2. How is it created?..................................................................14
(a) Review of Charge / Mortgage forms in case book..............................................14 (b) Concept of conveyance or transfer of interest in lands subject to right of redemption 15 (c) Registration (for purpose of notice but not necessary for creation).......................15
B. Interest...............................................................................21 1. The Interest Act Review.........................................................21 2. The Meaning of Interest (Premium/Bonus)....................................21 3. Calculation of Interest.............................................................22
6. Excessive Interest..................................................................35
(a) Criminal Code, section 347 (1)........................................................................35 (b) The Interest Act, section 2..............................................................................36 (c) The Unconscionable Transactions Relief Act, R.S.O. 1990.................................36 Longley v. Barbick, (1963) 36 D.L.R. (2nd) 672.........................................37 Collins v. Forest Hill Investments, (1967) 2 O.R. 351...............................38
2
All Canadian Peoples Finance Ltd. v. Marejan, (1970) 10 D.L.R. (3rd) 35238 William E. Thompson Associates Inc. v. Carpenter, (1990) 69 O.R. (2nd) 545..............................................................................................................39 Transport North American v. New Solutions Financial Corp., (2001) 54 O.R. (3rd) 144...............................................................................................40
C. Promise to Lend Money Promise to Borrow Money.......................40 1. Will a promise to lend or borrow money under a mortgage be specifically enforced if it is wholly executory?.................................................40
Rogers v. Challis, (1859) 54 E.R. 68..................................................................40
2. Will a promise to execute a mortgage be specifically enforced where part or all of the monies have been advanced?.......................................41
Peel v. Peel, (1918) 15 O.W.N. 297...................................................................41 Bank of British Columbia v. Denenfeld, (1974) 38 D.L.R. (3rd) 750..........................41
3. Will a promise to lend money under a mortgage be specifically enforced where the parties have executed a mortgage?..................................41
Schwartzman v. Great West Life Assurance and al., (1955) 17 W.W.R. 37..............41
3. Judicial sale.........................................................................49
Mortgage
Professor: Laird Rasmussen. laird.rasmussen@gmail.com
Mortgagee
Mortgagor
Maturity date
Acceleration clause
discharge means a discharge of a charge and includes a cessation of charge under the Land Titles Act and a certificate of discharge of mortgage under the Registry Act; (mainleve) document includes an instrument as defined in section 1 of the Registry Act; (document) land means land, tenements, hereditaments and appurtenances and any estate or interest therein; (bien-fonds) land registrar means a land registrar appointed under the Land Titles Act or the Registry Act; (registrateur) prescribed means prescribed by the regulations; (prescrit) regulations means the regulations made under this Part; (rglements) successor means an heir, executor or administrator; (successeur) transfer means a conveyance of freehold or leasehold land and includes a deed and a transfer under the Land Titles Act, but does not include a lease or a charge; (cession) transferee means a person in whose favour a transfer is given; (cessionnaire) transferor means a person who gives a transfer. (cdant).
iii. That the chargor has not done, omitted or permitted anything whereby the land is or may be encumbered, except as the records of the land registry office disclose. iv. That the chargor or the chargors successors will insure the buildings on the land as specified in the charge. v. That the chargee on default of payment for the number of days specified in the charge or in the Mortgages Act, whichever is longer, may on giving the notice specified in the charge or required by that Act, whichever is longer, enter on and take possession of, receive the rents and profits of, lease or sell the land. vi. That where the chargee enters on and takes possession of the land on default as described in subparagraph v, the chargee shall have quiet enjoyment of the land. vii. That the chargor or the chargors successors will, on default, execute such assurances of the land and do such other acts, at the chargees expense, as may be reasonably required. viii. That the chargee may distrain for arrears of interest. ix. That on default of payment of the interest secured by the charge, the principal money shall, at the option of the chargee, become payable. Covenant re freehold 2. In a charge of freehold land by the beneficial owner, that the chargor has a good title in fee simple to the land, except as the records of the land registry office disclose. Covenant re leasehold 3. In a charge of leasehold land by the beneficial owner: i. That, despite anything done, omitted or permitted by the chargor, the lease or grant creating the term or estate for which the land is held is, at the time the charge is given, a valid lease or grant of the land charged, in full force, unforfeited and unsurrendered, and that there is no subsisting default in the payment of the rents reserved by or in the performance of the covenants, conditions and agreements contained in the lease or grant at the time the charge is given. ii. That the chargor or the chargors successors will, while the money secured by the charge remains unpaid, pay, observe and perform all the rents reserved by and all the covenants, conditions and agreements contained in the lease or grant and will indemnify the chargee against all costs and damages incurred by reason of any non-payment of rent or non-observance or non-performance of the covenants, conditions and agreements. Multiple parties (2) Where a charge to which subsection (1) applies is given by or to more than one person, the covenants deemed to be included by that subsection are made, (a) by the chargors jointly and severally, unless the charge specifies otherwise; and (b) with the chargees jointly, unless the money secured is expressly secured to them in several shares or distinct sums. Amendment of implied covenants (3) A covenant deemed to be included in a charge by subsection (1) may, in a schedule to the charge, or in a set of standard charge terms filed under subsection
8 (1) and referred to in the charge by its filing number, be expressly excluded or be varied by setting out the covenant, appropriately amended. Enforcement of covenant (4) A covenant deemed to be included in a charge by subsection (1) may be enforced by a successor or assignee of the chargee. Prescribed terms (5) A charge in the prescribed form shall be deemed to include the prescribed standard charge terms, unless a set of standard charge terms filed under subsection 8 (1) is referred to in the charge by its filing number.
Amendment of prescribed terms (6) A prescribed standard charge term deemed to be included in a charge by subsection (5) may, in a schedule to the charge, be expressly excluded or be varied by setting out the term, appropriately varied. (7) REPEALED: 1998, c. 18, Sched. E, s. 94. Filing of standard charge terms 8. (1) A person may file with the Director, in the prescribed manner and form, a set of standard charge terms and, with the consent of the Director, may file a set of standard charge terms in a form other than the prescribed form. Amendment of set of standard charge terms (2) A set of standard charge terms filed under subsection (1) may be amended by filing a further set of standard charge terms under subsection (1). Duties of Director (3) Where a set of standard charge terms is filed under subsection (1), the Director shall, (a) promptly assign a filing number to the set and advise the person who filed the set of its filing number; and (b) ensure that copies of the set, identified by its filing number, are provided to the land registry offices for the parts of Ontario designated under this Part within thirty days of the day on which the set was filed. Public inspection (4) Every set of standard charge terms filed under subsection (1) shall be made available in the prescribed manner and upon payment of the required fee for public inspection and copying in the land registry offices for the parts of Ontario designated under this Part on a day not later than thirty days after the day on which the set is filed with the Director. (5) REPEALED: 1994, c. 27, s. 85 (1). Electronic filing (6) The Director may require a person to file standard charge terms in an electronic format and may require that the charge terms be delivered by direct electronic transmission. Effect of filing: incorporation by reference 9. (1) A charge shall be deemed to include a set of standard charge terms filed under subsection 8 (1) if the set is referred to in the charge by its filing number.
10
Amendment of standard charge terms in individual charge (2) A term deemed to be included in a charge by subsection (1) may, in a schedule to the charge, be expressly excluded or may be varied by setting out the term, appropriately amended. Only one set to be incorporated by reference (3) Where a charge refers to more than one set of standard charge terms by their filing numbers, the charge shall be deemed to include only the set that was filed last. Express term governs (4) Where there is a conflict between an express term in a charge and a term deemed to be included in the charge by subsection (1), the express term prevails.
When charge may be registered 10. (1) A charge that refers to a set of standard charge terms filed under subsection 8 (1) by the sets filing number shall not be registered before a copy of the set is available in the land registry office where the charge is to be registered, as described in subsection 8 (4). Saving (2) The fact that a charge is registered in a manner that contravenes subsection (1) does not, in itself, invalidate the registered charge. Disclosure: offence 11. A person named as chargee in a charge containing standard charge terms that have been filed under subsection 8 (1) who takes the charge before providing the chargor or the chargors solicitor with a copy of the standard charge terms is guilty of an offence and on conviction is liable to a fine of not more than $5,000. Director may require filing 12. (1) Where the Director is satisfied that a charge presented for registration contains terms that should be filed under subsection 8 (1) because of the frequency of their use in charges in favour of the chargee, the Director may give the chargee notice in the form and manner required by the Director that on and after a day specified by the Director, no charge in favour of the chargee that sets the terms out expressly shall be registered without the Directors authorization. Day to be specified (2) The day specified by the Director in a notice given under subsection (1) shall be a day at least 120 days after the date of the notice. No registration where filing required (3) Where the Director has given a notice under subsection (1), no charge in favour of the chargee that sets the terms out expressly shall be registered without the Directors authorization on or after the day specified by the Director. Seal not required 13. (1) Despite any statute or rule of law, a transfer or other document transferring an interest in land, a charge or discharge need not be executed under seal by any person, and such a document that is not executed under seal has the same effect for all purposes as if executed under seal. Guarantee
11
2. How is it created?
A mortgage is created by a contract. See page 10 of the course pack for a sample of a contract of Mortgage. A sample of a charge/mortgage form is on page 19 of the course pack. For the electronic one, see page 20 of the course pack. The set of standard charge/mortgage terms are on page 15-18 of the course package.
The concept of conveyance or transfer of interest in lands is subject to right of redemption. However, a chargor and chargee are entitled to all the legal and equitable rights and remedies that would be available to them if the chargor had transferred the land to the chargee by way of mortgage see section 6 (1) and (3) of Land Registration Reform Act above.
(c) Registration (for purpose of notice but not necessary for creation)
Registration is not necessary for the creation of the charge. Registration is for the purpose of establishing priorities. It follows the erga omnes principle. Registration gives notice to the world. If registered, after satisfactory payment of the debt the mortgagor can ask for the redemption of the register. This is an operation of re-conveyance.
4. Discharge
A mortgage grants an interest in the real estate to the mortgagee, and once it is paid in full, a mortgage discharge must be recorded in the land records.
12
A recorded mortgage discharge certifies that the mortgage has been satisfied and releases the interest of the lender in the property and thereby clears the title.
(a) Mortgage Act, section 2 and section 12 (3) (8) and (9).
Obligation on mortgagee to transfer instead of reconveying 2.(1)Despite any stipulation to the contrary, where a mortgagor is entitled to redeem the mortgagor may require the mortgagee, instead of giving a certificate of payment or reconveying and on the terms on which the mortgagee would be bound to reconvey, to assign the mortgage debt and convey the mortgaged property to any third person as the mortgagor directs, and the mortgagee is bound to assign and convey accordingly. Idem (2)The right of the mortgagor to require an assignment belongs to and is capable of being enforced by each encumbrancer or by the mortgagor, despite any intermediate encumbrance; but a requisition of an encumbrancer prevails over that of the mortgagor, and as between encumbrancers a requisition of a prior encumbrancer prevails over that of a subsequent encumbrancer. Exception (3)This section does not apply if the mortgagee is or has been in possession. 12. [] [] Where mortgagee cannot be found (3)When a mortgagor or any person entitled to pay off a mortgage desires to do so and the mortgagee, or one of several mortgagees, cannot be found or when a sole mortgagee or the last surviving mortgagee is dead and no probate of his or her will has been granted or letters of administration issued, or where from any other cause a proper discharge cannot be obtained, or cannot be obtained without undue delay, the court may permit payment into court of the amount due upon the mortgage and may make an order discharging the mortgage. [] Death of mortgagee, order for discharge (8)When a mortgagee has died and all money due upon the mortgage was paid to him or her in the mortgagees lifetime or has been paid to a person entitled to receive the same after the mortgagees death or where in any other case it appears that all money due upon the mortgage has been paid and for any reason a discharge or reconveyance cannot be obtained without undue delay and expense the court may make an order discharging the mortgage. Registration of order discharging (9)Upon the registration of an order discharging a mortgage it has the same effect as the registration of a certificate of discharge signed by the mortgagee would have under the Registry Act.
(b) Registry Act, section 56 (1) (8) and (10), sections 62 and 63.
13
Discharge of mortgage 56. (1) A certificate of discharge, in the prescribed form, of a registered mortgage, executed by the mortgagee, the executor, administrator, estate trustee or assignee of the mortgagee, or by such other person as may be entitled by law to receive the money and to discharge the mortgage, may be registered. [] Deletion of entries (8) If the land registrar is satisfied that a registered instrument purporting to discharge a mortgage validly discharges the land described in the discharging instrument from any claim arising under the mortgage or under any other instrument relating exclusively to the mortgage, the land registrar shall, (a) delete from the abstract index, in the manner that the Director of Titles specifies, the entry of the mortgage and all other instruments relating exclusively to the mortgage; or (b) make an entry in the abstract index in the manner that the Director of Titles specifies indicating that the entry of the mortgage and all other instruments relating exclusively to the mortgage is deleted. [] Effect of deletion (10) If the land registrar has complied with subsection (8), the land described in the discharging instrument is not affected by any claim under the mortgage or under any other instrument relating exclusively to the mortgage. Partial discharge of mortgage 62. Where only part of the land mortgaged by a registered mortgage is to be discharged therefrom, a certificate of discharge, in the prescribed form, that includes a local description of the land, executed by the mortgagee, the executor, administrator, estate trustee or assignee of the mortgagee, or by such other person as may be entitled by law to receive the money and to discharge the mortgage, may be registered. Effect of registration of discharge of mortgage 63. (1) If a certificate of discharge under this Act and the regulations that complies with Part I of the Land Registration Reform Act and the regulations made under it is registered for a mortgage described in subsection (2), the certificate is valid and effectual as a conveyance to the mortgagor, the heirs or assigns of the mortgagor of the mortgagors original estate in the mortgaged land or in the part of the land described in the certificate, as the case may be. Mortgage predating (2) Subsection (1) applies to a mortgage executed, (a) before September 6, 1984, in the case of a mortgage affecting land in the County of Oxford as it existed on December 31, 1980; or (b) before January 17, 1985, in the case of a mortgage affecting land elsewhere in Ontario.
102. (1) The land registrar shall, on the requisition of the registered owner of land and on due proof of the satisfaction of a charge thereon, or may, on the requisition of the registered owner of a registered charge or of the personal representative of the registered owner of the registered charge or on the certificate of such registered owner or the personal representative of the registered owner of the satisfaction thereof, note on the register in the required manner the cessation of the charge, and thereupon the charge ceases. Other encumbrances (2) The land registrar may in like manner and with the like effect note the cessation of any other encumbrance. Partial cessation of charge (3) On the requisition or certificate of the registered owner of a registered charge or of the personal representative of such owner authorizing or certifying the discharge of any part of the land therefrom, the land registrar may note on the register the discharge of such land from the charge, and thereupon the charge ceases as to the land discharged. Death of person certifying to cessation of charge (4) The death of the person who signed the requisition or certificate does not revoke or otherwise affect the discharge.
