In a recent decision of the British Columbia Supreme Court, a
private mortgagee's misunderstanding of the effect of a renewal
and forbearance agreement cost it dearly, to the tune of
The facts in 0895249 B.C. Ltd.1 are somewhat
convoluted, but the essentials are straightforward. A numbered
company, 360305 B.C. Ltd. ("360305")
held a first mortgage of the subject property. After the first
mortgage matured, 360305 entered into a forbearance agreement with
a number of debtor parties and agreed to delay enforcement of its
mortgage security. The mortgage indebtedness would now become due
and payable on May 31, 2010. In exchange, 360305 received payments
of $15,000 per month. A portion of the payments was used to cover
the prior month's accrued interest and the remaining amount was
taken as "fees". The fees were not related to any
activity that would require administrative, underwriting, or other
activities on the part of the mortgagee.
The debtors paid the monthly payments on time but when the
forbearance agreement expired on May 31, 2010, the mortgage
indebtedness was not repaid. Instead, 360305 subsequently entered
into further forbearance agreements with very similar terms.
Ultimately, the total fee portion from the monthly payments of the
forbearance agreements added up to hundreds of thousands of
Crucially, the prescribed mortgage terms of 360305's
mortgage did not contemplate the payment of the fees for extension
or forbearance agreements. Further, all of the forbearance
agreements were negotiated and executed without the consent or
knowledge of the subsequent mortgagees.
The second mortgagee, Romspen Investment Corporation
("Romspen"), eventually requested and
received a payout statement from 360305, for the purpose of
redeeming the first mortgage. When Romspen reviewed the payout
statement, it learned of the existence of one of the forbearance
agreements. Romspen then advised 360305 that 360305 was obliged to
apply the fees it had received against the outstanding indebtedness
on the first mortgage.
Eventually 360305 transferred its mortgage to 0895249 B.C. Ltd.
(the "Transferee Mortgagee") and the new
first mortgagee provided a payout statement to Romspen of over $1
million. Romspen replied on March 28, 2013, by tendering a cheque
for $645,551.97. This amount was intended to pay for the amount
secured by the first mortgage, less the fees paid under the one
forbearance agreement that Romspen knew about. When the Transferee
Mortgagee refused to provide a mortgage discharge and returned the
cheque, Romspen started its court action and subsequently learned
of the other forbearance agreements.
At trial, Romspen argued that the forbearance agreements created
a debt that was additional to the original terms of the first
mortgage. That debt was unsecured as against a subsequent mortgagee
(like Romspen) and any payments made towards that debt should be
applied against the outstanding balance on the first mortgage and
calculated pursuant to its original terms.
The Court ultimately agreed that all monthly payments received
by 360305 since the first mortgage matured had to be applied to the
amount required for Romspen to redeem the first mortgage. Holding
otherwise would "inappropriately increase the return on the
loan to the prejudice of the subsequent mortgagee" and
"saddle the subsequent mortgagee with risks it would be
impossible to assess".
The Transferee Mortgagee's problems did not end there. The
Court held that interest calculations on the principal amount
ceased as of March 28, 2013, when Romspen tendered its cheque for
$645,551.97, because a mortgagee is not entitled to interest or
costs after the date of a valid tender to redeem. In fact, the
tendered amount was substantially more than sufficient to pay out
the first mortgage, because Romspen was unaware at that time of the
other forbearance agreements and the many payments that had been
received pursuant to those agreements.
Ultimately Romspen paid just $536,043.58 to redeem the first
mortgage, an amount that was only about half of the original amount
claimed by the Transferee Mortgagee.
The broad lesson for mortgagees from this case is that any
collateral agreement (such as a forbearance or renewal agreement)
cannot affect a subsequent mortgagee that does not consent to, or
is unaware of, that collateral agreement. Many mortgagees will
enter into such an agreement at some point (usually a renewal
agreement, if nothing else), so this principle is an important one
to keep in mind when changing the terms of an existing
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