I recall taking out my first bank draft years ago. I inconspicuously tucked it into my front jacket pocket and took the shortest route to my car. I was trying to act normal while stretching the boundaries of my peripheral vision. If anyone had wanted to take my bank draft, they would have had to take my life, too. It turns out that my anxiety was not misplaced after all — not by much, anyway.
A bank draft is a negotiable trading instrument. In layman’s terms, it is a guaranteed cash equivalent. If it’s lost or stolen, a stop payment cannot be placed on it and it cannot be cancelled. Like cash, a bank draft does not, in theory, have an expiry date, either. Not surprisingly, then, a missing bank draft can wreak havoc on any real estate transaction.
Replacement not an easy – or quick – process
While a replacement draft can be issued, the process is far from straightforward. Although the issuer (financial institution) has an obligation to replace a bank draft under the Bills of Exchange Act[1], it is only required to do so if suitable security is provided.
Suitable security may take the form of an indemnity agreement whereby a party agrees to indemnify the issuer in the event the missing bank draft is ever cashed. In cases where the person or entity offering the indemnity lacks financial strength to cover the amount of the missing bank draft if it is ever negotiated, the issuer may require them to provide a surety bond or a fixed term deposit in the full amount of the bank draft.
Further, if an issuer is either resisting or refusing the reissuance of a bank draft, a petition commenced in court may be the only means to compel the issuer to replace a bank draft. A petitioner would nevertheless still have to show that they have provided the issuer with reasonable security. Needless to say, this is an expensive and time-consuming process.
Lost draft = lost time and money
Where the funds from a bank draft are required imminently to effect the purchase of a property, extensions may need to be negotiated, and there’s a real risk that a buyer won’t be able to complete a purchase unless they can arrange some alternate financial arrangements (e.g. bridge loan, second mortgage, etc.).
A buyer who is unable to secure alternative financing may sue a licensee for costs wasted on the first deal, for the increased cost to secure an alternative property and/or for damages paid to a seller if they can’t complete the contract. Similarly, a seller may sue the buyer and/or a licensee for any loss on resale. Rough stuff.
Keep drafts safe from any risks
The above is not intended to be fear-mongering. In a recent incident that came to E&O’s attention, a licensee lost a bank draft after her buyer delivered it to her personally. Despite extensive searches, she never found it. Her dog was the prime suspect, although charges were never proven.
With the completion date mere days ahead, the bank refused to commit to reissuing the lost bank draft. The seller had already committed to the purchase of another property and refused to negotiate an extension of the closing date. The bank eventually agreed to reissue the bank draft, but only after being served with a petition under the Bills of Exchange Act and requiring a 10-year surety bond.
Needless to say, the consequences of losing a bank draft are significant. The loss is akin to losing cash, a dozen gold bars, or a rare Pokémon card. At best, it is anxiety-provoking for both licensees and their clients and can result in multiple collapsed transactions and significant claims being made against licensees.
Just don’t lose them.
Hence, my best advice when it comes to bank drafts is this: just don’t lose them.
Here are some tips to help you know where your bank drafts are at all times:
- While carrying a bank draft is certainly more convenient (albeit less chic) than carrying a suitcase full of cash, it is not necessarily safer. Treat a bank draft like cash and do not let it out of your control.
- When transporting or delivering a bank draft, do it personally. In fact, most major courier companies do not offer insurance for the loss of financial instruments.
- As per Section 27 of RESA[2], deposit bank drafts into trust accounts promptly.
Oh, and keep any bank drafts away from your pets.
[1] S.155
[2] Real Estate Services Act [S.B.C. 2004] c.42
