LSUC & OBA JOINT COMMITTEE ON ELECTRONIC REGISTRATION OF TITLE DOCUMENTS

INTERIM REPORT TO THE PROFESSIONAL DEVELOPMENT AND COMPETENCE COMMITTEE

April 12, 2002

BACKGROUND & CREATION OF THE JOINT COMMITTEE The Joint Committee on Electronic Registration of Title Documents ($Joint Committee#) was formed at the joint request of The Law Society of Upper Canada ($LSUC#) and the Ontario Bar Association formerly the Canadian Bar Association of Ontario ($OBA#) in September of 1996. The mandate of the Joint Committee was to consider the impact of electronic registration upon conveyancing practice and to make recommendations as to what practice standards should be implemented to deal with electronic registration. The Joint Committee was intended to represent a valid cross-section of the real estate bar. It is comprised of representatives from the LSUC, OBA, County District Law Presidents Association ($CDLPA#), Ontario Real Estate Lawyers Association ($ORELA#) and the Lawyers Professional Indemnity Company ($LPIC#). The members of the Joint Committee also represent a broad cross section of practice origins, including rural small firms, medium size firms from London, Ottawa, Hamilton, Toronto, large firms, and in-house banking counsel. The Joint Committee is also augmented by significant staff representation from the LSUC, the Ministry of Consumer and Business Services formerly the Ministry of Consumer and Commercial Relations ($MCBS#), the OBA and Teranet Inc. ($Teranet#). The Joint Committee is jointly chaired by Maurizio Romanin, the OBA representative and James Leal, the LSUC representative. The original members of the Joint Committee were: James Leal Maurizio Romanin Lawrence R. Bremner Belinda James J.H. Kim Little Q.C. Andrea Nalyzyty Frank H.M. Stolwyk Albert Strauss Q.C. Donald V. Thomson David Warga Kathleen Waters

Co-Chair; LSUC Co-Chair; OBA CDLPA OBA LSUC OBA ORELA LPIC LSUC ORELA OBA

The original advisory members of the Joint Committee were as follows: Robert Blomsma Lawrence R. Dalton Q.C. Don Godden J. Robert Kelly, Q.C. Michael Seto

MCCR Teranet LSUC LSUC LSUC

The current members of the Joint Committee are as follows James Leal Maurizio Romanin

Co-Chair; LSUC Co-Chair; OBA 2

Lawrence R. Bremner Belinda James J.H. Kim Little Q.C. Greg Mulligan Frank H.M. Stolwyk Donald V. Thomson Kathleen Waters

CDLPA OBA LSUC Bencher ORELA LSUC OBA

The current advisory members of the Joint Committee are as follows: Kristen Pearson John Dalgliesh Caterina Galati Kelly Gorman Kate Murray

Teranet MCBS LSUC OBA MCBS

PRELIMINARY REPORT TO CONVOCATION In April of 1997, the Joint Committee issued a preliminary report that was presented to Convocation, CDLPA, and the OBA Executive. The preliminary report provided a high level overview of the areas in real estate practice that would be impacted by the implementation of electronic registration. The preliminary report recognized that it would be appropriate to formulate guidelines and rules on a $test basis# for evaluation in a working system prior to the formal adoption of same by the LSUC. The preliminary report also specified that a more comprehensive report be provided to Convocation in June of 1997.

JUNE 97 REPORT TO CONVOCATION The initial efforts of the Joint Committee were focussed on reviewing the technical innovations, functionality and practical requirements of electronic registration and the mechanics of a real estate transaction in an electronic environment. It was the goal of the Joint Committee to complete a set of draft recommendations for the profession in conjunction with the initial beta test of the e-reg system in Middlesex, Ontario. As a result of its consultation process, the Joint Committee formulated an initial report (the $Report#) which was submitted to Convocation in June, 1997. The Report contained recommendations respecting the following areas: 1.

Practice Guidelines: These are guidelines to the real estate bar regarding specific changes to real estate practice necessitated by e-reg; 3

2.

Rules of Professional Conduct (the $Rules#) / LSUC Regulations: These recommendations included two specific proposed amendments to the commentaries to the Rules as well as a recommendation that the LSUC examine changes to Trust Fund regulations to permit efficient transfers of funds in an electronic registration environment;

3.

Consultations with Appropriate Parties: The Joint Committee recommended consultations with specific stakeholders to implement certain requested improvements and changes to the electronic registration system, improvements to the standard Ontario Real Estate Association ($OREA#) Agreement of Purchase and Sale used in Ontario, confirmation of related procedures from MCCR, and coverage issues with LPIC and other issues with interested parties;

4.

Monitoring: The Joint Committee recommended the institution of a detailed and coordinated monitoring procedure for the Joint Committee to receive and review comments from the anticipated local User Groups to be established in each new ereg jurisdiction. The Joint Committee s function in this role was to suggest further changes to the recommended Practice Guidelines and other recommendations contained in the Report based on the input of the profession to actual use of the ereg system.

5.

Beta Testing: The Report reflected the view of the Joint Committee that the e-reg system itself and the recommended Practice Guidelines and Rule Changes required Beta Testing. The Joint Committee recommended that the practice guidelines be included in the Beta Test period and evaluated based on input from the applicable User Groups.

6.

Educational Initiatives: The Joint Committee identified the ongoing need for specific education of the real estate bar in connection with both the technology of e-reg and the professional requirements of the Practice Guidelines and other recommended changes.

In accordance with the Joint Committee s recommendations, the LSUC issued the suggested Practice Guidelines in June of 1999. These included recommendations as to procedures and in some cases actual suggested documentation to be used. In October, 1999, Teranet and the MCCR implemented optional electronic registration in Middlesex County. This period allowed lawyers to use either paper or electronic registration. Mandatory electronic registration was implemented in Middlesex on March 7, 2000.

POST REPORT ACTIVITIES 4

Since October 1999, e-reg has been introduced into 9 separate jurisdictions. Electronic Registration is now mandatory in Middlesex, Peel, Hamilton, Halton, Dufferin, York, and Durham and is optional in Ottawa and Simcoe County. We are informed that e-reg will become mandatory in Ottawa effective May 23, 2002. Attached to this Report as Appendix $ A# is the projected Roll Out Schedule of e-reg in Ontario as prepared by the MCBS. The Joint Committee has continued with its mandate of assisting the bar with implementation issues since that time. The following list provides a brief overview of the Joint Committee s activities in the last 3 years. 1.

Committee Structure The Joint Committee has established the following sub-committees: Education Sub-Committee which works to educate the profession about the ereg engendered changes to real estate practices. Banking Sub-Committee which works with representatives of the banking industry to improve interaction between lawyers and financial institutions in an ereg environment. Funds Transfer Sub-Committee which works to facilitate funds transfer and to study the implications of such transfers. User Group Sub-Committee which works to bring forward to the joint committee practice and other issues raised by users.

2.

Education The Joint Committee has developed two continuing legal education presentations to assist in educating local bars in electronic registration. In connection with the OBA, LSUC, CDLPA, and the applicable local law associations it has co-hosted two educational programs in all mandatory e-reg jurisdictions: the first program generally coinciding with enactment of the first regulation by MCBS, creating optional electronic registration and the second program being a more in depth practice oriented program coinciding with the enactment of the second regulation making electronic registration mandatory. The second program is pending in the jurisdictions which remain optional. The Joint Committee has helped to develop and confirm the curriculum in training programs offered in Community Colleges in each new e-reg jurisdiction as well as making detailed recommendations for and assisting in providing materials to the Bar Admission Course in Real Estate. Members of the Joint Committee also lecture at the Bar Admission Courses on electronic registration. 5

3.

User Groups In each jurisdiction, User Groups have been formed to provide feedback on the Practice Guidelines and to assist in the implementation of e-reg in that jurisdiction. The Joint Committee s User Group Sub-Committee has been responsible for the evaluation of submissions from the various User Groups and the preparation of responses to such inquiries. In addition, the User Group Sub-Committee has been responsible for initial recommendations to the Joint Committee of changes required to the guidelines, documents and procedures established and/or recommended by the Joint Committee. The User Group Sub-Committee is currently in the midst of evaluating requests from a number of sources for changes to certain standard documents as well as practice procedures. The Joint Committee has also met and continues to communicate with the various User Groups which are created in each new e-reg jurisdiction. The purpose of these meetings is to assist in explaining the draft Practice Guidelines issued by the LSUC and to ease the implementation of e-reg in that jurisdiction.

4.

Changes to original recommended Documents As part of the Report to the LSUC, the Joint Committee recommended the implementation of certain standardized documentation for use in e-reg transactions. These documents included certain documents to be produced by the e-reg system itself as well as procedural documents designed to be produced by lawyers in virtually all transactions. These documents include the various forms of Acknowledgement and Direction which are produced automatically by the e-reg system and the Document Registration Agreement ($DRA#), an agreement which governs the procedures applicable to closings which do not take place at the Registry Office and where the parties do not actually meet to exchange documents, keys and money. Based on input from the profession, the Financial Institutions, the local User Groups and other interested parties, the DRA has been amended and updated on numerous occasions by the Committee. This process is continuing at the present time with a current revision under consideration. Changes to the Acknowledgement and Direction are also under discussion by the Joint Committee.

5.

