A recent decision by the Ontario Court of Appeal in Business
Development Bank of Canada v. Pine Tree Resorts
Inc.1 illustrates the extent of exposure which a
second mortgagee could potentially face when it attempts to enforce
its second mortgage.
In Pine Tree, the mortgagor defaulted on a first
mortgage in favour of Business Development Bank of Canada
("BDC") and also defaulted on a second
mortgage in favour of Romspen Investment Corporation
("Romspen") with respect to an inn
located in Honey Harbour, Ontario. At the time of enforcement, BDC
was owed approximately $2.6 million. Romspen was owed approximately
In addition to amounts owing to BDC, the mortgagor was also in
arrears of approximately $250,000 for HST. Non-payment of HST was a
breach of a covenant under the BDC security.
To enforce payment, BDC applied for and was granted the
appointment of a court-ordered receiver over the mortgagor's
assets as it was contractually entitled to do under its security
documents. In contrast, Romspen attempted to initiate power of sale
proceedings over the property but the proceedings were halted by
BDC's appointment of a receiver.
Romspen, together with the mortgagor, then sought leave to
appeal the application judge's order appointing the receiver,
arguing that Romspen had the right as a subsequent mortgagee to put
BDC in good standing per Section 22 of the Mortgages
Act2, and thus take over the sale of the property
by resuming the power of sale proceedings.
Section 22 of the Mortgages Act entitles a mortgagor,
where default has occurred, to perform such covenant or pay the
amount due under the mortgage and thereupon relieves a mortgagor of
the consequence of any default.
Romspen proposed to do so by "[putting] the [first]
mortgage in good standing by paying all arrears of principal and
interest, together with all of BDC's costs, expenses and
outstanding realty taxes."3 However, Romspen did
not propose to repay the approximately $250,000 in remaining HST
Romspen and the mortgagor submitted that it was not necessary
for them to comply with the HST covenant in order to be able to
take advantage of their subsequent mortgagee's rights under
Section 22, as the HST arrears formed a subsequent encumbrance and
did not jeopardize BDC's security in any way.
In response, BDC submitted that bringing the prior mortgage in
good standing required "paying the amount due under the
mortgage and – where there are unperformed covenants –
performing those covenants as well."4
The Court did not accept Romspen's argument and instead
"Romspen relies upon the jurisprudence of this Court
establishing that a mortgagor – and therefore, a subsequent
mortgagee – is entitled as of right, upon tendering the
arrears or performing the covenant in default, to be relieved of
the consequence of default. The problem is that Romspen has not
offered to put the BDC mortgage in good standing, but has only
offered to do so partially. It proposes to leave unperformed a
$250,000 covenant – payment of the outstanding HST
For Romspen to succeed on appeal would require a very creative
interpretation of Section 22 of the Mortgages Act, and one
would potentially create an undesirable element of uncertainty in
the field of mortgage enforcement, because no one would know which
covenants could be left unperformed and which could not, without
litigating the issue in each case."5
As a result of the decision in Pine Tree, second
mortgagees may find themselves facing much more significant costs
before they can be in a position to enforce their second position
mortgage and may be more reluctant to enforce their security ahead
of a first mortgage.
1 Business Development Bank of Canada v Pine Tree
Resorts Inc, 2013 ONCA 282 [Pine
2 RSO 1990, c M.40
3 Pine Tree, at para. 9
4 Pine Tree, at para. 11
5 Pine Tree, at paras. 39 and 40.
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