Helping a Friend, Relative or Partner Qualify for a Mortgage: 1% Ownership Can Carry Much Greater Risk!
My client Eduardo agreed to help his good friend Jonnas qualify for a mortgage to purchase a condominium. They were registered on title as tenants in common: Eduardo held a 1% interest and Jonnas held a 99% interest.
Their understanding was straightforward. Jonnas would pay the mortgage, property taxes, insurance, condominium fees and all other property expenses. He would also receive all rental income and any sale proceeds. Eduardo was helping with financing, without expecting a financial benefit from the property.
Jonnas promised to arrange financing in his own name after one year and have Eduardo removed from both title and the mortgage. They decided against preparing a written trust agreement to save on legal fees.
A year passed, but Eduardo remained on title and responsible under the mortgage despite repeated requests to be released. When he wanted to purchase his own home, the existing mortgage appeared on his credit report. His income was insufficient to qualify for another mortgage while that obligation remained.
Eduardo contacted my office for advice. We first reached out to Jonnas to seek a voluntary resolution, but our correspondence went unanswered. Eduardo was left facing the prospect of court proceedings to resolve an arrangement he had expected to last only a year.
Eduardo’s situation shows why a trust agreement documenting the intended ownership arrangement, together with appropriate co-ownership or exit provisions, should be considered before helping someone buy a property, and why an application under the Partition Act may need to be considered when the promised release does not happen and the other owner refuses to cooperate.
Trust agreements, co-ownership agreements and the Partition Act: three different purposes
A trust agreement records legal and beneficial ownership and typically sets out the rights and obligations of the trustee—the person holding legal title—and the beneficial owner. A co-ownership agreement establishes the rules governing the owners’ relationship, including their financial responsibilities, decision-making and exit arrangements. The Partition Act provides a potential court remedy for people with qualifying interests in a property who cannot agree on its division or sale.
Trust agreement: who is entitled to the financial benefits?
A trust agreement can document that a registered owner holds an interest for another person’s benefit. It distinguishes legal title from beneficial ownership and records the trustee’s obligations.
A trust agreement, together with appropriate related contractual provisions, can address:
· Who holds legal title, who has the beneficial interest and the extent of each interest.
· Who pays the mortgage, property taxes, insurance, condominium fees, repairs and other expenses.
· Who receives rental income and other income, and who is entitled to net sale proceeds.
· The trustee’s authority and obligations, including accounting, recordkeeping and cooperation with a transfer or sale.
· Reimbursement and indemnity obligations if the registered owner pays expenses or incurs liability on the beneficial owner’s behalf.
· The refinancing deadline and the steps required to seek release from title and the mortgage.
· What happens if refinancing fails, payments are missed or cooperation breaks down, including agreed sale procedures.
· What happens on death or incapacity and how the arrangement is intended to continue or end.
For Eduardo and Jonnas, an appropriately prepared agreement could have documented that Eduardo’s role was to assist with financing, while Jonnas was to bear the expenses and receive the rental income and sale proceeds. Together with suitable contractual terms, it could also have addressed reimbursement, the refinancing deadline and the steps to take if refinancing did not occur.
A trust agreement cannot itself release Eduardo from the mortgage or require the lender to approve Jonnas for financing independently.
Co-ownership agreement: how will the arrangement work and end?
A co-ownership agreement can address ownership shares, contributions, expenses, use of the property, rental management and decision-making. It should also provide a clear exit process: notice requirements, valuation methods, buyout terms, sale procedures and a way to resolve disagreements.
A co-ownership agreement can address:
· Ownership percentages and the treatment of down payments, later contributions and money provided by family members.
· How mortgage payments, taxes, insurance, condominium fees, maintenance and major repairs will be shared.
· Who may occupy or use the property, and how tenants, leases, rental income and expenses will be managed.
· How improvements are approved and whether their cost or added value is recognized when proceeds are divided.
· How decisions are made, what requires consent and how financial records will be maintained.
· How title is held and what happens if an owner dies, becomes incapacitated or becomes bankrupt, subject to applicable law.
· An exit process: notice periods, valuation or appraisal methods, buyout terms, refinancing deadlines and sale procedures.
· How net sale proceeds will be divided after debts, sale costs and agreed adjustments.
· How missed payments, breaches and disagreements will be handled, including appropriate negotiation, mediation or arbitration provisions.
In this case, the documents needed to reflect the parties’ actual intentions, including Jonnas’s entitlement to the financial benefits and Eduardo’s expectation of being released after one year. Trust and co-ownership provisions can overlap; the appropriate documents depend on the arrangement.