15
according to the forms of covenants for such purposes set forth in Schedule B to the Short Forms of Mortgages Act, being chapter 474 of the Revised Statutes of Ontario, 1980, subject to the provisions of that Act; on mortgage of leaseholds, by beneficial owner (b) in a conveyance by way of mortgage of leasehold property, the following further covenants by the person who conveys and is expressed to convey, as beneficial owner, namely, (i) that the lease or grant creating the term or estate for which the land is held is, at the time of conveyance, a good, valid and effectual lease or grant of the land conveyed, and is in full force, unforfeited, and unsurrendered, and in no wise become void or voidable, and that all the rents reserved by, and all the covenants, conditions and agreements contained in the lease or grant and on the part of the lessee or grantee and the persons deriving title under the lessee or grantee to be paid, observed and performed, have been paid, observed and performed up to the time of conveyance, and (ii) that the person so conveying, or the persons deriving title under that person, will at all times, as long as any money remains on the security of the conveyance, pay, observe and perform, or cause to be paid, observed and performed, all the rents reserved by, and all the covenants, conditions and agreements contained in the lease or grant, and on the part of the lessee or grantee and the persons deriving title under the lessee or grantee to be paid, observed and performed, and will keep the person to whom the conveyance is made and those deriving title under that person indemnified against all actions, proceedings, costs, charges, damages, claims and demands, if any, to be incurred or sustained by that person or those persons by reason of the non-payment of such rent, or the non-observance or non-performance of such covenants, conditions and agreements, or any of them. Implied covenants in mortgages are joint and several 8.In a mortgage, where more persons than one are expressed to convey as mortgagors, or to join as covenantors, the implied covenants on their part shall be deemed to be joint and several covenants by them, and where there are more mortgagees than one the implied covenant with them shall be deemed to be a covenant with them jointly unless the amount is expressed to be secured to them in shares or distinct sums, in which latter case the implied covenant with them shall be deemed to be a covenant with each severally in respect of the share or distinct sum secured to each mortgagee. Exception 9.Sections 7 and 8 do not apply to a mortgage of land in a part of Ontario designated under Part I of the Land Registration Reform Act, that is executed on or after the day on which the land is designated under clause 14 (a) of that Act.
Land Registration Reform Act, section 7 (see above). This section provides the statutory basic obligations of the Mortgagor, which can be substituted by an agreement as seen in page 15-17 of the course pack.
16
The mortgagor is under a contractual obligation to perform the payment of the principal amount of money borrowed and its respectively interest.
(b) Taxes
Payment of taxes is commonly put as an obligation for the mortgagor because they have priority over any mortgage. Once it is put as a mortgagors obligation, he/she has the obligation to perform this payment.
(c) Insurance Mortgages Act, section 7 / Land Registration Reform Act, section 7
The mortgagee usually demands insurance because the value of the guarantee must be secure so the value of the debt protected by the mortgage is also secured. The insurance can be used by the mortgagor to repair the object of the security pay the loan; or replace the security.
(d) Repair (not to commit waste usually actions which diminish the value of the security)
Another common obligation for the mortgagor is to repair the object of guarantee in a mortgage for obvious reason, that is, preserve its value so the value of the debt protected by the mortgage is secured.
(a) Foreclosure
Foreclosure is an action brought by a mortgagee when a mortgagor is in default asking that a day be fixe on which the mortgagor is to pay off the debt, and that in default of payment the mortgagor may be foreclosed of, that is, deprived of her or his right to redeem, the equity of redemption. That is, to terminate all subsequent rights of redemption.
17
Generally, an order of foreclosure transfers title to the mortgagee and terminates the mortgagors equity of redemption.
(c) Possession
If a mortgagor fail to pay the loan repayments in accordance with the mortgage and are in default of the mortgage, the mortgagor may exercise their right to take possession of the property that guarantee the debt.
(e) Distress
A distress is a lawfully action of seizing the mortgaged property extrajudicially by the mortgagee in order to enforce his/her right such as payment of outstanding arrears elapsed from the contract and in default by the mortgagor.
18
B. Interest
1. The Interest Act Review
RATE OF INTEREST No restriction except by statute 2. Except as otherwise provided by this Act or any other Act of Parliament, any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on. Interest rate when none provided 3. Whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum. When per annum rate not stipulated 4. Except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the con- tract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent. Recovery of sums paid otherwise 5. If any sum is paid on account of any interest not chargeable, payable or recoverable under section 4, the sum may be recovered back or deducted from any principal or interest payable under the contract.
19
In the case of bonus, the mortgagee may lose some interest, but in other hand, it can use the money advanced to lend it to someone else.
3. Calculation of Interest
Interest can be totally calculated in advance, but payable in the end of the term, or on a maturity date. Interest can also be calculated in half-term advance. In this case, the other half of the interest is calculated over the balance of the debt at the end of the first half of the term. Interest can be finally calculated in the end of the stipulated term, over the balance at the end of this stipulated term. In this case the money paid until the calculation of the interest has no interest. In obiter: the fairer calculation is when the calculation is made monthly in advance and the payment of installments applies to reduce the interest proportionally to the calculation period, with the overpayment, if any, used to reduce the principal amount of the debt.
20
Such a method of calculation charges interest in advance and gives no credit for the monthly payments made on account of principal. Rather, the proper method to be used requires the mortgagee to use the capital portion of each monthly payment to write down the principal outstanding each month.
21
The deemed reinvestment principle, although not a rule of law, applies whenever interest is to be calculated "not in advance" and the mortgagor agrees to pay interest more frequently (that is, at shorter intervals) than it is to be calculated. It is not necessary that the mortgage require the mortgagee to reinvest interest as and when paid during the calculation period.
This section can be used only from the day one after the fifth year, when applicable. To avoid the application of section 10(1) of Interest Act, the parties can modify the date of the mortgage, by re-dating it.
22
23
A contract cannot be made out of section 10(1) of the Interest Act. So, he would still be free to pay off the mortgage on compliance with the statute.
Litowitz v. Standard Life Assurance Co., (1997) 30 O.R. (3rd) 579 Vale et al. v. Sun Life Re Glied and Confederation Life Insurance Company et al
These three cases were heard altogether Individuals who were beneficial owners are not entitled to rely on the prepayment rights when mortgages were given by corporations acting as their nominee or trustee. When a mortgage is granted by corporations on property, and later individuals acquired the mortgaged property, then section 10(2) of the Interest Act applies. Therefore, individuals who acquired properties previously mortgaged cannot exercise the right prescribed by section 10(1) of the Interest Act. The exemption to the right to prepay is determined by the corporate status of the mortgagor. Generally, when the mortgages were given by a corporation within the meaning of the exemption, the fact that a corporate mortgagor was acting as nominee or trustee for a non-corporate beneficial owner did not entitle the beneficial owner to the statutory right of prepayment. However, when a corporation and an individual grant jointly a mortgage on a property, the provision of section 10(1) of the Interest Act is available. This is so because the individual is clearly shown on the mortgages as a co-mortgagor and assumes responsibility in his/her personal capacity. Also, determining an individual's statutory rights by reference to whether he or she holds a minority or majority percentage interest is an approach not prescribed by the legislation and which cannot be imported therein.
Kucor Construction & Developments & Associates v. Canada Life Assurance Co., (1997) 32 O.R. (3rd) 548
The law regards only individuals and corporations as distinct legal entities. A partnership does not exist as a legal entity distinct or separate from its partners and is not capable of holding title to property or of mortgaging or granting security on property.
24
The property of a partnership is not owned by the partnership as a distinct legal entity but rather is property in which the partners have undivided ownership interests. In a limited partnership, the legal title is held by the general partner for the benefit of all the partners. Accordingly, the title to the property remained with the general partner, which held the property for the benefit of all the partners in the limited partnership. The mortgage documents must be interpreted as having been entered into by the general partner of the limited partnership on behalf of all the partners. The general partner was a corporation and not entitled to the right to redeem under section 18(1) of the Mortgages Act.
If the blended payments of principal and interest amount to more than the principal and interest at the rate stated, then, by section 7 no greater interest is recoverable than the rate stated.
25
26
What the prescribed statement of section 6 of Interest Act is to show is: i. the amount of such principal money advanced, I.e., the amount of the principal money secured which has been advanced and is to be repaid in the blended payments; i. the rate of interest chargeable thereon,. I.e., the rate at which the interest to be paid is to be computed. i. that such interest shall be calculated yearly or half-yearly not in advance, and that the statement must show that it is intended to be so computed. The adjective chargeable clearly relates to and qualifies the word rate. The participle calculated equally clearly relates to and qualifies the word interest. It cannot apply to the word rate; a rate of interest is not calculated. Thus, the statement to meet the requirements of the statute are satisfied if the mortgage shows the amount of principal money advanced and to be repaid, the rate of interest per annum which it is to bear and, if it be so intended, that such interest is to be calculated half-yearly. A stipulation for interest to be computed in advance or more frequently than half-yearly is altogether forbidden; a statement showing that interest is to be computed or is to be calculated in advance would not in either case render such a calculation legal; then no interest whatever would be "chargeable, payable or recoverable," on such a mortgage. Greymac Truscto v. Gould, (1983) 30 R.P.R. 157. This case superficially defines a plan that involves an allowance of interest on stipulated repayments purported by section 6 of Interest Act. In this case it was agreed between counsel that the principal or interest is not made payable on a sinking fund plan or on any plan under which the payments of principal money and interest are blended. The defendants took the position that it is a mortgage where moneys are repayable on any plan that involves an allowance of interest on stipulated repayments. If that is correct, then s. 6 applies but if not, it does not apply. The court, turning to the section itself, noted that the section speaks of payments of money and interest and then speaks of a plan involving an allowance of interest. The court then stated that allowance must mean something different than payment and on the basis of other cases cited, it appears that quite possibly the third category of mortgage is a mortgage in which a certain interest rate is stipulated but it is
27
then provided that the rate or the amount of interest will be reduced if the principal is paid at certain fixed times. By deciding the case, the court judged that at any rate, the mortgage in case constituted a mortgage of that third class. Therefore it does not fell within section 6 of the Interest Act and that defence which is a defence as to interest only does not raise a triable issue.
28
(2) Nothing in this section has the effect of prohibiting a contract for the payment of interest on arrears of interest or principal at any rate not greater than the rate payable on principal money not in arrears. Payment of principal upon default 17.(1)Despite any agreement to the contrary, where default has been made in the payment of any principal money secured by a mortgage of freehold or leasehold property, the mortgagor or person entitled to make such payment may at any time, upon payment of three months interest on the principal money so in arrear, pay the same, or the mortgagor or person entitled to make such payment may give the mortgagee at least three months notice, in writing, of the intention to make such payment at a time named in the notice, and in the event of making such payment on the day so named is entitled to make the same without any further payment of interest except to the date of payment. Exception (2)If the mortgagor or person entitled to make such payment fails to make the same at the time mentioned in the notice, the mortgagor or person is thereafter entitled to make such payment only on paying the principal money so in arrear and interest thereon to the date of payment together with three months interest in advance. Saving (3)Nothing in this section affects or limits the right of the mortgagee to recover by action or otherwise the principal money so in arrear after default has been made.
Tapio v. Kajander, [1965] 1 O.R. 431. Section 17 of Mortgage Act as a penalty is only available to the mortgagor. If he/she is not in default. If the mortgage contained a clause that, in the event of sale of foreclosure proceedings, the mortgagee should be entitled to add a stated sum to his mortgage-debt, this provision in the mortgage would have the effect against which section 17 of Mortgage Act is aimed. It would be termed a bonus, but would be in effect a penalty for default in prompt payment. It clearly would have the effect of increasing the charge on the arrears beyond the rate of interest payable on the principal money not in arrear, and so comes within the express prohibition of section 8 of Interest Act. In short, the mortgagee cannot use the text of section 17 of Mortgage Act in a contractual provision on his/her own favour because such clause would have the effect to contravene section 8 of Interest Act. A consideration of the authorities indicates that the only way to impose a penalty for failure to make prompt payments without falling
29
foul of the Interest Act is to stipulate for a greater rate and provide for a lower rate if payments are made promptly. Glinert v. Kosztowniak, (1972) 2 O.R. 284 A bonus clause requiring payment of three months interest in the event of the mortgagors default, payable on any proceedings taken by mortgagee on default of mortgage, is invalid as creating a penalty under section 8 of Interest Act. Parkhill v. Moher, [1977] 17 O.R. (2d) 543, 80 D.L.R. (3d) 754 As regards to section 17 of the Mortgage Act, the court does not consider it as a penalty imposed because of the default. The provision for three months notice or bonus applies only where the mortgagor seeks relief from the consequences of non-payment and restoration of the mortgagor's pristine position. It is the agreed cost of the indulgence in exercising a statutory right. In deciding whether a bonus is payable one must distinguish between the case where the mortgagor is attempting to make payment after default, and the case where the mortgagee is attempting to recover moneys that are in default. If there is default and the mortgagee is not taking any steps to enforce the mortgage, the mortgagor can exercise his/her right prescribed by section 17 of the Mortgage Act. Conversely, this section is not applicable when the mortgagee takes action to recover the moneys after default. Where a mortgage provides for the payment of a bonus of three months interest on any default, and where default occurs on the maturity of the mortgage, the mortgagee is not entitled to the bonus of three months interest. Such a provision in the mortgage is rendered nugatory or inoperative by section 8(1) of the Interest Act, even where the default occurs upon maturity, as it increases the charge beyond the rate payable on principal not in arrears. [This is arguable because theres no more principal not in arrears]. Re 459745 Ontario Ltd. v. Wideview Holdings, (1987) 59 O.R. (2nd) 361, 37 D.L.R. (4th) 765. This case reinforces Parkill v. Moher. The clause requiring three months interest on default amounted to a bonus or penalty, which had the effect of increasing the interest rate
30
beyond that stipulated by the mortgage, contrary to section 8 of the Interest Act.
Dickson v. Bluestein (in Trust), (1990) 2 O.R. (3d) 131. This case supports Parkill v. Moher. Bonus clause requiring payment of additional three months interest in event of default by mortgagor is unenforceable as creating penalty and therefore contrary to section 8 of the Interest Act. Mastercraft Properties Ltd. v. El Ef Investments Inc., (1993) 14 O.R. (3rd) 519. The major issue in this case was whether or not the provisions of section 17(1) of the Mortgages Act are in conflict with the provisions of section 8 of the Interest Act. The parties attacking the covenants took the position that section 17(1) was unconstitutional because it provides for a "fine" or "penalty" of the type prohibited by section 8 of the Interest Act. Section 17(1) gives a mortgagor a right, when in default of payment of principal, to repay that principal on giving three months notice to the mortgagee of his intention to pay, and protects him from any further payment of interest except to the date of payment. Such interest would merely constitute payment for the use of the principal during the notice period. The provision protects the mortgagor by permitting payment of arrears without penalty, or by permitting early redemption at a price; and it protects the mortgagee by giving him a three-month period during which to arrange for reinvestment of his principal, or monies to compensate for lack of that notice. Nevertheless, the option is that of the mortgagor. Covenants which go beyond what is provided for in section 17(1) of the Mortgages Act may well run into conflict with section 8 of the Interest Act. However, that does not affect the constitutional validity of section 17(1), or the enforceability of covenants which do not go beyond its provisions. Covenants which provide the protection intended by section 17(1) are in harmony rather than in conflict with the provisions of section 8. Both enactments can stand as constitutionally valid federal and provincial law. OShanter Development Co. v. Gentra Canada Investments Inc., (1994) 43 R.P.R. (2nd) 131, affirmed (1995) 47 R.P.R. (2nd) 24.
