What is a vendor take-back mortgage in a business sale?

When a business sale includes a building or land, the seller can finance part of the price by taking back a mortgage on that property. The buyer pays the rest at closing, owes the seller the balance, and the seller holds a charge against the property until it is paid. It is the real estate version of the arrangement in our guide to seller financing.

Where the mortgage is registered

British Columbia’s Mortgage Brokers Act defines “mortgage” to include every instrument by which land in British Columbia is conveyed, assigned, pledged or charged as security for the payment of money to be reconveyed, reassigned or released on satisfaction of the debt, but not an agreement for sale of or a right to purchase land or an interest in land. Ontario’s online personal property registration service says it does not provide information on real property such as land and points users to land registration instead, so a mortgage on land is registered through land registration, separately from a note secured on equipment or inventory, as in securing a vendor take-back loan.

Where it ranks behind the buyer’s lender

A lender financing the property may insist on first position. The Canada Small Business Financing Program guidelines, for example, say a loan that finances real property must be secured with a first mortgage on the property, or by another document creating a registered interest that can be realized on in the same way, which would leave a seller’s mortgage on the same property in second place. BDC says a financing structure may combine the buyer’s own investment, a business loan and seller financing. If you accept second place, settle in writing what each lender may do on default.

Releasing the charge

The mortgage stays on title until someone removes it. Alberta’s land titles forms include separate forms for a mortgage or encumbrance and for its full or partial discharge, and BC’s land title authority lists how to remove a paid-off mortgage. Agree in the sale documents who prepares the discharge once the note is paid.

Rules that differ by province

Land registration is provincial, and Quebec works under the Civil Code, where the program guidelines say the common-law term real property corresponds to immovables. Mortgage lending can be regulated provincially too: BC’s Act, for example, defines a mortgage broker to include a person who carries on a business of lending money secured in whole or in part by mortgages. Have a lawyer confirm how your province treats a one-time take-back.