For lending institutions, few things can interfere with the priority of a first-ranking mortgage - construction liens and writs of execution are familiar examples. Typically, though, these can be identified and remedied by conducting a simple title search. Lenders are more vulnerable in circumstances where these obstacles are less obvious, and sometimes deliberately hidden by dishonest borrowers.
A super priority lien is a type of statutory lien that gives governmental bodies priority over registered mortgages. When a particular section of a statute1 is triggered, a "deemed trust" is created by operation of law. What does this mean? Where the borrower has fully repaid the mortgage loan, the lender essentially holds the proceeds "in trust" for the government. This allows the government to collect from the lender amounts owing by borrowers for such things as unremitted HST and other source deductions.
In
This case underscores the importance of exercising care in a lender's due diligence and underwriting practices prior to funding and throughout the life of the credit facility. Despite internal safeguards and careful risk assessment, protection against super priority liens can still be difficult. Fortunately, many title insurers offer a super priority lien endorsement to cover a lender's losses associated with unknown super priority liens that are payable prior to the policy date. Lenders should ensure that their legal advisors adopt the practice of regularly obtaining such endorsements for real estate financing transactions in addition to regular due diligence.
Footnotes
1 e.g., Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.); Excise Tax Act, R.S.C., 1985, c. E-15
2 2020
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