Escrow Closings | Scarfone Hawkins LLP

Posted by | November 29, 2013 | Uncategorized | No Comments


I count myself lucky to be old enough to have closed real estate deals at the registry office. In many ways, life was simpler then. It was easy to tell when a deal was done and you could spend your money – the other lawyer picked up their registered deed and told you that you could spend your money. You knew in turn that they had not yet released the keys to their client by the very fact that they still had the keys. Simple.

I still think that the electronic registration system in Ontario (“e-regTM”) is quite something and it has really put our real estate practises on the cutting edge. But the problem I have come to observe is that in this age of faceless closings, some lawyers seem to have forgotten (or perhaps have never known) the importance of that phrase “we are closed now”, which historically has meant that the escrow has been released and therefore you can release the keys/money, as the case may be.

As early as 1996, the Law Society of Upper Canada and the Ontario Bar Association established a Joint Committee for the Electronic Registration of Title Documents(the “Joint Committee”) “ to consider the impact which electronic title document registration may have upon conveyancing practice and to make recommendations to the LSUC as to the procedures, courtesies and standards of practice which lawyers may reasonably be held to and to expect of each other when engaged in real estate transactions involving the electronic registration of title documents.”

When the Joint Committee made its final report to Convocation in 1997, it made several recommendations that laid the groundwork for some of the basic principles that guide our e-regTMclosings today. This included recommendations concerning changes to the standard form OREA Agreement of Purchase and Sale (“APS”), the creation of an Acknowledgment and Direction for our clients to execute and the creation of a Document Registration Agreement (“DRA”) to govern the terms of the escrow closing arrangements between lawyers.

At the start of the process, no matter what the size of the transaction, our clients for both residential and commercial transactions will generally sign the standard form APS, which provides in Paragraph 11 that:

“…the Seller and Buyer acknowledge and agree that the exchange of closing funds, non-registrable documents and other items (the “Requisite Deliveries”) and the release thereof to the Seller and Buyer will (a) not occur at the same time as the registration of the transfer/deed (and any other documents intended to be registered in connection with the completion of this transaction) and (b) be subject to conditions whereby the lawyer(s) receiving any of the Requisite Deliveries will be required to hold same in trust and not release same except in accordance with the terms of a document registration agreement between the said lawyers. The Seller and Buyer irrevocably instruct the said lawyers to be bound by the document registration agreement which is recommended from time to time by the Law Society of Upper Canada. Unless otherwise agreed to by the lawyers, such exchange of the Requisite Deliveries will occur in the applicable Land Titles Office or such other location agreeable to both lawyers.”

It is interesting to note that the parties are being asked to recognize that the keys/funds are going to be delivered at separate times, but more importantly, that the parties are agreeing that they will “irrevocably instruct” us to enter into the DRA. I think it is very unlikely that our clients are made aware of the fact that they are taking on such obligations when entering into the APS.

Once the deal comes to our office, we have a few options available to us in terms of how we will go about setting the ground rules for the escrow closing. It is now accepted that the escrow terms will be set out in a DRA. We have all come to generally use the DRA that has been posted by the Law Society of Upper Canada (“LSUC”) on March 29, 2004. The document is available in Word and in PDF form on the Law Society web site.

Some lawyers will execute the DRA and forward it to the other lawyer immediately upon opening the file and in a perfect world, the DRA would be executed forthwith and returned so that the ground rules are established early on in the process. Generally most lawyers will send the DRA with the letter of requisitions and ask that it be returned prior to closing.

It appears that it has become somewhat common practise that rather than a formal exchange of a DRA, lawyers will simply include in their letter of requisition a phrase to the effect that they agree to be bound by the terms of the DRA posted on the LSUC website on March 29, 2004 and ask in return that the other lawyer agree to be bound by the terms accordingly.

I would suggest that it is vitally important that you and/or your staff follow up and ensure that this exchange of DRAs (or the acknowledgment of same) is concluded early on in the process and not wait until closing. Aside from just being good practice, if you are required to tender on the other side, the DRA provides for the exchange of the documents by facsimile which could save you having to travel to tender in person.

Most importantly, the DRA (or any agreement you make to abide by the terms of an escrow closing) is in fact an undertaking that you are giving to the other solicitor. As with any undertaking, you need the consent of your client to give the undertaking. The consent begins with the provisions of the APS, as set out above, and is further expressly provided by your client when he/she executes the Teraview Electronic Registration System (“TERS”) generated Acknowledgment and Direction. The standard form of Acknowledgment and Direction provides that:

“You are hereby authorized and directed to enter into an escrow closing arrangement substantially in the form attached hereto being a copy of the version of the Document Registration Agreement, which appears on the website of the Law Society of Upper Canada as of the date of the Agreement of Purchase and Sale therein. I/we acknowledge the said Agreement has been reviewed by me/us and that I/we shall be bound by its terms.”

