A recent Ontario case has confirmed that guarantees included within registered mortgage documents enjoy the longer limitation period of ten years available under the Real Property Limitations Act1 rather than the standard two year limitation period for traditional guarantees under the Limitations Act, 20022.
The Marsig3 case arose from a motion for summary judgment made by the defendant guarantor ("Mr. Marsig") to dismiss a claim made against him on his guarantee of a mortgage which had gone into default. The mortgagee ("Equitable") had sued Mr. Marsig for the deficiency arising after the completion of its power of sale proceedings. Mr. Marsig had argued that his guarantee was a demand obligation, and that all demand obligations, including guarantees within a mortgage document, are governed by the Limitations Act, 2002. He submitted that the action against him on the guarantee was therefore statute-barred under Section 5 of that Act which establishes a general two year limitation period for all demand obligations. Mr. Marsig's initial motion was dismissed and he appealed.
The Court of Appeal dismissed the appeal, finding the Real Property Limitations Act was the governing statute, not the Limitations Act, 2002, stating the legislature clearly intended that all limitation periods affecting land be governed by the Real Property Limitations Act. Thus, the fact that almost three years had elapsed between the time the notice of sale under mortgage was served on the guarantor (which was held to constitute a demand for payment), and the commencement date of the action for the deficiency claim, was irrelevant as the operative limitation period was ten years, not two years.
In support of its ruling, the Court noted that it would cause more confusion and uncertainty in the law if the limitation period for enforcing a mortgage debt was different from the limitation period for enforcing a guarantee of that debt4. The Court determined that mortgagees confronted with a shorter limitation period for the guarantee than for the mortgage debt would undoubtedly sue and attempt to collect the whole debt outstanding from the guarantor first to preserve the limitation period.5 Such action would be taken rather than proceeding in a more cost effective manner to realize on the security over the real property first, and then suing the guarantor only for the deficiency as Equitable had done in this case.6 The Court found this would be an undesirable situation for mortgage guarantors generally.
Section 43(1) of Real Property Limitations Act is drafted fairly broadly such that the ten year limitation period applies to any action upon a covenant contained in an indenture of mortgage, or "any other instrument made ... to repay the whole or part of any money secured by a mortgage". As such, the reference to any other instrument might be interpreted as making the ten year limitation period available to stand-alone guarantees relating specifically to real property, even though the guarantee is not embedded within the registered document itself. In Marsig, the Court did not have to address that issue based upon the facts before it. However, extending the Court's reasoning and statements that limitation periods affecting land were intended to be separate and distinct from general limitation periods, it seems likely that the Court would interpret Section 43(1) as extending to a stand-alone guarantee provided it relates solely to a mortgage debt. Until we have a case on that specific point however, the better practice for lenders wishing to lock in the benefit of a longer limitation period would appear to be to include any such guarantee within the registered document itself.
Footnotes
*Nate Appleton, an articling student in the Toronto Office, also contributed to this post
1 Real Property Limitations Act, R.S.O. 1990, c. L. 15, as amended.
2 Limitations Act, 2002, S.O. 2002, c. 24, Sch. B, as amended.
3 The Equitable Trust Company v. Marsig et al., 109 O.R. (3d) 561 ["Marsig"].
4 Marsig, at page 568
5 Marsig, at pages 568-9.
6 Marsig, at page 569.
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