Notice to Lawyers Concerning Syndicated Mortgages

October 24, 2017

A syndicated mortgage is a mortgage where two or more persons participate as investors. Syndicated mortgages can be as simple as two people lending to a third person, the loan secured against a single family home, or as complex as a group of people pooling individual investments in a major development proposal known as a Syndicated Mortgage Investment (“SMI”).

The Law Society has become aware of instances in the marketplace where individuals have sustained significant financial loss by investing their savings in SMIs in which Ontario lawyers have played a role. The purpose of this notice is to alert lawyers to potential pitfalls when acting for clients on SMIs and to highlight lawyers’ obligations in dealing with syndicated mortgages.

High risk SMIs typically involve a third party entity such as a promoter or facilitator who promotes the investment to investors. The purpose of the syndicated mortgage loan is usually to fund “soft costs” in a development project such as applying for zoning changes, advertising, interior design and architect’s fees or to purchase real property for development.

In these syndicated mortgage transactions, a lawyer may be asked or offered an inducement by the facilitator or promoter to provide legal advice to the investors. The inducement might include the promise to refer investor clients to the lawyer or a commitment to pay the lawyer’s account for the legal advice given to the investor client. In addition, the lawyer may also be retained by the investors to:

  • provide independent legal advice to a group or one or more of the investors with respect to the transaction;
  • act on behalf of the investors in the transaction; and/or
  • hold the syndicated mortgage in trust on behalf of the investors including administering the mortgage proceeds and interest payments.

Before accepting such retainers and during the course of the retainer, lawyers must ensure that they are in a position to act in the best interests of their clients. In addition, lawyers should use care in accepting and fulfilling these retainers to ensure that they comply with their professional obligations.

Some of these obligations include the duty to:

  • avoid conflicts of interests in accordance with Section 3.4 of the Rules of Professional Conduct (Rules) including the rules on joint retainers and transactions with clients;
  • be honest and candid with the client in accordance with Rule 3.2-2;
  • represent clients competently in accordance with Rule 3.1;  
  • keep books and records in accordance with the provisions of By-Law 9;
  • delegate tasks only in accordance with Part 1 of By-Law 7.1 and Section 6.1 of the Rules; and
  • not assist in or encourage any dishonesty, fraud, crime or illegal conduct as provided in Rule 3.2-7.

The following are examples of situations that would place a lawyer in breach of the lawyer’s professional obligations under the Rules and other Law Society requirements. A lawyer:

  • representing multiple clients in a syndicated mortgage transaction in circumstances where the interests of the joint clients are not sufficiently similar to allow the lawyer to act in the best interests of all of the clients in the retainer;
  • providing independent legal advice to one or more investors in the syndicated mortgage transaction when the lawyer has a conflict of interest. For example, the lawyer may possess information relevant to the investor client that the lawyer cannot disclose to this client because of an obligation owed to another client or person;
  • delegating to someone who is not a lawyer, the responsibility of reviewing with the client the documentation relating to the transaction and providing the client with legal advice regarding these documents; 
  • accepting a retainer to provide legal advice to an investor regarding the transaction and/or the agreements and other documents to be signed by the investor and failing to provide such advice competently in accordance with Section 3.1 of the Rules. For example, the lawyer fails to perform all functions diligently and to communicate with the client at all relevant stages of the matter in a timely and effective way. Effective communication may vary depending on the nature of the retainer and the needs and sophistication of the client.
  • assisting in or encouraging any dishonesty, fraud, crime or illegal conduct by a promoter, facilitator or other person involved in the syndicated mortgage transaction. Sometimes lawyers are used in such schemes by third parties to give an appearance of legitimacy to an investment that is risky and/or involves dishonesty or other illegal conduct. Lawyers should be on guard against becoming the tool or dupe of an unscrupulous person. 

The Law Society has prepared the following resources to assist lawyers in identifying these types of syndicated mortgage arrangements and to highlight some of the lawyer’s ethical obligations when representing investor clients in syndicated mortgage transactions: 

Lawyers who have questions or require further information may contact the Law Society at 416-947-3315 or 1-800-668-7380, ext. 3315, Monday to Friday, 9:00 a.m. to 5:00 p.m. EST, and ask to be connected to the Practice Management Helpline.  

