Canada: Going For The Money: Suing On Mortgage Debt In Ontario

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate Mortgage Enforcement, October 2008

Selling the mortgaged property is the primary route a lender takes to recover what is owing on a mortgage in default. However, if the borrower has other assets and there is an actual or anticipated deficiency remaining after a sale of the mortgaged property, the lender should consider suing to recover the mortgage debt (referred to as suing "on the covenant"), obtaining judgment and executing on that judgment against those other assets of the borrower.

When to Sue?

An action on a covenant in a mortgage may be brought before or after sale under the mortgage (so long as it is not started during the redemption period). The timing depends on a number of factors such as the marketability of the property (such as how long it will take to sell and how much it will fetch), the strength of the covenant, and whether an early execution on the judgment arising from such an action is particularly important in the circumstances, such as where there is a fear of parties or assets disappearing.

While there may be circumstances in which a lender will wish to sue on the covenant before issuing a notice of sale under power of sale, it will usually be most effective to first proceed under power of sale and only pursue an action on the covenant if there is a deficiency after the sale is completed. One drawback of concurrently suing on the covenant and proceeding with a private power of sale is that the court action provides a ready forum for the mortgagor to raise a triable issue on liability and possibly obtain an injunction to restrain the lender from proceeding with the power of sale.

Whom to Sue?

1. Mortgagor

The person who gave the mortgage, the mortgagor, is the first person to consider suing. Usually the claim is for the accelerated amount. An exception may be where there is intentional default by a financially able mortgagor to get out of a mortgage, usually a high-interest mortgage.

2. Nominees

Where the mortgagor is a nominee or trustee for beneficial party, then, aside from any contractual rights of recourse against the beneficial owner, the mortgagee may have recourse against the beneficial owner.

The courts in Ontario have shown a willingness to permit a lender to reach behind a bare nominee or trustee to go after the beneficial owners of the property. This is especially so where the registered owner is merely a bare trustee for the beneficial owners, is the agent for them doing the bidding of the beneficiaries, and with no real powers or discretions to exercise on its own.

3. Guarantors

If the guarantee requires, as is typical, the guarantor to pay on demand, then the lender must first issue a formal demand before the action is commenced against the guarantor. The action is usually combined with an action against the borrower.

4. Purchaser from Original Mortgagor – Section 20 of theMortgages Act(Ontario)

Where the original mortgagor (i.e., the person who originally gave the mortgage to the lender) has sold the mortgaged property, the mortgagee, aside from any express contractual assumption agreements, may have recourse on the covenant against the current owner under Section 20 of the Mortgages Act.

Paraphrasing Section 20, it provides that if the mortgagor has sold the property to a purchaser, i.e., a grantee, in such circumstances that "the grantee is by express covenant or otherwise obligated to indemnify the mortgagor" on the mortgage, the mortgagee may recover the mortgage debt from that purchaser.

Typically, the first indication of such an express or implied indemnity is to be found by looking at the land transfer tax affidavit or statements in the transfer to see if the buyer assumed the mortgage in question, and then seek evidence of that indemnity in the terms or mere circumstances of the sale.

Before obtaining judgment against the original mortgagor or the current owner, the lender, if relying on Section 20, must elect to take judgment against one, but not both, of them. A word of caution: an election to take judgment against the grantee may operate to release a guarantor of a mortgage from his obligations under a guarantee of the original mortgagor.

This statutory right against a subsequent owner is limited to the person who is the registered owner when the action is commenced; it does not extend to previous buyers from the original mortgagor. Thus, if the current owner has deep pockets, and the lender does not have an express assumption agreement with it, the race is to the quick to commence the action against that current owner before it sells the property to someone else.

What Should a Lender do?

A few practical suggestions to a lender to enhance its rights in suing to recover the mortgage debt:

  • Avoid having to rely on the statutory right in Section 20 at all – the mortgage should be expressed to be due on sale unless: (a) the mortgagee approves the purchaser; and (b) the purchaser enters into an express assumption agreement making both the original mortgagor and the purchaser jointly and severally liable to the lender. As a result, the mortgagee will not have to choose between the current owner and the mortgagor. Also, such an agreement preserves recourse against the purchaser despite a subsequent transfer by that purchaser.
  • In the mortgage, make sure that there is a clause stating in effect that no sale by the mortgagor (or renewal or assumption) alters the rights of the mortgagee against the mortgagor or any other person liable for the payment of the money secured by the mortgage. This will avoid arguments that upon a sale by the borrower, the borrower becomes merely like a guarantor and accordingly entitled to enjoy the defences accorded to a guarantor.
  • Any guarantor (as well as the original mortgagor) should also join in the assumption agreement to confirm their continuing liability and that they are to be released only upon payment of the debt in full, whether by the original mortgagor, the grantee or anyone else.
  • A lender should be careful in accepting a quit claim deed from the borrower. If there are subsequent mortgages, then in order to remove the possible exposure of the lender as a "grantee" under Section 20:
  1. the quit claim deed should expressly exclude any indemnity by the first mortgagee in favour of the mortgagor in respect of the subsequent mortgages; and
  2. the land transfer tax affidavit or statements in the transfer should not show any mortgages assumed.

If, however, the lender becomes the owner by foreclosure, the lender does not become a "grantee" of the mortgagor under Section 20.

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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