News & Views

PPSA Insurance Coverage – Additional Protection Available for Commercial Lenders
November 26, 2019

PPSA Insurance Coverage – Additional Protection Available for Commercial Lenders

Written by Gina Putman

     Owner and lender title insurance policies are commonplace in today’s real estate market. Owner’s Policies, which protect the interests of the registered owner(s) of the realty, as well as Lender’s Policies, which protect the interests of lenders financing the acquisition or re-financing of properties, are obtained in a large majority of transactions. Title insurance involves a one-time premium payable at the time a policy is obtained and protects owners for the duration of their ownership of the property. While more commonly obtained at the time of the purchase of a property, an owner’s title insurance policy can also be obtained at any time after acquisition. Premiums are based on the purchase price when obtained at acquisition, or fair market value when obtained later during the period of ownership. A lender’s policy is obtained when a lender’s charge is registered and, in most cases, is based on the registered amount of the mortgage. This policy will protect lenders until such time as their charge is discharged. Where an owner’s policy and lender’s policy are purchased simultaneously, title insurance companies often provide the lender’s policy at a reduced premium rate.

     A lesser known, but equally valuable, product also provided by some title insurance companies is a policy which provides protection for lenders taking security over personal property collateral, as opposed to or in addition to real estate. When lenders take security over the personal property of a borrower or guarantor, the charge or “security interest” in favour of the lender is registered under the Personal Property Security Act (the “PPSA”) and lenders may obtain a policy which protects their personal property security interests (a “PPSA Policy”). A PPSA Policy may be purchased to supplement a title insured transaction or may be purchased alone in transactions where no mortgage security is being provided. The premium for a PPSA Policy is typically based on the amount of the loan but where a PPSA Policy is being purchased in tandem with a title insurance policy, the title insurance company may apply a reduced premium for the two policies.

     The coverage offered by a PPSA Policy is very broad and provides protection in favour of lenders for a wide range of issues including:

a) Technical matters: the failure of the insured security interest to attach, be perfected or have the priority as insured;

b) Proper Corporate Authority: the PPSA Policy insures that the document which creates the security interest in favour of the lender, typically a general security agreement (“GSA”), has been duly authorized, executed and delivered with the requisite corporate authority;

c) Inadvertent Errors: the lender may be covered for errors in the corporate debtor’s name, inconsistencies between the description of the collateral in the GSA versus that in the PPSA registration or losses which may occur due to incorrectly filed PPSA registrations; or

d) Enforceability of the GSA: the PPSA Policy may also provide protection in circumstances where enforceability of the GSA may be questionable or in jeopardy including situations involving fraud, forgery, errors in public records or lack of capacity of the debtor.

     Similarly, a PPSA Policy may be used to insure over problems or issues which cannot be resolved through traditional methods (such as the obtaining of an estoppel letter or registered postponement from a creditor) or where waiting for such issues to be resolved would unduly delay closing. In certain circumstances, and with the right supporting documentation provided to the title insurer, PPSA policies may be used to “save” transactions which would not otherwise close at all or in a timely manner.

     It is important for lenders to be aware of the tools available to them in order to ensure the punctual and smooth completion of transactions. Though the obtaining of such policies may result in increased costs to borrowers in order to complete their commercial lending transactions, the cost implications of terminating transactions or postponing closing dates may far outweigh the premiums associated with such policies.

If you have any questions regarding the matter, please do not hesitate to contact Gina Putman directly at [email protected] or at 905 763 3770 x 219. 

*The material provided in this article is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.

__________________________________________________________________________________________________________________________________________________________________________________________________

About the Author:

Gina Putman focuses on acquisitions and dispositions of commercial real estate properties and portfolios as well as on secured lending transactions. She assists both institutional lenders and corporate borrowers. Gina joined FIJ Law LLP in 2009 after articling and commencing her practice at a large Bay Street law firm.

Forbearance Agreements
November 26, 2019

Forbearance Agreements

Written by Robert. A Izask, Partner

At its core, a Forbearance Agreement is simply a settlement agreement between two or more parties. It is most often utilized in the context of business relationships between lenders and borrowers and most notably, when a loan has gone into default.

A situation that commonly arises is one where a borrower has defaulted on a mortgage or business loan. The borrower has provided assurances of payment, promising to pay the outstanding arrears or otherwise promising to pay the full mortgage balance on maturity. The lender is reticent to rely on verbal assurances of payment alone but for many reasons, may not wish to end the relationship or otherwise trigger costly and uncertain litigation and/or liquidation and enforcement proceedings.

As a rule of thumb, a borrower has the right to pay outstanding mortgage arrears (missed monthly payments and the expenses incurred by the lender, including legal expenses) to return the mortgage to a position of good standing if the mortgage has not matured. However, if the mortgage has matured and has reached its expiry date, the lender may insist on payment of the full loan balance. This rule applies to mortgage loans with a fixed maturity and would not apply to demand loans or lines of credit.

How does it work?

Despite one party’s desire to enter into a Forbearance Agreement, it takes two to tango.