31
The prepayment of a bonus does not contravene section 8 of the Interest Act, for the bonus is not a penalty being paid in punishment for breach of the mortgage agreement. The prepayment bonus constituted a payment required for the privilege of paying off the mortgage in advance. If mortgagee gives notice to a mortgagor for redemption in a sum inferior than the real amount due, the mortgagee has to accept this amount as a redemption for the debt once payment is tender by the mortgagor within the notices period. Only after the period expired without further payment, the mortgagee can correct the value of the amount due. Ialongo v. Serm Investments Ltd., (2007) 54 R.P.R. (4th) 310 After enforcement had begun, a mortgagor could not rely on section 17(1) to claim the prepayment bonus in order to pay off the mortgage in advance. A mortgagor may only claim the bonus payment after enforcement if the mortgage contract provides for the bonus. In this case, since the bonus was disallowed, it could be concluded that the mortgage contract did not provide for the payment of the bonus. Peat Marwick Thorne Inc. (Trustee of the Estate of T.F.P. Investments Inc.) v. Beacon Realty Co., (1991) 5 O.R. (3rd) 567. In this case, one of the issues was of costs and whether the provisions of the mortgage for interest payable on default or maturity of 15 per cent offended section 8 of the Interest Act. In this case, although the mortgage did not provide for interest until default or maturity, the parties had made allowance for the cost of the money in arriving at the terms of the loan agreement. The effective rate of return prior to default was 56.3 per cent per annum compounded continuously. Accordingly, the stipulation for interest at maturity or upon default did not have the effect of increasing the effective interest component and the mortgage did not offend the principle of section 8 of the Interest Act. Reliant Capital Ltd. v. Silverdale Development Corporation et al., (2006) 270 D.L.R. (4th) 717. A lender made a mortgage loan to borrowers for a commercial real estate development on 40 acres of vacant land. The interest provision in the mortgage provided that the interest rate payable would be 14% per annum for the first 12 months following the Interest Adjustment Date and 20% per annum thereafter.
32
One of the issues in this case was whether an increase in the rate of interest in a mortgage one month before the maturity date offended section 8 of the Interest Act. The appellant sought a declaration in BC Supreme Court that the interest clause in a mortgage was enforceable. A master of the court dismissed the application, holding that the stipulation for an increase in the interest rate one month before the mortgage was due was in the nature of a fine or penalty, and therefore unenforceable. The appellants appeal from the masters order to a judge in chambers was dismissed. The chambers judge held that the true purpose or substance of the interest clause was to create a penalty in the form of an increased rate of interest for non-performance, and therefore violated section 8 of the Interest Act. The master and the chambers judge considered whether the interest provision was saved as having a legitimate commercial purpose or a business reason that did not amount to a penalty. Both held that in the circumstances of the case the interest clause did not satisfy those tests. The BC Supreme Court held that the provision did not offend section 8 of the Interest Act. The fact that the increased rate was not dependant on default having occurred was not determinative. Section 8 did not prohibit rates of interest that were higher on arrears than on monies owing that were not in arrears, only if the increase was dependant on default; the section prohibited higher interest charges on arrears than on other monies owing regardless of the contractual language that created such a charge. In this case, the interest rate became effective by the passage of time, not by payment falling into default. The interest clause did not charge more interest in the arrears that on the other monies owing. It simply stipulated for a higher interest rate effective one month before maturity, and applied equally to arrears and to monies owing that were not in arrears. Thus, it did not offended section 8 of the Interest Act.
6. Excessive Interest
(a) Criminal Code, section 347 (1)
Criminal interest rate 347. (1) Despite any other Act of Parliament, every one who enters into an agreement or arrangement to receive interest at a criminal rate, or receives a payment or partial payment of interest at a criminal rate, is
33
(a) guilty of an indictable offence and liable to imprisonment for a term not exceeding five years; or (b) guilty of an offence punishable on summary conviction and liable to a fine not exceeding $25,000 or to imprisonment for a term not exceeding six months or to both.
Following the Criminal Code, section 347 (2), criminal rate means an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds sixty per cent (60%) on the credit advanced under an agreement or arrangement.
34
reopen former settlements (b) despite any statement or settlement of account or any agreement purporting to close previous dealings and create a new obligation, reopen any account already taken and relieve the debtor from payment of any sum in excess of the sum adjudged by the court to be fairly due in respect of the principal and the cost of the loan; order repayment of excess (c) order the creditor to repay any such excess if the same has been paid or allowed on account by the debtor;
set aside or revise contract (d) set aside either wholly or in part or revise or alter any security given or agreement made in respect of the money lent, and, if the creditor has parted with the security, order the creditor to indemnify the debtor. Exercise of powers of court, 3. The powers conferred by section 2 may be exercised, in action by creditor (a) in an action or proceeding by a creditor for the recovery of money lent; in action by debtor (b) in an action or proceeding by the debtor despite any provision or agreement to the contrary, and despite the fact that the time for repayment of the loan or any instalment thereof has not arrived; in other proceedings (c) in an action or proceeding in which the amount due or to become due in respect of money lent is in question. Relief by way of originating notice 4. (1) In addition to any right that a debtor may have under this or any other Act or otherwise in respect of money lent, the debtor may apply for relief under this Act to the Superior Court of Justice which may exercise any of the powers of the court under section 2. Appeal (2) An appeal lies to the Divisional Court from any order made under subsection (1). Saving holder for value, and existing jurisdiction 5. Nothing in this Act affects the rights of a assignee or holder for value without notice, or derogates from the existing powers or jurisdiction of any court.
The requirements for the Unconscionable Transaction Relief Act is applicable are: i. The cost of loan must be excessive. ii.The transaction is harsh and unconscionable. Those requirements are cumulative and prescribed by section 2 of the Act.
35
The approach in each case must be a teleological one (that is, on a case-by-case basis).
Longley v. Barbick, (1963) 36 D.L.R. (2nd) 672 Although section 6 of Interest Act does not apply to exclude recovery of interest on a mortgage for twice the sum actually advanced when the 100% bonus was stipulated in a separate collateral agreement, nevertheless the Court has power to rectify the mortgage to secure the amount actually advanced where on the evidence it is satisfied that the collaterally agreed-upon bonus is unfair and unconscionable, as where it is exacted, in respect of a first mortgage on a valuable property which would stand a first mortgage, of up to twice the sum actually advanced. The result is that a collateral advantage may now be stipulated for by the mortgagee provided that he has not acted unfairly or oppressively, and provided that the bargain does not conflict with the third form of the principle. This is that a mortgage cannot be made irredeemable, and that any stipulation which restricts or clogs the equity of redemption is void. Non est factum may properly be pleaded to avoid a 100% bonus provision exacted in an agreement collateral to a first mortgage on valuable property where the mortgagor was misled as to the contents of the documents she signed so that her mind did not go with her signature. Hence, even a bona fide purchaser of the mortgage cannot insist on payment to the extent to which the mortgage incorporates the bonus as part of the principal sum, and the mortgagor is entitled to have the mortgage rectified. Although there is no fiduciary relationship between mortgagee and mortgagor, a mortgagee who deals with inexperienced mortgagors of limited education must, at his/her own risk and in his/her own interest, ensure that they understand the transaction. Evidence in this case showed that the recitals in the mortgage and other supporting documents of a collateral advantage did not draw the attention of the mortgagors (as the word bonus would very likely have done) to the fact that the 7% interest was to be charged on $2,450 and not merely on the $1,500 actually advanced to them. A mortgage with a bonus is not a document of a character sufficiently different from a mortgage without a bonus to justify a reliance by plaintiffs upon the defence of non est factum, nor did there appear to be any active misrepresentation or fraudulent non-disclosure by defendant. However, the transaction would be described as harsh and unconscionable both in equity and under the Unconscionable Transactions Relief Act, the excessive bonus and 23% to 63% realized by defendant
36
(depending upon the mode of calculation adopted) being evidence of overreaching by defendant and in itself sufficient to attract statutory relief. The assignee of the impugned mortgage, although taking subject to such equities as an overreaching by the assignor of the original mortgagor, acted throughout in good faith and without notice of any impropriety and was protected by the laches of the plaintiffs. . The court of equity exists for many purposes and one of these purposes is the protection of unsophisticated and defenseless persons against the exactions of conscienceless persons who seek to take advantage of them. The Unconscionable Transactions Relief Act provides one method of exercising that benevolent authority, but the courts are not empowered to relieve a man of the burden of a contract he has made under no pressure and with his eyes open, merely because his contract is an act of folly. Therefore, regarding the facts on this case, when an experienced real estate agent, as mortgagor, entered into three related short-term mortgages with effective annual rates varying from 60% to 74% depending upon when the loan was repaid, the Court cannot act to upon the Unconscionable Transactions Relief Act to relief the mortgagor debt. Besides being an experienced real estate agent, the mortgagor made no real effort to seek the best market but had entered into the transaction as part of a fast move in and out of the property market. However, when the mortgagor sought a relief of one of the mortgages because he/she had entered into a contract to sell the property, and the mortgagee refused to discharge that mortgage unless the remaining mortgages were rewritten with additional bonus, it could not be said that the mortgagor had entered the subsequent rewritten mortgage transactions without pressure and with his eyes open. The Court may as a result revise the second mortgage transaction.
All Canadian Peoples Finance Ltd. v. Marejan, (1970) 10 D.L.R. (3rd) 352
William E. Thompson Associates Inc. v. Carpenter, (1990) 69 O.R. (2nd) 545 In this case, T. Inc. lent $250,000 to J. Ltd., and C. and M., directors of J. Ltd., guaranteed repayment of the loan, the liability of the guarantors being limited to $75,000 and $25,000 respectively. Under the loan agreement, a facility fee (stated to be for services and expenses "incurred in connection with the loan agreement and related transactions") was payable to T. Inc. which, if "interest", offended section 347(1) [305.1 back then] of the Criminal Code, prohibiting interest at a rate of over 60%, and defining interest to mean all charges and expenses. The Court held in this case that the facility fee fell within the definition of interest and, accordingly, the agreement was criminal, and the obligation to pay interest was unenforceable.
37
However, the obligation to repay the principal was severable, and the guarantees enforceable in respect of that obligation. Following the Courts view, the facts favoring severance in this case were that it would not undermine the policy of the Criminal Code. Whether or not a contract tainted by illegality is completely unenforceable depends upon all the circumstances surrounding the contract and the balancing of the considerations discussed in a case-by-case approach. It seems inadequate to say of an illegal contract simply that it is void without taking account of the effect that unjust enrichment should, where possible, be prevented and that the law have not to come to the assistance of persons who behave illegally. It is apparent that in this case, to prefer the latter effect would result in the unacceptable situation of unjust enrichment. So, it seems that the only reasonable recourse is to adopt a position that would return the principal money advanced by the mortgagee only and thus prevent the unjust enrichment of the mortgagor. Furthermore, the purpose of section 347(1) [305.1 back then] of the Criminal Code is to punish everyone who enters into an agreement or arrangement to receive interest at a criminal rate. It does not expressly prohibit such behavior, nor does it declare such an agreement or arrangement to be void. The penalty is severe, designed to deter persons from making such agreements, and to protect borrowers, so it is not designed to prevent persons from entering into lending transactions per se. As regards subject matter, its scope and application are limited to agreements regarding interest. Transport North American Express Inc. v. New Solutions Financial Corp., (2001) 54 O.R. (3rd) 144. This was a case where a mortgagee granted a loan to a mortgagor subject to security at criminal rate of interest. Following the rule of law brought by William E. Thompson Associates Inc. v. Carpenter above, the Court found that Transport North American Express Inc. (TNAE) was attempting on technical grounds to avoid performance on an important business obligation. This case was one of a financing transaction between arms-length parties experienced in business and represented by lawyers in the negotiations. As a result, the Court found that TNAEs conduct does not entitled it to any favorable exercise of the Courts discretion, and that the Court was not confined to strike out the illegal promises leaving the rest of the agreement untainted. Rather, with the support of recent authorities, the Court was entitled to make notional severance to enforce loan agreement, that is, to effect a
38
severance notionally by reading down provisions so that the criminal rate of interest would not be exceeded. Accordingly, the Court found that New Solutions Financial Corp. was entitled to enforce the agreement, except that the monthly interest rate was to be changed to reduce the effective annual interest rate to 60 per cent on the basis that all of the other payments were enforceable.
2. Will a promise to execute a mortgage be specifically enforced where part or all of the monies have been advanced?
The answer for this question is usually yes.
3. Will a promise to lend money under a mortgage be specifically enforced where the parties have executed a mortgage?
The answer for this question depends on the circumstances of the facts teleological approach.
39
Schwartzman v. Great West Life Assurance Company and Central Mortgage and Housing Corporation, (1955) 17 W.W.R. 37
In this case, the defendants sought for damages for an alleged breach of contract to advance moneys under a mortgage. Both the defendants relied upon a provision in the mortgage which provided that neither the execution nor registration of this mortgage, nor the advancing in part of the monies shall bind the mortgagees to advance the money or any unadvanced portion thereof but that the advance of the monies or any part thereof from time to time shall be in the sole discretion of the mortgagees. The parties have executed a mortgage, and the defendant advanced moneys. The mortgage after was cancelled. The plaintiff gave the defendants a notification to this order. The court held that the action should be dismissed because of the provision contained in the mortgage. Under this above-recited provision in the mortgage there was no obligation placed upon the mortgagees, or either of them, to advance any money.
40
41
2. Redemption - Generally
(a) Timing Mortgages Act, section 18 / Interest Act, section 10
See topic B., number 5., above for section 18 of Mortgages Act, and for section 10 of Interest Act. Subject to section 10 of Interest Act, the mortgagor can only redeem the mortgage following the clauses governing the mortgage contract. If a mortgagee wants to restrict the right to redeem for more than five (5) years, it has to make sure that section 10 of Interest Act does not apply. In order to do so, the mortgagee must make sure that the mortgage is given by a corporation. Also, the mortgagee and mortgagor can in common agreement modify the date of the mortgage, by re-dating it.
42
Judgment (4) In a redemption action, where the defendant has been noted in default, the plaintiff may require the registrar to sign judgment for redemption (Form 64M). (5) Every judgment for redemption shall direct a reference, whether or not there are any subsequent encumbrancers. Where Plaintiff Fails to Redeem (6) On default of payment according to the report in a redemption action, the defendant is entitled, on motion to the court without notice, to a final order of foreclosure against the plaintiff or to an order dismissing the action with costs. (7) Where the plaintiff is declared foreclosed, directions may be given, in the final order foreclosing the plaintiff or by a subsequent order, that the reference be continued for redemption or foreclosure, or for redemption or sale, against any subsequent encumbrancers, or for the adjustment of the respective rights and liabilities of the original defendants. (8) Where the reference is continued under subrule (7), (a) for redemption or foreclosure, the reference shall proceed in the same manner as in a foreclosure action; (b) for redemption or sale, the reference shall proceed in the same manner as in a sale action, and for that purpose the last encumbrancer shall be treated as the owner of the equity of redemption. (9) Where the plaintiff is declared foreclosed, a subsequent encumbrancer who attends and proves a claim on the reference is entitled to thirty days to redeem the mortgaged property. Where Nothing Due to Defendant (10) Where, on a reference in a redemption action, nothing is found due to the defendant, the defendant is liable for the costs of the action and the defendant shall pay any balance due to the plaintiff forthwith after confirmation of the report on the reference.
