Bulletin – October 2005

In discussions held with lenders, four areas were brought to our attention that required clarification to simplify the administration of CSBF Program loans.

1. Proof of payment - Lawyer or Notary's Trust Statement

Is a lawyer or notary's trust statement sufficient proof for the payment of the financed asset?

Yes. For some loan transactions, a lender will advance loan funds to a lawyer or notary to be held in trust until the completion of the transfer of the assets from the vendor to the purchaser. Once the transaction is completed, the lawyer or notary will pay the vendor or the vendor's lawyer or notary the balance of the purchase price owing under the agreement of purchase and sale. In this situation, the lawyer or notary's trust statement will set out the monies received from the lender and the borrower and the amount paid to the vendor or the vendor's lawyer or notary. The trust statement, together with proof of the payment of the deposit, will be sufficient proof for the payment of the financed asset.

Also, if a formal executed sales contract makes reference to the purchase price paid and contains a section referring to the payment indicating "receipt whereof is hereby acknowledged", such an attestation by a lawyer or notary is sufficient proof of payment.

2. Security - Landlord's Waiver

Is it necessary to obtain a landlord's waiver before loan funds are advanced to the borrower for a leasehold improvement or equipment loan?

In making and administering a loan under the CSBF Program, lenders must apply the same procedures as those for a conventional loan to a small business. If it is the lender's practice to obtain a waiver from a landlord, then such a waiver should also be obtained for a loan made under the CSBF Program.

However, in the event the landlord refuses to grant such a waiver, the lender can still proceed to advance the funds to the borrower provided a first-ranking security is obtained on the assets financed.

Lenders are reminded that for leasehold improvements loans, a lender may take security in any assets of the small business instead of security in the leasehold improvements. Please refer to ss. 14(3) of the Regulations and Item 7.2.1 Section A of the revised CSBFP Guidelines.

Please note that some landlords are requesting a general security agreement (GSA) from tenants when the lease is signed. The effect of such a GSA is to encumber any future assets acquired by the tenant/borrower. In such circumstances, lenders are reminded of ss.  14(5) of the CSBFP Regulations which provides that, where the existing security is a GSA, the lender must obtain a postponement of the GSA to ensure the security in the financed asset is first-ranking.

3. Security: Cross-default Provisions

For a loan made under the CSBF Program, can a lender include a cross-default provision in the loan or security document so that a demand payment of a CSBFP loan can be made if other loans to the same borrower are in default?

There is no provision in the CSBF Act or Regulations that would prevent a lender from including such a cross-default provision in the security documents of a CSBFP loan.

Under s. 36 of the CSBFP Regulations, default is no longer limited to non-payment. Failure by the borrower to comply with a material condition of the CSBFP loan agreement means that the borrower is in default of the CSBFP loan. If the lender considers that such a cross-default provision should be incorporated into the CSBFP loan or security agreement, then a default on the other loans could be considered a material condition and could trigger a default on the loan.

4. Written Rulings

Why does the CSBFP Directorate not provide answers in writing where the lender makes a verbal inquiry about a situation that may not be covered by the Act, Regulations or the Guidelines?

The introduction to the revised Guidelines indicates that the CSBFP Directorate may issue rulings in response to written requests originating from a regional office, central office or head office of a financial institution. In cases of verbal requests, the danger is the passage of time, the recollection of the parties involved in the request and in the ruling, as well as the clear articulation of the facts and situation. Requests for rulings should be put in writing to avoid misunderstandings about the situation presented to the Directorate. Such rulings are issued according to the fact situation addressed in the written request and may only apply to that particular situation.

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If you have any comments on the points raised by these questions, please feel free to contact us.

We encourage you to submit any topics of interest that you would like to see addressed in future bulletins.