FOLA calls on LSO to update real estate payment rules
By Jennifer Pritchett, Associate Editor
The Federation of Ontario Law Associations (FOLA) is calling on the Law Society of Ontario (LSO) to update its antiquated rules around the transfer of funds in real estate transactions and to push Canada’s banks to allow electronic transfers for property, says Eldon Horner, FOLA’s real estate committee vice-chair.
“The law society’s rules don’t reflect the modern reality of closing real estate transactions and they need to be updated,” he tells AdvocateDaily.com.
“And more than that, the lawyers and public in Ontario require an immediate and secure method of transferring funds to complete real estate transactions.”
Horner says the current system causes unnecessary delays and headaches for buyers and sellers and creates an administrative nightmare for lawyers handling the transactions.
"For many lawyers, the problems associated with the transfer of funds in real estate transactions are impediments to having a profitable and efficient business," he says.
Part of the problem, Horner says, is that the law society rules haven’t changed since lawyers for both the seller and the buyer would meet at the land registry office and exchange the paperwork and the certified cheque for the property.
"FOLA takes the position that the law society needs to recognize that the conversion of the province to electronic registration in land titles means more flexibility for the public, but there are costs and issues with the flow of funds that should not be an issue in this electronic age," he says.
Before the province converted to electronic land title registration, the lawyers met in person, but now closings are all done electronically, Horner says.
“As a real estate lawyer, I sit in my office and I exchange documents electronically but I still have to get the money to the other lawyer’s office," he says.
"I have to obtain a certified cheque and drive to the lawyer’s office and hand it over — that’s the way the law society regulations still contemplate real estate deals happening.”
In most transactions, the seller has a mortgage on the house and the purchaser needs to ensure it's paid off, Horner explains.
“The law society wants the lawyer to get two cheques — one payable to the lending institution for the seller’s mortgage and a separate certified cheque for the remainder of the cost of the property,” he says.
“The lawyer for the buyer has to deliver the cheque to the bank for the mortgage and in that way, they guarantee the money from the buyer went to pay off the old mortgage and remove it from the house.”
When lawyers used to meet at the land registry, this was an easy process because the lawyer for the buyer would bring two cheques, Horner says. But now that the paperwork is done electronically and the lawyers have no need to meet, this way of doing things no longer makes sense, he says.
Now the common practice with the real estate bar is to go the bank with one certified cheque and to place it in trust into the lawyer for the seller’s account, Horner adds. The buyer's lawyer relies on the undertaking of the seller's lawyer to deliver the mortgage monies to the lender, he says.
“There is no better way to make sure the money gets to the right people on a closing.”
Horner says there have been instances of buyers using a fraudulent cheque, and this causes a host of problems for the seller and the lawyers involved.
Some lawyers opt to wire-transfer the funds instead, but there are drawbacks with that as well, he adds.
“It’s immediate and supposed to be guaranteed but the reality is the banks will only ensure that the money arrives sometime in the next two days,” he says.
“So if I’m the lawyer for someone who is buying a house and I’ve sent the money via wire transfer and the lawyer for the seller doesn’t know if it’s coming today, tomorrow or the next day, that doesn’t work. There are also costs, sometimes unpredictable, which are associated with wire transfers.
“They’re not going to give you the keys to the house because they aren't sure the money is coming.”
As a result, sometimes buyers are ready to move in on a particular day but then the money isn’t transferred and there are delays, Horner says.
“What we really need is a system like Interac for real estate,” he says. “I can transfer someone $300 by email in seconds. That system already exists but there is a fairly low dollar-amount limit so it’s not available for larger transactions.”
Horner says FOLA would also like to see the law society lobby the banks to create a more efficient system of transferring money for real estates sales.
He acknowledges that the law society is aware of the issue and “there have been ongoing discussions.” Payments Canada, an organization responsible for the infrastructure, processes and rules essential to financial transactions, is in the midst of updating their systems, he adds.
“And that may yield an answer to this,” Horner says, noting that lawyers, the law society and real estate agents were not consulted during the Payments Canada process.
“There are some discussions but they seem to be going slowly,” he says. “FOLA would like to see more attention paid to this because it’s a problem that, in this technological age, should be easy enough to resolve if there is a will to do it.”