A Notice of Security Interest (“NOSI”) is lien on personal property. The security interest is granted by the debtor to a creditor over the debtor’s property. In the context of a residential property, I have recently come across a number of situations where a NOSI has been registered on title to a property, in many cases, without the knowledge of the owner. When the owner sells the property, the Buyer will discover the NOSI when its lawyer does a title search on the property. What follows is often a dispute between the parties as to who is responsible for discharging or paying out the NOSI on closing. This column will discuss this issue and provide some guidance for realtors on how to avoid disputes which could result in deal not closing.
A NOSI often comes in the form of equipment on the property such as a water heater, air conditioner, furnace or water softener. In many cases, the owner of the property would receive an offer from a company to allow the owner to purchase such equipment and a contract would be signed setting out the terms of repayment. Unfortunately, many of these door to door companies fail to explain to the homeowner that the equipment is not a true rental, but essentially a rent to own contract which would allow the provided to register a NOSI on title to the owner’s property. The terms of the contract would require monthly payments and in many cases, the cost to buyout the property would be exorbitant and much higher than the actual value of the property. I believe that these types of sales are now prohibited by law however, because so many of them have been sold to unsuspecting consumers, they continue to appear in many real estate transactions. These often create extra work for lawyers and often lead to disputes between the parties.
What can a prudent and careful realtor do to address these NOSIs? Below are some tips:
- If you are the listing agent, you must ask your client to confirm if any of the equipment on the property is a rental or if it is a rent to own and subject to a NOSI. This can be discovered by looking at the contract and calling the supplier to confirm the exact nature and terms of the contract between the supplier and the owner
- Ensure that the Agreement of Purchase and sale has clear and explicit language stating that the Buyer agrees to assume the terms of the contract between the supplier and the Seller and that the Buyer understands and agrees that it will agree to assume any NOSI registered on title to the property and will not require the Seller to discharge the NOSI.
Conversely, If acting for a Buyer, it is important to confirm that any equipment on the property is owned by the Seller and not subject to a rental contract or NOSI. Unfortunately, many Sellers are unaware of the nature of the Agreement between themselves and the supplier. However, as a co-operating realtor, you can protect your Buyer’s interest by inserting a clause into the Agreement of Purchase and Sale that obligates the Seller to discharge any NOSIs registered on title relating to any equipment located on the property. This clause will protect your client and ensure that they are not forced to assume a costly contract with potentially large buyout.
Finally, as is always the case, it is important to ask your Seller the right questions and confirm the responses in writing regarding any rental equipment located on the property. This will protect you from an unhappy Seller if there are any disputes following the closing.