Mastering the Mechanics of Private Mortgage Control

Private mortgages are often considered the Wild West of real estate law, so do not get caught unarmed.

In the context of private mortgage lending, profitability is not determined exclusively by yield, but by the degree of control retained by the lender throughout the transaction. The essence of prudent lending lies not merely in the interest rate or the term of the advance, but in the careful allocation of rights, remedies, and procedural authority.

The mortgage commitment is the legal instrument of control. Through its provisions, the lender defines the scope of its protection, the efficiency of its enforcement, and the predictability of its recovery. The sample provisions that follow can distinguish a well-structured, institutional-grade private mortgage commitment from one that is merely functional.

1. Drag-Along and Assignment Rights

Lenders appreciate that capital liquidity is the foundation of financial control. A mortgage is not merely a bilateral arrangement between lender and borrower; it is a financial asset intended to be held, transferred, or syndicated within a broader portfolio. The ability to reassign a lender’s interest without procedural or contractual impediment is essential to maintaining liquidity, managing exposure, and enabling participation arrangements with other investors or mortgage investment corporations (MICs).

Sample Drafting:

“The Lender may, at any time and without notice to or consent of the Borrower, assign, transfer, or syndicate all or any part of its interest in this Commitment, the Loan, or any related security. Any assignee or participant shall thereupon have the same rights and remedies as if originally named as the Lender, and no such assignment shall affect the Borrower’s obligations hereunder.”

This transforms a static loan into a tradable financial instrument, enhancing both liquidity and scalability.

2. Non-Merger Clause

Under the equitable doctrine of merger, when a lender acquires title to mortgaged property, whether by power of sale, foreclosure, or vesting order, the mortgage debt may merge with the estate in land, extinguishing the lender’s contractual and personal rights.

A non-merger clause preserves the lender’s rights under the mortgage and related instruments, ensuring that covenants, guarantees, indemnities, and interest obligations remain enforceable even after the lender takes possession or title. Without such a clause, post-enforcement recovery of deficiency balances or continuing interest may be jeopardized.

Sample Drafting:

“The taking of possession or the acquisition or vesting of title in the Lender, whether by foreclosure, power of sale, or otherwise, shall not operate as a merger of the debt or of any covenant, right, or remedy of the Lender under this Mortgage or any related agreement. All such rights and remedies shall continue in full force until all obligations secured hereby have been fully satisfied, and the Lender has executed a formal discharge.”

3. Environmental Representations and Indemnities

A prudent lender never assumes risk it has not priced. Environmental liability, particularly under the Environmental Protection Act (Ontario), can attach not only to owners but also to persons in possession or management control of contaminated property. As such, the standard borrower covenant to maintain insurance is insufficient protection.

An environmental representation and indemnity clause ensures the borrower bears full responsibility for compliance and remediation. It allocates risk expressly, both prior to and following default, and protects the lender from successor liability that may arise upon taking possession or title.

Sample Drafting:

“The Borrower represents and warrants that, to the best of its knowledge, the Property is and shall remain free from any hazardous substances or environmental contamination as defined under the Environmental Protection Act (Ontario) or any successor legislation. The Borrower shall comply with all applicable environmental laws and shall promptly remediate any contamination discovered at or affecting the Property. The Borrower shall indemnify and hold harmless the Lender, its successors, and assigns from and against all losses, damages, claims, liabilities, and expenses (including investigation and remediation costs and legal fees) arising directly or indirectly from any environmental condition, whether existing before or after the advance, and whether or not the Lender has taken possession or title.”

In enforcement scenarios, this clause can be the difference between a profitable recovery and a seven-figure remediation liability.

4. Cross-Collateralization and Cross-Default

For lenders managing multiple loans with the same borrower, often across several properties, entities, or related guarantors, maintaining control over the entire lending relationship is critical. A cross-default clause links all obligations within the lender’s portfolio, so that a default under one agreement automatically constitutes default under all. It serves as the connective mechanism that binds multiple facilities into a single, enforceable framework.

When paired with cross-collateralization, whereby each property or security interest secures the borrower’s entire indebtedness to the lender, these provisions transform a collection of discrete loans into an integrated and defensible structure. This approach enhances enforcement efficiency, deters selective default, and ensures that borrowers cannot shield assets behind separate entities or loans.

Sample Drafting:

“Any default by the Borrower, any Guarantor, or any related or affiliated entity of the Borrower under this Mortgage or under any other loan, mortgage, guarantee, or obligation owing to the Lender or any of its affiliates shall constitute a default under this Mortgage and under all such other obligations. The Lender may thereupon exercise any and all rights and remedies available under each such agreement concurrently and without limitation.”

5. Right to Substitute or Additional Security

In volatile markets, asset values can fluctuate more rapidly than loan maturities. A prudent lender must retain the ability to recalibrate collateral coverage if the value or condition of the secured property materially deteriorates. The right to substitute or require additional security allows the lender to restore the original loan-to-value ratio or risk position.

This clause is particularly valuable in construction, bridge, and equity-takeout lending, where market volatility or project delays may erode the lender’s security base before repayment. It provides a pre-enforcement remedy, enabling early correction of exposure rather than reliance on default proceedings.

Sample Drafting:

“If, in the opinion of the Lender, a material adverse change occurs in the value, condition, or marketability of the Property or any related security, the Lender may, upon written notice to the Borrower, require the Borrower to deliver substitute or additional security acceptable to the Lender within such time as the Lender may specify. Failure to do so shall constitute an event of default, entitling the Lender to declare all indebtedness immediately due and payable.”

This clause mirrors the institutional discipline of a margin call, allowing lenders to rebalance risk mid-term.