Liaison with LPIC The introduction of new concepts such as the escrow closing protocol envisaged under the DRA and the use of, and reliance on, compliance with law statements by the legal profession, gave rise to concerns about the increased liability that these new concepts could engender. In certain cases the Joint Committee was successful in implementing legislative changes to limit exposure. For instance, the introduction of subsection 40(3) O. Reg. 6

19/99 eliminated liability under the compensation sections of the Land Titles Act. Where a solicitor makes a compliance with law statement in an electronic document, he/she is deemed not to be the person on whose application the registration was made. Under the Land Titles Act, both the Land Titles Assurance Fund and parties wrongfully deprived of an interest in land, are entitled to seek compensation from the party or parties upon whose application a registration was made. In order to encourage use of the DRA and reliance on Compliance with Law Statements by the profession, members of the Joint Committee believed that LPIC should review these concepts and adopt (hopefully a favourable) position on their use. After consulting and working with various committee members, LPIC implemented an approach to support the use of these concepts. This support was reflected by LPIC s stated position that practitioners, who are the subject of an Errors and Omissions claim because of their innocent reliance on a Compliance with Law Statement or the DRA, would not be subject to a deductible or claims surcharge levy in respect of said claim under their errors and omissions policy. LPIC has also indicated that it will take a similar position with respect to the issue of reliance on the DRA. The DRA is an agreement designed (and redesigned) by the Joint Committee to provide a uniform set of rules governing the remote closing of real estate transactions. Again, LPIC has confirmed that practitioners, who are the subject of an Errors and Omissions claim because of their innocent reliance on another lawyer s compliance with the terms of the DRA would not be subject to a deductible or claims surcharge levy in respect of said claim under their errors and omissions policy. Please refer to LPIC s website for the full description of these terms and LPIC s policy. 6.

Liaison with Financial Institutions. With the implementation of e-reg, many financial institutions have had to change their procedures respecting standard instructions and have opted to change their procedures respecting the preparation and registration of mortgage discharges. The Banking SubCommittee has worked with the Financial Institutions (specifically a $Legal Issues SubCommittee# established by the Financial Institutions) to confirm Bank practices respecting discharges, instructions on e-reg mortgages and approval of standard documentation affecting mortgage transactions. The Banking Sub-Committee has provided input into the changing administrative practices of the Banks to ensure that the legal profession is not unduly inconvenienced in the implementation of these procedures.

7.

Stacked Deals Report 7

One of the recurring concerns expressed by practitioners about the deployment of e-reg was the impact of the system on stacked or chain transactions. Stacked deals are real estate transactions that are related to each other by common parties as follows. On the same day, the vendor (V1) in the first transaction in the stack is also the purchaser (P2) in the second transaction. The vendor (V2) in the second transaction is also the purchaser (P3) in the third transaction in the series. The vendor in each transaction becomes the purchaser in each subsequent transaction until the series comes to an end when a vendor is not purchasing another property on the same day. In stacked deals, the completion of any subsequent deal in the stack is related to the completion of the preceding deals in the same stack. These transactions have also been referred to as back to back transactions, chain deals, domino deals and double or triple deals. The Joint Committee felt that the impact of remote closings (whereby a common meeting place such as the Registry Office would no longer be required) on the ability to carry out stacked transactions should be studied. In light of this concern, Teranet provided some funding to LPIC who in turn retained an articling student to assist in the preparation of a report on $The Prevalence of Stacked Deals and Strategies on Closing Them with Electronic Registration.# A copy of this report is attached as Appendix $ B#. The report itself clearly underscored the need for a real time electronic funds transfer system, which is discussed elsewhere in this report. 8.

Changes to OREA Standard Form Agreement of Purchase and Sale In order to implement the use of the DRA, the Joint Committee felt that the standard OREA form of agreement of purchase and sale should contain the appropriate provisions reflecting the closing protocol contemplated under the DRA. Accordingly the following wording was inserted into the OREA form: 11. Closing Arrangements: Where each of the Seller and Buyer retain a lawyer to complete the agreement of purchase and sale of the Property, and where the transaction will be completed by electronic registration pursuant to Part III of the Land Registration Reform Act, R.S.O. 1990, Chapter L4 and the Electronic Registration Act, S.O. 1991, Chapter 44, and any amendments thereto, the Seller and Buyer acknowledge and agree that the exchange of closing funds, non-registerable 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 8

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 form of which is as 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. Additional amendments to the OREA form of offer will be needed to deal with the clauses in said form involving the practice around undertakings to discharge mortgages with financial institutions and the obligation on the vendor to prepare the transfer/deed of land.

9.

Electronic Funds Transfer ($EFT#) and the Trust By-laws. One of the challenges identified early in the e-reg rollout was the inability to transfer the actual closing proceeds electronically. There were some early discussions with the lending community, however these did not prove fruitful in large part due to the fact that, at the present time, the Canadian Payments Association does not provide for real-time, real value transfer of funds between financial institutions. As a certain level of (justifiable) anxiety was growing in the real estate bar about this issue, LPIC (at the urging of the Joint Committee) decided to investigate the issue further. It was discovered that within a single financial institution, a real- time, real value transfer could occur. Since approx. November 2000, LPIC has been negotiating an arrangement with at least one financial institution. The final agreement with this institution (namely the Bank of Montreal) is expected to be signed in April, 2002. The necessary software should also be ready at that time. In January 2002, Convocation approved amendments to By-Law 19 to facilitate the movement of the closing proceeds in real estate transactions between member trust accounts. The amendments are contained in Section 7.1 The final issue to be addressed, prior to implementing EFT, is the treatment of mortgage pay-out funds, which form part of the closing proceeds. The Joint Committee recommends that amendments be made to the LSUC s practice guidelines regarding undertakings to discharge mortgages. The proposed changes have been included in the Executive Summary and in Guideline 5 of the Joint Committee s recommendations to the LSUC attached as Appendix $C#. These changes underscore the 9

need to re-evaluate the LSUC Real Estate Checklist, a project which is far beyond the mandate of this Joint Committee, but which is nonetheless an essential component of required changes to the current practice of Real Estate in Ontario. 10.

Legislative Changes The Joint Committee has identified legal and practice issues relating to electronic registration and has made recommendations to the MCBS regarding the content of regulations and amendments to legislation. The Joint Committee helped shape and define the regulations made under the Land Registration Reform Act. It reviewed the draft regulations and made recommendations to the Ministry. In addition, on the recommendation of the Joint Committee, Section 4 of the Mortgages Act was amended to eliminate the requirement for a mortgagee to deliver a paper copy of the mortgage to the mortgagor. As a result of the amendment, it is now sufficient for a mortgagee s lawyer to print out a paper copy of the electronic charge as registered and deliver it to the mortgagor or the mortgagor s lawyer.

11.

Liaison with Big Firm Committee The Joint Committee also acts as a liaison with other interest groups, including an ad-hoc committee struck by the large Toronto Firms and affectionately referred to as the $Big Firm Committee#. While this committee has no official status, we have met on numerous occasions with them and have received their blessing to the draft documents which are included in the Practice Guidelines.

12.

Negotiation of Teranet Software License Agreement All members of the profession using Teraview for electronic registration are required to either enter into, or in the case of large numbers of lawyers and staff on one License Agreement, abide by the terms of the Teranet Software License Agreement (the $License#). The Joint Committee has reviewed each successive version of the License and has provided recommendations and requests for changes to Teranet. This process continues as the Joint Committee remains unsatisfied with the current from of License.

13.

Law Society Website and Advisory Services The Joint Committee has worked closely with the Advisory Services department of the Law Society to provide members with timely information on electronic registration and to assist members with practice issues. Advisory Services has a staff lawyer who deals with member telephone inquiries regarding practice issues in 10

electronic registration and who is responsible for developing and keeping up to date the electronic registration section of the website. Advisory Services has received approximately two hundred telephone inquiries on electronic registration issues during the period from January to March 2002 and there have been approximately 1500 visits on the LSUC e-reg web page during this same period. The Joint Committee has provided some of the materials for the website and has made its expertise available to Advisory Services. 14.

Preparation & Assessment of $e-reg: Making it Work For You# Summary The Joint Committee with the assistance of Teranet has published a booklet entitled $e-reg: Making it Work For You. The booklet simplifies and summarizes the procedures and practice standards for electronic real estate conveyancing. This booklet is sent to practitioners by Teranet when electronic registration is introduced into an area.

15.

Finalization of Practice Guidelines and Rule Changes The Joint Committee has finalized the practice guidelines and its recommendations to the LSUC regarding changes to the Rules and By-laws. The Joint Committee now wishes to proceed with these to the appropriate LSUC Committee(s) and to Convocation. A copy of the Joint Committee s Executive Summary together with the draft practice guidelines and proposals are contained in Appendix $C#.

CURRENT STATUS OF JOINT COMMITTEE The current activities of the Joint Committee are summarized as follows: 1.

Education Members of the Joint Committee take an active part in the educational programs scheduled at each new additional e-reg jurisdiction. The OBA and the local Law Associations provide both personnel and administrative staff support for these educational programs. There are more than 30 jurisdictions which have yet to implement e-reg.

2.

