Vendor Take-Back Mortgages in Alberta: How They Work for Sellers

In a vendor take-back (VTB) arrangement, the seller lends part of the purchase price to the buyer instead of the buyer borrowing all of it from a bank. The buyer repays the seller over time, and the seller's loan is secured against the property being sold.

Because the seller becomes a lender, the rules that apply to mortgages in Alberta apply to you. This article walks through how a VTB is secured on title, how it ranks, what to watch on interest and what happens if the buyer defaults.

This article covers the law of Alberta.

How a vendor take-back mortgage is structured

A VTB is an ordinary mortgage in which the seller is the lender. The Land Titles Act defines a mortgage as a charge on land created merely to secure a debt or loan. The buyer promises to repay the seller, and the mortgage is the security for that promise.

A registered mortgage has effect as security only and does not transfer the land, so the buyer, as borrower, stays the registered owner. Your terms, such as the amount, interest rate, payment schedule and term, are set out in the mortgage and the related agreement, so they need to be written clearly.

Securing the VTB on title

To register, the buyer as mortgagor signs a mortgage in the prescribed form or to the like effect. It is submitted to a Land Titles office on the prescribed form, with fees due at the time of submission. If accepted, it is registered in the ALTA database and given a registration number, and the submitter receives a registration notice.

The mortgage levy payable on registration is $50 plus $5 for each $5,000 or portion of the principal secured. A larger VTB means more $5,000 portions, so the levy rises with the size of the loan. If the Registrar does not accept the mortgage, the levy is returned.

A seller with an unregistered mortgage interest can protect it by registering a caveat, and a levy is also payable on that caveat. Land Titles mails a notice to all registered owners on the title when a caveat is registered.

Where the VTB ranks if the buyer also has a bank mortgage

Many buyers have a bank mortgage for the main part of the price, with the VTB as a second mortgage. Priority is decided by the serial number the Registrar assigns, not by the date of signing. A second mortgage ranks behind the first because the first has the earlier serial number.

Banks sometimes ask a seller to rank behind them. A person entitled to a registered mortgage may postpone their rights by filing a postponement in the prescribed form, which puts those rights behind the other lender's as if registered after. If you are the seller, ask what position you will hold on closing and what you would receive if the property had to be sold.

Interest, prepayment and limits on terms

• For mortgages repaid by blended or sinking-fund style payments, no interest is chargeable unless the mortgage states the principal and the yearly or half-yearly rate.
• If another clause states a higher rate, the lender is limited to the lower stated rate.
• No fine, penalty or higher rate may be taken on arrears of principal if it raises the charge above the rate on principal not in arrears.
• An annual percentage rate above 35 per cent on the credit advanced is a criminal rate, and interest includes all charges and expenses for advancing credit.
• If principal or interest is not payable until more than five years after the date of the mortgage, the borrower may generally pay it off with three months' further interest in lieu of notice, with exceptions for certain corporate mortgages.

Whether the buyer can prepay without penalty depends on the terms you agree. Prepayment privileges let a borrower pay extra without penalty, through higher regular payments or lump sums up to a limit, and open mortgages allow prepayment without penalty.

If the buyer misses payments

In a mortgage enforcement action, the lender's right is generally restricted to the mortgaged land, and the borrower cannot waive that. A seller therefore generally cannot sue the buyer personally on the covenant. On a foreclosure order, the default redemption period is six months for land other than farm land and one year for farm land.

These protections do not apply to mortgages given by corporations. They also do not apply to a high-ratio mortgage as defined in the regulations, an exception aimed at an insured high-ratio first mortgage, so whether a particular mortgage falls within it is worth confirming with a lawyer. If the buyer is a company, the enforcement picture may be different, so get advice before you agree to terms.

What to do next

• Decide the amount, interest rate, term and payment schedule and have them written into the mortgage.
• Confirm whether a bank will also lend and what ranking it expects.
• Check the interest terms against the rules above.
• Confirm whether the buyer is an individual or a corporation.
• Have a lawyer prepare and register the mortgage on closing.
• When the VTB is paid in full, the mortgagee must provide a discharge within 30 days, with no charge.

Frequently asked questions