Originally published in Blakes Bulletin on Real Estate
Mortgage Enforcement, October 2008
Upon the occurrence of a loan default, the lender may wish to
make a deal directly with the borrower to obtain its title to the
mortgaged property – generally when there is a depressed
market, or no ready market, for the mortgaged property and the
lender expects that in the long-term values will improve or can be
improved sooner by the lender's better management or capital
improvements – and the lender does not want to follow
through on a lengthy and costly foreclosure procedure. The deal
would require the borrower to transfer, by a so-called "quit
claim deed", its interest in the mortgaged property to the
lender, generally in satisfaction of the borrower's obligation
to pay the debt.
Provided that there are no unacceptable subordinate
encumbrances, a quit claim deed deal will be more expeditious and
less expensive for the lender than foreclosure proceedings, and
will achieve a similar result. The lender may even find it
financially beneficial to pay a small consideration to obtain a
quit claim deed so as to avoid a foreclosure action.
Following is a list of some factors to be taken into
consideration by a lender considering a quit claim deal:
a quit claim deed will not affect intervening encumbrances, or
writs of seizure or sale, and will result in the lender becoming
the owner of the property encumbered by all registered encumbrances
and other encumbrances of which it has actual knowledge;
if the mortgage is insured by a mortgage insurer, the
insurer's position regarding the acceptance of a quit claim
deed should be considered;
land transfer tax will be payable by the lender upon
registration of the quit claim, but would also be payable upon
registration of a final order of foreclosure;
a quit claim deed may be construed to be a fraudulent
preference or conveyance in certain insolvency situations;
courts have held that a lender which is the transferee of the
equity of redemption under a quit claim deed is personally liable
for the entire indebtedness under any prior mortgage debt; and
Section 10 of the Mortgages Act (Ontario) provides
that the acceptance by the lender of a quit claim deed does not
merge the mortgage debt as against a subsequent mortgagee, and that
no such subsequent mortgagee may foreclose or sell the property
without redeeming or selling subject to the rights of the prior
mortgagee in the same manner as if such prior mortgagee had not
acquired the property.
So, in the right circumstances, including having a co-operative
borrower, the quit claim deed deal can be a good alternative remedy
for a lender.
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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The first set of amendments applies to mortgage loans insured by Canada Mortgage and Housing Corporation (CMHC), and the second set of amendments applies to mortgage loans insured by licensed private mortgage insurers.