Implementation of Practice Directives In a distinct fashion, the Joint Committee s User Group Sub-Committee provides a supervisory role with respect to the implementation of the Practice Directives (coordination and monitoring of feedback on the Practice Directives) and coordination of the various educational initiatives apart from the basic first and 11

second regulation education programs. 3.

Local User Groups & User Group Sub-Committee The Joint Committee also assists in the establishment of the local User Groups in each new jurisdiction and its User Group Sub-Committee continues to monitor, discuss and action the comments from the various User Groups.

4.

Electronic Funds Transfer ($EFT#) At the present time, the Joint Committee remains involved with the initial phase of the implementation of EFT. The Joint Committee provides a liaison with LPIC respecting the insurance issues raised in connection with EFT and a resource for the LSUC concerning the practical consequences of EFT.

5.

Teranet e-reg License Agreement The Joint Committee is presently involved in the negotiation of certain requested changes to the Teranet 5.0 Terms and Conditions License Agreement with Teranet.

6.

Continuing Liaison with the Financial Institutions Committee The Joint Committee provides a continuing liaison with the Financial Institutions through the Financial Institutions Committee with respect to concerns raised by the bar respecting such items as discharge procedures and standardized mortgage instructions.

7.

Liaison with OREA As part of its mandate, the Joint Committee responds to regular requests from OREA respecting ongoing amendments to the standard OREA Form of Agreement of Purchase and Sale for the Province of Ontario.

OUTSTANDING ISSUES There are numerous outstanding issues which are anticipated to impact the implementation of e-reg and the real estate bar in the near future. These include the implications of expansion of the EFT capability from the initial provider, Bank of Montreal, to virtually all significant Financial Institutions. As is indicated below under the Joint Committee s recommendations, the implementation of 12

e-reg and the Practice Guidelines as well as other innovations such as the proliferation of Title Insurance, has rendered the review of the LSUC Real Estate Checklist a short-term necessity. E-reg is probably the single most important component of a revised Checklist. The actual passage and implementation of the Guidelines and Rules remains outstanding and it is expected that the Joint Committee would be requested to play some role in that process.

RECOMMENDATIONS Based on the foregoing Report, the Joint Committee wishes to make the following recommendations to the Professional Development and Competence Committee: 1. The Joint Committee continue with a mandate to maintain its role as required in the current activities as set forth above and to proceed to take steps to ensure the proper implementation and integration of the initiatives which will undoubtedly arise from the outstanding issues referred to immediately above. 2. The Joint Committee should have a formalized reporting structure. This should be established in conjunction with the Professional Development and Competence Committee of the LSUC. 3. The Joint Committee s jurisdiction with respect to monitoring and/or coordinating the education initiatives required for implementation of e-reg need to be clarified. In the Joint Committee s view, the importance of competence in this area should be of primary concern to the LSUC. The continuing educational requirements will likely require the assistance of current Joint Committee members and other volunteers who have assisted in the educational effort. 4. The implementation of e-reg has also raised numerous LPIC considerations which issues have been dealt with effectively with the cooperation of LPIC. The LSUC may wish to maintain a formal channel for communication of concerns which may require discussion in the future and a detailed examination of possible coverage initiatives and other changes which may be required or advisable in connection with electronic registration. In some cases, emerging issues may be beyond LPIC s mandate and necessitate the involvement of other entities such as the Lawyers Fund For Client Compensation. 5. To fulfill the foregoing responsibilities, the Joint Committee should be maintained and supported by the LSUC.

13

APPENDIX A

Electronic Registration - Rollout Schedule It is anticipated that electronic registration will be implemented in the following offices during the 2002/2003 fiscal year. This schedule is subject to change at any time. 1st Reg Wellington Brant Toronto Lanark Renfrew Russell Huron Perth Peterborough

July, 2002 July, 2002 September, 2002 January, 2003 January, 2003 January, 2003 February, 2003 February, 2003 March, 2003

2nd Reg Ottawa Simcoe Wellington Brant

May 23, 2002 November, 2002 December, 2002 December, 2002

APPENDIX B

The Prevalence of Stacked Deals and Strategies on Closing them with Electronic Registration

A Report for the Joint Committee on the Electronic Registration of Title Documents

June 18, 2001

I

INTRODUCTION

In 1996, the Law Society of Upper Canada ($LSUC#) and the Canadian Bar Association-Ontario ($CBA-O#) established the Joint Committee on Electronic Registration of Title Documents (the $Committee#) to address the impact of electronic registration on real estate conveyancing practice in Ontario. Since its inception, the Committee has continued to address concerns about changes required to implement a system of paperless electronic title document registration. It is the Committee s mandate to consider the impact of electronic registration on current and future conveyancing practices and to make recommendations to the LSUC regarding procedures, courtesies and standards of practice which lawyers may reasonably be held to and to expect of each other when engaged in real estate transactions involving the electronic registration of title documents. The Committee s members are from various regions of Ontario, practice in variety of settings from sole practitioners to larger firms, and represent the LSUC, CBA-O, County and District Law Presidents Association ($CDLPA#), Ontario Real Estate Lawyers Association ($ORELA#) and Lawyers Professional Indemnity Company ($LPIC#). As electronic registration becomes mandatory on a county by county basis, the Committee has continued to be proactive in addressing issues arising from its implementation.

Report Objectives This report will address the prevalence of stacked deals as encountered in real estate conveyancing in Ontario and how these particular types of transactions affect closing procedures in both the paper system and the e-reg- system. In discussing stacked deals, the following key questions must be addressed: 1.

How common are stacked deals in real estate transactions under the paper system and the e-reg- system?

2.

How are stacked deals completed for properties that are in the same or different Land Registry/Land Title Offices? and

3.

What particular problems do stacked deals present for the e-reg- system?

In preparing this report, a questionnaire was designed in collaboration with the Committee to find the answers to these questions. This report is intended as a tool to promote the understanding of stacked deals among real estate practitioners and to assist the Committee in assessing the practical problems associated with these transactions. Methodology In order to obtain the information required to produce this report, the questionnaire attached at Appendix $A# was administered to thirty-two interviewees. The interviewees were chosen from -1-

a pool of practicing lawyers and freelance conveyancers from different counties in Ontario proposed by the Committee as individuals who handle large volumes of real estate transactions in their respective regions. The questionnaire was administered over the telephone to eleven conveyancers and twenty-one lawyers. Fifteen of the interviewees had closed deals in the TERS and seventeen were still using the paper system only. The writer thanks all those who took the time to participate in answering the questions. The writer recognizes that the small sample of interviewees does not permit detailed statistical analysis. The use of statistics in this report is for qualitative and illustrative purposes and should not be taken as a statement of statistical accuracy. Defining Stacked Deals Stacked deals are real estate transactions that are related to each other by common parties as follows. On the same day, the vendor (V1) in the first transaction in the stack is also the purchaser (P2) in the second transaction. The vendor (V2) in the second transaction is also the purchaser (P3) in the third transaction in the series. The vendor in each transaction becomes the purchaser in each subsequent transaction until the series comes to an end when a vendor is not purchasing another property on the same day. In stacked deals, the completion of any subsequent deal in the stack is related to the completion of the preceding deals in the same stack. These transactions have also been referred to as back to back transactions, chain deals, domino deals and double or triple deals. A detailed example of a four-deal stack is set out infra.

II

THE PREVALENCE OF STACKED DEALS

Lawyers and conveyancers do not keep a tally of how many deals are stand-alone deals (those involving only a single transaction) and how many are stacked deals. Stand-alone deals generally generate fewer problems because you are only dealing with one purchaser and one vendor. In stacked deals, funds must flow through several transactions before coming into the hands of the last vendor s lawyer. In the process, there may be several mortgages to be paid out in the stack requiring the funds to be redirected through to a subsequent deal in order to permit closing. In the paper system, funds are exchanged at the registry office allowing for the easy exchange of documents and registration. When registration has occurred, cheques required for deals further up the stack may be passed on provided that there has been an appropriate redirection. In the alternative, the vendor s lawyer may deposit closing proceeds and draw cheques but banking between transactions takes time. Redirected funds can simply be handed up the stack. The problem presented by electronic registration, is that unlike the paper system, it does not require meeting at a central location which makes handing up of cheques to subsequent deals more difficult, even when in the same Land Titles office.

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The general consensus among the interviewees was that approximately 25% to 35% of deals are stacked deals. The higher estimates came from lawyers and conveyancers who close more than 30 deals a month. Those still operating under the paper system indicated that 35% of closings involved stacked transactions, while those closing electronically indicated stacked deals comprised 30% of their closings. The cycle of the residential real estate market is such that summer is the busiest season with closings clumped around mid-month and month-end. It would be during the busy summer month-end when the most stacked deals would occur. The majority of stacked deals have the entire stack in one Land Registry or Land Titles office. Multiple-office stacked deals were estimated to occur 15% of the time by those closing less than 15 deals a month. Those closing over a hundred deals a month indicated that approximately 40% of stacked deals involved multiple offices. A few lawyers indicated that they strictly discourage their clients from buying and selling on the same day and strongly advocate bridge financing. When asked whether he or she was aware of his or her transaction s relative position among a stack of deals, 77% answered affirmatively. Most indicated that they became aware of the stack on the day of closing or the day before. A few contended that unless there were problems with a closing they would not become aware of the stack s existence. A handful of interviewees indicated the contrary and said they took a proactive approach to finding out whether there were other transactions before or after their client s deal and that they would make those inquiries weeks in advance of closing. When asked what the maximum number of deals in a stack, the range was from four with the highest estimates at ten deals in a single stack. The mean maximum number of deals in a stack was five.