43
i. If B forecloses neither A nor C does something, but D redeems x dollars to B, then accordingly to section 2(1) of Mortgages Act B assigns the first mortgage to D. In this scenario, C still has his credit that A owes to him, but C has no more security to realize upon. Also, if D obtains a final order to foreclose, he becomes the owner of the mortgaged property in fee simple. In any of these situations, if the value of the security is superior to the total value of the mortgage and if one of the mortgagees takes an action to foreclose and if A has no moneys to redeem, then A can demand that the action for foreclosure be turned into an action for sale so everyone be paid and A stills get his equity on the property mortgaged. Hypothetical situation of simultaneous proceedings took by different creditors with guarantee attached to property. A mortgages property to B to secure a debt of x dollars, and then transfers to C his right of redemption towards B for y dollars (second mortgage). i. If B is foreclosing and C is exercising a power of sale, an eventual purchaser can buy the property mortgaged subject to Bs mortgage. ii.If B and C are exercising a power of sale and each one has a purchaser, then the purchaser in negotiation with B has priority over the purchaser in negotiation with C to buy the property mortgaged. This is so because Bs rights has priority over Cs. In both cases, if proceedings has been taken following the Part III of Mortgages Act, when a purchaser buy the property mortgaged, he/she receives it in fee simple section 35 of Mortgages Act (see number 4 bellow. A mortgagor can redeem a debt guaranteed by a mortgage any time after the mortgagee has taken action to exercise his/her rights under the mortgage, provide that the result of this action has not been achieved, that is the action be still in effect. When a mortgagee takes an action to foreclose, he/she takes the property mortgaged in possession and payment (that is, in fee simple) and his/her credit totally disappears whether the value of the security is worth more or less than the value of the debt secured.
44
Municipal Savings & Loan Corp. v. Wilson, (1981) 127 D.L.R. (3rd) 127
45
A mortgagee cannot exercise a power of sale without giving the mortgagor an opportunity to redeem. A mortgagor cannot contract himself out of his equitable right of redemption. It is inherent in the nature of a mortgage and wholly unaffected by any provisions in the document, which have the effect of excluding it. A mortgagee cannot resort to the security and at the same time assert his option to prevent redemption. His resort to the security triggers the mortgagor's right to redeem in equity notwithstanding the contractual provision in the document making the acceleration of the principal the option of the mortgagee. The appellant mortgagors had bought land for development from the respondent mortgagees and given them a mortgage back. The instrument provided that the mortgagor could prepay any amount on principal when not in default, and could obtain partial discharges upon payment of the proportionate balance of principal plus accrued interest to the date of partial discharge. Upon the mortgagees refusal to grant partial discharges of certain lots upon tender of the appropriate sums, the mortgagor sought relief under section 11(3) [actual section 12(3)] of the Mortgages Act. The purpose of s. 12(3) is to give relief to a mortgagor who desires to and who has the right to pay the mortgage money and to receive a discharge when that right has been denied for no valid reason. Whether a mortgagor in default is entitled to a partial discharge depends upon the construction of the terms of the mortgage. In this case, the pre-payment privilege was clearly subject to a no-default clause, but the partial discharge clause was not. Hence the mortgagor had a right to partial discharge upon payment. Also, there is not any rule of law preventing the grant of a partial discharge when a mortgage is in default. In any case, the default is to be judged when the discharges are first requested, and the mortgagor was not in default at that time. The mortgagor was entitled to a partial discharge of mortgage. The appellant purchased certain lands subject to a mortgage in favour of the respondent. The charge did not provide for early redemption. When the appellant defaulted, the respondent brought an action claiming the amount of the arrears due and possession, but did not attempt to accelerate payment of the principal amount. The appellant then tendered a cheque to the respondent for the entire balance owing, which the respondent rejected.
46
Thereupon the appellant brought an application for a declaration that he was entitled to pay the entire balance due on the charge without bonus or penalty. The application and the appeal were dismissed. If the chargee resorts to the security in any ways, he cannot refuse tender of the principal and interest owing on the charge on the ground that he is entitled to notice or interest. A chargee resorts to the security if he forecloses the mortgaged property in order to obtain payment of the principal outstanding under the mortgage together with interest, or if he serves a notice of sale pursuant to his contractual power of sale. If, however, the chargee takes possession to recover payment of arrears only, he is not resorting to the security, but is merely acting to protect his security. In those circumstances he is not, then, forced to permit the mortgagor to redeem. In this case, second mortgagees sought to redeem a first mortgage in arrears. The first mortgage provided that if any payments were not made on due date balance, then principal outstanding under the mortgage together with interest would be immediately due and payable. It also provided that, when not in default, the mortgagor may repay the mortgage upon payment of additional three months of interest as a bonus. The Court interpreted the first proviso as an acceleration clause and decided that by the terms of this mortgage, unusual though they may be, a default in payment of an instalment of interest automatically accelerates the whole principal and interest so that all immediately becomes due and payable. Thus, as the terms of the mortgage must be applied, both for the benefit of the mortgagee and for the benefit of the mortgagor, and since the principal and interest was due and payable by contract after default in payment of any instalment, the second mortgagee had the right to redeem this mortgage without payment of any bonus of interest. Accordingly to the court, an acceleration clause did not give to the first mortgagee any option.
Theodore Holdings Ltd. v. Anjay Ltd., (1990) 11 R.P.R. (2nd) 151 In this case, the mortgagee entered into an agreement of purchase and sale of the mortgaged property under power of sale. After that, the mortgagee abandoned this agreement. The abandon by the mortgagee of the agreement entitled the mortgagor to redeem. While entering into a bona fide agreement to sell the mortgaged property in order to redeem the mortgage, the mortgagor obtained an order restraining the
47
mortgagee from selling or entering into agreements to sell the mortgaged property. Despite having notice of the order, the mortgagee entered into an agreement to sell the mortgaged property. A motion was brought to determine whether the mortgagor or the mortgagee had the right to complete the agreement. The court held that the agreement entered into by the mortgagee amounted to an illegal contract and was therefore null and void, since the restraining order was to be constituted for a period sufficient to permit the mortgagor to complete the sale and purchase transaction. The mortgagor was ordered to pay into court the amount alleged to be due to the mortgagee, upon which payment the mortgages were to be discharged.
3. Judicial sale
As remarked before, a judicial sales involves the sale of the mortgaged property under the supervision of a court, with the proceeds going first to satisfy the mortgage, and then to satisfy other lien holders, and finally to the mortgagor. With this remedy any excess money from the sale of the property over and above the mortgage debt is distributed to the borrower. It is a rare situation where judicial sale is exercised because, the court is extensively involved ordering that the property be sold; confirming the sale procedure after it occurs; and, hearing any application for a deficiency judgment. The costs of a judicial sale are higher than in a power of sale.
In a power of sale a mortgagee must give notice to some people determined by statute section 31 of Mortgages Act.
48
If the mortgagee has a second mortgage and wants to exercise a power of sale, this mortgagee has the right to sell the land subject to the first mortgage. Section 32 of Mortgages Act stipulates a when a notice the exercise of power of sale can be served and the circumstances under with this notice can be given. Even when the power of sale is not provided in a contract, it can still be exercised following section 24, subject to section 26 of the Mortgages Act. Section 33 of Mortgages Act provides for rules regarding the manner of giving notice so it can be valid, and section 34 of the same Act provides when notice given under section 33 is effective. Section 35 of Mortgages Act determines declarations that have to contain in a notice in order to comply with Part III of the Mortgages Act, that is power of sale. In this case, if the notice is given with all those declarations and complies with Part III of the Mortgages Act, once a deal following a power of sale is closed, the purchaser receives the mortgaged property in a good title, that is in fee simple. Section 38 of Mortgages Act ensures that its Part III is paramount. Section 39 of Mortgages Act is quite important for it provides the exercise of power of sale without notice. This section can be useful in case of failure of notice everyone section 31 of the Act demands in order to proceed with the sale. It is important to remark that where, pursuant to any condition or proviso contained in a mortgage, there has been made or given a demand or notice either requiring payment of the money secured by the mortgage, or any part thereof, or declaring an intention to proceed under and exercise the power of sale therein contained; until after the lapse of the time at or after which, according to such demand or notice, payment of the money is to be made or the power of sale is to be exercised or proceeded under, no further proceeding and no action to enforce the mortgage shall be commenced or taken until an order permitting the same has been obtained from a judge of the Superior Court of Justice section 42 of Mortgages Act.
49
50
Section 29 [actual section 30] of the Act provides in part that so much of the Mortgages Act as confers a power of sale does not apply in the case of a mortgage that contains a power of sale. Therefore, in this case, the period of time in which the notice of sale must be given before the power is exercised as set out in the Mortgages Act has no application and there is no inconsistency between the mortgage and the Act. .
Sierra Garden Homes v. 668417 Ontario Ltd., (1990) 1 O.R. (3rd) 446
A mortgagee issued a notice to a mortgagor declaring an intention to proceed under and exercise the power of sale. During the redemption period the mortgagee spoke to a real estate agent about selling property after the redemption period expired. The mortgagor moved for an injunction to restrain the mortgagee from acting on the notice of sale on the grounds that it was contrary to section 40 [actual section 42] of the Mortgages Act for the defendants to commence selling the property before the termination of the redemption period. Section 40 [actual section 42] of the Mortgages Act is directed to allow persons entitled to redeem to have the redemption period to do so without proceedings being taken which might hinder or prejudice the right of redemption or increase the cost thereof. Section 40 [actual section 42] does not preclude a mortgagee from talking to real estate agents in general terms where no listing is promised. Informal discussions about selling the property do not interfere with the mortgagor's ability to sell the property in the redemption period.
51
There was no action or proceeding taken which would interfere with the mortgagor's right to redeem or result in any additional cost to the mortgagor. Assuming a breach of section 40 [actual section 42], this did not void the notice of sale. The result of a contravention of section 40 [actual section 42] is that the notice will remain valid but further proceedings during the currency of the notice will be set aside as invalid In this case, the Court dismissed the motion.
5. Foreclosure Situations
Foreclosure is rarely exercised as a remedy. To execute foreclosure, the secured party needs to petition the court, and the order is made in two stages (nisi and absolut), making the process slow and cumbersome. A decree nisi is a provisional decree which will become final or absolute unless there is reason shown not to do so.
52
53
The mortgagor brought an action against mortgagee and purchaser of her property, claiming that a mortgage purportedly executed by her in favour of the mortgagee was null and void and that the purchaser who purchased the property from the mortgagee under the power of sale held the property in trust for her, the mortgagor. The mortgagee had started foreclosure proceedings and a specially endorsed writ was issued against the mortgagor. The mortgagor failed to appear and a default judgment was taken. The judgment directed a reference and, when originally drawn up in typed form, contained a clause providing for a reconveyance to the mortgagor upon payment of the amount due to the mortgagee. The mortgagee did not however proceed with the reference directed in the default judgment but instead purported to act under the power of sale contained in the mortgage. The majority of the Supreme Court held that the default judgment was a judgment nisi for foreclosure. The mortgagor would have been entitled to invoke the equitable jurisdiction of the Court to claim a right to redeem on payment of the amounts found owing on the reference and on such other terms as the Court might fix. The mortgagee was not entitled to improve his/her position by proceeding to a sale under the mortgage without leave when he/she had crystallized his/her remedies through a judgment nisi which called for a reference. Having obtained a judgment of the type obtained, the mortgagee must carry out that judgment or obtain the leave of the Court to do otherwise. The minority held that the fact of obtaining such a judgment nisi did not preclude the mortgagee from exercising his/her power of sale under the mortgage since the sale did not prejudice any rights asserted by or accorded to mortgagor in the foreclosure proceeding.
1 Writ of fieri facias is a writ of execution after judgment obtained in a legal action for debt or damages.
54
The mortgagee elected to recover the first property by way of foreclosure. The subsequent sale of that property put it out of the reach of the mortgagor and, therefore, precluded the mortgagee from taking any further action on the covenant or the guarantee. It was proper for the defendants to seek to set aside the writ of execution by motion in the action rather than by originating motion. Furthermore, the Court held that the mortgagee was liable to the mortgagor for the sale of the property under the collateral mortgage and had to account to him/her for the sale price.
55
The Court reopened the foreclosure, ruled that the mortgagor was not entitled to add to the mortgage debt any claim that might be made for the commission, and allowed the mortgagor to redeem the mortgage.
The mortgagor informed the mortgagee of an intention of redeem before that date but the funds for redemption would be not available until after the redemption date. Regarding the particularities of the facts in the case, the Court decided that the mortgagor was entitled to redeem in such circumstance upon payment of money into Court by the date fixed therein. This case shows that Courts do not approve a sale proceeded by a mortgagee within the period of redemption, even if conditional to the expiration of the said period of redemption.
57
so to do or if the answer is incomplete or incorrect, any rights that the mortgagee may have to enforce the mortgage shall be suspended until the mortgagee has complied with subsection (2). Relief after action commenced 23.(1)Despite any agreement to the contrary, where default has occurred in making any payment of principal or interest due under a mortgage or in the observance of any covenant in a mortgage and under the terms of the mortgage, by reason of such default, the whole principal and interest secured thereby has become due and payable, in an action for enforcement of the rights of the mortgagee or of any person claiming through or under the mortgagee, the mortgagor, upon payment into court of the sum of $100 to the credit of the action as security for costs, may apply to the court and, conditional upon performance of such covenant or upon payment of the money due under the mortgage, exclusive of the money not payable by reason merely of lapse of time, and upon payment of the costs of the action, the court, (a) shall [no option] dismiss the action if judgment has not been recovered; or (b) may [discretionary] stay proceedings in the action, if judgment has been recovered and if no sale or recovery of possession of the land or final foreclosure of the equity of redemption has taken place. Idem (2)Despite clause (1) (b), where judgment has been recovered and recovery of possession of the land has taken place, the court may stay proceedings in the action upon the application of a person added as a party in the masters office, made under subsection (1) within ten days after service of notice of the judgment has been made upon the person. Subsequent default (3)Where proceedings have been stayed under clause (1) (b) or under subsection (2) and default again occurs under the mortgage, the court upon application may remove the stay.
Those sections differ from section 17 of Mortgages Act in the sense that section 17 is only used during the term, when there is no acceleration clause under the mortgage; or, if there is one, it has not been exercised by the mortgagee; or, if the default occurs at the date of maturity of the mortgage. As regards or section 17 of Mortgages Act, one cannot contract out of sections 22 and 23. Although section 21(1)(a) of Mortgage Act permits a mortgagor to put the mortgage in good standing at any time before sale, the benefit of this section ceases to flow to the mortgagor when the mortgagee accepts a bona fide offer from a third party. The acceptance of the offer by the mortgagee is subject to the rights, if any [of the mortgagor] to put the mortgage in good standing.
