1 Minute Read for Commercial Mortgage Lenders: Real or Registered Ownership – Real Estate

Ownership of real property in Ontario is divided into legal or registered title and beneficial ownership. Legal ownership and beneficial ownership of real estate are often held in the same entity, but in many cases they are held in different entities. Lenders must take certain steps to properly secure their interest in real estate when there is separation of legal and beneficial ownership. A simple investigation of the ownership structure behind the underlying real estate asset can have a big impact on a loan transaction.

A common type of separation between legal and beneficial ownership is done using an agency relationship. This exists where there is an asset held by a bare trustee or agent for the benefit of a third party beneficiary or beneficiaries. Beneficial owners may wish to appoint an agent to hold assets where, for example, the beneficiaries do not wish to be disclosed; facilitate contract execution logistics; or when the beneficiaries are not legal persons capable of holding real estate titles.

Under a nominee agreement, the beneficial owner appoints a bare trustee or nominee to act as agent and generally has no discretion to manage the asset other than at the direction of the beneficial owner. . Since the beneficial owner retains the power to manage the asset and the agent or bare trustee only acts on the instructions of the beneficial owner, it is ultimately the beneficial owner who is responsible for the debts and obligations incurred. by the mandatary or the bare trustee.

Jurisprudence has confirmed the principle which allows an undisclosed principal to be protected from all liability when a simple fiduciary or an agent enters into a contract under seal, such as a mortgage on an immovable. Where an asset is held in trust by an agent or bare trustee for third party beneficiaries, it is essential that a beneficial ownership agreement is included in the security package. An agent and beneficiary beneficial owner agreement is a non-title agreement to charge for the beneficial owner’s interest in the subject property.

Where there is a separation of legal title and beneficial ownership, the following should be closely considered by a commercial lender when securing their interest in the underlying real estate:

• Ensure that a well-drafted beneficial owner agreement is in place that: confirms the relationship between the agent and the beneficial owner, authorizes the agent to incur the mortgage, confirms that the beneficial interest in the property is subordinated or deferred to the mortgage and other security interests and confirms that there are no existing liens on the beneficial interest in the property and limits the transfer of the beneficial interest.




• Attached to the beneficial owner agreement must be the attorney or bare trustee agreement that confirms the terms under which the property is held and who the beneficiaries are and what threshold of beneficiaries is required to authorize action by the attorney.




• The lender must ensure that the appropriate authorization resolutions are obtained to guarantee the authorization of all parties to enter into the transaction.




• To the extent that there is a security interest in personal property tied to the real property (i.e. PPSA registrations), the lender will want to register under the PPSA not only against the nominee but also against the beneficial owners.




• The lender must require the beneficial owner to undertake that there will be no change in the beneficial ownership of the property without the prior written consent of the lender.




• The beneficial owner must confirm that the lender has the right to deal with the title and the nominee without notifying the beneficial owner. However, a lender would not necessarily want to rely on this clause when there are material changes to obligations or security or when taking steps to enforce ownership.




• The lender shall require the beneficial owner to agree to execute such other documents and provide any other delivery required by the lender, including regular financial statements.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.