Loan and Security Documents What's in a Commercial Lending Package

The Commitment Letter

The commitment letter is the first binding document in a commercial lending transaction. Issued by the lender after approving the loan, it sets out the key terms of the financing:

Once signed by the borrower, the commitment letter is binding. The borrower's lawyer reviews it carefully before execution many commercial borrowers don't realise that the commitment letter, not just the final loan documents, creates binding obligations.

The Mortgage / Charge

The mortgage (formally called a "charge" in Ontario under the Land Titles Act) is the primary security document it grants the lender a registered interest in the real property as security for the loan. Key provisions:

• Principal amount and interest: The debt secured and the interest rate
• Payment obligations: When and how payments must be made
• Standard charge terms: Standard obligations built into every registered mortgage (insurance, taxes, maintenance, no further encumbrances without consent)
• Default provisions: What constitutes a default (non-payment, breach of covenant, insolvency)
• Enforcement remedies: Power of sale, foreclosure, receiver appointment

The mortgage is registered on title through Teraview. First mortgage priority is established by the order of registration first to register, first in priority (subject to some exceptions).

The General Security Agreement (GSA)

A GSA is a security agreement registered under the Personal Property Security Act (PPSA) that grants the lender a security interest in all personal property of the borrower assets other than real property: equipment, inventory, accounts receivable, intellectual property, and other moveable assets.

In commercial lending, most institutional lenders take both a mortgage (real property security) and a GSA (personal property security) to give them the broadest possible security base. The GSA is registered in the PPSA registry, establishing the lender's priority over the borrower's personal property assets against other creditors.

Assignment of Rents

For income-producing properties (commercial buildings, multi-residential, industrial), the lender typically requires an Assignment of Rents a security instrument that grants the lender the right to collect rents directly from tenants if the borrower defaults. In practice, the assignment is dormant while the borrower is current on the loan tenants continue paying rent to the borrower normally. On default, the lender activates the assignment and collects rents directly.

An assignment of rents is a powerful security tool it gives the lender an income stream immediately upon default, before the property is sold.

Personal Guarantee

For corporate borrowers, lenders almost universally require the principal shareholders and/or directors to personally guarantee the loan. The guarantee makes the guarantors personally liable for the full outstanding balance of the loan if the corporate borrower defaults and the security is insufficient.

Key guarantee provisions to understand:

• Continuing guarantee vs. limited guarantee: Continuing guarantees cover the full outstanding balance at any time; limited guarantees cap the guarantor's liability
• Primary vs. secondary obligation: Some guarantees require the lender to exhaust remedies against the borrower first; others make the guarantor immediately liable on default
• Independent legal advice: Lenders typically require guarantors to obtain independent legal advice and sign an ILA certificate this protects the lender if the guarantor later claims they didn't understand what they signed

Postponement and Subordination Agreements

Where there are multiple lenders (e.g., a first and second mortgage), the lenders need to define their relative priority. A postponement agreement requires one lender to subordinate their claim to another. A intercreditor agreement is used between institutional lenders in more complex financing structures to define enforcement rights, notice obligations, and how proceeds are allocated on enforcement.

Direction re: Funds

A direction re: funds is a simple but essential document it instructs the lender's lawyer where to advance the loan proceeds on closing. Typically, the proceeds are directed to the borrower's lawyer's trust account to fund the property purchase or refinancing transaction.

Conditions to Advance

Before the lender releases funds, all conditions to advance set out in the commitment letter must be satisfied. Common conditions in commercial lending:

• Satisfactory independent appraisal of the property (typically required to be current within 6 months)
• Clean title first mortgage to be registered, no prior encumbrances except as approved
• Environmental clearance no material environmental issues identified
• Building insurance in place, with lender noted as first loss payee
• Executed leases and assignment of rents (for income properties)
• Corporate authority documents (board resolutions authorizing the borrowing)
• PPSA search results satisfactory to lender

Annual Reporting Covenants

Commercial loans typically include ongoing covenants requiring the borrower to maintain certain financial ratios debt service coverage ratio (DSCR), loan-to-value ratio and to provide annual financial statements and rent rolls for income properties. Breach of a covenant is a default under the loan, even if payments are current.