III

THE SIMPLE CLOSING

A closing in its simplest form occurs between one purchaser A and one vendor B, where neither is participating in another sale or purchase, respectively, on the same day as closing. This was referred to above as a stand-alone transaction. In most deals there may be a mortgage and other payouts. For the sake of simplicity, we will assume that there is only a mortgage and that there are no outstanding taxes, executions, liens, utilities or other payouts. We will also assume that a separate cheque has not been requested to pay the realtor. In the Paper System In the paper system, the vendor s lawyer X prepares the Transfer/Deed, along with other off-title documents required under the agreement of purchase and sale. Draft documents would be sent by facsimile to the purchaser s lawyer, Y. Y would review the documents and communicate any changes to X. X and Y would communicate and revise documents until they are in a mutually acceptable form. Y would be responsible for preparing any Charge for monies being borrowed by his or her client. X would provide Y with a direction regarding funds setting out how funds were to be paid on closing. In this example, Y would receive a redirection for funds to be paid to -3-

the mortgagee financial institution and the balance to X in trust. In the paper system, the funds, Transfer/Deed, off-title documents and keys would be exchanged at the registry office on the day of closing and the appropriate registrations effected. It would be rare in the paper system to have funds and documents exchanged outside the Registry Office in escrow pending registration. In the e-reg- System1 If we continue with the same example in the e-reg- system, the following would occur. X would create the Transfer then message the Transfer to Y granting him or her access to the document. When each of X and Y are satisfied with the form of the Transfer, each signs electronically for completeness. Y would then write to X confirming his or her intention to close in escrow using the DRA and asks X to confirm the agreement. The lawyers would meet with their respective clients to review the transaction and sign off-title documents and an Acknowledgment and Direction for documents to be registered electronically. The parties would exchange off-title documents. X would send documents and keys to Y to be held in escrow. Y would send off-title documents and closing funds to X to be held in escrow. If X is satisfied with the documents, he or she signs the transfer for release and advises Y. Y opens the Transfer, signs for release, searches executions, conducts subsearch and registers. Y advises X that the documents and funds can be released.

IV

STACKED DEALS

The Flow Through of Funds When there are stacked deals the closing process can become more complicated. For ease of reference, the following example of a four-deal stack will be used for demonstrative purposes. On the same day, AP buys from BV in transaction 1; BP buys from CV in transaction 2; CP buys from DV in transaction 3 and DP buys from EV in transaction 4. For the sake of discussion, we will assume that each of A through E has retained his or her own lawyer who will be referred to by reference to his or her client, for example A s lawyer will be Lawyer A. Further, we will assume that Vendor s B, C and D have mortgages with a recognized institutional lender that will be paid on closing and that there are no other payouts required. Table A below details how the balance due on closing is divided between mortgage payout, monies to the vendor s solicitor and redirected funds. The exchange of documents is not included, as it would occur in a similar manner to that described above under simple closing.

1

FOR A MORE DETAILED DISCUSSION OF CLOSING IN THE E-REG- SYSTEM THE READER MAY FINAL REPORT OF THE LSUC/CBA-O COMMITTEE ON ELECTRONIC REGISTRATION OF TITLE DOCUMENTS. THE REPORT IS AVAILABLE ON THE LSUC WEB SITE AT WWW.LSUC.ON.CA. REFER TO THE

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Table A % An Example of a Four Stack Transaction Vendor

Purchaser

Transaction

Balance Due on Closing

Mortgage Payout

Net Cash

Mortgage Advance

Purchaser s Cash

Redirected other than Mortgage Payout

Paid to Vendor s Solicitor

1 (AP ÚBV)

$100,000

$ 55,000

$ 45,000

$ 75,000

$ 25,000

$ 35,000

$ 10,000

2 (BP ÚCV)

$125,000

$ 70,000

$ 55,000

$ 85,000

$ 40,000

$35,000 $10,000

$ 10,000

3 (CP ÚDV)

$150,000

$100,000

$ 50,000

$110,000

$ 40,000

$35,000 $ 5,000

$ 10,000

4 (DP ÚEV)

$100,000

$

$100,000

$

$100,000

$

$ 10,000

0

0

0

On the day of closing the following is a likely scenario. Transaction 1 % A Buys from B A would receive a mortgage advance of $75,000 payable to the Lawyer A in trust. The mortgage funds together with the purchaser s cash of $25,000 would be deposited into the Lawyer A s trust account and the following three certified cheques drawn: one to the mortgage company representing the outstanding balance on the discharge statement for $ 55,000; one to the Lawyer B in trust for $10,000; and one to Lawyer E in trust for $35,000. Transaction 2 % B Buys from C B would receive mortgage advance of $85,000 payable to Lawyer B in trust. The mortgage funds together with $5,000 of B s money would be deposited into Lawyer B s trust account and following three certified cheques drawn: one to the mortgage company representing the outstanding balance on the discharge statement for $70,000; one to Lawyer C in trust for $10,000; and one to Lawyer D in trust for $10,000. Lawyer C would also be handed the cheque redirected to Lawyer E in trust for $35,000 on closing. Transaction 3 % C Buys from D C would receive a mortgage advance of $110,000 payable to Lawyer C in trust. The mortgage funds would be deposited into Lawyer C s trust account and the following two certified cheques drawn: one to the mortgage company for $100,000 and one to Lawyer D in trust for $10,000. Lawyer D would also receive the cheques to Lawyer E in trust for $35,000 and $5,000. Transaction 4 % D Buys from E The final transaction is a cash deal with neither D obtaining mortgage financing nor E having an outstanding balance on his or her mortgage. Lawyer D would deposit $60,000 from D into his or her trust account and draw a certified cheque to Lawyer E in trust for $60,000. The remaining -5-

closing funds have been redirected from previous deals in the stack, namely the $35,000 cheque from transaction 1 and the $5,000 cheque from transactions 3. (Interviewees indicated that cheques would be redirected up the stack between one and three transactions.) This example illustrates the flow through of funds. This redirection of funds permits closing to go forward without the need for additional banking transaction (the deposit and certification of funds) between the closings of different deals in the stack. Table B set out the specific details of how funds would move through the four deals. Table B % Flow of Funds in Stacked Transaction Treatment of Funds

Payor

Amount

Transaction 1

Mortgage Payout

A

$ 55,000.00

(AP ÚBV)

Lawyer B in Trust Redirected Funds forwarded for Transaction 4 Total

A A

$ 10,000.00 $ 35,000.00

Transaction 2

Mortgage Payout

B

$ 70,000.00

(BP ÚCV)

Lawyer C in Trust Redirected Funds forwarded for Transaction 4 Redirected Funds forwarded for Transaction 3 Total

B A

$ 10,000.00 $ 35,000.00

B

$ 10,000.00

Transaction 3

Mortgage Payout

C

$100,000.00

(CP ÚDV)

Lawyer D in Trust Redirected funds received from Transaction 2 Redirected funds forwarded for Transaction 4 Redirected funds forwarded for Transaction 4 Total

B

$ 10,000.00

A

$ 35,000.00

C

$

$100,000.00

$125,000.00

5,000.00

$150,000.00

Transaction 4

Lawyer E in Trust

D

$ 60,000.00

(DP ÚEV)

Lawyer E in Trust Redirected funds received from Transaction 1 Lawyer E in Trust

A

$ 35,000.00

C

$

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5,000.00

Redirected funds received from Transaction 3 Total

$100,000.00

Protection of client s interests Where there was a signed direction regarding the redirection of funds, lawyers and conveyancers acting for the purchasers felt that the interests of their clients were adequately protected. If you were acting for A in our example, the lack of concern about where redirected funds might end up is quite understandable. However, if Transaction 3 in the above example did not close and the cheques were returned to the Purchaser s lawyer, then Lawyer C in addition to cheques drawn on his or her own trust account would have a cheque payable to Lawyer E in Trust (drawn by Lawyer A in transaction 1) for $35,000. Lawyer C could not deposit these funds into his or her account. If the deal ultimately did not close, Lawyer C would have to return the cheque to Lawyer A and direct that a new cheque be drawn to him or her in Trust or to his client. This is a possibility that should be in the mind of lawyers redirecting funds to subsequent deals. Lawyer A may not have known that E had directed D who directed C who directed B to direct A to pay funds to Lawyer E in Trust. This may be the first contact between Lawyer A and Lawyer C, and Lawyer A s cooperation in reissuing the certified cheque is crucial for Lawyer C. A further complication could arise where closing funds are paid by personal cheque or bank draft from a client s account rather than from his or her lawyer s account. One reason that the redirection of funds to a subsequent deal in the stack does not concern most interviewees is simply that most deals ultimately close and therefore this problem is avoided. In our example, Lawyer E is receiving redirected funds from two different transactions in the stack, transactions 1 and 3. Let us further consider two further permutations, whether this transaction happens under the paper system or electronic registration and whether all four properties are in the same Land Registry Office or at least two different Land Registry offices. Paper System % Same Office In the paper system, the parties meet at the registry office and the cheques can be physically handed over as each deal closes and gets registered. Unlike the DRA in the e-reg- system, there is rarely a formal written agreement between parties when funds are released at closing prior to registration. Some interviewees suggested that there is an implied undertaking to hold funds in specie until after registration. On closing, Lawyer A or his conveyancer would hand over the three certified cheques set out under transaction 1 in Table B to Lawyer B or her -7-

