In 2009, the Law Society advised its member lawyers that when acting on behalf of buyers using mortgage financing to purchase a property, a special condition must be included in the contract of sale.
This condition provides that the completion of the contract is subject to the approval of the buyer’s loan existing at the date of completion, to the extent of an amount sufficient to complete the purchase. Essentially, this means that if the full mortgage amount is not available from the bank on the day the sale closes, the buyer can opt out of the transaction.
The loan clause is recommended to protect buyers from the loss of their deposit if the bank were to withdraw their loan offer for reasons beyond the customer’s control, and to protect against the customer potentially facing legal action from the bank. part of the seller in the absence of a loan clause.
This special condition was designed at a time of the market when prices were falling and was conservative at that time. However, almost 12 years later, this is problematic, leaving the other party to the transaction, the seller, in a vulnerable position. Even if the contract is signed and exchanged, it can be considered null and void if the mortgagee decides to terminate the loan offer.
Before the introduction of the loan clause, sellers could rest easy knowing that once the contract was signed, they could make arrangements to proceed with their own moving plans. However, due to this clause until the conclusion of the sale, the contract can be terminated at any time.
This poses major logistical difficulties for sellers. Those who buy another house on foot to sell their existing house may be prevented from signing a purchase agreement until their existing house is completed and vacated because they do not want a situation where the loan is invoked when selling their own home, leaving them exposed to the risk of lawsuits for breach of contract or concrete performance of their purchase.
As a result, sellers often have to arrange a short-term rental to mitigate this. It adds another step and a pinch point in the process. It is not uncommon for sellers to book hotels for a few weeks between homes, as finding a short-term rental can be difficult and expensive.
Loan clauses have become even more problematic since the onset of the pandemic. Many borrowers have been affected since last March, where banks refused to advance funds as borrowers found themselves on Covid-19 backers, such as the pandemic unemployment payment or the wage subsidy program.
Another reason for invoking the loan clause is the loss of a job immediately before the levy.
In addition, this clause can be invoked when problems are discovered during a medical examination for life insurance coverage. The life cover is one of the last items to put in place before the draw. If it cannot be set up for health reasons, the loan funds will not be released by the bank.
Once again, we are experiencing such cases more frequently since Covid-19 obscured all of our doors. It appears that everything to do with the respiratory tract has become a red flag for life insurance in the world of Covid. For example, a minor and entirely mild lung infection in an otherwise healthy young borrower in the months leading up to the debit may prevent a bank from releasing the funds. These types of scenarios cause major headaches for sellers as houses are usually fully cleaned to be completed and sellers’ forward plans are then canceled.
Another recent victim of a loan clause involved clients downsizing. They proceeded to dispose of all their furniture in anticipation of the conclusion of the sale because the contract was signed. However, the special condition clause was invoked at the last moment and our clients ended up in a house with nothing but patio furniture and a mattress until the property was sold to another party for a few months. later.
You would think that once Covid-19 is firmly in the rearview mirror this will no longer be a problem, but the continued existence of the loan clause in transactions means that neither party can benefit from the certainty until ‘at the end of the sale.
Aside from the pandemic, and since it is prudent, banks usually do a last minute credit check on borrowers before the debit to verify that they, for example, have not spent on an expensive new car when rental or splurge on a world tour. This would be one more reason for the banks to refuse to advance funds and for the seller to be left dry at the last minute.
Sadly, health issues and job losses are a fact of life with or without Covid-19. One solution that would be fairer for all consumers would be to make the loan offer unconditional.
The bank could require that life cover be activated before the loan offer is issued to protect against this problem. Banks in any event take a long-term risk on a borrower as part of the underwriting decision. Borrowers could lose their jobs or find themselves on Covid-19 or equivalent support at any stage of the loan. It shouldn’t matter that this happens between the loan offer and the drawdown, as it could happen the day after the drawdown. Their subscribers have already factored all of this into their decision to lend.
The length of time that probate is granted can also be an issue. When a loan clause is in place and a contract is exchanged but completion is subject to approval, the buyer’s loan offer may expire as many lenders revised their loan offer periods from 12 months to six months.
If loan offers were unconditional, borrowers could fully rely on them and loan clauses would not be necessary for transactions to be concluded. Both buyer and seller could rely entirely on the contract at the time of signing, unlike sellers who have to vacate properties, find temporary accommodation, and wait for transactions to complete before they can move on.
It looks like we’re just making an already loaded system unnecessarily more complicated for everyone involved.
Ann-Marie McCoy is Senior Negotiator at Lisney Real Estate Agents