Tenant triggers bank to call note (mortgage)

[Roy N.]

All,

I struggled with deciding under which forum, I should post this bizarre situation: Landlord & Rental Property, Conventional Financing, Off-topic? I settled on Landlord & Rental Property (for 100, Alex), but if a moderator feels it better belongs elsewhere, please move it.

Background:

Late last year I bought out my partner in the company. He had provided his personal guarantee on two properties we hold and one of the Company's obligations under the separation agreement was to remove him as guarantor on these properties.

The bank which holds the mortgage has hummed, hawed, and changed their minds for 9-months on how they would handle the situation. A straight forward Letter of discharge was not something they would entertain. Four months in, the bank decided the mortgage would need to be refinanced and they spent the next 5-months going back and forth over how this should be done {one would think this should have been easy}.

Once the bank had made a "final" decision, they naturally wanted new appraisals on both properties (since we had carried out fairly extensive renovations to each).

The Tenant:

One of the properties in question is a 4+1bdrm/2bath SFR that is one of our student rentals. It is also one that underwent a major renovation (complete basement: 3rms, 2nd bath, kitchenette(no stove) & laundry) over the summer. A new tenant, or rather tenants (there are 4 of them) had signed a lease back in April which commenced on September 01.

One month into the lease, one of the four decides she wants out. She does not approach her housemates (lease-mates) nor us, but posts an advertisement on-line looking for someone to take over her lease on her room. Aside from the poor etiquette, and incorrect facts (it's not her lease on her room), a housemate wanting out of a lease at one of our student properties is an annual occurrence. We tell them this will happen when they sign the lease and have them read & sign, a Schedule to the lease which spells out the procedure to add/remove/substitute a signatory to the lease.

The {bizarre} results:

It so happens the day after this tenant posted her advertisement on-line, I received and e-mail from our mortgage agent at the bank with a link to the advertisement - which is how we (the landlord) and her housemates learned of her desire to leave. In the e-mail, our mortgage agent explained that the underwriter handling our file - who lives in a cubical in southern Ontario - found this advertisement while performing her diligence on the refinance of the property. Based upon the wording of the advertisement, the underwriter concluded that the property was in-fact a rooming house and not being rented as an SFR - despite the fact she had a copy of the lease, the prior lease, and the bank had held the mortgage for 2-years prior.

We initially tried to demonstrate otherwise and re-submitted copies of the lease, a letter from our council and a letter from a City by-law officer attesting that the property was *not* a rooming house. The underwriting agent in question was unwilling, for whatever reason, to admit her judgement was in error, and based on her recommendation the bank declined to proceed with their refinancing and gave us 60-days notice they would be calling the note.

What next?:

I am happy to say, we sat down with another lender and in 72-hours had a new financing arrangement approved. It will likely cost us a penalty with the other bank ... I like how they can arbitrarily call the note, yet still expect us to pay an early termination penalty.

Despite the poor manners (towards her housemates) and the ignorance displayed by our tenant in her advertisement, she was more a catalyst for the underwriters incorrect judgement, rather than a willful agent of trouble.

We have council examining whether we have justification to retain her portion of the Security Deposit under these circumstances (if and when she does leave).

Always something new in this landlord life!

[Michaela G.]

@Account Closed Well, it looks to me as if this would be a very small town, for them to have recognized this property. So, I think a small bank like that would be much more careful to deal in an ethical manner, because word spreads quicker and it's impossible to stay anonymous.

While we've certainly seen unethical behavior behind the curtains of large banks, I do believe that most people that work at banks in smaller capacities, want to do honest work and be helpful.