What terms should a commercial vendor take-back mortgage include?

Our answer on what a vendor take-back mortgage is explains the structure. This page is about the clauses in the mortgage and the note behind it, which a seller should negotiate before closing because they decide what happens when something goes wrong. Have a lawyer draft and register the mortgage. In Ontario, the Personal Property Security Act does not apply to the creation or assignment of an interest in real property, including a mortgage, charge or lease of real property, subject to the exceptions in s.4(1)(e). The list below is meant to help you ask the right questions.

Payments, interest and arrears

Fix the amount, the payment dates, the interest rate and how payments are split between principal and interest. Then deal with arrears. The Interest Act says no fine, penalty or rate of interest may be stipulated or taken on arrears of principal or interest secured by a mortgage on real property if it increases the charge on the arrears beyond the rate payable on principal not in arrears (s.8(1)). Section 8(2) permits interest on arrears at a rate not greater than the rate on principal not in arrears. The Act also has rules on blended payments (s.6) and on repaying a mortgage not payable until more than five years after its date (s.10), so ask your lawyer how they apply.

Ranking against the buyer’s lender

The Canada Small Business Financing Program guidelines say a loan that finances real property must be secured with a first mortgage on the property, and that the amount a vendor finances is not eligible for a program loan. If a program loan finances the buyer’s purchase of the property, the seller’s mortgage cannot be the first mortgage. Agree beforehand what the seller can do if the senior lender enforces.

Terms that protect the property

• Property insurance with the seller named as a mortgagee or loss payee.
• Responsibility for property taxes and utilities, with proof of payment on request.
• Whether the buyer may sell, lease or refinance without the seller’s consent.
• Whether the buyer may repay early, and on what notice.
• A deadline for delivering a discharge once the note is paid.