The topics in the Dial-A-Law series provide general information on legal issues within the Province of Alberta. The purpose of this topic is to inform you of your legal rights and responsibilities. This is not legal advice. If you require legal advice, you should contact a lawyer.
This topic discusses Quit Claims.
Quit Claims Defined
When a mortgage is taken out from a bank or lender, the borrower agrees to make payments against the mortgage, keep the property insured, and ensure that the taxes be paid. If a borrower fails to do any of these things, they are “in default” of the mortgage.
If a person is in a situation where they cannot meet their obligations under a mortgage, they can offer a Quit Claim to the lender. A Quit Claim is an agreement between the lender and the borrower to give up specific claims to the other. Essentially, the lender agrees to cancel the debt against the borrower, and the borrower agrees to give up the property to the lender.
If the borrower has some equity in the property and cannot make the necessary payments and the property is worth more than the debt owed, they may want to sell it.
An Alternative to Foreclosure Proceedings
Quit Claims can be an alternative to being forced into foreclosure proceedings by the lender. Foreclosure proceedings on a property are more serious. If a borrower does not respond appropriately, they could lose their home, and their credit rating could be seriously affected, among other things.
Advantages of a Quit Claim
A lender may agree to a Quit Claim because it is quicker than foreclose of the property. Foreclosure proceedings can take up to one year to be completed. Quit Claims are less expensive, as the legal fees are lower and appraisals, advertising, and service costs are avoided.
Equity in the Property
A lender will not agree to an offer of a Quit Claim if the borrower does not have any equity in the property. A borrower should get rid of any registered financial interests on their property before asking the bank or lender to agree to a Quit Claim. These financial interests may be called “encumbrances”.” To find out what encumbrances are registered against your property, a copy of the title of your home is available from any Alberta Registries outlet.
For example, there may be registered financial interests against your home, including other mortgages, encumbrances, or liens registered against the home. If the lender takes the house in a Quit Claim, all financial registrations against the home will transfer with the title to the lender. This would not be beneficial to the lender if the financial registrations are more than the property’s value.
Lender Taking the Property or Suing for the Balance of the Mortgage
Generally, a bank or lender cannot take the property and sue the borrower for the balance owing. Action taken depends upon the type of mortgage held over the property.
A conventional mortgage is where the mortgage amount is less than 80% of the home’s value. If you hold a traditional mortgage, the lender cannot take the property and sue you for the outstanding balance. They can only do one or the other.
You can also hold a mortgage insured by Canada Mortgage and Housing Corporation (CHMC) or the National Housing Act (NHA). This is a mortgage where the borrower paid less than 20% as a down-payment on the purchase of the property. If you hold an insured mortgage by CHMC or NHA, the lender may take your property and sue you for the outstanding balance. You should consult a lawyer if your property is an insured mortgage.
Transfer of Title
If the lender accepts an offer of a Quit Claim, the borrower signs a document called a Transfer of Title. This transfers the title back to the lender.
Signing the Quit Claim
The borrower and the lender both sign the Quit Claim. The Quit Claim states that they agree to transfer the property ownership to the lender, and the lender agrees to release the borrower from any debt owed. Once a Quit Claim is signed, the borrower is required to move out of the house immediately. The move-out date can be negotiated with the lender.
The Quit Claim should clearly state that the debt is canceled. It should also state the items the borrower may take with them when they leave. For example, you may want to take the appliances with you, so long as they are built-in appliances.
For property other than residential property, there are different considerations to be made before signing a Quit Claim. If the property is commercial property, the GST tax considerations and income tax considerations should be resolved.
For non-residential situations, you should consult a lawyer to ensure that you are signing the correct Quit Claim.
Signing a Quit Claim may harm a person’s credit rating. Future creditors can infer, from a credit rating, that a Quit Claim was signed. This may affect their decision to lend money to the person in the future. The Quit Claim will also indicate that the person was cooperative, which could be beneficial.
The signing of a Quit Claim is typically not as bad on a credit rating as a foreclosure. Consult a lawyer to determine whether a Quit Claim is the best option in your situation.
Dial-A-Law is a Calgary Legal Guidance public service project funded in part by the Alberta Law Foundation.