6. Solicitor Undertakings and Lender-Controlled Closings

In private mortgage transactions, the most common point of failure arises when closing control is delegated to the borrower’s solicitor. Without direct oversight, lenders risk improper registration, unauthorized discharges, or the premature release of funds before all conditions are satisfied. Institutional lending practice mitigates these risks by ensuring that closing, registration, and fund disbursement are conducted exclusively through lender’s counsel, acting under enforceable undertakings.

A properly drafted clause centralizes control of the closing process, preserves the lender’s priority position on title, and ensures that the lender’s security is perfected only upon full compliance with its written conditions precedent. This approach aligns with recognized professional obligations under the Rules of Professional Conduct governing solicitor trust undertakings and closing protocol.

Sample Drafting:

“All closing documentation, registrations, and undertakings shall be prepared, reviewed, and completed by the Lender’s solicitors, who shall hold all advance funds in trust and release same only upon satisfaction of all written conditions precedent specified by the Lender. The Borrower’s solicitor shall provide such undertakings, directions, and confirmations as the Lender’s solicitors may reasonably require to ensure proper registration, maintenance of priority, and valid completion of the transaction.”

This ensures clean title, prevents unauthorized discharges, and mitigates fraud or registration errors protecting the lender’s priority position.

7. Power of Attorney and Irrevocable Direction

In mortgage enforcement, speed and autonomy are essential. Once default occurs, lenders must often renew, discharge, or transfer title to facilitate realization or resale. Delays arising from borrower non-cooperation can impede recovery, increase carrying costs, and weaken the lender’s security position.

To prevent such obstruction, a mortgage commitment should include an irrevocable power of attorney authorizing the lender to execute, deliver, and register all documents necessary to complete enforcement steps.

Sample Drafting:

“The Borrower irrevocably constitutes and appoints the Lender, and any person designated by the Lender, as its true and lawful attorney to execute, deliver, and register, in the Borrower’s name or otherwise, any discharge, renewal, transfer, conveyance, or other instrument relating to this Mortgage or the Property, and to complete any sale, realization, or other disposition of the Property following default, as the Lender in its sole discretion deems necessary or desirable. This power of attorney is coupled with an interest and shall be irrevocable.”

When properly drafted, this clause empowers the lender to act unilaterally, which validates instruments executed under a lawful power of attorney.

8. Set-Off and Application of Payments Clause

While often overlooked in private mortgage commitments, a set-off and application of payments clause provides the lender with flexibility in managing defaults, cross-collateralized loans, and portfolio-level recovery.

In essence, it allows the lender to apply funds received from any source, including rent, insurance proceeds, guarantor payments, or other borrower accounts, to any debt, in any order, and at the lender’s sole discretion. It also permits the lender to set off sums owed to the borrower (such as undisbursed advances or security deposits) against any obligations owing under the mortgage.

Sample Drafting:

“The Lender may, at any time and from time to time, without notice to the Borrower, apply any funds, proceeds, or payments received from the Borrower, any Guarantor, or any other source, whether under this Mortgage or any other agreement with the Borrower, to any indebtedness, liability, or obligation of the Borrower to the Lender, in such order, priority, and manner as the Lender, in its sole discretion, determines. The Lender may further set off or apply any deposits, advances, or other monies held by or payable to the Borrower against any obligations owing under this Mortgage or any related agreement. No application, set-off, or exercise of discretion by the Lender shall constitute a waiver of any default or limit the Lender’s rights or remedies under this Mortgage or at law."

Without this clause, a lender is often bound by the borrower’s direction on how payments are to be applied (for instance, to principal rather than interest, or to one loan instead of another), limiting control during enforcement or restructuring.

9. Section 118 Restriction – Control of Dealings

Section 118 of the Land Titles Act allows a registered owner to consent to a “restriction on dealings”, preventing any transfer, charge, or other disposition of the property without the written consent of the person in whose favour the restriction is registered.

For lenders, this operates as a statutory freeze on title by preventing the registered owner from encumbering, selling, or otherwise dealing with the property without lender approval, even before or outside the registration of the mortgage itself. The restriction appears directly on title and is enforceable through the land registry system, not merely contractually.

This mechanism is particularly effective in high-risk private lending, multi-lender transactions, or deferred-advance commitments, where the lender wants to ensure the borrower cannot refinance, transfer, or otherwise impair the lender’s security before advance or during the loan term.

Sample Drafting:

“As a condition of this Commitment, the Borrower shall execute and deliver to the Lender an application under section 118 of the Land Titles Act (Ontario) in registrable form, authorizing the registration of a restriction on title to the Property prohibiting any transfer, conveyance, charge, or other disposition of the Property, or any interest therein, without the prior written consent of the Lender. The Borrower acknowledges that such restriction shall remain in effect until formally released by the Lender in its sole discretion.”

Unlike a caveat or caution, which only provides notice, a section 118 restriction creates an actual prohibition against registration unless the lender consents effectively locking the title against unauthorized dealings.

Why These Clauses Matter

These provisions operate as the quiet architecture of control within a private mortgage commitment. They distinguish the speculative investor from the experienced lender. Each clause reinforces the lender’s command over risk, remedy, and realization, transforming a simple loan into a structured, enforceable investment.

At ALF LLP, we draft mortgage commitments with precision, foresight, and entrepreneurial agility through balancing protection and opportunity to safeguard our clients’ investment, yield, and exit strategy in every market condition.

Next Step for Private Lenders and Investors

Before you fund your next mortgage, have our team stress-test your commitment for:

• Enforceability under the Mortgage Act and Land Titles Act;

• Compliance with the Interest Act (Canada) and disclosure requirements; and

• Preservation of remedies through default, realization, and assignment.

Contact ALF LLP | Real Estate Law in three easy ways:

1. Download the ALF One-Stop Client Portal App 

2. Email us at reception@alfllp.ca 

3. Call us at 905-629-2722