Some Characteristics of Syndicated Mortgage Investments (SMIs) referenced in this Notice


 The following is a list of characteristics, one or more of which may be present in high risk SMIs. Lawyers retained or being retained to act for parties involved in SMIs should be vigilant of their professional and ethical obligations1.  

  • The syndicated mortgage arrangement involves an entity that promotes and/or facilitates the syndicated mortgage loan (Syndicator) and a mortgage broker.

  • The Syndicator is not licensed under the Mortgage Brokerages, Lenders and Administrators Act, 2006 to deal in mortgages.
  • Individual investors are encouraged to invest monies from their registered savings accounts such as a Self-Directed Registered Retirement Savings Plan or Tax Free Savings Account in the syndicated mortgage.
  • The stated purpose of the syndicated mortgage loan is to fund “soft costs” in the development project such as applying for zoning changes, advertising, interior design and architect’s fees or to acquire the real property for development.
  • The investment is promoted to prospective investors as a safe and guaranteed investment when it actually involves significant risk. For example, the mortgage includes a high loan to value ratio.
  • The promotional materials for the syndicated mortgage investment indicate that a lawyer is available to provide free independent legal advice on the investment to the investor.
  • The Syndicator or mortgage broker or agent makes the arrangements with the lawyer for the provision of independent legal advice to the investors.
  • The lawyer is requested to provide the independent legal advice to the investors remotely via Skype, phone or video conferencing and sometimes in the presence of the Syndicator, mortgage broker or agent.
  • The loan agreement provides that the lawyer will hold the mortgage in trust for the investors and administer the syndicated mortgage proceeds and interest payments.
  • The mortgage securing the loan does not rank in first priority or the priority of the mortgage changes over time pursuant to the terms of the loan agreement. 
  • Higher fees than usual are payable or paid to the Syndicator, mortgage broker and/or lawyer and these fees are paid from the loan advances of the mortgage.
  • The lawyer’s fees are a percentage of the loan advances.
  • The Syndicator or borrower requests that the lawyer release mortgage advances on terms different than those set out in the loan agreement.
  • The loan agreement and/or advertising materials indicate that a quantity surveyor or loan monitor will be engaged to protect the interests of the lenders, but a quantity surveyor or facilitator is not engaged.
  • The lawyer who provides the independent legal advice to the investors may be asked to act for other parties in the transaction.
  • The Investor/Lender Disclosure Statement(s) for Brokered Transactions required pursuant to the Mortgage Brokerages, Lenders and Administrators Act, 2006 are incomplete or do not have the required documentation attached.

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1 The presence of one or more of these characteristics in a transaction does not necessarily mean that the transaction is a high risk SMI. Lawyers should use their professional judgment to identify these types of transactions.   

 

Syndicated Mortgages: Some Professional Obligations 


What is a syndicated mortgage? 

A syndicated mortgage is a mortgage having more than one investor.2 Syndicated mortgage transactions can vary in complexity. For example a syndicated mortgage transaction may include a transaction in which two lenders lend monies to a borrower for the purchase of a home and the loan is secured by a first mortgage on the real property; or a more complex arrangement such as a transaction in which multiple investors pool their monies and lend them to a developer for the funding of construction or pre-construction costs of the development project, the loan being secured by a mortgage on the real property. In some of these arrangements, the mortgage may be registered on title in the name of a third party trustee or the lawyer as trustee for the investors.

Lawyers may be asked to act for various parties in syndicated mortgage transactions: investors, borrowers, developers and perhaps others. Lawyers who accept such retainers must ensure that they are in a position to act in the best interests of their clients and in compliance with their professional obligations.

What are some of the key ethical issues and professional responsibility requirements that arise when a lawyer acts in a syndicated mortgage transaction?

The following is a summary of some of the key ethical issues and professional responsibility requirements that may arise when lawyers act for clients involved in syndicated mortgage transactions.

