Table of Contents

Mortgage................................................................................................................... 8

Common terminology in Mortgage.......................................................................8Mortgage........................................................................................................................................................................ 8Mortgagee..................................................................................................................................................................... 8Mortgagor...................................................................................................................................................................... 8Maturity date................................................................................................................................................................ 8Acceleration clause.................................................................................................................................................. 8Collateral Security (or simply Security)..........................................................................................................8

A. Nature of a Mortgage and Means of Discharge..............................................9

1. What is it?............................................................................................................. 9(a) Covenant and Security....................................................................................................................................9(b) Concept of conveyance of fee simple or equity of redemption.................................................9(c) Right to possession until default................................................................................................................ 9(d) Real Property Limitations Act, section 23(1).......................................................................................9(e) Mortgages Act, section 1............................................................................................................................ 10(f) Land Registration Reform Act, section 1.............................................................................................10(g) Land Registration Reform Act, sections 6 – 13...............................................................................11

2. How is it created?.............................................................................................. 14(a) Review of Charge / Mortgage forms in case book........................................................................14(b) Concept of conveyance or transfer of interest in lands subject to right of redemption..15(c) Registration (for purpose of notice but not necessary for creation).....................................15

3. Concept of Redemption – Re-acquiring interest theoretically conveyed..15

4. Discharge............................................................................................................ 15(a) Mortgage Act, section 2 and section 12 (3) (8) and (9)..............................................................15(b) Registry Act, section 56 (1) (8) and (10), sections 62 and 63................................................16(c) Land Titles Act, section 102...................................................................................................................... 17

5. Basic Obligations of the Mortgagor................................................................18(a) Covenant to pay principal and interest................................................................................................19(b) Taxes..................................................................................................................................................................... 19(c) Insurance – Mortgages Act, section 7 / Land Registration Reform Act, section 7.......19(d) Repair (not to commit waste – e.g. actions which diminish the value of the security)...19

6. Basic Rights of Mortgagee Following Default...............................................20(a) Foreclosure......................................................................................................................................................... 20(b) Judicial sale / Power of sale......................................................................................................................20(c) Possession.......................................................................................................................................................... 21(d) Action on covenant to pay..........................................................................................................................21(e) Distress................................................................................................................................................................. 21

B. Interest................................................................................................................ 21

1. The Interest Act – Review.................................................................................21

2. The Meaning of Interest (Premium/Bonus)....................................................21

3. Calculation of Interest.......................................................................................22

4. Re-investment of the principal received........................................................22– Re Miglonn and Castleholm Construction Ltd., (1975) 5 O.R. (2nd) 444...............................23– Re Fabasco Ltd. and Abrams, (1976) 13 O.R. (2d) 342...............................................................23– Morenisch Land Development v. Metro Trust, (1979) 23 O.R. (2nd) 1...................................24– Brunn v. Lock, (1987) 61 O.R. (2nd) 772.................................................................................................24– London Acres v. Sparcord Holdings, (1988) 67 O.R. (2nd) 583..................................................24

5. Right to Tender Payment..................................................................................24(a) The Interest Act, section 10.......................................................................................................................24(b) The Mortgages Act, section 18................................................................................................................25– Potash v. Royal Trust, (1986) 2 S.C.R. 351 at 161-163................................................................25– Litowitz v. Standard Life Assurance Co., (1997) 30 O.R. (3rd) 579..........................................26– Vale et al. v. Sun Life....................................................................................................................................... 26– Re Glied and Confederation Life Insurance Company et al........................................................26– Kucor Construction v. Canada Life Assurance Co., (1997) 32 O.R. (3rd) 548...................27– Re Moore and Texaco, (1965) 2 O.R. 253...........................................................................................27

6. The Interest Act, sections 6, 7 and 9...............................................................27(a) Requirements for complying with Interest Act, section 6...........................................................28

– Canadian Northern Investment Co. v. Cameron, (1917) 33 D.L.R. 792........................................28– Standard Reliance v. Stubbs, (1917) 55 S.C.R. 422................................................................................29– Greymac Truscto v. Gould, (1983) 30 R.P.R. 157....................................................................................29

(b) Meaning of blended payment...................................................................................................................30– Re Kilgoran Hotel Ltd. v. Samek, [1968] S.C.R. 3....................................................................................30– Re McGoran v. Cowan, [1973] 3 O.R. 557.................................................................................................. 30– Ferland v. Sun Life Assurance Co., [1975] 1 S.C.R. 266........................................................................30