conveyancer. Once registered, B would then be in a position to close with C and hand over the three certified cheques set out under transaction 2 in Table B to Lawyer C or his conveyancer, and so on for transactions 3 and 4. With all of the lawyers, conveyancers or agents for the parties at the same location, the cheques can easily be passed up the stack. If the funds were not redirected to flow through to subsequent transactions then the Vendor s lawyer would have to deposit the monies in the bank and draw a certified cheque most likely slowing down the closings. Paper System % Different Offices Difficulties can arise when part of a stack is closing in one office and part in another. If transactions 1 and 2 are in Registry Office A and transactions three and four are in Registry Office B, then the final two transactions cannot close until the deals in Registry Office A close and the funds arrive at Registry Office B. Depending on the distance between offices, the funds may be sent by courier, runner or more commonly brought by a conveyancer. It is also in these circumstances where there are larger distances between registry offices to have funds wired to the lawyer s trust account rather than having cheques transported from one location to another. Interviewees indicated that wiring funds occurred most frequently where the offices are more than 2  hours apart. e-reg- System - Same Office There is no central meeting place for e-reg- system closings. Therefore, Lawyer A would send its funds to B including the redirected funds which are to eventually make their way to Lawyer E. After registration, B would send funds on to C and so on. It becomes clear that the efficiencies of redirected funds in the paper system translate somewhat poorly in the electronic system, even when closings are occurring in the same Land Titles office. Some lawyers will direct deposit funds or wire funds to a lawyer s trust account. However, when closings are in the same registry office, it is usually possible to physically transport cheques between deals. e-reg- System % Different Offices When the stack of deals are closing by electronic registration, there is no central meeting place and cheques would be couriered between offices. When you have deals closing in different offices out of town, interviewees indicated that the physical transfer of cheques is often replaced by the direct transfer of funds into a lawyer s trust account. Further, interviewees indicated that this practice was more common for e-reg- system closings than under the paper system. Where there is a -8-

mortgage to be paid out on closing, such practice is inconsistent with the LSUC practice directive regarding mortgage payouts because there is no separation of the monies being paid to the mortgagee and those going to the lawyer in trust.

V

MORTGAGE PAYOUTS

The LSUC Practice Directive2 This is not intended as an exhaustive examination of the requirement set out under the LSUC practice directive regarding the discharge of mortgages on closing. Rather, it is intended to highlight parts of that practice directive relevant to the discussion here. The practice directive regarding the payout of institutional mortgages on closing requires that: the purchaser s solicitor write directly to the mortgagee and request that a discharge statement be directed to him or her; that on closing the purchaser should deliver to the vendor s solicitor a certified cheque payable to the mortgagee in accordance with the vendor s written direction together with a letter to the mortgagee stipulating that the funds are to be applied to the payment of the mortgage debt; and that the purchaser s solicitor should obtain the vendor s solicitor s personal undertaking to deliver the cheque and letter to the mortgagee, to make reasonable efforts to obtain and register a discharge as soon as possible after closing and to be responsible for any additional monies payable for the discharge as a result of delay in delivery of the discharge of funds or otherwise. For private/non-institution mortgages, the practice directive requires that the discharge be made available for delivery and registration at the time of closing. Interviewees indicated that this practice directive is strictly followed. Payments to Vendor s Solicitor s Trust Account The direct wiring of funds to the vendor s solicitor s trust account was reported to occur in both the paper and electronic system, although it was most pervasive for ereg- system closings out of town. When there is a mortgage to be paid on closing and monies are wired directly there is no separation of the mortgagee s funds from the other closing funds. The purchaser s lawyer is relying on the personal 2

The LSUC practice directive sets out a recommended procedure for dealing with the discharge of an existing mortgage at the time of closing a real estate transaction. The procedure contained in the directive is not mandatory. It is a recommended procedure aimed at risk management and loss prevention.

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undertaking and integrity of the vendor s lawyer to pay out the mortgage and should he or she fail to do so, the purchaser s lawyer puts himself or herself and his or her client at risk. Most lawyers also admitted to relying on a discharge statement supplied by the vendor s solicitor rather than one requested directly from the mortgagee. In both cases, the failure to follow the practice directive means that the purchaser s lawyer is reposing his trust in the vendor s lawyer and possibly putting himself and his client at risk. Interviewees indicated that another problem associated with direct wiring of funds is the difficulties banks have when tracking funds in transit. The result is that neither the sending nor receiving branch may appear to have the funds for several hours leaving the parties in limbo.

VI

FUND TRANSFERS

Paper System The necessity of meeting at a central location allows funds to be physically transferred between parties, most frequently in the form of certified cheques. On closing, the purchaser s lawyer will give certified funds to payout the Vendor s mortgage together with a letter to the mortgagee that the funds are to be applied to the payment of the mortgage debt. In exchange, the Vendor s lawyer will give his personal undertaking to deliver the funds and letter and to be responsible for any cost incurred by delay or otherwise. As each deal in the stack closes and is registered, redirected funds are handed up the stack for the next deal. e-reg- System There is no central location for e-reg-, so funds must be physically transferred between parties by courier, taxi or personal delivery. Alternate methods of transferring funds (such as direct wire to the vendor s solicitor s trust account) may also be used. The problem with remote closings is that rather than have a cheque handed between three or four people in the same room, cheques may travel several kilometers to one office for a closing then be redirected to another office a hundred kilometers away for the next deal. The practice of wiring funds to the vendor s solicitor s trust account has grown under e-reg- to accommodate the difficulties in transporting redirected cheques through multiple offices on the day of closing. Mortgage payouts may be done in the same manner as under the paper system described above or where funds are wired to the vendor s solicitor s trust account the purchaser s lawyer is relying on the undertaking that the other solicitor will pay the mortgagee.

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VII

CONCLUSIONS

We have reviewed the closing of stacked transactions in both the Paper and e-regsystems and offer the following conclusions.

VIII

1.

Stacked deals comprise a large percentage of real estate transactions, in particular, on busy days.

2.

The transfer of funds is more complicated under e-reg-.

3.

Paying out mortgages in strict compliance with the LSUC s Practice Directive is more difficult or impractical under e-reg-.

4.

There are risks if one deal in a stack fails to close.

SUGGESTIONS

Electronic registration is here to stay and will continue to be implemented on a mandatory basis, county by county. If practices are developing in e-reg- system that put lawyers and their clients at risk, these issues should be addressed so that appropriate practices can be developed which adequately protect both lawyer and client. The system to register documents electronically has developed more quickly than the related banking technology to transfer funds. Until closing funds can be transferred electronically, the problems noted above are likely to continue. Here are a few options that may help avoid problems. Avoid buying and selling on the same day. Some lawyers encourage their clients to get bridge financing rather than both sell and buy on the same day. However, this involves additional cost for the client and may not be a practical solution in all circumstances; Payout the mortgage through its local branch. This would avoid the inclusion of mortgage payout monies in funds wired directly to the vendor s solicitor s account; or Direct deposit to vendor s solicitor s account. The risks of this approach have been discussed above.

IX

RECOMMENDATIONS 1. The Committee should continue to work closely with the banks to develop electronic funds transfer mechanisms that are in harmony with e-reg- closings. -11-

2. The Committee should study the matter of mortgage payouts and make recommendations to LSUC and LPIC so that a practice can be suggested that addresses both the practical realities of the real estate bar and the risk concerns of the LSUC and LPIC.

3. A subcommittee should be established to address the issue of funds transfer.

4. The Committee should study the redirection of funds and assist in the education of the profession in the dangers inherent in redirected funds. The study should also consider the number and nature of cheques that a purchaser s solicitor can be directed to draw. For example, should a solicitor be obliged to draw closing cheques for purposes not required under the agreement and not necessary to protect the interests of his or her client. 5. Discuss with the LSUC and LPIC the possibility of developing a clearinghouse for electronic transfer of funds. 6. Develop Practice Directives dealing with funds transfer, mortgage payouts and other risks inherent in stacked deals. 7. When completed, this report should be forwarded to the Treasurer of the LSUC and to the President of LPIC.

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Appendix $A# QUESTIONNAIRE STACKED DEALS IN ELECTRONIC REGISTRATION Defining Stacked Deals Stacked deals are real estate conveyancing transactions that are related to each other by common parties as follows. The vendor in the first transaction (V1) in the series is the purchaser (P2) in the second transaction. The vendor in the second transaction (V2) is the purchaser (P3) in the third transaction in the series. The vendor in the each transaction becomes the purchaser in the each subsequent transaction until the series comes to an end. In stacked deals, the completion of any deal in the stack is related to the completion of the preceding deals in the same stack. Paper System 1.

How many deals do you close in a month?

2.

How many of those deals are stacked deals?

3.

Of the stacked deals how many would have all of the deals in the same Land Registry/Titles office?

4.

Of the stacked deals how many would involve more than one Land Registry/Titles offices?

5.

How are off-title documents and keys dealt with?