Conflicts of Interest

Dishonesty and Fraud by the Client or Others

Independent Legal Advice

Recordkeeping Requirements

Conflicts of Interest – Section 3.4

Examples of some conflict of interest situations that may arise when lawyers act for clients in syndicated mortgage transactions include: conflicts that arise as a result of the lawyer acting for multiple parties in the transaction; or personal conflicts by reason of the lawyer or someone connected to the lawyer having a personal interest in the transaction.

Section 3.4 of the Rules of Professional Conduct (Rules) deals with conflicts of interest. The issue of whether there is a conflict of interest and whether the lawyer may act despite the conflict, will depend on the circumstances of the transaction or matter.

The Rules provide that a lawyer cannot represent:

  • opposing sides of a dispute; or
  • a client in a matter when there is a conflict of interest unless there is consent from all of the affected clients and the lawyer reasonably believes that he or she is able to represent each client without having a material adverse effect upon the representation of or loyalty to the other client. Consent must be in writing or confirmed in writing and must be fully informed and voluntary after disclosure.3

The following resource may be of assistance to lawyers when dealing with conflicts of interest.

Steps for Dealing with Conflicts of Interest under Section 3.4 of the Rules of Professional Conduct  

Joint Retainers - Acting for More than One Client in the Transaction

A joint retainer is a retainer in which a lawyer acts for more than one client in a matter or transaction. Some examples of joint retainers in syndicated mortgage transactions include a lawyer acting in the transaction for: the investor(s) and the borrower(s); the investor(s) and the developer/borrower; the investors and the syndicator; two or more investors; or two or more borrowers. 

Before accepting a joint retainer, lawyers must ensure that they are able to act in the best interests of all of the clients in the retainer. In addition, there is no confidentiality as between the clients in the joint retainer and the lawyer has a duty to be honest and candid with all of the clients in the retainer when advising them.

Lawyers should be alert to situations where the interests of the clients in the joint retainer are not sufficiently similar to allow the lawyer to act in the best interests of all of the clients. Depending on the circumstances of the matter, there may be situations where one or more of the parties will require separate representation or perhaps independent legal advice on one or more issues. In making such determinations, lawyers must consider the duties that the lawyer owes to the client(s), other clients, former clients and third parties and the lawyer’s personal interests that affect the duties owed to the clients. In addition the lawyer may also wish to consider the complexity of the transaction, the sophistication of the parties and the nature of the retainer. For example, depending on the circumstances of the matter, it may not be prudent for a lawyer to act for both an investor client and the promoter of a syndicated mortgage as the interests of these two parties may not be sufficiently similar to allow the lawyer to act in the best interests of both of these clients. Similarly where a lawyer intends to act for multiple borrowers in a syndicated mortgage transaction and one of the clients is less sophisticated than the other(s), the lawyer should recommend that the less sophisticated client obtain independent legal advice. In some cases depending on the circumstances of the matter, the lawyer may determine that it is preferable if that client receives separate representation in the matter.   

When the lawyer accepts a joint retainer, the Rules set out a procedure that lawyers must follow. At the outset of the retainer, the lawyer must advise all of the clients in the joint retainer that:

  • the lawyer has been asked to act for both or all of them;
  • no information that the lawyer receives with respect to the matter from one client can be treated as confidential so far as any of the other clients in the retainer are concerned; and
  • if a conflict develops that cannot be resolved the lawyer cannot continue to act for both or all of them and may have to withdraw completely.4 

After providing such advice, if the clients are content that the lawyer act, the lawyer must obtain the clients’ consent.  Consent must be fully informed and voluntary after disclosure and must be in writing or confirmed in writing.5 

In addition, the lawyer should be vigilant for conflicts of interest that may arise during the course of the retainer. If a conflict develops that cannot be resolved the lawyer may need to withdraw completely.

