrower wishes to borrow and repay).
Not every line of credit is registered on title. If a line of credit is secured by real estate, it will be registered as a “Mortgage” on title and will need to be paid out and discharged as a part of the sale process. This type of line of credit is usually referred to as a home equity line of credit (“HELOC”). If a line of credit is not secured by real estate, it will not need to be paid out or discharged as part of the sale process (although it may need to be paid down and/or closed as part of a refinance).
In order to pay out and discharge a “Mortgage” (whether that be a traditional mortgage or HELOC), we need to request and obtain a payout statement from the lender. If the “Mortgage” registered on title is really a HELOC, it is important to advise your lawyer as it will affect when they request a payout statement. In addition, it is important not to use/draw down funds from the HELOC after the payout statement is requested as it can cause complications and delays with closing.
You can use sale proceeds to pay down or pay out a line of credit that is not registered on title. However, this would be done between you and your lender directly after closing. Note, although the sale proceeds will be coming from your lawyer’s trust account, your financial institution may place a hold on the funds. If you are planning on using the sale proceeds immediately to pay off a line of credit or for any other purpose, it is best to contact your bank in advance to request that they waive the holding period, if applicable.
Please note that we are not licenced or insured to provide financial advice with respect to various forms of financial products. If you have any questions about your existing mortgage or line of credit, please contact your mortgage broker and/or lender.
If you have any questions regarding the above, the sale process or any other real estate matter, please do not hesitate to reach out to our office at (778) 940-3768.
Author: Danielle (Dani) Brito
This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (778) 940-3768 or any of our lawyers practicing in the area of real estate law at the following:
Jennette Vopicka: jennette@acornlaw.ca
Danielle (Dani) Brito: [email protected]
