In the Market for a New Furnace or AC? Read this first.

Planning on a new furnace or AC? Read the fine print first before signing a financing or rental agreement.

Not many homeowners consider the long-term legal and financial consequences of replacing or upgrading their household appliances – at least not until it is time to sell or refinance their home.

Every so often, when representing clients on a closing we are made aware of a Notice of Security Interest, a lien, registered against their property for an installed HVAC system. In most instances the liens come as a surprise to homeowners, who ironically have never received a notice of its registration.

In the course of a real estate transaction, once a lien is discovered the purchaser’s lawyer will requisition the seller to remove the lien so as to provide a clean title on closing. A lender in a refinance will likely ask for the lien to be discharged to ensure priority of their mortgage and maintain marketability of title. In either event, the result is a lower net balance to the seller at the end of the transaction.

How and why does a lien get on a homeowner’s title in the first place?

A vendor, or for the purposes of this article, a creditor, providing HVAC equipment that is financed or rented to the homeowner will want to register a lien against the property as a means of ensuring that they have something to fall back on in case the home owner stops making payments. In theory by registering a lien on title, the creditor ensures enforcement of payment upon the sale or refinance of a home. In practice however, the application of a lien within this context is often insidious leaving the homeowner with very little recourse if they disagree with its registration, its validity or the payout amount without initiating a court action.

It is insidious because during a real estate transaction time remains of the essence and if a lien is discovered a few weeks prior to closing your leverage and negotiating power against a creditor is severely diminished. The creditor will often demand a payout in order to discharge the lien and the payout amount is typically far from reasonable and exceeds the cost of the unit and the labour needed to install it.

Your other option is to close, and if the purchaser agrees, undertake to discharge the lien with a judges order which will require a costly court action, often greater or roughly equal to the payout amount. The creditors are betting that you won’t and use this to their advantage.

The creditor also may not be the contractor or vendor that provided the unit to you. All contracts that we have seen allow the original vendor to sell or assign the contract to a collections agency. Sometimes there are agencies whose primary business model is to acquire the contracts only to sell to other agencies at a profit who then manage the accounts and collect. Each time another agency gets involved costs of the payout are increased to maintain profit margins. The real cost however is on the homeowner as their equity gets consumed by parasitic companies that offer very little value for the services provided.

How do homeowners find themselves in this predicament?

The agreement for an appliance could have been entered into by fraudulent or at the very least legally dubious means through door-to-door campaigns by companies that at the time claimed the unit and instillation were free and/or part of a government initiative to replace existing units with high-efficiency ones. See here for more details on how to deal with aggressive door-to-door sales companies. Many of these companies have been renamed, dissolved, or are in receivership but their damage is still being felt. Their portfolios were sold or assigned to collection agencies that have registered liens to protect their assets. It is difficult to quantify the true cost of these door-to-door campaigns to homeowners.

Such tactics are not unique to door-to-door pressure sales, many standard financing or rental agreements for home appliances contain much of the same wording. The word standard should provide little comfort and if in doubt about what you are about to sign or have signed please contact a legal professional for a consultation. If you are about to purchase a home, be sure that your offer is worded in a way so that you do not assume the previous owner’s problems. If selling a home and you suspect that your property may have a lien or are party to a rental agreement consult with legal professional and begin negotiations prior to listing the property, allowing time for negotiations to take place and all options to be explored.

The above is to illustrate in broad terms some risks to consider prior to finalizing your Agreement of Purchase and Sale and is not intended as legal advice. To better understand the options available to you consult with your Toronto Real Estate Lawyer.