58
Once the offer is accepted, the right of the mortgagor to put the mortgage in good standing is at an end. Theodore Daniels Ltd. v. Income Trust Co., (1982) 37 O.R. (2nd) 316 The mortgagor had fallen into arrears under a mortgage containing an acceleration clause. When the mortgagee commenced power of sale proceedings the mortgagor sought an order under section 21 of the Mortgages Act, giving him/her the right to pay up the arrears owing and staying the power of sale proceedings. The trial judge allowed the mortgagor two weeks to pay off the principal amount of the mortgage, including interest, taxes and costs. The mortgagor appealed. Section 21 of the Mortgages Act gives the mortgagor in default an unqualified right to relief at any time prior to a sale upon payment of the arrears and any expenses necessarily incurred by the mortgagee. The words exclusive of the money not payable by reason merely of lapse of time indicate that the money due under the acceleration clause need not be paid in order to obtain relief. Therefore, the Court ruled that the trial judge had no discretion to order payment of the principal amount and his order amounted to a complete denial of relief under section 21. In this case, default under the mortgage having been made, the mortgagor sued for foreclosure and obtained an interlocutory judgment. The mortgagor redeemed and the mortgagee agreed not to take further proceedings in the action until further default. The mortgagor again was in default and relying on the interlocutory judgment, the mortgagee erected a barricade on the property and had the sheriff take formal possession. The same day this happened the mortgagor tendered the payment and three days after commenced an application for stay under section 19a [actual section 23] of the Mortgages Act, which was granted. Under section 19a (b) (ii) [actual section 23(1)(b)] of the Mortgages Act, the token taking of possession by the mortgagee was not such a recovery of possession as disentitled the Court to grant a stay. The mortgagee did not contemplate obtaining any advantage from the taking of possession which was inherent in the taking of possession itself and which was what was contemplated by recovery of possession in the section of the Act. Thus, the acts of the mortgagee did not amount to recovery of possession. The validity of the tender not being disputed, the mortgagor was entitled to a stay of proceedings.
59
Van Minnen Construction v. Murphy et al. (Murphy as a Third Party), (1977) 19 O.R. (2nd) 125 For the purpose of the mortgagor's entitlement to the relief provided by section 21(1) of the Mortgages Act, an auction sale that concludes with a successful bid is a sale within the meaning of section 21(1). Accordingly, a tender by the mortgagor to cure the default after the conclusion of the successful bid is too late. It is not necessary that the transaction be closed before one can conclude that a sale has occurred within the meaning of the section.
8. Remedies of Mortgagee
(a) Action on the covenant
(i) Practical points Shiner v. Varadeff, (1975) 7 O.R. (2nd) 684 In this case, a mortgagor paid less than the amount owed on mortgage Mortgages and received discharge, due to a common mistake on part of both mortgagor and mortgagee. The issue arose was whether mortgage debt was extinguished by the discharge. The Court ruled in this case that where, by a mistake common to both mortgagor and mortgagee, a discharge of mortgage is given for less than the amount owing, it is proper to reopen the account and to order the mortgagor to pay the proper balance owing on the covenant in the mortgage. The section 61 [actual section 622] of the Registry Act, which provides that the registration of a certificate of discharge is valid and effectual as a conveyance of the original estate, does not extinguish the rights and obligations of the parties with respect to the covenant for payment. Beaty v. Gregory, (1897) 24 O.A.R. 325 The duly appointed trustees of a religious congregation, to whom by that description the site for a church has been conveyed, and who by that description give to the vendor to secure part of the purchase money a mortgage with the ordinary covenant for payment, are a corporation and are not personally liable upon the mortgage although it is signed and sealed by them individually.
2 See topic A., number 4., letter b above for the transcription of section 62 of Mortgages Act.
60
In this case, trustees are treated as corporation without any personal liability under the act relating to the property of religious institutions. (ii) In judicial sale Gordon Grant v. Boos, [1926] A.C. 781 A mortgagee who has obtained an order for sale, and, bidding with the leave of the Court, has purchased the mortgaged property, is not precluded form suing the mortgagor upon his personal covenant in the mortgage for the difference between the sum due under the mortgage and that realized by the sale. In this case it was irrelevant and not material that the mortgagee has resold the property at a profit, because he obtained the property with the leave of the Court. Besides, conversely and for various reasons, the mortgage could have resold the property at a loss. (iii) In power of sale Review Mortgages Act, sections 24 to 43 See pages 80 to 92 if the course pack. Rudge v. Richens, (1873) L.R. 8 C.P. 358 In this case, the mortgagor could not redeem the mortgage because as a result of his/her default the mortgagee efficiently exercised his/her rights by taking possession of the property mortgaged and selling it. The mortgagee has exercised his rights on the land and the land has been sold to a third party. Furthermore, in this case the mortgagee could pursue the mortgagor for the short fall on the mortgage contract. Farrar v. Farrars Ltd., (1888) 40 Ch. D. 395 This is case of power and sale under a contract of mortgage where a mortgagee sold the mortgaged property to a company formed for the purpose of purchasing the property, in which himself, the mortgagee, was a shareholder. The Court held that the sale could not be set aside on the simple ground that the mortgagee was a shareholder in the company, for that sale by a person to a corporation o which he/she is a member is not either in form or substance a sale by him/her to himself/herself along with other people. However, the Court held that there was such a conflict of interest and duty in the mortgagee shareholder, of which the company had notice, as to throw upon the company the burden of upholding the sale.
61
Nevertheless, in the case, the Court found that the company had discharged itself of this burden by showing that the mortgagee shareholder had taken all reasonable and careful efforts to secure a purchaser at the best price, and that the price given was not at the time inadequate, though more might have been obtained by postponing the sale. Re Nunes, (1972) 21 D.L.R. (3rd) 97 In this case, one of the several mortgagors purchased the mortgaged property at a mortgage sale. The District Registrar of Winnipeg refused to permit registration under the argument that it was not in a position to properly determine the bona fide of a purchase by one of several registered owners. As a consequence, the purchaser moved for an order that he was a bona fide purchaser for value of the property, and that he was entitled to be registered as owner in fee simple of the said land in accordance with the terms of purchase. The court found that the facts showed that there was no collusion between the purchaser and the mortgagee. One is not precluded from purchasing at a mortgage sale merely because of already having an interest in the property being sold. Thus, a second mortgagee may purchase and obtain an irredeemable title. Similarly, one of two co-owners of the equity of redemption can purchase without being bound to account to the other. Accordingly, the Court ruled that the co-mortgagor purchasing a mortgaged property at a mortgage sale was entitled to do so and granted the application. (iv) In foreclosure Lockhart v. Hardy, (1964) 50 E.R. 378 After foreclosure, the mortgagee fairly sold the estate for less than what was due to him. Where a debt is secured by mortgage, covenant, and bond, the mortgagee may pursue all his/her remedies at the same time. If mortgagee obtains full payment on the bond or covenant, the mortgagor becomes entitled to the estate, but if the mortgagee obtains part payment only, he/she may go on with his/her foreclosure suit and foreclose for the remainder. On the other hand, if the mortgagee forecloses first, and the value of the estate proves insufficient to satisfy the debt, he/she may, while the mortgaged estate remains in his power, sue on the bond or covenant, but he thereby opens foreclosure, and the mortgagor may thereupon redeem.
62
If the mortgaged estate does not remain in the mortgagees power, than he could not afterwards recover from the mortgagor, upon mortgagors personal securities, the amount still remaining unpaid.
Munsen v. Hauss, (1875) 22 Grants Ch. 279 This was a case where a mortgagor sought to restrain the mortgagee from suing at law for the amount due upon a mortgage, on the ground that the defendant had previously obtained an order for final foreclosure; and had since obtained such final order mortgaged the property, and had allowed the buildings thereon, which where the chief value of the property, to fall into decay. The court held that although the fact of a mortgagee having a final order of foreclosure, it does not preclude him from suing for the mortgage money. On another hand, it would seem that the mortgagor is not entirely helpless as he/she may offer to pay the mortgage, and if the mortgagee declines receiving the money, the Court would restrain him from afterwards suing for the mortgage debt. Also, the Court ruled that if after a mortgagee has obtained a final order of foreclosure he/she has mortgaged the property, that fact alone will not deprive him of the right to sue for the mortgage money if, at the time of bringing the action, he/she has paid off the mortgage created by himself and is in a position to reconvey the property. Finally, the Court stated that the fact alone of the mortgagee having allowed the property to fall into decay does not prevent him from suing for the mortgage money.
Dowker et al. v. Thompson, [1941] O.R. 44 In this case, the mortgagor having defaulted in the payments under the mortgage, the mortgagees issued a writ of foreclosure. The mortgagees signed default judgment for foreclosure and for a remaining sum on the covenant. A writ of fieri facias was issued to the sheriff and the mortgagor took out a final order of foreclosure two months after, and then went into possession of the property. At the time of the final order there were arrears of taxes and the mortgagees neglected to pay any taxes as they accrued and made no payments on arrears. As a result there was owing for taxes an outstanding sum when the town advertised the property for sale for taxes. At the tax sale the town itself became the purchaser.
63
The writ of fieri facias lapsed three years form its first issue, but an alias writ was issued five months later, after the tax sale had taken place. The defendant moved for an order setting aside the writ of fieri facias and it was held that the writ of fieri facias should be set aside. After foreclosure the mortgagee, in order to be entitled to recover payment of the mortgage debt from the mortgagor by virtue of the covenant in the mortgage, must be in a position to reconvey the mortgaged property. The mortgagee cannot invoke a suggested exception that this rule does not apply where the property was lost through the act or default of the mortgagor. Once a final order has been taken out it is difficult to conceive how the property can subsequently be lost through any act or default on the party of the mortgagor. Even though the taxes were substantially in default when the final order was taken out, the mortgagees must be presumed to have known that such was the condition and they accepted it. When they took out the final order the mortgagees elected to take the property subject to maintaining it in position to reconvey if they realized on the writ of fieri facias and they cannot have both the property and the money. There was nothing the mortgagor could have done and nothing he/she was obliged to do towards payment of taxes after the final order of foreclosure.
64
writing to be given to the person distraining or the attorney, bailiff, or agent of the person before such lawful sale, claims the benefit of this restriction. Duty of distrainor when restriction applies (3)When such notice is given, the distrainor shall relinquish to the officer or assignee the goods and chattels so distrained, upon receiving one years arrears of such interest or rent and the reasonable costs of distress, or if such arrears and costs are not paid or tendered the distrainor shall sell only so much of the goods and chattels distrained as is necessary to satisfy one years arrears of such interest or rent and the reasonable costs of distress and sale, and shall thereupon relinquish any residue of them, and pay any residue of money, proceeds thereof so distrained, to such officer or assignee. Reimbursement of officer or assignee (4)An officer executing an execution, or an assignee who pays any money to relieve goods and chattels from distress under this section, is entitled to reimburse himself, herself or itself therefore out of the proceeds of the sale thereof.
Contractual right to distrain for principal Right to distrain is the right of a landlord to seize the property of a tenant which is in the premises being rented, as collateral against a tenant that has not paid the rent or has otherwise defaulted on the lease, such as deliberate disrepair or destruction of the premises.
65
The mortgagor is not bound to expend its own monies on repairs. Nevertheless, the court will not allow the mortgagee to recover the cost of repairs and improvements where it appears that the he/she is over-improving the mortgaged property in an attempt to prevent the borrower from redeeming the mortgaged property.
A mortgagee in possession cannot itself charge a commission for the collection of rents. A mortgagee in possession may, however, in appropriate circumstances, appoint an agent to collect the rents and charge the cost of the agent against the mortgaged estate. The mortgagee has the onus of satisfying the court that the appointment of a manager was reasonably necessary. So long as the mortgagee in possession has not interfered with the mortgagors right to redeem the mortgage, the mortgagee has the right to lease the whole or any portion of the mortgaged property. In addition, most standard form mortgages contain a power to lease as well as a power of sale. The courts will not interfere with this power of lease where the term of the lease did not expire until after the time fixed for redemption, and the mortgage by its terms gives the mortgagor a power to lease the mortgaged property. Having taken possession of the mortgaged property, the mortgagee is required to continue to perform the obligations imposed upon the property. The mortgagor is not entitled to relinquish possession of the mortgaged property without the consent of the mortgagor or the approval of the court. Generally, the court will not approve the appointment of a receiver simply to relieve a mortgagee, who has taken possession of the mortgaged property, of his/her responsibilities.
66
insufficient to overcome the presumption that the deed of conveyance truly stated the transaction. Arnal v. Arnal, (1969) 6 D.L.R. (3rd) 245 In this case, the plaintiffs deceased father conveyed certain lands to the defendant by a deed absolute in form in response of a loan not paid in full. The defendant paid a balance of the purchase price of the lands assumed by him under the agreement of purchase, consisting of certain debts of the plaintiffs deceased father. On parol evidence, the trial judge found the conveyance by a deed absolute in form as a security for a loan made by the defendant. The Court upheld the trial judges findings and stated that the evidence was admissible to show the parties intention to create a mortgage notwithstanding the Statute of Frauds. In order to determine whether it is or is not a mortgage, equity has always looked to the real intention of the parties, to be gathered not only from the terms of the particular instrument but found from all the circumstances of the transaction, and has always admitted parol evidence in cases where the real intention was in doubt. The evidence required to induce a Court to declare a deed, absolute on its face, to have been intended to operate as a mortgage only must be of the clearest, most conclusive and unquestionable character.
(b) Where the grantor has executed a deed with an option to purchase
Wilson v. Ward, [1930] S.C.R. 212 In this case, the defendant Wilson owed moneys to the plaintiff Ward. They entered into an agreement where the plaintiff would buy the property, the value of the execution of the agreement being the value owed by the defendant to the plaintiff. The agreement provided the defendant had ninety (90) days as an option to purchase back the property for some amount superior to the value of the alleged execution to the agreement. Up to the Supreme Court it was held that the agreement embodied in the document in question between the parties was not for the sale of land from the defendant to plaintiff with an option of repurchase, but for a loan from plaintiff to defendant on security of the land. The document, taken by itself, in certain respects favoured the latter construction, but, further, the parties' rights were not to be determined exclusively by examining the terms in the document.
