Interest, Prime + 2%; Vendor Take-Back Mortgage; Residential Mortgage or Residential Agreement for Sale #130
By Gerry Neely
An offer to purchase a commercial building was subject to raising a first mortgage at a rate of interest no more than "C.I.B.C. prime plus 2%." The Commitment letter from the mortgage company carried the same reference to "C.I.B.C. prime plus 2%." This became "C.I.B.C. prime plus 2% per annum" in the mortgage. Everyone assumed that 2% and 2% per annum are the same, but if prime is 11%, shouldn't prime plus 2% be 11.22% rather than 13%? Since the borrower needs the money to complete the purchase, he is not interested in an argument with the mortgage company that he should only be paying 11.22%.
What however is the position of the vendor if the purchaser can obtain a mortgage at prime plus 2% per annum, but decides for other reasons, not to proceed with the purchase? The vendor commences an action for damages for the breach by the purchaser of the agreement. He is met by the defence that either the agreement is void for uncertainty, or that no mortgagee was willing to lend the purchaser money at 11.22%.
The probabilities are that the judge hearing this case would accept evidence of common usage that anyone using the phrase "prime plus 2%" understood it to mean "prime plus 2% per annum." On the other hand, the judge might interpret the phrase literally, and agree with the purchaser that his obligation to complete was dependent upon his being able to obtain a mortgage with a rate of interest no more than 11.22% per annum.
Since the word "prime" in the offer to purchase became a seven line clause in the mortgage def1ning prime rate there is sufficient vagueness in the meaning of the word "prime" without compounding the interpretation of it by omitting the words "per annum" from the phrase.
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As interest rates rise, and the prices of homes in many areas of B.C. continue to increase, their affordability is reduced for prospective purchasers with low down payments, and a limited capacity to meet higher mortgage payments. We may be entering into a period where the vendor take-back mortgage will become a useful instrument for making a sale. The Clauses and Phrases Manual contains appropriate clauses to use for first and second mortgages, clauses which give the vendor the right to check the credit of the purchaser.
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Columns 125 and 126 referred to the legislation which became effective on December 1, 1988, possibly limiting the personal liability of a mortgagor or purchaser under an agreement for sale of residential property, who resells to a purchaser who assumes the payments to be made under the mortgage or agreement for sale.
This legislation does apply to mortgages or agreements for sale in existence at December 1, 1988,
- if the mortgage or agreement for sale has a term, and the term expires after December 1, 1988, or
- if the mortgage or agreement for sale is payable on demand, and the transfer of the estate in fee simple or the assignment of the purchaser's interest in the agreement for sale is made after December 1, 1988.
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