Canada: Mortgage Advances – Who Has Priority?

Copyright 2010, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate–Mortgage Lending, October 2010

In today's challenging credit market, it is not uncommon for a borrower to look to more than one lender to meet its financing needs, which usually means that the borrower will be required to grant security to multiple lenders in the same property.

In British Columbia, absent any other arrangement between mortgage lenders, in multiple mortgage transactions involving a single advance of funds by each mortgage lender, the priority of the mortgage lenders is straightforward as, pursuant to the Land Title Act (British Columbia) (the LTA), priority is generally based on the date and time the respective applications for registration of the mortgages were received by the registrar. The mortgage lender who registers its mortgage first in time is entitled to see its debt fully satisfied out of the mortgaged property before any subsequent secured parties are entitled to be paid.

FURTHER ADVANCES

The issue of competing claims between secured lenders becomes more complicated in the scenario where at least one secured lender has agreed to make periodic advances under its mortgage. In these cases, the first secured lender providing the multiple advances will want to have full priority over any subsequent mortgages in respect of all advances made under its mortgage, regardless of when such advances are made. The second secured lender will require certainty as to the amount secured and outstanding under the first mortgage at the time that its second mortgage is registered and will seek some degree of comfort that such amount will not increase so as to prejudice its security against the remaining equity in the mortgaged property.

In these situations, the priority rules set out in the LTA fall short of balancing the interests of multiple secured lenders as they would favour those mortgage lenders who registered their mortgage first in time by allowing them to enjoy priority for all advances made under their mortgage, even if such advances are made after the registration of subsequent mortgages. The Property Law Act (British Columbia) (the PLA) and the Builders Lien Act (British Columbia) (the BLA) address the issue of competing claims where multiple mortgage advances are involved.

PROPERTY LAW ACT

The PLA provides that, unless a prior mortgagee makes a further advance pursuant to written agreement with the subsequent mortgagee or, alternatively, is committed by the terms of the mortgage to make further advances, the prior mortgagee will be postponed to the second mortgage if it makes further advances after it has notice of the second mortgage.

The PLA enables prior and subsequent lenders to preserve their respective priority positions provided that they take the necessary steps to fulfill the requirements set out therein. In the vast majority of cases where competing claims between registered mortgages may arise, a first lender wishing to preserve its ability to claim priority over subsequent advances will want to satisfy the requirements of the PLA by entering into a written agreement with the subsequent mortgagee. A subsequent lender who wishes to curtail the first lender's ability to "tack" further advances will want to ensure that the prior mortgagee has received written notice of the subsequent mortgage.

Nothing in the law precludes competing secured lenders from making an arrangement to vary the statutory priority that would otherwise apply. In fact, the PLA makes express provision for this. In order for the first mortgagee to claim priority over further advances, the subsequent registered mortgagees must agree in writing to the priority of such advances. In most cases, this requirement is met when the secured parties enter into a priority or subordination agreement which allows each of the secured lenders to define their respective priority positions. When negotiating a priority agreement, the first mortgage lender will want to ensure that it has priority for all advances made under the first mortgage up to a stated maximum amount and for any advances aimed at preserving and protecting the mortgaged property (including property inspection fees, appraisal fees, insurance and property taxes) which are added to the principal amount secured by the mortgage. Although courts do not characterize protective disbursements of this nature as "further advances" for the purposes of the priority rules set out in the PLA, prudent lenders should ensure that any agreement with subsequent lenders provides for the priority of such advances so as to avoid any dispute.

Of course, subordinate lenders will want to make clear in the priority agreement that their security is only subordinated to the extent of a stated maximum amount and that its subordinated position shall not extend to any re-advances under the first mortgage.

Although the prudent and recommended approach in a multiple lender scenario is for all of the lenders to enter into a priority agreement, some courts in British Columbia have interpreted the written agreement requirement in the PLA broadly enough to apply to provisions in second mortgages which contemplate repayment of the first mortgage in full prior to the repayment of the second mortgage (even though the first mortgage lender is not a party to, nor has knowledge of, such contractual arrangement).

Under the PLA, in order for a subsequent mortgagee to claim priority over further advances made under a prior mortgage, it must provide actual notice to the first mortgagee of the registration of the subsequent mortgage. The mere registration of the subsequent mortgage on title does not constitute notice. If a second mortgage has been granted but the first mortgagee has not received actual notice thereof, the first mortgagee has priority over the second mortgage with respect to advances made subsequent to the second mortgage up to the stated principal amount secured by the first mortgage.

BUILDERS LIEN ACT

In addition to the priority rules embodied in the PLA, the priority of secured lenders for further advances is also affected by the provisions of the BLA which deal with competing interests between a mortgage lender and a builders' lien claimant. These provisions are of particular importance to lenders providing financing for a construction project as they are most likely to find themselves competing with the claims of contractors, suppliers, subcontractors or workers in the same property.

The BLA provides that an advance by a mortgagee that results in an increase in the direct or contingent liability of a mortgagor, or both, under a registered mortgage occurring after the time a claim of lien is filed ranks in priority after the amount secured by that claim of lien.

The notable difference between the PLA and the BLA is that the BLA does not require actual notice to the first mortgage holder as a condition of priority for the subsequent interest. That is, under the BLA, the mere filing of a lien claim is sufficient to give that claim priority over any further advances made under a prior mortgage and the lien claimant is not required to notify the mortgage lender of the lien claim. The practical effect of this is that mortgage lenders providing financing for a construction project should, as a matter of practice, always search title of the mortgaged property for liens to ensure that their priority position is secure prior to making any further advances during the course of the project.

The provisions of the PLA and BLA attempt to strike a balance between the competing interests of multiple secured lenders while protecting the rights of borrowers to freely utilize the equity in their lands. Mortgage lenders involved in construction financing or collateral loans should familiarize themselves with the PLA and BLA and work within the statutory provisions in order to protect their respective secured positions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.