67
Evidence was admissible, not only of the surrounding circumstances, but also of all the oral or written communications between the parties relating to the transaction, for the purpose of determining its true nature. Even where the instrument professes fully and clearly to give the reasons and considerations on which it proceeds, collateral evidence is admissible to show that the transaction is not thereby truly stated, although, in such cases, only the most cogent evidence avails to rebut the presumption to the contrary. The Supreme Court upheld what was until then held stating that, in view of the summary character of the document and the superficial incoherence of its terms, resort to parol evidence was peculiarly appropriate; and upon all the evidence (as viewed by this Court) the substance of the transaction must be held to have been a loan on security. In such case the court will disregard, as repugnant to the equitable right of redemption, a stipulation professing to confer upon the lender the right of purchase, even if the parties, between themselves, had intended that it should be binding. The plaintiff, a mortgagor in default, executed a quit claim deed of the mortgaged land to the defendant, the mortgagee, who was then in possession under proceedings taken in a foreclosure action. A letter from the defendant's solicitors to the plaintiff's solicitor agreed that that plaintiff was to have the right for a period of three months to purchase the land upon payment of the mortgage, including all interest, taxes and costs up to date. There was no payment or tender within said period. In an action for redemption, the plaintiff attempted to show that by the true arrangement the mortgage debt remained undischarged and the period for redemption was extended for three months. There is, that the relation of mortgagor and mortgagee still subsisted. In this case, the Supreme Court held that on the evidence, the plaintiff's said attempt must fail, and that the true arrangement must be held to be that disclosed by the documents (namely, that the land became vested in defendant in fee simple in possession free from the equity of redemption, but that plaintiff had the option of re-purchase according to the terms in said letter). It is true, in principle, that a conveyance absolute in form may be shown even by parol evidence to have been, according to the real agreement between the parties, accepted as security only, and the Statute of Frauds will not prevent the proof of this by parol evidence. However, for this purpose convincing evidence is always required and it behooves the one who alleges to adduce evidence of the most cogent character. A plaintiff invoking the aid of the court for the enforcement of an option for the sale of land to him/her must show that the terms of
68
the option as to time and otherwise have been strictly observed, and that the owner incurs no obligation to sell unless the conditions precedent are fulfilled or as the result of the owner's conduct the holder of the option is on some equitable ground relieved from the strict fulfillment of them. Krieck v. Wansbrough, [1973] S.C.R. 588 In this case, there was an agreement for sale of land for an amount exceeding the vendors indebtedness to purchaser with an option to repurchase the land for the amount of indebtedness. The purchaser had to pay the balance of purchase price if the vendor does not exercise the option to repurchase the land for the amount of indebtedness. The Court below sustained the vendor's position that the transaction must be viewed as a mortgage However, the Supreme Court ruled that the appeal should be allowed and set aside the judgment below, directing that the agreement should take effect according to its terms. There was no basis for recasting the transaction to make it a security one alone to the exclusion of the overriding element of sale. Therefore, the purchaser was entitled to a decree of specific performance.
E. Priorities
1. The Registry Act, sections 70 to 74 (specially section 73)
REGISTRATION AND ITS EFFECT Effect of unregistered instruments 70. (1) After the grant from the Crown of land, and letters patent issued therefor, every instrument affecting the land or any part thereof shall be adjudged fraudulent and void against any subsequent purchaser or mortgagee for valuable consideration without actual notice, unless the instrument is registered before the registration of the instrument under which the subsequent purchaser or mortgagee claims. Exception as to certain leases (2) This section does not extend to a lease for a term not exceeding seven years where the actual possession goes along with the lease, but it does extend to every lease for a longer term than seven years. Exception as to certain by-laws (3) This section does not extend and shall be deemed never to have extended to, (a) a by-law passed before the 6th day of April, 1954 under section 390 of The Municipal Act, being chapter 243 of the Revised Statutes of Ontario, 1950 or a predecessor of that section;
69
(b) a by-law passed after the 5th day of April, 1954 under section 390 of The Municipal Act, being chapter 243 of the Revised Statutes of Ontario, 1950 or under section 34 of the Planning Act or a predecessor of that section of the Planning Act; or (c) any other municipal by-law, heretofore or hereafter passed, affecting land that does not directly affect the title to land. Actual notice 71. Priority of registration prevails unless before the prior registration there has been actual notice of the prior instrument by the person claiming under the prior registration. Certificate of title 71.1 A certificate of title that is registered in accordance with the Certification of Titles Act, as that Act read immediately before subsection 2 (1) of Schedule 17 to the Good Government Act, 2009 came into force, is conclusive as of the day, hour and minute stated in the certificate that the title of the person named as owner of the land described in the certificate was absolute and indefeasible as regards the Crown and all persons whomsoever, subject only to the exceptions, limitations, qualifications, reservations, conditions, covenants, restrictions, charges, mortgages, liens and other encumbrances mentioned in the certificate. Equitable liens, and tacking 72. No equitable lien, charge or interest affecting land is valid as against a registered instrument executed by the same person, the heirs or assigns of the person, and tacking shall not be allowed in any case to prevail against the provisions of this Act. Effect of subsequent registered conveyances on mortgage money paid subsequently 73. A registered mortgage is, as against the mortgagor, the heirs, executors, administrators, estate trustees, assigns of the mortgagor and every other person claiming by, through or under the mortgagor, a security upon the land comprised therein to the extent of the money or moneys worth actually advanced or supplied under the mortgage, not exceeding the amount for which the mortgage is expressed to be a security, although the money or moneys worth, or some part thereof, was advanced or supplied after the registration of a conveyance, mortgage or other instrument affecting the mortgaged land, executed by the mortgagor, the heirs, executors, administrators or estate trustees of the mortgagor, and registered subsequently to the first-mentioned mortgage, unless before advancing or supplying the money or moneys worth, the mortgagee in the firstmentioned mortgage had actual notice of the execution and registration of such conveyance, [subsequent] mortgage or other instrument, and the registration of such conveyance, mortgage or other instrument after the registration of the firstmentioned mortgage, does not constitute actual notice.
Registration to be notice 74. (1) The registration of an instrument under this or any former Act constitutes notice of the instrument to all persons claiming any interest in the land, subsequent to such registration, despite any defect in the proof for registration, but
70
nevertheless it is the duty of a land registrar not to register any instrument except on such proof as is required by this Act. Where subs. (1) does not apply (2) Subsection (1) does not apply to an instrument entered in the by-law index or to an instrument registered as a general registration under subsection 18 (1) or (6) or under predecessors of those subsections, (a) unless an entry of the instrument appears in the abstract index; (b) unless an entry of a declaration under section 25 or a predecessor of that subsection referring to the instrument appears in the abstract index; or (c) unless the instrument is mentioned in a subsequently registered instrument and an entry of the latter instrument or of a declaration referring thereto, as mentioned in clause (b), appears in the abstract index. Deemed notice (3) For the purposes of subsection (1), the registration of a notice under section 113 or a statement under section 25 constitutes registration of the instrument referred to in the notice or statement. Idem (4) The registration of a notice under subsection 22 (7) or (8) constitutes notice only of the particulars contained in the notice. Where no notice (5) After the expiry of a notice registered under subsection 22 (8), the notice shall not constitute notice of the agreement, option or assignment or of any particulars referred to in the notice.
Priorities are important in determining which creditors must be paid first when the value of the mortgaged property is not sufficient. Priorities are established by mortgages priority of creation, subject to register of that creation, unless the subsequent mortgagee had actual notice of an unregistered mortgage prior to his/her. Mortgagees can enter into an agreement to re-inverse priorities of mortgage, although no one can re-inverse the order of registration. Registration constitutes registration actual to notice to the world. Nevertheless, registration is not necessary to create rights. Registration indicates the maximum value secured by the property mortgaged.
71
(5) Subject to any entry to the contrary in the register and subject to this Act, instruments registered in respect of or affecting the same estate or interest in the same parcel of registered land as between themselves rank according to the order in which they are entered in the register and not according to the order in which they were created, and, despite any express, implied or constructive notice, are entitled to priority according to the time of registration. () CHARGES AND ENCUMBRANCES Charges 93. () () Where advances under registered charge to have priority over subsequent charges (4) A registered charge is, as against the chargor, the heirs, executors, administrators, estate trustees and assigns of the chargor and every other person claiming by, through or under the chargor, a security upon the land thereby charged to the extent of the money or moneys worth actually advanced or supplied under the charge, not exceeding the amount for which the charge is expressed to be a security, although the money or moneys worth, or some part thereof, was advanced or supplied after the registration of a transfer, charge or other instrument affecting the land charged, executed by the chargor, or the heirs, executors, administrators or estate trustees of the chargor and registered subsequently to the first-mentioned charge, unless, before advancing or supplying the money or moneys worth, the registered owner of the first-mentioned charge had actual notice of the execution and registration of such transfer, charge or other instrument [subsequent mortgage], and the registration of such transfer, charge or other instrument after the registration of the first-mentioned charge does not constitute actual notice.
Moreover, under section 19 of the Execution Act, the sheriff is only empowered to seize mortgages belonging to the person against whom the execution has been issued, and section 24 of the Execution Act only provides for the mode of taking in execution a mortgage which is made exigible under section 19, that is, a mortgage which belongs to the execution debtor. As in McDonald v. The Royal Bank, this case deals with priorities between an unregistered mortgage followed by registered certificates of judgment. Here, accordingly to the Real Property Act of Manitoba, an unregistered mortgage takes priority against subsequently registered certificates of judgment against the same land. At common law, an unregistered mortgage creates rights in the mortgagee, and these are acknowledged by the Real Property Act of Manitoba as against a registered certificate of judgment, this being by way of exception to the general principle of the Act that priority is determined by registration. So, accordingly to this Act, it is only against a bona fide transferee that rights under an unregistered instrument are extinguished, and judgment creditors do not qualify as such.
73
In this case, a mortgagor requested assignment of mortgage upon payment of sum owing in lieu of discharge. The mortgagee refused assignment because the property was subject to other mortgage held by subsequent encumbrancer, and here the mortgagor had notice of the third and fourth mortgages to another person. Accordingly to the mortgagee, without the second mortgagee's consent and because the latter did not consent to the assignment, he/she, the first mortgagee, could only give a discharge. The Court held that, because of section 2 of Mortgages Act, specially section 2(2), the first mortgagee was not entitled to refuse the assignment to the mortgagor on the ground that subsequent encumbrancer was not agreeing to assignment rather than discharge. Section 2(2) of Mortgages Act makes clear that the mortgagor has a right to require an assignment regardless of subsequent encumbrances although his/her right might be subject to and subservient to a contemporaneous claim to an assignment by an intermediate encumbrancer. The subsection says nothing about the need for consent from such intermediate encumbrancer. In this case, the mortgagee was a holder of a first registered mortgage against certain lands. The discharge of that mortgage was registered. On the same date of the discharge, a second mortgage was executed in favour of another mortgagee, which was registered three days after. Then again three days after this latter registration, a mortgage in favour of the original first mortgagee was registered. The registration of the discharge of the original first mortgage was inadvertent and the subsequent registration of the first mortgagee's mortgage was to secure the indebtedness owing under the original first mortgage. Second mortgagee knew of the indebtedness and the registered first mortgage when its mortgage was executed. He/she did not know of the registration of the discharge of the first mortgage, nor did he/she know that there was an agreement by the mortgagor to give a subsequent mortgage to the first mortgagee to secure that existing indebtedness. The question was whether the original first mortgagee was entitled to priority over second mortgagee. The Court confirmed the trial judgment and held that the registration of the discharge constituted actual notice to the second mortgagee that first mortgagee no longer had security in the real property for the indebtedness owing to it.
Lambton Lumber Ltd. v. Claran Homes Ltd., (1979) 23 O.R. (2nd) 673
74
The fact that second mortgagee had knowledge that the indebtedness to first mortgagee was still outstanding would not be sufficient for the second mortgagee to lose its priority under section 69(1) [actual section 63(1)] of the Registry Act. This is a case where Nova Scotia as the first mortgagee advanced further sum to a mortgagor, releasing first mortgage and replacing it with mortgage subsequent to date of second mortgage given to Co-op Atlantic, the second mortgagee. The subsequent mortgage contained a postponement clause, postponing it in priority to all past and future advances made under the first mortgage between the mortgagor and Nova Scotia. The mortgagor sought additional funds, and the Nova Scotias solicitor, instead of obtaining a further charge from the mortgagor to be secured and leaving the original first mortgage undisturbed, advised the him/her to take a new mortgage for the full amount of the first mortgage plus the additional amount requested, and to release the original mortgage. This advice was followed, and Nova Scotia attempted to rely on the postponement clause. The question in this case was whether Nova Scotias subsequent mortgage had priority over Co-op Atlantics mortgage, for to the postponement clause. The Court held that the postponement clause only assured priority of the first mortgage and advances under it so long as it continued in force. The formal released completely erased any priority Nova Scotia would otherwise have had, and the later mortgage stood alone unaided in equity or otherwise by the cancelled first mortgage. Arguments based on subrogation or other equitable preservation of the initial priority fails because the initial mortgage was released and must now be regarded as if it had never existed. The Court cannot properly relieve from the consequences of a lawyer's misunderstanding of the legal effect of the mortgages and their covenants by disregarding the legal instruments it produced or by distorting the priorities which legally resulted. In this case, Mutual Trust advanced funds to the mortgagor in order to discharge existing mortgages. In this period, a pending litigation between Credit View and the mortgagor was already registered and Mutual Trusts lawyer failed to advise his/her client about it. The funds were advanced and the existing mortgages were discharged. Later, the pending litigation became effective as against the mortgagor. The question in this case was whether Mutual Trusts charge had priority over a certificate of pending litigation.
Mutual Trust Co. v. Credit View Estate Homes, (1997) 34 O.R. (3rd) 583
75
The Court held that Mutual Trusts charge had priority over a certificate of pending litigation by operation of doctrine of subrogation. The fundamental principle underlying the doctrine is one of fairness in the light of all the circumstances. Within this principle is an understanding that no injustice is done by the appropriate subrogation of a party to the rights of original mortgagees. In this case, the argument was that, in the absence of subrogation, a lender would be denied the priority for which it had bargained and Nova Scotia would receive a windfall in the form of a higher priority than for which it had bargained. The doctrine of subrogation was not precluded by the negligence of the party claiming subrogation, nor was it precluded because the subject lands were under the land titles system. Mutual trust is entitled upon the ground of mistake to be subrogated to the rights of the original mortgagees to the extent of allowing him a priority over Credit View for the amount Mutual Trust paid to discharge the mortgages. It is clear beyond question that Mutual Trust would not have discharged these mortgages had he been aware of the existence of the pending litigation. He would either have refused to make the advance altogether, or he would have had the mortgages assigned to him instead of discharging them. It is equally clear that Credit View has not been in any way prejudiced by what has happened, and that no injustice will be done by replacing him in his former position, for he knew about the mortgages when pending litigation was registered.
Armatage Motor Ltd. v. Royal Trust Corp. of Canada, (1995) 45 R.P.R. (2nd) 204 In this case, Armatage had a second mortgage on a property. The mortgagors were seeking to refinance and to roll the amounts of the first and second mortgages into one new mortgage. The mortgagors subsequently obtained financing from Royal Trust. However, the mortgage funds were used to discharge the existing first mortgage on the property only. The respondent solicitor had not searched title and had registered Royal Trusts mortgage without realizing that it stood second in priority to the Armatages mortgage. Royal Trust sought declaration that it had priority over the Armatages mortgage by virtue of the application of the doctrine of subrogation. The Court held that Armatages mortgage had priority over the Royal Trusts mortgage. The doctrine of subrogation is an equitable doctrine and allows for a subsequent mortgagee to assume the rights of a prior mortgagee in certain
76
circumstances and is an exception to the general rule established by the Registry Act as to the priority of registration. However, Royal Trust had a remedy at law against its solicitor in either contract or negligence. By determining the appropriate remedy in any case, the Court must be satisfied first, that there is a substantive cause of action or violation of the plaintiff's rights; second, that substitutionary relief would not adequately vindicate those rights; and finally, that no discretionary factors incline against specific relief. The question is whether it is a case in which the remedy at law is so inadequate that the Court ought to interfere, having regard to the legal remedy, the rights and interests of the parties, and the consequence of this court's interference. Thus, a Court should not apply an equitable remedy, as the doctrine of subrogation, where there exists an equal remedy at law to rectify a partys loss. Royal Trust would not be prejudiced by the failure to impose the equitable doctrine of subrogation in the circumstances of the case.