Acting for both the Lender and the Borrower in the Mortgage or Loan Transaction

If the joint retainer involves representing both the lender and borrower in a mortgage or loan transaction, the lawyer must comply with Rules 3.4-12 to 3.4-14 often referred to as the “Two Lawyer Mortgage Rules”. These rules provide that a lawyer or two or more lawyers practising in partnership or in association cannot act for or otherwise represent both the lender and the borrower in a mortgage or loan transaction except in certain limited defined circumstances and then only if the lawyer is able to comply with the rule on conflicts of interest. These limited circumstances are:

  • the lender is a bank, trust company, insurance company, credit union or finance company that lends money in the ordinary course of its business;
  • the lender is selling real property to the borrower and the mortgage represents part of the purchase price (vendor take back mortgage);
  • the lawyer practises in a remote location where there are no other lawyers that either party could conveniently retain for the mortgage or loan transaction;
  • the consideration for the mortgage or loan is $50,000.00 or less;
  • the lender and borrower are not at “arm’s length” as defined in Section 251 of the Income Tax Act (Canada).6

The lawyer should assess the individual circumstances of the transaction when determining whether or not to act for both the borrower and the lender in a transaction. There may be situations where, although the Rules permit the lawyer to act for both parties, it may not be prudent for the lawyer to do so because of the high potential for a conflict of interest developing as the matter progresses.  An example of this might be a situation where one of the clients is more vulnerable than the other and the lawyer determines that it would be in that person’s  best interests if the person  were separately represented.

Transactions with Clients

Lawyers sometimes directly or indirectly through another person, a self-directed RRSP or other entity invest in syndicated mortgage transactions in which their clients are also investors or have an interest.  While transactions between a lawyer and a client are not prohibited, the Rules impose strict requirements for lawyers who engage in these transactions. Rules 3.4-28 to 3.4-36 deal with transactions with clients. These rules provide that a lawyer must not enter into a transaction with a client unless the transaction is fair and reasonable to the client. In addition, the lawyer cannot do indirectly what the lawyer is prohibited from doing directly under these rules. Apart from a few limited exceptions, lawyers are prohibited from borrowing from clients.7

The rules on transactions with clients specifically address syndicated mortgages. Generally a lawyer engaged in the private practice of law cannot directly or indirectly through an entity in which the lawyer or a related person to the lawyer has a financial interest:

  • hold a syndicated mortgage or loan in trust for investor clients unless each investor client receives: 
    • a complete reporting letter on the transaction;
    • a trust declaration signed by the person in whose name the mortgage or any security instrument is registered; and
    • a copy of the duplicate registered mortgage or security instrument
     
  • arrange or recommend the participation of a client or other person as an investor in a syndicated mortgage or loan where the lawyer is an investor unless the lawyer can demonstrate that the client or other person had independent legal advice in making the investment; or
  • sell mortgages or loans to, or arrange mortgages or loans for, clients or other persons except in accordance with the skill, competence, and integrity usually expected of a lawyer in dealing with clients.8

If the lawyer determines that the transaction with the client is a permitted transaction under the Rules, the lawyer must take some additional steps. The lawyer must in sequence:

  • disclose the nature of any conflicting interest or how and why it might develop later;
  • depending on the circumstances recommend or require that the client obtain independent legal advice or independent legal representation; and
  • obtain the client’s consent to the transaction in accordance with Rule 3.4-29.

The lawyer retained to provide independent legal advice in such transactions must not have a conflicting interest with respect to the client’s transaction. The lawyer must:

  • advise the client that the client has the right to independent legal representation as opposed to independent legal advice and satisfy himself or herself that the client has expressly waived the right to independent legal representation and has elected to receive no legal representation or representation from the other lawyer;
  • explain the legal aspects of the transaction to the client and satisfy himself or herself that the client appears to understand the advice given;
  • inform the client of the availability of qualified advisers in other fields who would be in a position to give an opinion to the client as to the desirability or otherwise of the proposed investment from a business point of view.9

Where a client elects to waive independent legal representation and rely on independent legal advice only, the lawyer who provides the independent legal advice has a responsibility that should not be lightly assumed or perfunctorily discharged.10

The lawyer who provides the independent legal advice should document the independent legal advice by: providing the client with a written certificate that the client has received independent legal advice; having the client sign a copy of the certificate of independent legal advice; and forwarding the signed copy of the certificate of independent legal advice to the lawyer with whom the client proposes to transact business.11

