Canada: Lenders Beware – Your Mortgages May Not Be Valid (At Least For A Short Period Of Time)

Last Updated: February 3 2016
Article by Matthew (Shui-Yuen) Choi

One of the worst things that can happen to a mortgage lender is if it advances a loan and then realizes it doesn't have the security that it thought it had. A recent decision from the BC Court of Appeal indicates that there is an inherent risk in many mortgage transactions in British Columbia that would make a lender's mortgage unenforceable, at least for a period after closing, even if the mortgage is validly signed and fully registered.

A typical payout gone sideways:

Consider a typical refinancing scenario – The Borrower grants a first mortgage to secure a loan from New Bank, to be used for paying out a prior mortgage in favour of Old Bank.  On the closing date, New Bank advances funds to its notary public, who, after registering a mortgage in favour of New Bank, forwards those funds to the Borrower's notary public, who accepts the funds on her undertaking to pay out Old Bank and obtain a discharge of Old Bank's mortgage.  The Borrower's notary then absconds with the funds without paying out Old Bank.  That is essentially the factual context the Court was asked to consider in Lin v. CIBC Mortgage 2015 BCCA 518.

At the time the theft was discovered, Old Bank had not received the pay-out amount and its existing mortgage was still registered on the Borrower's property; New Bank already advanced funds, but it thought that it at least had a registered mortgage against the Borrower's property, though one ranking behind Old Bank's; the Borrower now had two mortgages registered on its property.

What the Court ruled:

The Court held that there was a condition attached to New Bank's funds – that New Bank be granted a first  mortgage of the Borrower's property.  Since that condition was never satisfied, the Borrower never got the benefit of the funds; i.e. the funds never became the Borrower's own funds.  This was the case even though the funds were advanced to the Borrower's notary and there was no dispute that the notary was acting as an agent of the Borrower.  Since no valid consideration was received by the Borrower in return for granting the mortgage, New Bank did not have any right to the mortgage and thus its mortgage (even though fully registered) was not valid.  In short, the Court's decision means that the funds remained New Bank's property when they were stolen, and that not only did New Bank not have a first ranking mortgage, it did not have a mortgage at all.

Wait...what is an "undertaking" again?

Every refinancing and pay-out scenario poses a chicken-and-egg conundrum – The existing lender will not discharge its mortgage until it receives the pay-out funds; the new lender will not advance funds unless it obtains a valid mortgage.  This can be resolved by having all parties meet in person, with the funds, a signed mortgage and a signed discharge tabled and exchanged at the same time, but that is not practical.  Instead, regulated professionals (i.e. lawyers and notaries) close transactions using undertakings.  Undertakings are personal promises made by one legal professional to another, and the person making the undertakings will be personally liable for their breach.  For lawyers and notaries, the breach of an undertaking has serious professional consequences.

What the ruling means:

It is ironic that, as a result of New Bank making it a condition for the advance of its loan that it have a first mortgage, New Bank was denied the very protection that the condition was intended to provide, through no fault of New Bank.  This ruling means that, in the interim period between New Bank advancing funds and Old Bank discharging its prior mortgage, New Bank did not have a valid mortgage.  When a theft like one in the present case occurs, the new lender almost certainly has a claim against the rogue notary / agent, and it might also have a claim against the otherwise innocent borrower (for being the principal of the rogue agent), but now the law in BC is that it does not have rights against the mortgaged property because its mortgage is invalid.  The inherent risk to the lender is that, for a loan supposedly secured by a mortgage, there is a period of time that the lender's recourse is an unsecured claim against some individuals and not the property.

But the ruling doesn't mean...

There were some comments made in the media after the decision was released, which might benefit from some clarification:

Solicitors v. Notaries Public?

The ruling did not imply that undertakings given by a notary are inherently less dependable than those made by a lawyer.  The Court's decision would have been the same, had the lender and the borrower been represented by lawyers, instead of notaries.  When a lawyer or a notary gives an undertaking, recourse for a breach of the undertaking is against the person making it.

The Court made the innocent New Bank shoulder all the loss?

The Court emphasized that it arrived at its decision based on how the claims were put to the Court by the parties – i.e. whether New Bank had a valid mortgage.  What it did not decide was which party bore the ultimate liability for the loss.  In fact, the Court suggested that:

"It remains open to CIBC [as the New Bank] to sue to recover damages for that loss, whether against the notary, the notary's insurance fund, or even ... against the Borrowers as the principals of the absconding notary."

The end of undertakings in mortgage lending transactions?

Some lawyers wonder whether they will have to find alternatives to undertaking to facilitate closing – such as having the new lender's own lawyer / notary handle payout directly to the old lender, or having the old lender deliver a signed discharge to the new lender in advance, to be held by the new lender until the old lender has been paid out. 

It is too early to say whether undertakings will fall by the wayside in lending practice, and it remains to be seen how commercial lenders react to this decision.  However, we note that this case highlights that it is very difficult to eliminate the risk created by dishonest individuals and even more difficult for the courts to adjudicate between two innocent parties.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Matthew (Shui-Yuen) Choi
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions