Appendix 3 of the Handbook has been revised to recognize multiple-draw residential mortgage transactions as a form of simple conveyance
Lawyers can act for both sides in residential multiple-draw mortgages
The Benchers have paved the way for lawyers to represent both a mortgagor and a mortgagee in multiple-draw mortgage transactions that involve no commercial element by amending Appendix 3 of the Professional Conduct Handbook. Multiple-draw mortgages are those in which a financial institution or other mortgagee advances funds in stages, usually as building construction progresses.
Lawyers are generally prohibited from acting for both sides in real estate transactions: see Appendix 3, Rule 2 of the Professional Conduct Handbook. An exception is when a transaction amounts to a simple conveyance.
Rule 4 describes a “simple conveyance” as including a mortgage that does not contain any commercial element, given by a mortgagor to an institutional lender to be registered against the mortgagor’s residence. Examples now include:
a revolving mortgage that can be advanced and re-advanced,
a mortgage to be advanced in stages [new] or
a mortgage given to secure a line of credit.
Rule 5(g) of Appendix 3 previously excluded a multiple draw mortgage from the definition of a simple conveyance, but that provision is now rescinded. A transaction is still not considered to be a simple conveyance if it contains a commercial element, such as a conveyance involved in the sale of a business.
The Ethics Committee recommended that lawyers be permitted to represent both parties in residential transactions involving multiple-draw mortgages, following consultations in 2005. The Committee noted that separate representation of clients always had value, and therefore so did the restriction under the traditional rule.
“We say only that, on balance, the problems with having the rule and making affected clients engage separate lawyers in the circumstances addressed by it outweigh its advantages,” the Ethics Committee stated in its report. “Where lawyers act prudently and conduct appropriate lien and judgment searches at the time of the draw, and decline to act where a dispute is evident, the chances of a lawyer getting into difficulty because of a conflict will be minimal.”
Ethics Committee Chair Gavin Hume, QC, presented the issue to the Benchers in March. He said that Law Society complaints statistics over the past five years showed fewer than a dozen complaints arising over Appendix 3, and none involved multiple-draw mortgages.
A number of BC lawyers and financial institutions favoured a change to reduce costs for clients and standardize practices. Mr. Hume signalled by way of example a letter from Emiko S. Ando, senior counsel for the Royal Bank. Ms. Ando noted that the change would create a level playing field between lawyers and notaries public (who are entitled to represent both sides) and bring mortgage preparation practices in line with the rules established by other law societies in Canada. “The current requirement of having separate counsel increases costs borne by our customers and can cause delays in funding, which may impact construction,” Ms. Ando said. “The current practice also puts more pressure on customers to waive legal advice, which is not, in the bank’s view, a desirable outcome.”
Duff Waddell, a senior real estate lawyer at Kaplan & Waddell in Vancouver, accepted an invitation from the Ethics Committee to speak to the Benchers about the potential for conflicts. In his view, a construction mortgage involving multiple draws created no greater risk of conflict for a lawyer than a mortgage in which there is one advance of funds. In each case, it was the function of a lawyer to do a lien and judgment search prior to any advance of funds — not to decide the timing of further advances. That was the role of an inspector retained by the bank who oversaw progress of the construction in accordance with the contract between the mortgagor and mortgagee.
Mr. Hume said that, from its consultations, the Ethics Committee was satisfied a rule change was needed. “We learned that by far the majority of the draw mortgage work in construction is simple …,” he said. “[I]t’s also simple for lawyers to identify when a conflict arises and to send both parties off for separate representation.”
Appendix 3, as revised, is set out in the enclosed Member’s Manual amendment package.