The Court can never order parties to enter into a Forbearance Agreement. You cannot apply to the Court to force another party to sign a Forbearance Agreement. Both parties must be willing to negotiate and must agree upon the terms of the Forbearance Agreement. As with all contractual relationships, one party may be in a position to exert pressure to compel the other side to consider entering into a Forbearance Agreement, that party is usually the lender.

Why would a lender want a Forbearance Agreement?

Assuming that default under a loan is the main issue at hand and it is the sole cause of the dispute between the parties, why would any lender want to enter into a Forbearance Agreement?  Why would the lender in the context of a business loan where security had been provided in the form of a GSA and PPSA registration over inventory and equipment, and/or personal guarantees, want to have a Forbearance Agreement instead of insisting upon immediate payment? Similarly, why would a lender holding a mortgage over the debtors’ property wish to enter into a Forbearance Agreement? Why not just sell the property immediately and reap the benefits of the sale?

While it is relatively easy to retain a lawyer and commence loan enforcement proceedings, there can be a number of impediments which make the enforcement process costly and unpredictable. Furthermore, there can be questions as to the value of the assets pledged such as security and whether enforcement will lead to full recovery.

The essence of a Forbearance Agreement is that it provides additional time to the borrower and in return, provides greater certainty, predictability and reduces the lender’s costs.

One example of a situation where a lender may not wish to proceed with enforcement is where the collateral pledged is a remote cottage property and the default has occurred in the late summer or fall. Rather than initiating power of sale proceedings  which may result in the lender taking possession of the cottage in the winter, thereby inheriting all of the carrying costs associated with the property throughout the winter months, the lender may benefit from an agreement whereby the defaulting borrower agrees to maintain the property throughout the winter season and agrees to either pay out the loan or otherwise to voluntarily relinquish possession of the cottage to the lender in the spring, in order to list the property for sale at the height of the seasonal market.

The beauty of the Forbearance Agreement is that if drafted correctly, the parties can agree to whatever terms they wish to include, within reason and within the law.

Recent cases in mortgage enforcement proceedings have called into question the interest charged and the various fees that private (and institutional) lenders can charge upon default, regardless of the provisions included in the mortgage contract. The Forbearance Agreement can “seal” the amount due and owing. By agreeing on the principal, interest, and expenses, the borrower will be precluded from subsequently successfully challenging the amounts in dispute, which tends to be a common defence launched by defaulting borrowers.

The Forbearance Agreement often includes provisions requiring the borrower to continue making some payments during the forbearance period resulting in a lessening of risk and a reduction in the balance due and owing.

As a Forbearance Agreement can be entered into at any time, the Forbearance Agreement can also be utilized to “shore up” and legally confirm the lender’s position regarding the validity and enforceability of the mortgage. Another common defence or challenge to mortgage enforcement proceedings by borrowers, is that the lenders security is technically improper or that the lender’s enforcement proceedings have been technically deficient. For example, if there is a deficiency in the delivery of a Notice of Sale as there was an error by the lender in including the total balance owing, the parties can agree on the correct balance and that the same Notice of Sale is valid, binding and proper despite a typographical or accounting error.

The Forbearance Agreement can also include a tolling agreement. In older long-term or demand contracts the Forbearance Agreement can address issues or terms that were not mentioned in the original contract. Additionally, tolling agreements can be added to extend limitation periods that may be soon to expire, thereby allowing the lender to preserve its right to issue a Statement of Claim without being required to actually issue the Claim.

Forbearance Agreements can also deal with anticipated legal issues, as the borrower will be agreeing that he/she will not defend or otherwise challenge the enforcement rights of the mortgagor if he/she defaults under the terms of the Forbearance Agreement. These non-challenge provisions can include a Consent Judgment and consent to the issuance and enforcement of a writ of possession (eviction order) if the borrower does not turn over vacant possession of the property upon a defined date.

Why would a borrower want to have a Forbearance Agreement?

Usually, to buy more time.

The prospect of the loss of possession and control of property, inventory, equipment, and the possibility of a sale of the security at a purchase price that could be much lower than that attained by the borrower is the driving factor in a borrower attempting to make alternative arrangements to repay the loan or otherwise sell the property on their own accord.

As with the benefits of certainty and predictability provided to the lender, the borrower will also obtain certainty in predictability and will provide protection against rapid enforcement and sale, as long as the terms and conditions of the Forbearance are met.

Conclusion

A well-crafted and well drafted Forbearance Agreement will necessarily provide benefits for both the lender and borrower.  While on its face it may seem to be a straightforward document establishing the basic agreements between the parties, there are enormous risks that will occur if the parties are unaware of their full legal rights or otherwise, if provisions are included which violate the law and therefore may render the Forbearance Agreement wholly or partially invalid. As such, it is always a good idea to consult with a lawyer in the negotiation of, or at the very least, prior to the execution of a Forbearance Agreement.

If you have any questions regarding the matter, please do not hesitate to contact Robert A. Izsak directly at [email protected] or at 905 763 3770 x 211. 

*The material provided in this article is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.

__________________________________________________________________________________________________________________________________________________________________________________________________

 About the Author:

Robert A. Izsak is a respected leader in the debt recovery sector. Combining a systematic approach with a sensitivity to the individuality of debtor issues, Rob provides unrivalled collection portfolio management and litigation support to financial institutions and large commercial enterprises.