(c) Bonus on default – Interest Act, section 8 / Mortgages Act section 17..............................30– Tapio v. Kajander, [1965] 1 O.R. 431........................................................................................................... 31– Glinert v. Kosztowniak, (1972) 2 O.R. 284.................................................................................................32– Parkhill v. Moher, [1977] 17 O.R. (2d) 543, 80 D.L.R. (3d) 754........................................................32– Re 459745 Ontario Ltd. v. Wideview Holdings, (1987) 59 O.R. (2nd) 361....................................32– Dickson v. Bluestein (in Trust), (1990) 2 O.R. (3d) 131.......................................................................33– Mastercraft Properties Ltd. v. El Ef Investments Inc., (1993) 14 O.R. (3rd) 519........................33– O’Shanter Development v. Gentra Canada, (1994) 43 R.P.R. (2nd) 131.........................................33– Ialongo v. Serm Investments Ltd., (2007) 54 R.P.R. (4th) 310...........................................................34– Peat Marwick Thorne Inc. (Trustee) v. Beacon Realty Co., (1991) 5 O.R. (3rd) 567................34– Reliant Capital Ltd. v. Silverdale Development Co., (2006) 270 D.L.R. (4th) 717......................34

6. Excessive Interest............................................................................................. 35(a) Criminal Code, section 347 (1)................................................................................................................35(b) The Interest Act, section 2..........................................................................................................................36(c) The Unconscionable Transactions Relief Act, R.S.O. 1990.....................................................36

– Longley v. Barbick, (1963) 36 D.L.R. (2nd) 672........................................................................................37– Collins v. Forest Hill Investments, (1967) 2 O.R. 351............................................................................38– All Canadian Peoples Finance Ltd. v. Marejan, (1970) 10 D.L.R. (3rd) 352.................................38– William E. Thompson Associates Inc. v. Carpenter, (1990) 69 O.R. (2nd) 545............................39– Transport North American v. New Solutions Financial Corp., (2001) 54 O.R. (3rd) 144.......40

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C. Promise to Lend Money – Promise to Borrow Money.................................40

1. Will a promise to lend or borrow money under a mortgage be specifically enforced if it is wholly executory?......................................................................40– Rogers v. Challis, (1859) 54 E.R. 68.......................................................................................................40

2. Will a promise to execute a mortgage be specifically enforced where part or all of the monies have been advanced?........................................................41– Peel v. Peel, (1918) 15 O.W.N. 297.........................................................................................................41– Bank of British Columbia v. Denenfeld, (1974) 38 D.L.R. (3rd) 750.........................................41

3. Will a promise to lend money under a mortgage be specifically enforced where the parties have executed a mortgage?.................................................41– Schwartzman v. Great West Life Assurance and al., (1955) 17 W.W.R. 37......................41

4. Will a promise to give a mortgage in consideration of a pre-existing debt be specifically enforced?...................................................................................... 41– Rooker v. Hoofsteter, (1896) 26 S.C.R. 41...........................................................................................42

5. Equitable mortgages, including mortgage by deposit of title deeds.........42– The Registry Act, section 72 – notice of lodgement of title documents.................................42– Zimmerman v. Sproat, 26 O.L.R. 448.....................................................................................................42– Royal Bank v. Grobman et al, (1979) 18 O.R. (2nd) 636................................................................42– Sikorski v. Sikorski, (1978) 21 O.R. (2nd) 65........................................................................................42

D. Redemption by Mortgagor and Remedies of Mortgagee............................43

1. Remedies - Generally........................................................................................43

2. Redemption - Generally....................................................................................43(a) Timing – Mortgages Act, section 18 / Interest Act, section 10................................................43(b) Assignment – Mortgages Act, section 2..............................................................................................43(c) Redemption Actions – Rules of Practice, 64.05.............................................................................44(d) General commentaries about redemptions.......................................................................................45(d) Case law.............................................................................................................................................................. 46

– Coplan v. Sparlin, [1969] 2 O.R. 166............................................................................................................ 46– Municipal Savings & Loan Corp. v. Wilson, (1981) 127 D.L.R. (3rd) 127......................................46– Graystone Properties Ltd. v. Smith et al., (1982) 39 O.R. (2nd) 709................................................47– Re Shankman and Mutual Life Co. of Canada, (1985) 52 O.R. (2nd) 65.........................................48– Eusanio v. Iaci, (1982) 136 D.L.R. (3rd) 569..............................................................................................48– Theodore Holdings Ltd. v. Anjay Ltd., (1990) 11 R.P.R. (2nd) 151....................................................49

