Have a Mortgage on Your Property? Don’t Forget to Read the Standard Charge Terms
In the majority of residential real estate purchases, the purchaser must obtain a mortgage in order to finance the purchase of the property. In these mortgage transactions, the borrower is known as the “Chargor”, while the lender is called the “Chargee”. Most people understand the general concept of a mortgage: it is a type of loan where a lender agrees to loan a significant sum of money (at a specific rate of interest) towards a borrower’s purchase of a property in exchange for such property serving as the borrower’s collateral. Most people also understand the concept of interest rates, the term, amortization schedule, and approval process. However, for many Chargors, the extent of their knowledge and focus on mortgages ends there. Just as important to understand is that when a mortgage is registered on a property (called a “charge”) to secure the Chargee’s loan, a set of Standard Charge Terms (SCT) is also incorporated by reference into this registered charge. The SCT can vary from Chargee to Chargee, but there are key commonalities in most SCT that every Chargor should read and consider.
The SCT lay out the Chargor’s obligations throughout the term of the mortgage. The usual obligations include:
- to have good title to the property being charged;to pay all interest and principal as it becomes due;
- to keep paying interest on any amounts in default and until the Chargee disposes of the property;
- to make all payments auxiliary to the property such as realty taxes, insurance, utilities, maintenance, etc.;
- to keep the land and structures in a good state of repair;to not do anything that could result in a lien, claim or encumbrance being placed against the property that may have priority over the Chargee’s mortgage;
- to obtain the written consent of the Chargee before completing any additions, alterations or improvements to the property, or before leasing the property;
- in the event of a power of sale, to allow the Chargee to peacefully distrain and have quiet possession of the lands and structures; and after default, not to sell, transfer, dispose of the land.
Some of the above will seem like common sense to most; others may have surprised you. So long as these obligations are always fulfilled, the Chargee will allow the Chargor to use and enjoy the property.
When the Chargor does not fulfill these obligations, the SCT outlines the Chargee’s powerful rights, which can include the following:
- Sue the Chargor for breach of the mortgage contract (which includes the SCT);
- Foreclose on the property (through a court process, Chargee takes possession and ownership of the property in lieu of its unpaid debt)
- Judicial sale of the property (court-supervised sale of the property with proceeds going towards fulfilling Chargee’s debt)
- Power of sale (private sale of the property by the Chargee)
In addition, some other provisions commonly found in the SCT are terms related to renewing the mortgage, porting the mortgage (i.e., transferring the mortgage to a new property), discharging the mortgage (i.e., removing the charge from title to the property), prepayment privileges (i.e., ways you could repay your loan faster without penalty), and prepayment costs (i.e., penalties for paying your mortgage beyond what the prepayment privileges allow).
It should also be noted that all Chargors must sign an Acknowledgement on the closing of their mortgage transaction that states that they have received a copy of the SCT. Even though we advise clients of the significance of such SCT, most do not bother to read them and simply brush them off. Defaulting on mortgage payments or acting contrary to the terms laid out in the SCT can have serious consequences for Chargors. We urge everyone who has or will have a mortgage on their property to do their due diligence by reading the SCT and consulting with their real estate lawyer for guidance wherever necessary.