Conflicts of Interest: Lender/Borrower-Purchaser

Conflicts between lender and borrower

The Mortgage Instructions Toolkit offers practical guidance for lawyers responding to lender requests in residential real estate transactions. This page addresses conflicts of interest when acting for the lender and the borrower-purchaser.

The situation

It is common practice in residential real estate transactions for a lawyer to have two clients: the lender and the borrower-purchaser.

The lender sends the lawyer instructions, specifying that the lawyer may act for both the lender and the borrower-purchaser and giving direction on what the lawyer must do for the lender. The lender will also provide information on the lending rate and terms for the lawyer to include in the mortgage agreement to register on title.

The borrower-purchaser client is looking to the lawyer to provide advice on title and other matters relating to the purchase and to complete the necessary registrations to record the transaction.

The lawyer has different responsibilities to each client and disclosure obligations as with any other conflict of interest situation.

The fact that a lawyer acting for both lender and borrower-purchaser is a common practice does not relieve a lawyer from the conflict of interest rules in the applicable Code of Professional Conduct or reduce the lawyer`s standard of care.

Sample lender instructions

We consent to your acting on behalf of the Mortgagor in connection with the Mortgage. However, once you have agreed to act on our behalf, you may not advise or counsel the Mortgagor to renegotiate any terms of the underlying Mortgage or to investigate the availability of alternative lending arrangements. We understand that you are obliged to raise all issues, which may be of importance to us or to the Mortgagor and to explain the legal effects of such issues to each party that may be affected by the issue. We also understand that any information received in connection with this matter from us or from the Mortgagor cannot be treated as confidential so far as the other party is concerned and if a conflict of interest arises between us and the Mortgagor which cannot be resolved, you will thereafter be unable to act for either party regarding the matter.

Practice guidance

  • Check the conflict rules in the Code of Professional Conduct that apply to you. The Federation of Canadian Law Societies Model Code of Professional Conduct has specific sections covering “Acting for Borrower and Lender” (section 3.4-12 and following).
  • Advise your borrower-purchaser client that you are also acting for the lender. Should you act for the lender on an on-going basis, your Code of Professional Conduct may require you to disclose this to your borrower-purchaser client as well. You may explain to your client that this is a common practice in residential real estate transactions and a way to reduce costs to the client.
  • Discuss the consequences of a joint retainer and representing both the lender and the borrower-purchaser to the borrower-purchaser:
    • Your lender likely forbids you to advise the borrower-purchaser of other loan arrangements or better terms from another lender (see Prohibition to advise borrower).
    • You cannot negotiate with the lender on behalf of your borrower-purchaser client.
    • Any information that you receive from one of them cannot be kept confidential from the other.
    • Should a conflict of interest arise, you cannot continue to act for both of them and may have to withdraw completely.
  • Ask your borrower-purchaser client to consent to the joint retainer in writing. Should it not be possible for your client to sign the consent, write to the client confirming the joint retainer as soon as practical. This may also be a requirement in your Code of Professional Conduct. The Law Society of Ontario has a sample Joint Retainer Acknowledgement and Consent for use in Real Estate Transactions online.
  • Consider whether or not you should require your client to seek independent legal advice.
  • Be alert to possible conflict situations and handle them as required by the Code of Professional Conduct that applies in your jurisdiction.

Sample situations

Your borrower-purchaser client tells you that the financial information provided to the lender is no longer accurate.

  • You have an obligation to report this to the lender.

After registration of the mortgage and the passage of some months, the borrower-purchaser defaults on the mortgage. The lender asks you to take enforcement action.

  • Check your Code of Professional Conduct. A lawyer can generally not act against a former client on the same matter.

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