Can a lawyer act for both the lender and borrower?

In most conventional cases where the mortgage is not a “private” mortgage or loan transaction, there are no hard rules rather than good judgement and a lawyer’s duty to ensure that both the lender and borrower are adequately represented (not just independently advised) and aren’t materially prejudiced by any inherit conflict.  Some business considerations may include if the lender or borrower is someone the lawyer routinely acts for and therefore possibly putting the lawyer in a conflict should a dispute with the borrower arise.

However, a private mortgage is not defined by what it is, but instead by what it is not.  In Ontario, a lawyer, or the lawyers in a law firm (in partnership or association), cannot represent both a lender and borrower in the same mortgage or loan transaction (except in four limited circumstances illustrated below) if the lender is NOT:

1. a bank, trust company, insurance company, or credit union, as defined by the legislation that governs them federally or provincially (i.e. you can’t just assume a client is a “trust company” because it is a “trust”);
2. a “finance company”, which is a corporation or partnership:
   • whose primary (main money making) business involves giving loans (including refinances), or entering into other similar arrangements for advancing funds or credit; and
   • that is publicly listed (i.e. a public entity) or that one of its affiliates, including subsidiaries, is.
     • An affiliate includes:
       • • a corporation that one controls, or that is controlled by another affiliate, or controlled by the same group of shareholders or affiliated persons (eg. other affiliated corporations, or individual spouses or common-law partners); or
         • where one is a partnership and the other is a majority interest partner of the partnership, or one who is affiliated with such partner; or
         • where one is a trust and the other is its majority interest beneficiary (generally, a beneficiary who enjoys a majority of the trust income or capital), or one who is affiliated with such a beneficiary;
3. a corporation or partnership designated as an approved lender (full or limited status) under the National Housing Act (Canada), which requires a rigorous vetting and application process administered by the Canada Mortgage and Housing Corporation (CMHC); or
4. a Community Futures Development Corporation, a federal or provincial crown corporation or a corporation or agency affiliated with or funded by such a corporation, a municipality or an agency affiliated with or funded by a municipality.

Unless in the following four limited circumstances the mortgage or loan transaction itself:

1. is part of a sale of real property and the seller, as lender, is taking back a mortgage by lending to the buyer a portion of the purchase price (i.e. a seller/vendor take back mortgage). Because the loan given is part of the purchase price, these types of transactions must close with the sale transaction;
2. is in a remote location or requires a lawyer that practices in a remote location where there are no other lawyers that either the borrower or lender could conveniently retain for the mortgage or loan transaction. This limited circumstance is highly unlikely with virtual meetings, remote signing and digital signatures;
3. the size of the loan is no greater than $75,000 (formally $50,000), which includes broker fees and lender fees and any other amounts secured by the mortgage loan; or
4. the lender and borrower are not at arm’s length.  This means that the borrower and lender are:
   • Related individuals connected by blood relationship, adoption, marriage or common law partnership; or
   • Related corporations (or where one is) involving common control usually by way of their controlling shareholder or group of shareholders, one of which may be the borrower or the borrower is related to the shareholders or group of shareholders that control the lender and vice versa. Or where the borrower and lender are commonly controlled corporations, usually by the same controlling shareholders or group of controlling shareholders, or where the shareholders or group of shareholders of a borrower are related to the shareholders or group of shareholders that control the lender; or
   • Involved in a Personal Trust or Specified Personal Trust relationship, such as a borrower that is a beneficiary in a family trust or spousal trust, for example, and where the trust is the lender, and the beneficiary directly or indirectly controls the trustees or can exhibit control over the trustees of the trust; or
   • There are other far less common circumstances illustrated in Section 251 of the Income Tax Act (Canada).

In all circumstances where a lawyer or the lawyers practicing in partnership or association are permitted to act for both the lender and borrower, written consent from both parties is required, illustrating the inherit conflict and other options.

The loans provided by Mortgage Investment Corporations (i.e. MICs) are considered private mortgages unless the corporation qualifies as one of the types of entities mentioned above (i.e. a bank, trust company, a public company or affiliated with one, a designated lender under the NHA, a government or quasi-government organization).

For all your loan transactions and regulatory guidance, contact Jeff Levy, a lawyer at Levy Zavet PC.

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