Dishonesty and Fraud by the Client or Others

Lawyers who act for clients engaged in syndicated mortgage transactions may be used by their clients or persons associated with their clients for the purpose of giving the appearance of legitimacy to a transaction or mortgage investment that is fraudulent in nature or involves misrepresentation, dishonesty or illegal conduct. Lawyers should be on guard against becoming the tool or dupe of unscrupulous persons. Lawyers must act with integrity and in the best interests of their clients. In addition, the Rules provide that a lawyer cannot:

  • knowingly assist in or encourage any dishonesty, fraud, crime or illegal conduct;
  • do or omit to do anything that the lawyer ought to know assists in, encourages or facilitates any dishonesty, fraud, crime or illegal conduct by a client or any other person;
  • advise a client or any other person on how to violate the law and avoid punishment.12

Lawyers have a duty to make reasonable efforts to ascertain the purpose and objectives of the retainer and to obtain information about the client necessary to fulfill this obligation. They should be alert to identifying the presence of “red flags” and make inquiries to determine whether a transaction relates to a bona fide transaction.   In addition lawyers cannot use their trust account for purposes not related to the provision of legal services.13

Independent Legal Advice

Lawyers may be asked to give independent legal advice to one or more parties engaged in syndicated mortgage transactions. A retainer to give such advice is a limited form of retainer in which legal advice is provided by a lawyer who does not have a conflicting interest with respect to the client’s transaction or matter. The lawyer is retained for the limited purpose of providing independent legal advice to a person so that the person appreciates the nature and consequences of a decision to be made. The role of the lawyer is to provide legal advice that is objective and unbiased regarding the decision that the client is facing.

Some practice tips on giving independent legal advice (PDF

Recordkeeping Requirements

The Rules impose certain recordkeeping keeping requirements on lawyers handling monies in syndicated mortgage transactions.

Collecting Mortgage or Loan Payments made Payable to the Lawyer

A lawyer may only collect mortgage or loan payments on behalf of a client payable in the name of the lawyer if:

  • the client has directed the borrower or mortgagor in writing to do so; and
  • the monies are deposited into the lawyer’s trust account and the lawyer complies with all recordkeeping and other obligations under the Rules and By-Law 9.14 

Holding Mortgages in Trust for Clients 

Section 20 of By-Law 9 sets out certain recordkeeping requirements for lawyers holding mortgages or charges in trust for clients.  In addition to other recordkeeping requirements contained in By-Law 9, lawyers must maintain:

  • a mortgage asset ledger containing separately for each mortgage or charge:
    • all funds received and disbursed on account of the mortgage or charge;
    • the balance of the principal amount outstanding for each mortgage or charge;
    • an abbreviated legal description or the municipal address of the real property; and
    • the particulars of registration of the mortgage or charge.
     
  • a mortgage liability ledger showing separately for each person on whose behalf a mortgage or charge is held in trust:
    • all funds received and disbursed on account of each mortgage or charge held in trust for the person;
    • the balance of the principal amount invested in each mortgage or charge;
    • an abbreviated legal description or the municipal address for each mortgaged or charged real property; and
    • the particulars of registration of each mortgage or charge; and
     
  • a record showing a monthly comparison of the total of the principal balances outstanding on the mortgages or charges held in trust and the total of all principal balances held on behalf of investors as they appear from the financial records together with reasons for any differences between the totals and the following records to support the monthly comparison:
    • a detailed listing made monthly identifying each mortgage or charge and showing for each the balance of the principal amount outstanding; and
    • a detailed listing made monthly identifying each investor and showing the balance of the principal invested in each mortgage.
     
Completing Forms 9D and 9E 

By-Law 9 sets out some recordkeeping requirements for lawyers who act for or receive money from a lender. In addition to other recordkeeping requirements, a lawyer acting in these transactions must maintain a file for each charge containing:
  • if required under Section 24 of By-Law 9, a completed investment authority (Form 9D)  signed by each lender before the first advance of funds to or on behalf of the borrower  and a completed report on the investment (Form 9E);
  • an original declaration of trust if the charge is not held in the name of all of the lenders;  
  • a copy of the registered charge; and
  • any supporting documents supplied by the lender.

Where Form 9E is required, the lawyer must deliver the original completed form to each lender forthwith after the first advance of money to or on behalf of the borrower along with a copy of the declaration of trust if applicable.

