Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Real Estate Mortgage Enforcement, October 2008
Although a mortgage is a legal document, equity has always played a large role in mortgage transactions. The fundamental term that equity has incorporated into a mortgage is the right of the borrower/mortgagor to "redeem" the mortgage – in other words, to pay off the mortgage debt in exchange for the return of the security after enforcement proceedings have been commenced and there has been a legal or technical forfeiture under the mortgage. In addition, there are certain statutory and other rights that the borrower/mortgagor may exercise in the event of legal or technical default.
Since most lender/mortgagees generally prefer to exercise their power of sale remedy (as opposed to foreclosure or judicial sale), the focus of this article is on the steps that the borrower/mortgagor and subsequent encumbrancers may take to protect or enhance their positions in a power of sale scenario.
The term "mortgagor" is defined in Section 1 of the Mortgages Act (Ontario) as including "any person deriving title under the original mortgagor or entitled to redeem a mortgage, according to its estate, interest or right in the mortgaged property". Thus, a "mortgagor" includes the original borrower/mortgagor, a purchaser of the mortgaged property, a second or subsequent mortgagee and any other person to whom the notice of sale has or should have been addressed (as those persons are subsequent in interest to the mortgagee). Therefore, the comments that follow regarding the statutory rights of the borrower/mortgagor are also rights in favour of the other parties receiving the notice of sale, such as a second or subsequent mortgagee.
Statutory Rights in a Power of Sale Scenario
1. Section 42. The mortgagor should first consider whether the mortgagee issued a notice or demand to pay, and if so, whether such demand had expired at the time the notice of sale was issued. If the time stated in the demand had not expired, Section 42 of the Mortgages Act (Ontario) permits the mortgagor to apply for a declaration that the notice of sale, being a "further proceeding," is a nullity.
2. Section 22(1). If, as in most cases is appropriate, the mortgagee under a notice of sale accelerates all of the monies secured by the mortgage, both principal and interest, Section 22(1) of the Mortgages Act (Ontario) will "negate" the "acceleration clause" and the mortgagor may pay the amount due under the mortgage (exclusive of the accelerated sum) and any expenses incurred by the lender to put the mortgage back into good standing, and the enforcement proceedings will be considered to be at an end.
3. Section 23(1). If an action has been commenced to enforce the mortgage, Section 23(1) of the Mortgages Act (Ontario) is applicable. Upon payment of C$100 into court as security for the costs associated with the action, the mortgagor may apply to the court for relief conditional upon payment of the money due under the mortgage, exclusive of the amount payable pursuant to the acceleration clause. If judgment has not been recovered, the action will be dismissed. If judgment has been recovered, the proceedings in the action will be stayed provided that "no sale or recovery of possession of the land or final foreclosure of the equity of redemption has taken place."
4. Section 22(2). To enable the mortgagor to pay the arrears under the mortgage in accordance with Sections 22(1) or 23(1), the mortgagor may need further information, such as the unaccelerated amount due under the mortgage. Section 22(2) of the Mortgages Act (Ontario) permits the mortgagor to require the lender to provide the mortgagor with a written statement specifying the amount of principal or interest with respect to which the mortgagor is in default and the amount of the expenses necessarily incurred by the lender. The section also requires the lender to respond to such a request within 15 days of its receipt. If the lender fails to respond without a reasonable excuse or, if the response is incomplete or incorrect, any rights that the lender may have to enforce the mortgage shall be suspended until the mortgagor has complied with Section 22(2).
5. Section 2. Where a mortgagor is entitled to redeem, the mortgagor may require the lender, instead of giving a discharge of mortgage, to assign the mortgage debt and convey the mortgaged property to a third person. Section 2(2) of the Mortgages Act (Ontario) states that the right of the mortgagor to require an assignment belongs to and is capable of being enforced by each encumbrancer or by the mortgagor, notwithstanding any intermediate encumbrance. A requisition of an encumbrancer prevails over that of the mortgagor and, as between encumbrancers, a requisition of a prior encumbrancer prevails. Section 2 does not apply if the lender is or has been in possession of the mortgaged property. In certain circumstances – and provided that the first lender has not taken possession of the mortgaged property – a third lender may require the first lender to assign the first mortgage to the third lender, as a means of preventing the first lender from exercising its power of sale while, at the same time, preventing the second lender from gaining an improved priority position.
Technical Attacks in a Power of Sale Scenario
In addition to statutory rights, the mortgagor may raise several technical grounds to invalidate a notice of sale. The courts will be receptive to technical arguments, perhaps at the penalty of costs, particularly if there is compelling evidence that the parties receiving the notice of sale could have been confused or misled by the technical defect. Accordingly, a mortgagor that has received a notice of sale should review it carefully to determine whether or not the notice has been properly prepared and executed. The mortgagor should raise any technical objections as soon as possible. If there is any delay in raising such objections, there is greater risk that the lender will complete the sale of the mortgaged property under power of sale proceedings. In such event, provided that the notice was given in "professed compliance" with the Mortgages Act (Ontario), the purchaser will obtain good title to the mortgaged property from the lender, leaving the mortgagor with a remedy solely against the lender exercising the power of sale.
Generally, a lender acting in good faith and without fraud will not be restrained from a proper exercise of the power of sale remedy unless the mortgagor pays the lender the principal monies and interest due under the mortgage and the lender's costs. An application by a mortgagor for the postponement of a sale on a mortgagor's vague and indefinite hope of finding new financial backing would be an unwarranted interference with the contractual rights of the lender, even if the mortgaged property is ample security for the loan.
Where the mortgagor raises a triable issue, the court will grant an injunction restraining the lender from selling the mortgaged property on the condition that the mortgagor keep the mortgage in good standing until trial or other final disposition of the action.
The director of titles may approve a caution under Section 71 of the Land Titles Act (Ontario) if a claim is made by the registered owner that the power of sale proceedings are improper because the owner had redeemed the charge prior to the sale of the mortgaged property. However, the registration of a certificate of pending litigation by the mortgagor has been held to be an abuse of process where the mortgagor raised no substantial ground for the invalidity of the power of sale proceedings.
If the lender accepts merely a partial payment of the outstanding arrears, the lender is not precluded from relying on the notice of sale so long as the partial payment does not put the mortgage into good standing. A lender can best protect itself when receiving a partial payment by ensuring that the mortgagor is made aware at the time the payment is accepted that notwithstanding the acceptance of the partial payment, strict compliance with the notice of sale is still insisted upon. The lender should also confirm that no agreement nor any accommodation has been made with the mortgagor.
Form 1 of the Mortgages Act (Ontario) requires a lender to set out its costs being claimed in the power of sale proceedings. The costs recoverable by a lender are those on a substantial indemnity (i.e., solicitor and client) basis if the mortgage so provides, provided that the costs are not unreasonable. If there is a dispute as to costs payable by the person who is tendering the monies due, such costs may be taxed by an assessment officer. Further, the costs of the exercise of the power of sale, and the costs incidental to the exercise of the power of sale, may be taxed by a taxing officer of the Superior Court or a local master having jurisdiction at the instance of any interested person. The costs are at the discretion of the taxing officer.
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.