Canada: How To Lose Your Mortgage Security In 24 Months!

The British Columbia Court of Appeal (BCCA) recently released its first decision considering the application of BC's new limitations statute in the context of security enforcement generally and foreclosure practice specifically. The new limitations statute reduced the limitation period for contractual claims and security enforcement from six years to two years, and imposed a new section that that two year period applies to security enforcement and runs from the first day "the right to enforce the security arises." 

Leatherman v. 0969708 BC Ltd., 2018 BCCA 33 highlights the potential consequence for lenders that do not act promptly within that limitation period to commence foreclosure proceedings or take other actions to realize on their security.

Under the new legislation, the limitation clock starts to run from the first day the right to enforce the security arises. In Leatherman, the loan was between friends secured by a mortgage and General Security Agreement. The loan was payable on demand with interest only payments required annually prior to demand. Starting in October 2013, the borrower ceased making the required interest payments. In November 2015, the parties exchanged correspondence about the debt and its repayment. When, after that, the borrower failed to pay the interest as would have been required in October 2016, the lender issued demand and then commenced foreclosure proceedings in December 2016.

The chambers judge granted the order nisi on the usual terms. He rejected the debtor's argument that the proceedings were time barred and held that the limitation clock ran from the date the lender made demand and thus the proceedings were commenced in time. 

The debtor successfully appealed and the order nisi was set aside. While the debtor was still liable on his personal covenant, the Court found that the recovery of certain interest payments and the ability to enforce the security generally were statute barred. The security in issue was enforceable upon default. As such, the Court found that the limitation clock under which the Lender could realize on its security started on the date of the first default (in this case in October of 2013 when the first annual interest payment was missed). 

Like in most cases, the mortgage secured a number of obligations, the relevant ones here being the required payments, and secondly the full accelerated amount payable on demand. The Court of Appeal confirmed that the ability to recover those interest payments that were due more than two years prior to November 2016, when the proceedings were commenced, became statute barred. While the Court of Appeal confirmed that the obligation for the remaining debt that only became due upon the accelerated demand being made was not barred by the Limitation Act, the Court found that the ability to enforce the security, in this case through the foreclosure proceedings, was also statute barred. 

In the result, the lender was left without any security to pursue the debtor's personal covenant.  This finding rested largely on the wording of the security, which stated that it was enforceable upon default, rather than enforceable upon demand. 

Thus, the perverse result of this decision is that, where the security is stated to be enforceable upon default, even a trivial default that goes uncured now triggers the running of the limitation period clock by which legal proceedings must be commenced to realize on that security. If a trivial default persists for more than two years, the loan will become unsecured as the lender's ability to enforce its security will be statute barred. Going forward, lenders will need to carefully monitor defaults to ensure they are cured or proceedings are commenced within two years of the first default to preserve the right to enforce their security.

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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