Canada: Know Your Limits - Enforcing Mortgage Guarantees

The Take-Away:

Not all guarantees are governed by the general two year limitation period provided under the Ontario Limitations Act, 2002.

The recent decision in The Equitable Trust Company v. Marsig held that guarantees contained in mortgages are governed by the ten year limitation period prescribed by the Ontario Real Property Limitations Act, rather than by the usual two year period.

Accordingly, mortgagees looking to recover from a guarantor should be aware that the limitations clock ticking on their right to commence an action has a much longer battery life than might otherwise be expected. 

The Facts:

In February 2005, Equitable Trust ("Equitable") made a loan to 2062277 Ontario Inc. ("Borrower") secured by a real property mortgage. The mortgage contained a guarantee from Ernest Marsig ("Guarantor"). Following default, Equitable issued a notice of sale under the mortgage in December 2007, and served both the Borrower and the Guarantor.

The property was sold under power of sale, but there was a deficiency. In September 2010, Equitable commenced an action to recover the deficiency from the Borrower and the Guarantor.

In a motion for summary judgment, the Guarantor took the position that the action against him was statute barred because (i) his guarantee was a demand obligation and (ii) all demand obligations are subject to the general two year limitation period of the Limitations Act, 2002

The motion was dismissed. After concluding that the guarantee was not a demand obligation, the motion judge more importantly held that the action was subject to the ten year limitation period prescribed by the Real Property Limitations Act, rather than the two year period of the Limitations Act, 2002. The Court of Appeal did not find it necessary to deal with the demand obligation issue, and in a clear judgment held that the ten year limitation period would apply to the guarantee whether or not it was payable on demand.

The Law:

The case serves as an excellent reminder of the existence of the real property-related limitations regime created by the Real Property Limitations Act, which co-exists with the regime created by the Limitations Act, 2002 for limitation periods other than those affecting real property.

As the decision illustrates, the former Limitations Act was made up of definitions and Parts I through III. Parts II and III were repealed in 2002 and replaced by the Limitations Act, 2002 to deal with limitation periods that do not affect real property. The definitions and Part I continue today as the renamed Real Property Limitations Act and deal exclusively with real property limitations.

The case turned on the proper interpretation to be given to Section 43 of the Real Property Limitations Act, the relevant part of which reads as follows:  

43.(1) No action upon a covenant contained in an indenture of mortgage or any other instrument made on or after July 1, 1894 to repay the whole of part of any money secured by a mortgage shall be commenced after ... the expiry of 10 years after the day on which the cause of action arose.

Relying on, among other things, the unreported decision of Montreal Trust Co. of Canada v. Vanness Estate,1 the motion judge had no difficulty in concluding that guarantees found in a mortgage are governed by the Real Property Limitations Act. The Court of Appeal agreed, referring to a 1924 decision of that Court2 which concluded that the ten year limitation period contained in a predecessor statute governed guarantees contained in real estate mortgages.

While the Equitable Trust decision dealt with a guarantee contained within the body of a mortgage, the ten year limitation period should apply as well to any guarantee of a mortgage obligation, including guarantees contained in a separate instrument. This would result from the language of Section 43(1)(a) of the Real Property Limitations Act which refers not only to "a covenant contained in an indenture of mortgage" but also to "any other instrument repay the whole or any part of any money secured by a mortgage".

As the Court of Appeal indicated, while the decision certainly confirms that lenders have additional time to sue guarantors of mortgage loans, it may paradoxically assist guarantors. Given the ten year period in which lenders can bring an action, they may decide to first realize on their mortgage security and then demand that the guarantor only pay any deficiency, rather than rush to sue the guarantor for the entire mortgage debt.  From a practical standpoint, this approach may also benefit the lender since a claim for the smaller deficiency balance may lead to a quick resolution of the matter and avoid litigation.


1 (19 August 2004), Ottawa, 02-CV-19501 (Ont. S.C.), aff'd,  [2005] O.J. No. 594 (C.A.)
2 Martin v Youngson (1924),55 O.L.R. 658 (C.A.)

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.

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