Each person should obtain independent legal advice, and the arrangement should be accurately disclosed to the lender. Written terms can clarify rights and responsibilities, but they cannot guarantee refinancing or prevent every dispute.
Partition Act: when can the court order a sale?
Ontario’s Partition Act allows a person with a qualifying interest in Ontario land to ask the Superior Court of Justice to divide the property or order its sale. It commonly applies when one co-owner wants to sell and another refuses.
“Partition” means physically dividing land into separate portions. For a condominium unit, that is generally impractical, so a court-ordered sale is usually the relevant remedy.
Eduardo’s registered 1% interest as a tenant in common is relevant to a potential application. A minority share does not, by itself, exclude a co-owner from seeking partition or sale. However, because their understanding was that Jonnas would receive all the financial benefits, Eduardo’s rights must be assessed against the ownership arrangement and supporting evidence.
A qualifying co-owner generally has a presumptive right to partition or sale, but the court retains discretion. An application may be refused in circumstances involving malice, oppression or vexatious intent. A refusal to cooperate does not necessarily prevent a sale, but filing an application does not guarantee an order.
The Act does not automatically remove Eduardo from the mortgage, compel Jonnas to refinance or force him to buy Eduardo’s interest. Other contractual or trust-related remedies may also require consideration.
Before agreeing to help a friend, relative or partner purchase real estate, consider the following legal and financial risks:
1. A 1% ownership interest does not mean 1% mortgage liability
The percentage registered on title and the borrower’s obligations to the lender are separate matters. If the mortgage documents make Eduardo jointly and severally liable, the lender may seek the entire unpaid mortgage debt from him if Jonnas defaults—not merely 1%.
For example, if the unpaid balance were $500,000, Eduardo’s 1% ownership interest would not necessarily limit his liability to $5,000. His exposure could extend to the full unpaid balance, together with recoverable interest and enforcement costs. This is an illustration, not the actual balance in Eduardo’s case.
Jonnas’s promise to make every payment does not alter Eduardo’s obligations to the lender. Even if payments remain up to date, the mortgage can affect Eduardo’s ability to obtain financing for another purchase.
2. Unpaid taxes and condominium fees create additional risks
Mortgage liability is not the only concern. Unpaid property taxes can result in a lien against the property and statutory collection proceedings. Unpaid condominium common expenses can also give rise to a lien against the unit, including interest and reasonable collection costs.
These obligations arise under their own legal rules. They should not be treated as if they all depend on the mortgage’s joint and several liability clause. A private promise that Jonnas will pay does not prevent the municipality or condominium corporation from exercising its legal remedies.
3. Could Eduardo’s other property be affected?
If Eduardo owned other property, it could potentially be affected by enforcement of a monetary judgment against him. The mortgage on the condominium would not automatically become a mortgage over his other properties.
However, if the lender obtained a judgment against Eduardo, it could pursue enforcement measures such as a writ of seizure and sale of land against his interest in other property, subject to applicable procedures, exemptions and existing secured interests. This is a potential risk; it does not assume Eduardo actually owned other properties.
4. A sale does not automatically settle entitlement to the proceeds
If the property is sold, the mortgage, sale expenses and other applicable charges must be addressed. Any remaining proceeds must be distributed according to the parties’ legal entitlements.
Eduardo’s registered 1% interest does not automatically settle whether he is entitled to 1% of the net proceeds. Their understanding was that Jonnas would receive the financial benefits, so registered ownership must be distinguished from beneficial entitlement. The agreement and evidence matter.
Being removed from title and being released from the mortgage are also separate steps. A transfer alone does not release a borrower from the debt. The exit arrangements must address the lender’s requirements and any outstanding liability.
The cost of an undocumented favour
Court proceedings can involve substantial expense, depending on the complexity and course of the dispute. This is a case-dependent estimate.
The consequences also include time spent resolving the dispute, stress and missed opportunities while the mortgage continues to affect borrowing capacity. For Eduardo, the arrangement prevented him from qualifying to purchase his own home.
A promise to remove your name “in a year” needs a realistic financing plan and a clear process if that plan fails. Before agreeing to help, understand your obligations, document the actual ownership arrangement and obtain advice about how you can leave it.
A small interest on title can carry a much greater financial commitment. Saving on legal advice at the outset may ultimately cost far more than preparing the right agreement.
By The Six Law Group
SMP/mi
Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice or create a solicitor-client relationship. Every situation is different. Obtain independent legal advice tailored to your circumstances before entering into a property ownership or mortgage arrangement or taking legal action.