Forms 9D and 9E are required when a lawyer acts for or receives money from a lender unless one of the six exceptions in subsection 24(2) of By-Law 9 applies. These forms are not required if:

  • the lender:
    • is a bank listed in Schedule I or II to the Bank Act (Canada), a licensed insurer, a registered loan or trust corporation, a subsidiary of any of them, a pension fund or any other entity that lends money in the ordinary course of its business;
    • has entered into a loan agreement with the borrower and has signed a written commitment setting out the terms of the prospective charge; and
    • has given the lawyer a copy of the written commitment before the advance of money to or on behalf of the borrower;
     
  • the lender and borrower are not at arm’s length as defined in the Income Tax Act (Canada);
  • the borrower is an employee of the lender or of a corporate entity related to the lender;
  • the lender has executed the Investor/Lender Disclosure Statement for Brokered Transactions, approved by the Superintendent under subsection 54(1) of the Mortgage Brokerages, Lenders and Administrators Act, 2006, and has given the lawyer written instructions, relating to the particular transaction, to accept the executed disclosure statement as proof of the loan agreement;
  • the total amount advanced by the lender does not exceed $6,000.00; or
  • the lender is selling real property to the borrower and the charge represents part of the purchase price. 

Please note that this information is not a substitute for the member’s own research, analysis and judgement.  Professional Development and Competence does not provide substantive legal advice or opinions.

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2 Rule 3.4-27 of the Rules of Professional Conduct (Rules).

3 Rules 3.4-1 and 3.4-2 and Commentaries.

4 Rules 3.4-5 to 3.4-9 set out the lawyer’s obligations regarding joint retainers.

5 Section 1.1 defines the term “consent”.

6 Rules 3.4-12 to 3.4-14.

7 Rule 3.4-28 provides that a lawyer must not enter into a transaction with a client unless the transaction is fair and reasonable to the client. Rule 3.4-28.1 provides that except for borrowing from a regulated lender or from a related person, a lawyer shall not borrow from a client. The term “related person” is defined in 3.4-27. In addition Rule 3.4-28.2 provides that a lawyer shall not do indirectly what the lawyer is prohibited from doing directly under Rules 3.4-28 to 3.4-36.

8 Rule 3.4-33.1 and commentary.

9 Section 1.1.

10 Commentary [1], Rule 1.

11 Rule 3.4-29 and commentary.

12 Rules 3.2-7.

13 Rules 3.2-7 to 3.2-8 and commentaries.

14 Commentary [1(c)] of Rule 3.4-33.1.  

Some Practice Tips When Giving ILA

 

1.  Determine who is your client.  

2.    Determine if you have a conflict of interest.    

3.    Determine the nature of your retainer. Is ILA sufficient or should the client receive ILR?   

4.    Determine if you are competent to provide the ILA.  

5.    Determine if there are any language or other barriers to communicating effectively with the client.    

6.    Consider whether it might be useful to use a checklist when meeting with the client.

7.   Consider making and retaining notes of your meeting with the client.

8.    If the client declines to follow your advice, consider having the client sign an acknowledgment confirming the fact that the client has declined to accept your advice.

9.    If the ILA involves a transaction between a lawyer and a client (either directly or indirectly), comply with Rule 3.4-29 and its commentary. 

Syndicated Mortgages:  Some Practice Tips

  • Determine who your client(s) is.
  • Before accepting the retainer, ensure that you are able to act in the best interests of the client(s).
  • Before accepting the retainer, ensure that you are competent to handle the matter.
  • If you are being retained to provide independent legal advice, determine whether you can properly provide independent legal advice or whether the matter is such that the client should have independent legal representation.
  • Before accepting the retainer, ensure that you do not have a conflict of interest that would preclude you from accepting the retainer.
  • If there is a conflict of interest and you determine that you may act despite the conflict, make the necessary disclosure about the conflict to all of the affected clients and obtain their informed consent.
  • If the transaction involves a transaction with a client, ensure that the transaction is fair and reasonable to the client and that you have complied with Rules 3.4-27 to 3.4-35.
  • Determine the purpose of the retainer and ensure that you are not assisting in or encouraging any dishonesty, fraud, crime or illegal conduct.