The nature of your undertaking given under the DRA nd the authority being given to you by the client in the Acknowledgment and Direction needs to be taken seriously and your client needs to understand that the money/keys will not be released until the escrow has ended. Further your client must understand that once the Requisite Deliveries are made in accordance with the provisions of the DRA, you have an obligation to complete the terms of the DRA.

Your client’s (and your staff’s) full prior understanding of your undertaking/obligations will help you avoid uncomfortable scenarios on the day of closing when your client is demanding release of the keys and/or money prior to the registration of the Transfer, or asking you to hold off on closing pending some circumstances that were not otherwise provided for in the DRA.

Under the Practice Guidelines for Electronic Registration of Title Documents (the “Practice Guidelines”), you are permitted to draft your own form of Acknowledgment and Direction, however, it is recommended that a “true copy” of the DRA be attached as a schedule to any Acknowledgment and Direction type form executed by your client.

In accordance with the Rules of Professional Conduct, and in particular subrule 6.03(10), you are not to give an undertaking that you cannot fulfill and you shall fulfill every undertaking. In the event that you do not fulfill your undertaking as set out in the DRA, you can be subject to disciplinary action.

As for the terms of the DRA itself, the vendor’s lawyer is not permitted to release funds or closing documents until the earlier of:

“4. a) the registration of the Electronic Documents;

b) the closing time specified in the Purchase Agreement unless a specific time has been inserted as follows [________ a.m./p.m. on the Closing Date] (the “Release Deadline”), and provided that notice under paragraph 7 below has not been received; or

c) receipt of notification from the Registering Solicitor of the registration of the Electronic Documents.

If the Purchase Agreement does not specify a closing time and a Release Deadline has not been specifically inserted the Release Deadline shall be 6.00 p.m. on the Closing Date.”

Based on the above, the vendor’s solicitor is able to release funds upon observing in the Teraview system that the Transfer has been registered (in the case where the purchaser’s solicitor has not had the courtesy to advise that the Transfer has been registered). Otherwise, it would appear that in the event that the Transfer has not been registered by 6:00 p.m. (or such other time as may have been agreed to by the parties), the vendor’s solicitor can then release the funds, unless the other party has advised that it is not in a position to complete the electronic registration or the parties have otherwise agreed.

Your DRA can be amended to suit your particular transaction. With the permission of your client, you are permitted to provide that the purchaser be given possession to the property prior to the registration of the Transfer or to settle on such other terms as are agreed upon by the parties.

Discharges of Private Mortgages/Tripartite DRAs

The use of the DRA is not limited to the solicitors for purchasers and vendors and in fact was designed to be used by all parties to the real estate transaction including solicitors for mortgagees, guarantors and anyone else who may have a related interest.

The discharge of a private mortgage on closing can be such an unnecessary battle. Making the private mortgage document part of the DRA, and therefore part of the escrow closing, is so simple and yet very few lawyers seem to take advantage of this option.

Bottom Line obligations as lawyer for the Vendor

Once you are in receipt of funds and the other closing documentation, advise the purchasers solicitor of any deficiencies immediately. If there are none, sign the Deed/Transfer for completeness and release and advise the other lawyer by means that you know will be received. If you must leave a message, follow up in a reasonable amount of time to make sure your message was received. You are not permitted to release the funds until all of the documents that are subject to the DRA have been registered or the time as set out in the DRA has passed.

Do not release the funds, use the funds to purchase another property, pay off a mortgage, release funds to your client or deposit the funds into a new lawyer’s account unless you have received confirmation that your Transfer is registered. Your delivery of the closing funds and signing of the Transfer does not release the escrow.

Your obligations as lawyer for the Purchaser

Upon receipt of the keys and other closing documentation, advise immediately of any deficiencies. Attend to the registration immediately upon being advised of the release of the Transfer. Upon registration, you are permitted to release the keys and other closing documents to the purchase. You must advise the vendor’s solicitor forthwith after the registration has been completed.

I know for many of you this information is basic, however, it is surprising the number of lawyers who do not appear to fully understand the full extent of their obligations with respect to escrow closings in the real estate context. It is worth considering and reviewing some of the basic documents in our day to day transactions to fully understand the nature of the transaction we are entering into and the undertakings we are assuming on behalf of our clients.

As published in the Hamilton Law Association in April, 2013 By Catherine Buntain Jeske

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