6.

How are the cheques directed & redirected in regard to: Closing balance Mortgage payouts Real estate commissions Other How far up the !stack ?

7.

Which of the foregoing cheques in Question 7 are certified?

-13-

8.

When deals are in the same Registry/Land Titles Office, are monies generally sent to/with a conveyancer? If no, what arrangements are made?

9.

How are the closing funds dealt with when the deals are in different offices? Conveyancer? Courier? Escrow letter to lawyer? Other?

10.

When acting for purchaser or vendor on out of town deal, do you forward cheques to Vendor or Purchaser s lawyer (respectively) under an escrow agreement? To a conveyancer in an independent office? To other?

11.

How many cheques are normally drawn for a closing?

12.

Are you satisfied that your client s interests are properly protected when funds are directed to third parties?

13.

What form or undertaking, if any, is signed when you release funds at closing, prior to registration? If none, has this ever created a problem?

14.

Do you ever find out your transaction s relative position among a series of stacked deals?

When?

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In Electronic Registration 15.

How are keys and off-title documents dealt with?

16.

How are funds delivered? Courier? Direct wire? Direct deposit to lawyer s trust account? By paralegal? Other?

17.

When are funds delivered?

18.

When closing funds are redirected, to whom are they delivered? Vendor s lawyer? Conveyancer/agent for Vendor s lawyer? Third party lawyer? Other?

19.

How are mortgage payouts dealt with? Certified cheque and undertaking? Discharge statement? Do you follow the LSUC practice directive? If no, why not?

20.

Is your practice consistent with the provision in the agreement of purchase and sale?

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21.

Are mortgage payouts done in accordance with the provisions in the agreement of purchase and sale? OREA Form? Other?

22.

Maximum number of deals in one stack?

12/06/01

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APPENDIX C

Executive Summary - Electronic Registration - Rules, By-laws and Directives 1) Definition of Terms The Rules of Professional Conduct The Rules of Professional Conduct (the $Rules#) govern the conduct of lawyers in Ontario. They contain ethical standards to which lawyers must adhere. The Rules are expressed in the form of rules and commentaries. Rules Rules are expressed in mandatory language and they constitute duties that a lawyer must fulfill. A breach of a rule may result in a finding of $professional misconduct# and a lawyer may be disciplined for such conduct.1 Commentaries Commentaries explain the rule and assist lawyers in interpreting the rule. They contain explanatory and advisory language. Commentaries are usually expressed using the subjunctive $should#.2

Law Society of Upper Canada, Rules of Professional Conduct, Rule 1 $professional misconduct# means conduct in a lawyer s professional capacity that tends to bring discredit upon the legal profession including a) violating or attempting to violate one of the rules in the Rules of Professional Conduct ... 1

2

Task Force on Review of the Rules of Professional Conduct, Final Report of the Task Force on Review of the Rules of Professional Conduct (April 28, 2000) (Co-Chairs: Gavin A. Mackenzie and W.A. Derry Millar) at 17.

-1-

Directives The term $directive# is used interchangeably with the term $guideline#. Both terms are used to describe guidelines or recommended procedures in the practice of law. They are aimed at risk management or loss prevention and they are not mandatory. The Joint Committee on Electronic Registration of Title Documents ($the Committee#) proposes that in the context of electronic registration, the term $guidelines# rather than $directives# be used because the term $directives# may be interpreted as imposing mandatory responsibilities. By-Laws By-Laws are rules made by Convocation pursuant to the Law Society Act. Section 62 authorizes Convocation to make by-laws relating to matters listed in that section. For example, one of the matters listed in section 62 is the handling of money and other property by members.

2) Proposal Regarding Final Form of Guidelines and Amendment to Rules The Committee recommends the following: Amendments to Rules (1) Use of the Personal Security Package $ PSP# The Committee proposes that a rule prohibiting a lawyer from sharing his or her Personal Security Package $PSP# (personalized specially encrypted diskette and corresponding pass phrase required to access the e-regTM system ) be added to the Rules. The Law Society of Upper Canada ($the Law Society#) may wish to consider drafting this rule in a more general form to deal not only with the sharing of credentials to access e-regTM but the sharing of credentials to access systems in other areas of practice. We propose that this rule be added to rule 5.01 which deals with delegation to non-lawyers. (2) The Document Registration Agreement ($DRA#) Subrule 6.03(8) provides that a lawyer shall not give an undertaking that cannot be fulfilled and shall fulfill every undertaking given. The Committee proposes that a commentary be added to subrule 6.03(8) in order to explain that a lawyer who enters into a DRA will be giving undertakings pursuant to that agreement and accordingly, must comply with subrule 6.03(8). (3) Delegation in Electronic Registration The commentary to subrule 5.01(2) illustrates situations where it may be appropriate for a lawyer to delegate work to non-lawyers in the area of Real Estate. The Committee proposes that an addition be made to this commentary to indicate that a lawyer who gives approval authority for -2-

registration of documents to a non-lawyer is ultimately responsible for the content of any document that contains the electronic signature of such non-lawyer. Guidelines That the following guidelines contained in Schedule $A# be approved:

Practice Guideline #1 - Maintaining Integrity of Access and Accounts 1. Responsibilities Regarding Accounts 2. Responsibilities Regarding Access for Users 3. Account Responsibility - $Law Firms# 4. Effect of Suspensions and other Changes to Law Society Status Practice Guideline #2 - Obligations Regarding Document Preparation 1. Computerization 2. Consequences of the Failure to Computerize Practice Guideline #3 - The Acknowledgment and Direction 1. The Acknowledgment and Direction 2. Amendments to the Acknowledgment and Direction 3. The Signing of the Acknowledgment and Direction 4. Reliance on Documents Other than the Acknowledgment and Direction Practice Guideline #4 - Electronic Closings and the Document Registration Agreement ($DRA#) 1. Electronic Closings and the DRA 2. Additions or Modifications to the DRA 3. Authorization to enter into the DRA 4. Professional Obligations of Lawyer regarding the DRA Practice Guideline #5 - Electronic Closings and Mortgage Transactions 1. Parties to the DRA 2. Delivery of Paper Copy of Mortgage 3. Guarantees 4. Discharge of Mortgages 5. Electronic Payment of Closing Proceeds and Discharge Funds Practice Guideline #6 - Use of Compliance With Law Statements 1. Use of Compliance with Law Statements 2. Supporting Evidence 3. Going Behind Compliance With Law Statements

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1992 Adviser Supplement - Undertakings to Discharge Mortgages The Committee proposes that in the context of discharges of institutional mortgages, the practice guideline set out in the Law Society September 1992, Adviser Supplement be amended to provide for the electronic real time cleared funds transfer capability being developed by Lawyers Professional Indemnity Company in conjunction with the Joint Committee. The Committee proposes that the recommendation that certified funds be directed to the institutional mortgagee, whose mortgage is being discharged pursuant to the vendor s solicitor s undertaking given on closing, be revised. In particular, where the electronic funds transfer capability is utilized, it would be acceptable for the purchaser s solicitor to transfer discharge funds directly into the vendor s solicitor s trust account and to rely on the vendor s solicitor s personal undertaking to deliver discharge funds to the institutional mortgagee and to procure a discharge of the mortgage. By-Laws The Law Society By-Laws generally do not permit lawyers to deposit their own funds into trust accounts. Lawyers who have designated special trust accounts as their Electronic Registration Bank Account (ERBA) and who are not in possession of client trust funds are unable to effect registrations. The Committee proposes that section 8 of By-Law 19 be amended to permit lawyers who are not in possession of client trust funds to deposit their own funds into special trust accounts.

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SCHEDULE $A# PRACTICE GUIDELINE 1 MAINTAINING INTEGRITY OF ACCESS AND ACCOUNTS Responsibilities Regarding Accounts Teranet Account Every person who wishes to use e-regTM must become a subscriber with Teranet Land Information Services Inc. ($Teranet#). In the context of lawyers, each subscribing lawyer or law firm will need to establish an account with Teranet. It is from this account that user fees (access charges and on line charges) will be debited. Registration fees and Land Transfer Tax can be paid from lawyers special trust accounts or general accounts. The Personal Security Package Each user under a Teranet account (i.e. each person in a law firm that will be accessing the e-regTM system) needs to obtain a personalized, specially encrypted floppy diskette and a corresponding pass phrase. Both must be used in conjunction to access the system. Integrity and security of the electronic registration system is achieved by Teranet establishing and maintaining an audit trail of all transactions and the party (identified by the pass phrase used) who performed them. Rule 5.01 of The Rules of Professional Conduct provides that a lawyer shall not share his or her Personal Security Package. Compliance With Law Statements While non-lawyers may obtain access to the e-regTM system, by regulation under the Land Registration Reform Act, only lawyers entitled to practice may make statements professing compliance with law without registration of supporting evidence. Consequently, Teranet maintains a current list of lawyers entitled to practice which is updated to reflect lawyers whose rights and privileges have been affected by, for example, retirement, suspension, disbarment or resignation. Responsibilities Regarding Access For Users Individual users within a law firm will be allowed access through that firm s account with Teranet. Given the importance to the security and integrity of the e-regTM system and since the knowledge of, and control over, movements of members of law firms (employees, associates or partners) rests with the firm, law firms must be vigilant to ensure appropriate safeguards are implemented in relation to individual encrypted diskettes and pass phrases. At a minimum, firms should ensure that:

-5-

a. the need to maintain the confidentiality of pass phrases and the need to safeguard encrypted diskettes are emphasized to all users granted access pursuant to their accounts. Firms should take appropriate steps to discourage and prevent sharing of pass phrases; b. appropriate guidelines are established in formulating pass phrases to take full advantage of the security afforded by the system; c. appropriate steps are taken to destroy/disable and/or replace pass phrases and diskettes when such confidentiality is breached; d. appropriate monitoring procedures are implemented to safeguard against unauthorized access to the e-regTM system under their accounts. This should include careful recording and reconciliation of any and all charges incurred with Teranet which may disclose unauthorized access; and, e. procedures are implemented which includes the immediate notification of Teranet when the law firm has changes in its membership (whether employees, associates or partners) affecting who the authorized users are under the firm s account. In particular, where an authorized user leaves the firm, the firm should ensure that all copies of the user s encrypted diskette are returned and that Teranet is immediately notified of the termination of access of the specific user. Account Responsibility - "Law Firms" When establishing accounts with Teranet, lawyers must carefully consider which lawyers may operate under the same account. Lawyers who are partners or who are employers/employees will normally access the e-regTM system under the same account. However, care must be exercised where lawyers are practising in "association". Where there is no intended joint and several liability, it is ill advised to subscribe to the e-regTM system under the same account. Additionally, it will be permissible to pay registration fees and land transfer tax out of a special trust account. Since it is inappropriate for associated lawyers who are not "practising in the manner of employed solicitors" to share the use of a common trust account, pragmatically, it is improper for such associated lawyers to operate under the same Teranet account. Effect of Suspensions and Other Changes to Law Society Status As only lawyers entitled to practice law are able to approve electronic documents containing compliance with law statements, lawyers need to be extremely sensitive to the effects of changes in their status on their ability to complete real estate transactions. E-regTM will automatically verify statuses of lawyers and will not allow lawyers who are not entitled to practice to approve

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documents containing compliance of law statements. The Law Society will be providing timely updates to Teranet as to changes in members statuses. Lawyers voluntarily leaving their practices through retirement or resignation need to ensure that all real estate closings are either completed or reassigned (both paper files and access to electronic documents in the e-regTM system) to other counsel, before the effective date of their status changes. Lawyers who are suspended and/or disbarred will likewise be precluded from approving these types of documents. This will be particularly germane for lawyers who are "administratively" suspended (i.e suspended for non-payment of Law Society fees/Lawyers Professional Indemnity Company levies or non-filing of required Law Society/Lawyers Professional Indemnity Company forms). As the Law Society will be providing electronic updates regarding member statuses to Teranet, this will likely result in a much faster effect to changes than in the past. It is conceivable that the change to Teranet access may take effect before members receive written confirmation of status change by registered mail. Consequently, lawyers will need to exercise additional care to ensure that their fees and levies are paid on time or they may risk being precluded from completing certain real estate transactions.

PRACTICE GUIDELINE 2 OBLIGATIONS REGARDING DOCUMENT PREPARATION Computerization Accessing e-regTM will involve learning how to use the hardware and software for preparation and registration of documents. Currently, lawyers are required to draft certain documents for registration to complete real estate transactions. For example, the lawyer for the transferor is responsible for preparation of the transfer. In the e-regTM system, this is now an electronic document which is prepared at a computer terminal and, at the appropriate time, released for electronic registration and will require input from the lawyer for both the transferor and transferee in a timely manner. Although access to e-regTM will continue to be available through computer terminals at Land Registry Offices ( LROs), current staff and service levels there are not likely to be maintained once e-regTM is introduced to an LRO. Lawyers cannot rely on attending at the LRO to prepare and register documents in electronic format. This is not a viable alternative to properly outfitting the lawyer s office with the required computer equipment to gain remote access to e-regTM. Accordingly, lawyers practising real estate should equip themselves with the required technological tools to properly service their clients. In particular, the necessary computer equipment should be acquired to function as real estate practitioners in the e-reg TM system. Teranet has published hardware specifications with recommended requirements and also a set of -7-

minimum requirements. It should be noted that with upgrades imminent, it will be necessary to have equipment which meets current requirements. Consequences of the Failure to Computerize A lawyer who is not prepared to meet the minimum technical investment required is incapable of producing any registerable documentation under e-regTM. Apart from the obvious concerns about the lawyer s failure to fulfill his or her duty to the client and the potential effect on the client s contractual rights and obligations, this will cause inconvenience for the lawyer s colleague(s) acting for other parties to the transaction, who is computer-equipped for e-regTM. In these situations, the lawyer should be prepared to make suitable arrangements to meet his or her obligations. Arrangements may include retaining an agent, or making arrangements with a lawyer for another party to the transaction. In either case, the lawyer should be prepared to compensate the agent or other party s lawyer (as the case may be) for the costs associated with assisting the lawyer in completing his or her obligations. Compensation to the other party s lawyer for expenses and additional time caused may take the form of financial compensation to the other parties lawyer for the costs of using e-regTM in preparing the documentation on the lawyer s behalf, and may also include an amount for the time spent by him or her in assisting the lawyer. If assistance is required, this should be identified and addressed early in the transaction and confirmed in writing with the lawyer acting for other parties, to avoid last minute delays, inconvenience to the other lawyer as well as potential prejudice to the lawyer s clients.

PRACTICE GUIDELINE 3 THE ACKNOWLEDGMENT AND DIRECTION The e-regTM system has been designed to produce five different standard forms of Acknowledgment and Direction corresponding to each of the electronic registration formats, which can be amended to suit the particular needs of any transaction:  Transfer (Transferors)  Transfer (Transferee)  Charge (Chargor)  Discharge of Mortgage/Charge (Chargee)  Document General. The Law Society recommends that the appropriate form of Acknowledgment and Direction for each electronic document to be registered under e-regTM be printed from the e-regTM system for signature by the lawyer s client(s) before each electronic document is released for registration. Alternatively, one may draft his or her own form of Acknowledgment and Direction containing the pertinent information. However, if one drafts his or her own form of Acknowledgment and -8-

Direction, it is still recommended that the e-regTM document registration report be attached to the form. Where an electronic document to be registered relates to a transaction where it is also appropriate for the lawyer to enter into a Document Registration Agreement (DRA), such as where the lawyer represents the vendor or the purchaser of property under an agreement of purchase and sale, a statement authorizing the lawyer to enter into a DRA should be included in the Acknowledgment and Direction. A true copy of the DRA should be appended as a schedule and also be signed by the client(s). The description of the electronic document contained in an Acknowledgment and Direction should correspond exactly to the electronic document which is ultimately registered electronically. Amendments to the Acknowledgment and Direction In a situation where an amendment, which is not merely clerical in nature, is required to be made to an existing Acknowledgment and Direction, such as a change in the rate of interest provided in an Acknowledgment and Direction for a Charge (Chargor)or where contrary instructions are received from the client, an amended Acknowledgment and Direction that includes any necessary changes should be prepared and signed by the lawyer s client(s) to confirm the changes. The Acknowledgment and Direction only confirms client instructions for registration of an electronic document and, additionally, a related DRA in some instances. Lawyers are cautioned to obtain written confirmation of client instructions appropriate to the circumstances of the individual transaction. For example, the lawyer may represent the party or parties to an agreement of purchase and sale for property as purchasers and she or he may be instructed by the client(s) to electronically register a Transfer in favour of one or more but not all of those parties or in favour of a third party as transferee(s). In addition to obtaining an Acknowledgment and Direction for a Transfer (Transferees) from the party or parties to be named as transferee(s) in the Transfer document, written instructions should be obtained from all parties who are purchasers under the Agreement of Purchase and Sale. Those instructions should set out the party or parties to be named as transferee(s) and therefore the registered owner(s) of the property described. Lawyers should continue to obtain written confirmation of client instructions for issues not directly related to the registration of an electronic document itself and in particular for those transactions where the lawyer will be providing a qualified opinion on title. The Signing of the Acknowledgment and Direction An Acknowledgment and Direction and any other appropriate form of written client instructions should be reviewed, where possible and/or practicable with the client(s) in a personal interview with the lawyer before an electronic document is released for registration. The review should include a detailed explanation of the contents of the Acknowledgment and Direction and other client instructions before signature. Signed copies of the Acknowledgment and Direction should be retained in the lawyer s file as the written verification of client instructions and authority for electronic document registration.

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Reliance on Documents other than the Acknowledgment and Direction During the transition period in which e-regTM is being introduced in a region, lawyers may find it appropriate to rely on documents other than the Acknowledgment and Direction to confirm client instructions. This is particularly the case when such alternate written documents already exist and the Acknowledgment and Direction merely serves as a duplication. For example, documents prepared in Polaris format and signed by clients can serve as instructions to counsel if this is fully explained to the clients.

