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Delays in Funding, Delays to Closing Day? The CBA Standard Undertaking YOU Need to Know About.
What Happens to the Deal if a Buyer's Mortgage Doesn't Fund on Closing Day?
Eli Zbar
April 17, 2024
Did you know the standard real estate Contract of Purchase and Sale allows Buyers to pay less than the full Purchase Price on the Completion Date?
This newsletter is an in-depth explanation all about Section 13 “Buyer Financing”. By the end of this article, you should know enough about Section 13 to explain it to a client.
The phrase the “Buyer….may wait to pay the Purchase Price to the Seller” in Section 13 causes much confusion because of the technical language and reference to the “CBA Standard Undertakings”.
Let’s demystify and explain how it works.
Why Does Section 13 Exist?
If you’ve ever had a bank account, you know that banks make mistakes and work slowly. Section 13 exists to prevent innocent home buyers from losing their deals due to bank errors and general slowness.
What’s an “Undertaking” & Why’s it in the Contract?
An undertaking is a solemn promise made by a lawyer in their personal capacity. Pursuant to Law Society rules, lawyers face serious penalties for even minor or technical breaches of undertakings. The value of undertakings exists because of the professional sanctions established to enforce those undertakings.
The CBA Standard Undertakings are a key part of how lawyers close real estate transactions in a predictable and efficient manner, without needing to negotiate bespoke closing mechanics for every transaction, including:
delivery and exchange of documents;
timing and order of document registration;
form and timing of payment;
the order of operations for clearing title; and
how to return the Buyer and Seller to their pre-contract positions and deal with other contingencies if the transaction does not complete for some reason.
Imagine if you had to work through each of these issues with every Buyer and Seller, every time!
Since 1999, the BC branch of the Canadian Bar Association works with the BC Real Estate Association on the standard form Contract of Purchase and Sale, and the CBA Standard Undertakings. That’s why you see both logos at the top of every contract:
When and How Does Section 13 Protect the Buyer?
KEY POINT: the payment in full exception in Section 13 only applies if the buyer is getting a new mortgage.
A “new mortgage” includes:
a regular mortgage from a bank, or any lender securing their funds with a mortgage;
a renewal of an existing mortgage (Javelin Investments Inc. v Canadian Western Trust Company, 2020 BCSC 1179); and
assuming an existing mortgage (per the CBA Standard Undertakings definition).
If the Buyer simply doesn’t have the cash on closing day, Section 13 will not help them. If the Buyer is selling their home and relying on that money for their purchase, Section 13 will not help if the sale collapses making them unable to purchase.
However, if the Buyer’s new mortgage hasn’t funded on closing day, the Buyer’s lawyer can still close the deal, and “wait to pay” under certain conditions as set out in 13(a)-(c).
Conditions Imposed on the Buyer
Condition in Section 13 | Meaning | Importance |
|---|---|---|
13 (a) made available for tender to the Seller that portion of the Purchase Price not secured by the new mortgage | The Buyer must offer the Seller’s lawyer all the funds except those expected from the lender, normally, this is the Buyer’s “down payment”. | By offering the funds, the Buyer confirms they are not simply unable to come up with the funds and unable to complete. |
13 (b) fulfilled all the new mortgagee’s conditions for funding except lodging the mortgage for registration | The Buyer must confirm there’s no known reason why the lender would not fund once they mortgage is registered in the land title office. | Sometimes, banks and lenders have funds held, wires delayed, business days do not align etc. Section 13 is not meant to protect unprepared buyers. If the buyer no longer qualifies for the mortgage, or hasn’t met all the lender conditions on closing day, they cannot meet the requirements of Section 13. |
13 (c) made available to the Seller, a Lawyer’s or Notary’s undertaking to pay the Purchase Price upon the lodging of the transfer and new mortgage documents and the advance by the mortgagee of the mortgage proceeds pursuant to the Canadian Bar Association (BC Branch) (Real Property Section) standard undertakings (the “CBA Standard Undertakings”). | The offers and assurances made in (a) and (b) must be backed up by an undertaking as set out in the CBA Standard Undertakings. | An undertaking essentially ‘underwrites’ the entire transaction when relying on Section 13. The lawyer offering the undertaking is so sure that the mortgage will fund, they bet their license on it. |
Implications for the Seller
Notably, neither Section 13 nor the Standard Undertakings offer a specific deadline for how long the Buyer may “wait to pay”. This is not an extension to the Completion Date.
This is why I tell realtors never to put the Completion Date on a Friday or a day before a long weekend! If something happens to the Buyer’s mortgage, the Seller will have to give up possession and otherwise proceed with closing before being paid in full, as the Buyer waits until the next week for their mortgage to fund.
The CBA Standard undertakings specify that the lawyer must, to the best of their knowledge, know of no reason why the funds should not be disbursed in the ordinary course of business. Ordinary course of business is context dependant. During COVID, ordinary business was interrupted and thus parties to real estate contracts needed to provide lenders with extra time to move the funds between accounts.
More info:
Did You Know?
I offer real estate agents and mortgage brokers complimentary short phone consultations. Message me on WhatsApp, or book a call.
A reminder that Arora Zbar LLP has 4 lawyers offering services in real estate transactions, construction disputes, corporate law, commercial litigation, tenancy/strata disputes, and estate planning.
We offer services in English, Punjabi, and Farsi.
We are super transparent about pricing, check out our app at www.pricemyconveyance.com - it calculates property transfer tax, too!
Contrary to what people think, a lawyer is not more expensive than a notary. Remember that all lawyers are notaries, but notaries are not lawyers. In my experience, most notaries refer clients to a lawyer as soon as there’s a problem with a deal. Why not start with a lawyer?
Sincerely,
Eli Zbar
Lawyer
Check out some previous newsletters:
👉What is “Family” in Real Estate”