77
The Court held that a second mortgagee may file a bill of foreclosure against subsequent mortgagees and the mortgagor, subject to prior mortgages, without making prior mortgagees a party. There is no reason for preventing a second mortgagee from asserting his/her rights against the persons who comes in under him/her. The case is different where a first mortgagee omits to make the second mortgagee a party to the suit, for by doing so first mortgagee gives the right of redemption to the third mortgagee.
78
Failing to pay all the taxes after one year, the municipality evicted the mortgagor from the property and the mortgagee became the owner of this property in fee simple. Subsequently, the first mortgagee sued the mortgagor on covenant for payment, putting it out of his power to transfer the land to the defendants in case they paid the mortgage money. The mortgagor sought judgment against the action because the first mortgagee removed the power to reconvey the property from it. The Court held that the mortgagee, being the transferee of the title under a taxsale, was entitled to recover in an action upon the covenant in the mortgage deed, notwithstanding that he had put it out of his power to transfer the land to the defendants in case they paid the mortgage money. The municipality, by statutory title paramount, has evicted the mortgagee and everybody else, quoad the estate under the mortgage. It is, no doubt, true that the mortgagor by paying the taxes might have prevented this eviction; but he/she was no more bound to redeem the previous encumbrance or to delay the prior encumbrancer in realizing on his security. The first mortgagee was in no way responsible for the municipality action that wiped out the mortgagees bound to reconvey on being paid the mortgage-money. He/she did not owed some duty to his mortgagor in respect of the land in which he had that estate, nor abused his position-or used it.
79
mortgaged property to the first mortgagee, the fact that the second mortgagee subsequently quitclaimed to the first mortgagee for a sum in order to avoid a foreclosure action, does not have the effect of precluding recovery by the second mortgagee against the mortgagor in an action on the covenant.
80
right of the grantor to have his life estate and that the grantees intention was to relieve the it of the burden by payment of the mortgage. However, the son grantee was entitled to have the mortgage assigned in such a way that it would remain an encumbrance on the remainder in fee vested in him.
5. The position of mortgagor where subsequent mortgage is created by the purchaser of equity of redemption
Kinnaird v. Trollope, (1888) 39 Ch.D. 636 at page 641
In this case, a mortgagor assigned his right of equity of redemption under a mortgage contract to a third party. The third party mortgaged the property in favour of the original mortgagees. The third party became insolvent and the mortgagee started an action on covenant against the original mortgagors for both mortgages. The Court held that the original mortgagor was entitled to reconveyance on payment of first mortgage debt only. The original mortgagor is under no responsibility for the second mortgage, and if he pays off the first mortgage there is no equity in the mortgagees favour as against the mortgagor which would entitle the mortgagee to refuse to reconvey the property to the mortgagor. A second mortgage given by a third party assignee creates in the mortgagee a fresh interest in the equity of redemption, but it does not impose any additional burden or liability on the first mortgagor assignor.
81
In other words there was no one who could compel the original mortgagors to pay the mortgage money, except the first mortgagee, and he only, because of the covenant to pay.
The mortgagee having sued on the covenant to pay principal and interest contained in the mortgage, the mortgagor, although having absolutely assigned his equity of redemption, acquired a new right to redeem, and is entitled upon payment of the mortgage money to a reconveyance to himself, subject to the equity of redemption vested in the other purchasers, if they want to proceed accordingly, as they were entitled under the statute to redeem the first mortgage.
Mahood Lumber Co. Ltd. v. M & J Roofing etc, (1982) 36 O.R. (2nd) 541
In this case, following the registration of a third mortgage on a certain piece of property, executions were filed against it. The third mortgagees subsequently took a transfer of the mortgagors equity of redemption in the property. When the second mortgage caused the property to be sold under a power of sale, the execution creditors resisted the claim of the third mortgagees to the residue of the fund, arguing that upon the conveyance to the latter of the equity of redemption, the mortgage debt merged therein. The Court held that the third mortgagees were entitled to the money ahead of the execution creditors. Section 9(1) [actual section 10(1)] of the Mortgages Act creates a presumption against merger which can be rebutted by showing that it was
82
the intention of the transferee of the equity of redemption that merger should occur. An examination of the deed and the surrounding circumstances did not aid in determining the parties intention, and in such cases it is presumed that the transferee intended what was most for his advantage. Here it was clearly to the advantage of the third mortgagees to avoid merger, and thus the execution creditors failed to discharge the onus upon them to rebut the presumption created by section 9(1) [actual section 10(1)] of the Mortgage Act.
83
building mortgage means any mortgage made for the purpose of financing the construction of a building. When no action may be brought (2)Where, in any building mortgage made on or after the 1st day of July, 1942, it is expressly stated that it is a building mortgage made pursuant to this section, no action may be brought by the mortgagee after the expiration of one year from the date of the maturity of the mortgage whereby to recover payment from the person who executed the mortgage of the whole or any part of the money therein secured, if such person has made a sale in good faith of the property and has conveyed and transferred the equity of redemption to a grantee under such circumstances that the grantee is by express covenant or otherwise obligated to indemnify such person with respect to the mortgage.
2. Duty to pay mortgage debt as between mortgagor and purchaser of equity of redemption Methods by which a purchaser may assume the mortgage debt / relationship between purchaser and mortgagor/relationship between purchaser and mortgagee
(a) Purchase subject to a mortgage
In this situation, the purchaser or grantee buy the mortgaged property (actually, the right of redemption) subject to the existing mortgage. It means that the mortgagor is not paying off the existing mortgage and the grantee is taking over the payments. The unpaid balance of the existing mortgage is then calculated as part of the buyer's purchase price credit against purchased price.
84
grantee of the mortgage, so the mortgagee can recover the amount of the mortgage from both.
Small v. Thompson, (1898) 28 S.C.R. 219 In this case, the plaintiff had conveyed the lands to a third party by deed, whereby the third party assumed a mortgage thereon and covenanted with the plaintiff that he would pay the same. The third party conveyed the lands to the respondent by a deed made in consideration of the assumption by her of the said mortgage and eventually to indemnify him and his assigns from all payments on account thereof. The respondent did not sign the deed which contained her covenant in favour of the third party, but she took possession and enjoyed the lands there under until the mortgagees took possession in default. The Court decides that where a deed of lands to a married woman, but which she did not sign, contained a recital that as part of the consideration the grantee should assume and pay off a mortgage debt thereon and a covenant to the same
85
effect with the vendor his executors, administrators and assigns, and she took possession of the lands and enjoyed the same and the benefits thereunder without disclaiming or taking steps to free herself from the burthen of the title, it must be considered that in assenting to take under the deed she bound herself to the performance of the obligations therein stated to have been undertaken upon her behalf and an assignee of the covenant could enforce it against her separate estate. Campbell v. Douglas, (1916) 54 S.C.R. 28 In this case, Douglas advanced money to a third person, who conveyed to him certain properties. Further, this third person entered into an agreement with Campbell to exchange the property conveyed for lots on another place, which was carried out by conveyances between Campbell and Douglas. In his deed Campbell stated that the consideration was an exchange of lands and $1.00, and conveyed the lots, subject to certain mortgages, the description being followed by the words, the assumption of which mortgages is part of the consideration herein. Later, Campbell was obliged to pay these mortgages, and brought suit against Douglas to recover the amount so paid. The Court held that Douglas was a purchaser of power's land, not a mortgagee. Whichever he was, Douglas assumed the mortgages as part of the consideration, and, therefore is liable in this action. The assumption of the mortgages amounted to an express covenant to pay them. Even if it did not, as Campbell would not have conveyed without this clause for assumption, such a covenant should be read into the contract. Friedman v. James, (1938) O.W.N. 356 In this case, one Gray sold a property to one Morgan, subject to a mortgage in favour of the plaintiff Friedman, and Morgan specifically covenanted in such agreement to indemnify Gray against such mortgage. Some months later Gray purchased another property from the defendant James and offered as part of the purchase price the debt owing by Morgan under the aforesaid agreement of sale (such as in a transfer of credit). Gray assigned this agreement to James, Morgan also being a party to such assignment, wherein Morgan admitted the amount of his liability and covenanted that the assignment by Gray to James did not in any way release him, Morgan from his obligation under the agreement to indemnify Gray. Morgan then further covenants to pay to James the balance of purchase price owing by him.
86
James covenants that upon Morgan paying the balance of the purchase money he will convey the premises to Morgan subject to the existing encumbrances, in which was included the mortgage sued on in this action. On the same date Gray executed a deed in favour of James. The issue in this case was whether there was a transfer of equity of redemption or even an implied covenant to indemnify. The Court said that there was no transfer of equity of redemption nor an implied covenant to indemnify. The transaction is quite different in substance from one where two persons exchange properties subject to mortgages. In such case each party is a real purchaser, and there is no reason why the usual implied covenant in favour of his vendor should not arise. Here, the assignment of the agreement, which was, of course, signed by Gray, shows plainly that the contemplation of the parties was that James was to be in the position of a temporary holder of the property subject to the encumbrances, and then pass it on to Morgan when Morgan paid the cash which he owed. James's position in essence was more that of a second mortgagee than of a purchaser.
National Trust v. Fuciarelli, (1980) 30 O.R. (2nd) 289 In this case, a mortgagor intended to sell property subject to mortgage. However, the covenants in deed did not express that the selling was to be subject to mortgage, that is, the mortgagor failed to obtain express covenant for indemnification. The purchaser subsequently resold the land. Later after, the mortgage was under default. The mortgagee then sold the property under power of sale and sued the mortgagor for the deficiency. The mortgagor paid for the deficiency. The question in this case was whether the mortgagor was entitled to recover from the purchaser. The Court held that where a mortgagor sells land subject to the mortgage, which is being assumed by the purchaser, but fails to exact an express covenant of indemnification from the purchaser and to modify the covenants in the deed, an implied covenant on the part of the purchaser nevertheless arises to indemnify the mortgagor for any loss sustained in an action against him by the mortgagee. The implied covenant arises not by virtue of the deed but by virtue of the sale and, therefore, parol evidence is admissible to establish the consideration for the sale and the assumption of the mortgage by the purchaser.
87
Moreover, the obligation to indemnify continues even though the purchaser has resold the property before the mortgagees action. Section 19 [actual section 20] of the Mortgages Act, which empowers the mortgagee to bring an action against the purchaser from the original mortgagor if there is an express or implied covenant to indemnify, but which terminates that right where the purchaser has resold the property before the action is commenced, does not affect the obligation to indemnify. Crown Trust v. Moriarity, (1980) 14 R.P.R. 309 In this case, Moriarity sold a property to a third party. This third party placed a first mortgage on the property in favour of Crown Trust and gave a second mortgage to Moriarity for the balance of the purchase price owing. The second mortgage went into default, and Moriarity accepted a quitclaim from the third party, registered in the ordinary course. First mortgage went into default, so Crown Trust sold the property under a power of sale and sued Moriarity for this deficiency. Moriarity alleged the quitclaim to avoid the suit. The Court decided that the quitclaim could not be opposed as against Crown Trust. It is true there is no express covenant in the quitclaim deed to assume the existing first mortgage, but the circumstances of this transaction are such that Moriarity under the circumstances where obligated to indemnify the third party with respect to the first mortgage. [It seems that the situation would be different if the first mortgage has paid the deficiency and tried to recover it from Moriarity]. Had Moriarity merely wished to release the third party from the second mortgage, they could have given a release of the mortgage only. Instead, Moriarity accepted and registered a quitclaim, and in the absence of special circumstances the law will imply that a purchaser will indemnify his/her vendor against all personal liability in respect of a pre-existing mortgage debt. It's established law that the purchaser of an equity of redemption is bound to indemnify the vendor against all personal liability in respect of the mortgage debt unless there is something in the deed or the circumstances showing a contract intention. A covenant that the purchaser will do this is implied by law.
88
89
owners of the equity to a subsequent purchaser of a portion of it, and released such right of way from his mortgage. The Court decided held that the mortgagee, having debarred himself from restoring the mortgaged lands unaltered in character and in a manner unauthorized by the terms of the mortgage owing to quantity, right of way, an assignee of the mortgage, could not claim under the covenant therein in an administration of the mortgagor's estate. However, the Court stated that in such a case, the mortgagee should have an opportunity within a limited time to get into a position so to restore the land, and twenty days were here allowed for that purpose.
4. Is a mortgagor who sold the equity of redemption a proper party in an action for foreclosure?
No. An action for foreclosure is an action that terminates the equity right of redemption. Thus, a mortgagor who sold his/her equity right of redemption is no longer the owner of such a right. In a situation where a mortgagor sells his/her equity right of redemption, the purchaser of the equity right of redemption is the proper party in an action for foreclosure.
90
91
The Court held that the obligation of a purchaser of mortgaged lands to indemnify his grantor against the personal covenant for payment may be assigned even before the institution of an action for the recovery of the mortgage debt and, if assigned to a person entitled to recover the debt, it gives the assignee a dire right of action against the person liable to pay the same.
H. Guarantees
A guarantee is a contract between a guarantor and the mortgagee. The subject of the guarantee is a debt owed to the mortgagee by a mortgagor. In the contract of guarantee, the guarantor agrees to repay the mortgagee if the mortgagor defaults. The exact nature of the obligation owed by the guarantor to the mortgagee depends on the construction of the contract of guarantee. Generally, the liability of the guarantor is usually made coterminous with that of the principal debtor.
1. Different situations
(a) Guarantor joins in the mortgage itself
Price v. Letros, supra See topic D., number 5., above for the Price v. Letros case.
92
In this case, the defendant Lucky executed a mortgage as guarantor for mortgagor. Mortgagor sold the mortgaged land to a purchaser, who assumed the mortgage, but later defaulted. The mortgagee obtained judgment on the covenant against the purchaser and took possession and then proceeded to sue the guarantor on the guarantee. The guarantor applied for an order dismissing the action against him on the ground that the action was barred by section 19 [actual section 20] of the Mortgages Act. The Court held that the action should be perpetually stayed (i.e. interrupted). Section 19(1) [actual section 20(1)] of the Mortgages Act defines original mortgagor as () any person who by virtue of privity of contract with the mortgagee is personally, liable to the mortgagee (). On the ordinary and natural reading of these words, defendant was, by virtue of the clause of guarantee, an original mortgagor. However, since mortgagee had already recovered judgment from purchaser, section 19(3) [actual section 20(3)] of the Mortgages Act applied to forever prevent it from recovering judgment against the defendant, guarantor.
3. Rights of a guarantor
(a) Generally
Generally the guarantee has a right of subrogation of the mortgagees rights as against the mortgagor guaranteed. The right of subrogation includes the right to the benefit of the security after the creditor is satisfied.
93
That right exists regardless if security was obtained at the mortgage contract or later. But if a security exists and the mortgagee release mortgagor from that security, then the guarantor has a right to be discharged totally or partially from the guarantee, depending on the terms of the contract of guarantee and also the circumstances. Guarantor has the right to recover debt paid only from the primary debtor. Guarantor has no interest in the property. He/she is liable to the debt of the primary debtor. Primary debtor under a guarantee cannot recover credit from his/her own guarantor.