PRACTICE GUIDELINE 4 ELECTRONIC CLOSINGS AND THE DOCUMENT REGISTRATION AGREEMENT ($DRA#) Closings in the e-regTM system will require a procedure to be established whereby documents, funds, keys etc. are exchanged between the lawyers prior to closing and held under very strict escrow terms until the computerized title documents have been electronically registered. The terms of escrow should be clearly set out in an agreement executed prior to closing. A standardized form of agreement (the DRA) can be used for this purpose. Alternatively, the DRA can form the basis for a closing protocol which the parties would expressly agree to adhere to. Items that require completion in the DRA would be set out in a letter confirming adherence to the DRA closing protocol. Additions or Modifications to the DRA Additions or modifications to the DRA may be required to meet the circumstances of individual transactions. The DRA establishes strict escrow terms relating only to the closing procedure. It does not, for example: 

provide for giving or acceptance of possession of the real property in advance of registration of title documents, or



address any of the issues relating to interim possession, readjustments, amendment or preservation of contractual rights/obligations or other matters normally associated with an "escrow closing" as that term is commonly used in relation to a transaction which cannot be completed on the scheduled closing date.

Those issues, in addition to the specific escrow provisions of the DRA itself, will have to be reviewed and addressed by lawyers for the parties to a transaction.

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Authorization to enter into a DRA As each lawyer entering into a DRA will be undertaking professional obligations with respect to the handling and disposition of a client s documents and funds, specific written authority should be obtained from the client authorizing the lawyer to make that commitment. A lawyer who becomes a party to the recommended form of DRA contracts as agent for his or her client with the intention that the client shall have both the benefits and burdens of the covenants in the agreement. Provision for the written acknowledgment and consent of the client required to enable a lawyer to enter into a DRA in these terms is included in the forms of Acknowledgment and Direction referred to earlier in these Practice Guidelines. It should also be noted that the DRA neither precludes nor prevents a lawyer from retaining conveyancers to assist in the closing of the transaction. Professional Obligations of Lawyer A lawyer who becomes a party to the prescribed form of DRA incurs professional obligations. A lawyer must fulfill all obligations that the lawyer has undertaken pursuant to the DRA. It is important to remember that a lawyer who enters into a DRA is giving undertakings pursuant to that agreement and accordingly the lawyer must comply with subrule 6.03(8) of the Rules of Professional Conduct which provides that a lawyer shall not give an undertaking that cannot be fulfilled and shall fulfill every undertaking given.

PRACTICE GUIDELINE 5 ELECTRONIC CLOSINGS AND MORTGAGE TRANSACTIONS Parties to the DRA Although the recommended form of DRA refers to "Purchaser s solicitor" and "Vendor s solicitor", it is not intended that the agreement would be limited to purchase and sale transactions. Lawyers representing mortgagees, guarantors or others involved in a real estate transaction may be necessary parties to such agreements with respect to funds and documents (whether in electronic or paper form) held for disbursement, registration or release subject to escrow terms. Appropriate additions or amendments to the recommended form may be made to accommodate those additional parties and the further obligations involved. Delivery of Paper Copy of Mortgage Lawyers acting for mortgagees are reminded that Section 4 of the Mortgages Act (R.S.O. 1990. Chap. M.40, as amended) requires the mortgagee to deliver a true copy of the mortgage or charge to the mortgagor within thirty days "after receipt by the mortgagee of a mortgage executed by the mortgagor". Section 4 of the Mortgages Act has been amended to provide that for the purposes -11-

of this section $a true copy# includes a facsimile as defined in section 1 of the Land Titles Act R.S.O. 1990 Chap. L.5 as amended. A $facsimile# is defined in the Land Titles Act as an accurate reproduction of a book, document or record and includes a print from microfilm and a printed copy generated by or produced from a computer record. The mortgagee s lawyer should, therefore, print out a paper copy of the electronic charge as registered and deliver it to the mortgagor (or the mortgagor s solicitor) together with a paper copy of the Standard Charge Terms within thirty days of registration. Lawyers for mortgagees should also obtain from the mortgagor a signed paper copy of the acknowledgment of receipt of the Standard Charge Terms before the electronic charge is registered. Guarantees Although a guarantor may be identified in the electronic form of charge, it would appear necessary for the guarantor to sign a separate (paper) form of guarantee to bind the guarantor to the covenant. Lawyers should ensure that the terms of the paper document signed by the guarantor are consistent with the provisions (if any) regarding the guarantee in the charge and the Standard Charge Terms. Discharge of Mortgages The forms of Agreement of Purchase and Sale of real property now in common use make provision for the payment and subsequent discharge of institutional mortgages (mortgages held by banks, trust companies, insurance companies, credit unions, or finance companies) held by certain financial institutions so that these mortgages may be paid from the proceeds of the sale. Yet undefined procedures as to who is to prepare and electronically register discharges (lawyers or financial institutions) require lawyers to be careful in clarifying who is to assume these tasks, who is to pay for associated costs and the scope of the lawyer s undertaking. The procedure set out in the Agreement of Purchase and Sale requires that the vendor s lawyer give his/her personal undertaking to obtain and register a discharge of the mortgage after closing. The recommended forms of Acknowledgment and Direction previously referred to include a form by which the mortgagee could authorize the vendor s lawyer to create and register the required discharge of mortgage. If financial institutions will give that authority, the vendor s lawyer should be able to give the undertaking in accordance with the terms of the Agreement of Purchase and Sale. However, it is anticipated that some financial institutions may establish a practice of creating and registering an electronic discharge of a mortgage without the assistance of the vendor s lawyer after discharge funds have been received. When requesting a discharge statement from the financial institution, lawyers retained to act for vendors under an Agreement of Purchase and Sale requiring the lawyer to give a personal undertaking respecting the discharge of an institutional mortgage, should also seek clarification on whether the lawyer or the financial institution itself will prepare and register the electronic discharge of mortgage. If the financial institution insists upon dealing with this matter "in-house", the lawyer should obtain written confirmation to that effect. In these circumstances, and subject to any contrary provision in the Agreement of Purchase and Sale , the lawyer may be more comfortable changing the wording of

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the undertaking to provide that the vendor s lawyer "will cause a discharge of the mortgage to be registered". It will still be the responsibility of the vendor s lawyer to ensure that the necessary funds (including any additional interest accrual and the discharge registration fee) are forwarded to the financial institution, that the electronic discharge is prepared and registered by the financial institution in a timely manner (in default of which an application may have to be brought to the court for an order discharging the mortgage) and that registration particulars of the discharge are obtained and forwarded to the purchaser s solicitor to confirm compliance with the undertaking. In the case of "private mortgages" (mortgages held by persons other than financial institutions), and in the absence of any express provision to the contrary in the Agreement of Purchase and Sale, lawyers should not give or accept personal undertakings respecting discharge after closing. Unless the private mortgage is paid out and discharged prior to closing, it may be necessary for the vendor s solicitor or the mortgagee s solicitor to seek written authority from the lender in the recommended form of Acknowledgment and Direction to create the required electronic form of discharge and arrange for it to be registered on closing. In the case of a private mortgage, it would be acceptable for a lawyer to transfer amounts required to pay out the mortgage directly to the vendor s solicitor s trust account where the mortgage discharge itself comprises one of the documents to be registered under the DRA. Acting on proper written authority, the vendor s solicitor could include a Discharge of Mortgage in the DRA as one of the documents to be registered on closing, subject to compliance with the escrow terms of that agreement. The vendor s solicitor would confirm to the lender that a DRA was being utilized as part of the closing procedure and that the discharge of mortgage would be shown as a document for registration under that agreement, subject to the terms of the escrow. Electronic Payment of Closing Proceeds and Discharge Funds Where the electronic real time cleared funds transfer capability is utilized, it would be acceptable for the purchaser s solicitor to transfer the amount required to payout an institutional mortgage directly to the vendor s solicitor s trust account. In this context, the purchaser s solicitor would rely on the vendor s solicitor s personal undertaking to deliver discharge funds to the mortgagee and procure a discharge of the mortgage.

PRACTICE GUIDELINE 6 USE OF COMPLIANCE WITH LAW STATEMENTS Electronic registration moves away from the practice of placing large volumes of supporting material in the public records. The new practice involves a legally trained professional determining whether a document is suitable for registration and in compliance with applicable -13-

legislation. Each electronically registered document must contain prescribed information. Among the types of information which may be included or used are statements which call for an application of legal expertise based on legal judgments, which must be made by a lawyer. These statements are called the "Compliance with Law Statements", and will be used in the place of filing hard/paper copy of the evidence upon which the statements is based. Supporting Evidence Lawyers should obtain and retain in their files the evidence upon which compliance with law statements are based, or alternatively, ensure that publicly available information to fully support the statements is and remains available. This is important in the Teraview Electronic Registration System ($TERS#) as copies of the supporting evidence will not be available from the Land Registry Office when a document has been registered in reliance on one or more compliance with law statements. The copies retained in the lawyer’s file may be the only source of such supporting evidence. This may be particularly important where a claim is made against the lawyer in consequence of any such statements. Lawyers should also be aware of the effect that this may have on the period that files must be retained. In considering whether real estate files can be safely destroyed, members should take additional care in ensuring that they are not destroying what may be the only source of evidence in support of an electronic document registration and that alternate, public supporting information is available. Going Behind Compliance with Law Statements Lawyers need not look to nor request nor require evidence behind registered compliance with law statements, but rather should rely upon the provisions of the Land Titles Act as to the sufficiency of title once certified. The entire TERS and Land Titles system is premised on the sufficiency of the register to establish title to real property.

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