Copyright 2008, Blake, Cassels & Graydon LLP

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:

  1. 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;
  2. if the mortgage is insured by a mortgage insurer, the insurer's position regarding the acceptance of a quit claim deed should be considered;
  3. 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;
  4. a quit claim deed may be construed to be a fraudulent preference or conveyance in certain insolvency situations;
  5. 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
  6. 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.