ManuLife Bank v. Conlin, 41 R.P.R. (2nd) 283 ManuLife made a loan to the spouse of Conlin, guarantor, which was secured by a first mortgage on an apartment building. The guarantor covenanted to be bound by all conditions of the mortgage, and to remain so bound, notwithstanding an extension of time for payment of the loan or an increase in the interest rate charged for the loan. Prior to the mortgage maturing, the respondent agreed to extend the time for repayment of the loan for a further three years in consideration of a higher interest rate. At that time, the guarantor had separated from his spouse, and had no notice or knowledge of the renewal. The spouse, mortgagor, executed the renewal agreement although the document provided for the signature of the guarantor as well. The mortgage went into default, and the respondent commenced proceedings for recover the mortgage debt. The issue was whether the guarantor was liable for the renewal agreement or not. The majority of the Court held that: i. A guarantor can contract out of the normal rule that an increase in the interest rate or an extension of the term of the mortgage is a material variation in the original contract that operates to extinguish the liability of the guarantor. However, the issue in this case was whether the language in the mortgage covered the renewal agreement. On balance and keeping in mind that the documents were drawn and presented by the mortgagee, it was not clear that the guarantor contemplated a renewal agreement. The resolution of this case was not assisted by the references in the mortgage to the guarantor as principal debtor because there is a
94
major difference between a contract of guarantee and of indemnity and it was necessary to determine the overriding intention. In this case, the references to the guarantor as principal debtor should be ignored as extraneous and repugnant. i. A guarantor's rights may be contracted away, but the language used, particularly when drafted by the lender, must be clear. Here, the contract of guarantee did not use the word renewal, which was significant because the word renewal is common in mortgage parlance and would normally be used if contemplated. The clause of the contract of guarantee was not explicit enough to embrace a renewal. As for another clause, strictly construed, it was divided into two independent parts, the first dealing with extensions and the second part dealing with renewals. For renewals, this clause only authorized a renewal which the mortgagee hoped would stand against subsequent encumbrancers. It did not stipulate that the guarantor need not be a party to the renewal, and, since the first clause designated the guarantors as principal debtors and not sureties one would expect them to be signatories to the renewal agreement. The minority of the Court sustained that the general rule is that the guarantor will be discharged if the principal contact is varied or altered without the guarantor's consent in a material way not necessarily beneficial to the surety. However, a guarantor can contract out of the general rule, and whether he or she has done so depends upon the construction to be given the contract and the intention of the parties as evidenced by the transaction viewed as a whole. Here the contract clearly provided for the extension of time for payment and the increase in the mortgage rate. The contract authorized the mortgagee to give additional time for the payment of the mortgage, which is what the renewal agreement did, without releasing the guarantor. It permitted the mortgagee to vary, that is, to change or alter, the terms of payment and the rate of interest. There was no requirement that the guarantor be given notice or agree to such variation. The guarantor signed the guarantee as a principal debtor, which was obviously intended to keep the guarantor liable until payment in full of the moneys secured by the mortgage.
95
Holland Consolidated v. Hutchins, (1936) 2 D.L.R. 481 In this case, the mortgagor changed the terms of the mortgage contract initially guaranteed and secured by a mortgage on bonds to extend the time with an increase in rate of interest, and discharged some of the sureties. The mortgage contract went into default, and the respondent commenced proceedings for recover the mortgage debt. The Court held that sureties to a mortgage are discharged from liability by an arrangement between mortgagor and mortgagee changing the terms of the original obligation and increasing the rate of interest without fully disclosing the particulars to them. Likewise, for withholding information that other sureties, jointly and severally liable with them, refused their assent to the new terms and were thus discharged, thereby affecting their right to contribution. A provision in the suretyship contract, that no matter what dealings between the mortgagor and mortgagee the obligation shall remain in full force so long as any money remains unpaid under the mortgage or any renewal or extension thereof, does not entitle the creditor to make a new contract with the principal debtor and to hold the sureties to the bond of the original obligation. A renewal or extension with an increased rate of interest is not something collateral to but a definite alteration of a material part of the original contract.
96
A failure from the mortgagee to preserve security set the guarantor free from the obligation guaranteed under the mortgage on a dollar per dollar basis, proportional to the prejudice or the loss. That is because the mortgagee spoiled guarantors rights of subrogation. However, this can be set aside by the terms of the contract as the examples on pages 22 and 26 of the course pack show.
97
98
99
The estate in mortgage may be redeemed, not only by the persons specified in the proviso for redemption and their representatives, but also by all persons who have any interest in or lien upon the estate Thus, no order for foreclosure and sale should be made unless the persons entitled to redeem are parties to the action. It is the right to redeem which is to be barred and foreclosed and if the husband defendant has the right to redeem, then it follows that this right cannot be taken away without his being heard or given the opportunity to be heard.
Canadian Financial Trust v. First Federal Construction Ltd., (1982) 34 O.R. (2nd) 681
Mortgages Power of sale proceedings Requirement of notice to guarantors of mortgage debt Mortgages Act, R.S.O. 1970, c. 279, s. 30(1). Guarantee and suretyship Nature of guarantors' interest in mortgaged property Guarantors' interest appearing in mortgage instrument but not on register of title Whether "register of title" includes instruments mentioned therein. The plaintiff mortgagee sold real property belonging to the defendant corporation pursuant to a power of sale upon the defendant's default. When a deficiency arose, the plaintiff sought to have it made good by the three individual defendants, officers and directors of the defendant corporation, who had guaranteed the mortgage debt. The plaintiff served a valid notice under Part III of the Mortgages Act, upon the defendant corporation, but did not serve the individual defendants, although two of them received copies of the notice and were at all relevant times fully aware of its contents. The trial judge held that the individual defendants were absolutely discharged from the guarantee because of failure to give notice pursuant to section 30 [actual section 31] of the Mortgages Act. The plaintiff appealed. The Court held that the appeal should be allowed for the following reasons: i. Section 30 paragraph 1 [actual section 31(1)1 requires that where the mortgaged property is registered under the Land Titles Act, notice be given to every person appearing by the register of title . . . to have an interest in the mortgaged property. Section 30(2) [actual section 31(2)] extends the definition of register of title to include instruments received for registration before 4:30 p.m. on the day immediately prior to the day on which a notice of exercising the power of sale is given. Section 30(2) [actual section 31(2)] refers only to late-filed instruments which would not have appeared on the register at the relevant time. It does not extend the register of title to include all instruments referred to therein.
10 0
Here the guarantor's interest, if any, appeared only in the mortgage instrument itself and not "by the register". i. The guarantors did not have an interest in the mortgaged property as required by section 30(1) paragraph 1 and paragraph 4 [actual section 31(1)1 and 4]. Upon paying a guaranteed mortgage debt, but not before doing so, a guarantor is entitled to an assignment of the security held by the creditor relating to that debt, and to be subrogated to the rights of the creditor against the principal debtor under the security. Such a guarantor is entitled to notice in any foreclosure or power of sale proceeding. But here the guarantors had paid no part of the mortgage debt prior to the exercise of the power of sale. They consequently had no interest in the property and were not entitled to notice. i. There was no contractual obligation upon the plaintiff to give notice because the mortgage instrument required only that notice ... as provided in the Mortgages Act be given.
I. Marshalling
Marshalling is an equitable remedy. The doctrine of marshalling, in its application to mortgages or charges upon two estates or funds, may be stated as follows. If the owner of two estates mortgages them both to one person, and then one of them to another, either with or without notice, the second mortgagee may insist that the debt of the first mortgagee shall be satisfied out of the estate not mortgaged to the second, so gar as that will extend. This right is always subject to two important qualifications: i. Nothing will be done to interfere with the paramount right of the first mortgagee to pursue his remedy against either of the two estates. ii.The doctrine will not be applied to the prejudice of third parties.
10 1
Brewer mortgaged lands on Bruce and Brant Townships to Victoria & Grey Trust Co. He then mortgaged both lands to the Toronto-Dominion Bank. Finally, he mortgaged both lands to Industrial Development Bank. Victoria & Grey Trust Co. obtained a judgment for foreclosure of both parcels and in the proceedings the local master held that the Victoria & Grey Trust Co. should first realize its claim on the Bruce lands before having recourse to the Brant lands. On appeal by the Industrial Development Bank, the Court held that the appeal should be allowed. The local master erred in applying the doctrine of marshalling since the doctrine should not be applied when its operation prejudices a third party. Since a large deficiency existed, Industrial Development Bank could be caused great prejudice if the entire proceeds of the Bruce lands on which it had a second mortgage were to be applied in first payment of Victoria & Grey Trust Co.s mortgage. Accordingly, the claim of Victoria & Grey Trust Co. ought to be satisfied out of the proceeds of both parcels rateably according to their sale values.
10 2
(a) the actual value of the premises at the time when the first lien arose; and (b) the total of all amounts that prior to that time were, (i) advanced in the case of a mortgage, and (ii) advanced or secured in the case of a conveyance or other agreement. Prior mortgages, subsequent advances (4) Subject to subsection (2), a conveyance, mortgage or other agreement affecting the owners interest in the premises that was registered prior to the time when the first lien arose in respect of an improvement, has priority, in addition to the priority to which it is entitled under subsection (3), over the liens arising from the improvement, to the extent of any advance made in respect of that conveyance, mortgage or other agreement after the time when the first lien arose, unless, (a) at the time when the advance was made, there was a preserved [registered and not discharged] or perfected lien against the premises; or (b) prior to the time when the advance was made, the person making the advance had received written notice of a lien. Special priority against subsequent mortgages (5) Where a mortgage affecting the owners interest in the premises is registered after the time when the first lien arose in respect of an improvement, the liens arising from the improvement have priority over the mortgage to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV. General priority against subsequent mortgages (6) Subject to subsections (2) and (5), a conveyance, mortgage or other agreement affecting the owners interest in the premises that is registered after the time when the first lien arose in respect to the improvement, has priority over the liens arising from the improvement to the extent of any advance made in respect of that conveyance, mortgage or other agreement, unless, (a) at the time when the advance was made, there was a preserved [registered and not discharged] or perfected lien against the premises; or (b) prior to the time when the advance was made, the person making the advance had received written notice of a lien. Advances to trustee under Part IX (7) Despite anything in this Act, where an amount is advanced to a trustee appointed under Part IX as a result of the exercise of any powers conferred upon the trustee under that Part, (a) the interest in the premises acquired by the person making the advance takes priority, to the extent of the advance, over every lien existing at the date of the trustees appointment; and (b) the amount received is not subject to any lien existing at the date of the trustees appointment. Where postponement (8) Despite subsections (4) and (6), where a preserved or perfected lien is postponed in favour of the interest of some other person in the premises, that person shall enjoy priority in accordance with the postponement over, (a) the postponed lien; and
10 3
(b) where an advance is made, any unpreserved lien in respect of which no written notice has been received by the person in whose favour the postponement is made at the time of the advance, but nothing in this subsection affects the priority of the liens under subsections (2) and (5). Saving (9) Subsections (2) and (5) do not apply in respect of a mortgage that was registered prior to the 2nd day of April, 1983. Financial guarantee bond (10) A purchaser who takes title from a mortgagee takes title to the premises free of the priority of the liens created by subsections (2) and (5) where, (a) a bond of an insurer licensed under the Insurance Act to write surety and fidelity insurance; or (b) a letter of credit or a guarantee from a bank listed in Schedule I or II to the Bank Act (Canada), in a form prescribed is registered on the title to the premises, and, upon registration, the security of the bond, letter of credit or the guarantee takes the place of the priority created by those subsections, and persons who have proved liens have a right of action against the surety on the bond or guarantee or the issuer of the letter of credit. R.S.O. 1990, c. C.30, s. 78 (10); 1997, c. 19, s. 30. Home buyers mortgage (11) Subsections (2) and (5) do not apply to a mortgage given or assumed by a home buyer. Persons who comprise class 79. All persons having a lien who have supplied services or materials to the same payer comprise a class, and a person who has supplied services or materials to more than one payer is a member of every class to the extent to which the persons lien relates to that class. Priority between and within class 80. (1) Except where it is otherwise provided by this Act, (a) no person having a lien is entitled to any priority over another member of the same class; (b) all amounts available to satisfy the liens in respect of an improvement shall be distributed rateably among the members of each class according to their respective rights; and (c) the lien of every member of a class has priority over the lien of the payer of that class. Where conveyance or mortgage void (2) Any conveyance or mortgage in respect of the premises to any person entitled to a lien on the premises, in payment of or as security for that claim, whether given before or after that lien arises, is void against all other persons entitled to a lien on the premises.
The construction lien is a creature of statute only. It grants to one class of creditors a security or preference not enjoyed by other creditors of the same debtor.
10 4
It gives those who supply labour, services and materials to an improvement an extra-contractual charge against the interest of the owner in the improved lands and lands used and enjoined therewith. It attaches to interests in land only. The object of lien legislation is to prevent owners of land from benefiting from improvements to their land without payment. Holdback is the charge upon the land that secures payment of a statutory holdback. Owners are obliged to retain out of all payments made under the contract to the contractor a percentage (10%) of the value of the work done at the time the payment is made. This percentage retained, or holdback, forms a fund out of which the claims of the subcontractors and material suppliers are eventually paid in priority, according to the scheme of the Act. The Ontario Act grants lien claimants a general priority over registered interests. Mortgages generally have priority over liens if they were registered prior to the date the lien arose, but that priority is limited to the lesser of the value of the premises at the time the lien arose and the total amounts advanced before that time. In addition, the Act gives such prior mortgages additional priority with respect to advances made in the absence of a preserved lien or written notice. Generally, mortgages registered after the first lien arose rank after the lien. However, unlike other provinces, the Ontario Act provides that building mortgages, i.e., mortgages taken with the intent of financing an improvement, rank after the lien, regardless of when they were registered.
10 5
Section 80 distinguishes between liens arising from the improvement and liens preserved or perfected against the premises. The former deals with work and service performed, the latter with registration.
Royal Bank of Canada v. Lawron Developments Inc., (1994) 16 O.R. (3rd) 450
In this case, a mortgagee advanced money under a single mortgage for several different intentions, such as to purchase land and also to secure the financing of an improvement. The issue in this case was to establish the priorities of the mortgage in respect of the construction liens. The Court held that the priorities between mortgage and construction liens should be determined by segregating the several intentions for the mortgage loan for the purpose of application of section 78(2) of the Construction Lien Act. Under section 78(2) of the Construction Lien Act, it was possible: i. to recognize that a mortgagee may have more than one intention; ii.to segregate those intentions and the associated advances; and, iii.to assign different priorities to the different advances. The result is consistent with the principles and purposes of the Act. In line with the general principle that the rights of the lien claimants begin when they begin to add value, it made sense that, where a bank agrees to take a mortgage with the dual intentions of financing the acquisition of the land and thereafter financing the erection of a building upon it, the section should be interpreted in a way that is consistent with convenient commercial practice, so as to allow the Bank to take a single mortgage for more than one purpose. The result was that the Bank had priority for the first advance moneys with the purpose to buy the premises.
10 6
the premises at the time when the lien arose, and the total of all amounts that were advanced under the mortgage prior to that time. Nevertheless, the fact was that the property had no actual value at time when the first lien arose. Actual value means market value; that is, the price that would likely result from negotiations between a willing vendor and a willing purchaser. Therefore, Park Constractors construction lien acquired priority over Royal Banks prior registered mortgage.
10 7