Posted On: Saturday, July 11, 2009 Lenders need to have all pertinent information to prevent
mortgage fraud allegations
An Alberta court has ruled that the contents of a lawyer's file in a real estate transaction may be disclosed to the police when no legal advice was provided to the client, and the circumstances give rise to a presumption that a crime was committed.
Back in April 2007, Christopher and Roya Gour began the process of buying their first home in Edmonton. They contacted a local realtor, Sanjay Sharma, who showed them a house listed at $405,900. He did not reveal that he was the seller as well as the agent.
When the Gours expressed concern that they would not be able to afford the renovations needed on the property, Sharma informed them that the seller would give them a "renovation credit'' of $40,000 on the purchase.
On May 1, 2007, the Gours agreed to buy the house for $405,000 and signed the paperwork.
ResMor Trust Company agreed to provide financing for $364,500 without knowing about the $40,000 renovation credit. As a result, it unknowingly financed the entire purchase price.
Sharma referred the Gours to David Westra, a local lawyer who would represent seller, buyer and new mortgage lender in the transaction. The deal closed June 30, 2007, and the Gours moved in.
In 2008, the Gours filed a complaint about the transaction with the Edmonton Police Service. The police began an investigation and applied to a judge under the Criminal Code for a warrant to search the Westra law office "on the basis that there were reasonable grounds to believe that Mr. Sharma and Mr. Westra had taken part in the furtherance of a mortgage fraud."
In the search warrant application, ResMor stated that had they known about the $40,000 credit, they would never have advanced the mortgage funds. They claimed they had been defrauded.
The search warrant was granted and executed. Various files relating to the Gour transaction were seized and sealed pending a second hearing by a judge to determine whether they were protected from disclosure to the police by solicitor-client privilege.
That hearing took place in Edmonton in April before Justice Sheila Greckol. The Crown alleged that there were reasonable and probable grounds to conclude that mortgage funds were obtained by fraud, and as a result, the files should be released to it.
ResMor and the Gours waived solicitor-client privilege, but Sharma strongly objected to the release of the transaction files and accounting records to the Crown.
As further evidence of the alleged offence, the police introduced an appraisal of the house concluding that its value at the time of the Gour purchase for $405,000 (or $365,000 after the $40,000 "credit") was between $320,000.00 and $335,000.00.
In her 25-page judgment published last month, Justice Greckol wrote, "The Crown has met its onus of showing, on a balance of probabilities, that there has been the commission of a crime." She ruled that the documents were not protected by solicitor-client privilege and ordered that they be released for purposes of the police investigation.
Two lessons emerge from the Westra Law Office case. The first is that where a criminal offence has allegedly been committed with respect to a real estate transaction and no legal advice has been provided, the transaction files may be released to the police. The second is that when a credit against the purchase price has been arranged but not disclosed to the mortgage lender, the lender may well allege that the mortgage has been arranged by fraudulent means.
A further reminder is in order. Some builders are offering an inducement of $15,000 as a credit against the contract purchase price. Even though this sort of inducement is perfectly legal, it is typically prepared on a separate document as an amendment to the agreement of purchase and sale.
It is imperative that buyers disclose this credit to their lenders. Failure to disclose may well be regarded as mortgage fraud.
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Bob Aaron is a Toronto real estate lawyer and frequent speaker to groups of home buyers and real estate agents.
He can be reached by email at firstname.lastname@example.org, phone 416-364-9366 or fax 416-364-3818.