3. Judicial sale........................................................................................................ 49

4. Power of Sale – Part III of the Mortgages Act................................................49(a) Notice prescribed by section 58 of Mortgages Act.......................................................................51– Scollard Investments v. Halsid, (1975) 9 O.R. 402..........................................................................51– Confederation Trust v. Mac-Don Builders Inc., (1990) 75 O.R. (2nd) 278.............................52– Sierra Garden Homes v. 668417 Ontario Ltd., (1990) 1 O.R. (3rd) 446...............................52– Grenville Goodwin Ltd. v. MacDonald, (1988) 50 R.P.R. 222....................................................53

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5. Foreclosure Situations......................................................................................53– Soloway v. Sheahan, (1971) 3 O.R. 652...............................................................................................53– Marshall v. Miles, (1970) 13 D.L.R. (3rd) 158.......................................................................................54– Petranik v. Dale, (1977) 2 S.C.R. 959.....................................................................................................54– Price v. Letros, (1974) 2 O.R. (2nd) 292..................................................................................................55

6. Further Right to Redeem in Equity..................................................................56– Campbell v. Holyland, (1877) 7 Ch.N. 166...........................................................................................56– Concord Securities Ltd. v. Phayre, (1960) O.W.N. 419.................................................................56– Hutel v. Guilmette, (1961) O.W.N. 83......................................................................................................56– Nickerson v. Alexanian, (1964) 1 O.R. 145..........................................................................................57– Camp Wee-Gee-Wa for Boys v. Clark, (1972) 1 O.R. 374..........................................................57

7. Stay Mortgagee’s Proceedings........................................................................57(a) Mortgages Act, sections 22 and 23.......................................................................................................57

– Re Mission Construction and Seele Investments, (1973) 33 D.L.R. (3rd) 285..............................59– Theodore Daniels Ltd. v. Income Trust Co., (1982) 37 O.R. (2nd) 316............................................59– MacDonald v. Dakar Investments, (1959) O.W.N. 9..............................................................................60– Van Minnen Construction v. Murphy et al., (1977) 19 O.R. (2nd) 125............................................60

8. Remedies of Mortgagee....................................................................................60(a) Action on the covenant.................................................................................................................................60

(i) Practical points.................................................................................................................................................. 60 – Shiner v. Varadeff, (1975) 7 O.R. (2nd) 684..........................................................................................60 – Beaty v. Gregory, (1897) 24 O.A.R. 325...................................................................................................61(ii) In judicial sale................................................................................................................................................... 61 – Gordon Grant v. Boos, [1926] A.C. 781.................................................................................................... 61(iii) In power of sale (Review Mortgages Act, sections 24 to 43).......................................................61 – Rudge v. Richens, (1873) L.R. 8 C.P. 358.................................................................................................61 – Farrar v. Farrars Ltd., (1888) 40 Ch. D. 395.........................................................................................61 – Re Nunes, (1972) 21 D.L.R. (3rd) 97......................................................................................................... 61(iv) In foreclosure.................................................................................................................................................... 63 – Lockhart v. Hardy, (1964) 50 E.R. 378.................................................................................................... 63 – Munsen v. Hauss, (1875) 22 Grant’s Ch. 279.........................................................................................63 – Dowker et al. v. Thompson, [1941] O.R. 44............................................................................................64

(b) Right to distrain for arrears of interest..................................................................................................64– Mortgages Act, sections 14 to 16.................................................................................................................. 64– Contractual right to distrain for principal............................................................................................... 65

(c) Right to take possession............................................................................................................................. 65– Considerations...................................................................................................................................................... 65

9. Redemption of Disguised Forms of Mortgages............................................67(a) Where the grantor has executed a deed absolute in form to pay a debt..........................67

– Barton v. Bank of New South Wales, (1890) 15 App. Ca. 379...........................................................67– Arnal v. Arnal, (1969) 6 D.L.R. (3rd) 245.................................................................................................... 67

(b) Where the grantor has executed a deed with an option to purchase..................................67– Wilson v. Ward, [1930] S.C.R. 212................................................................................................................. 67– Pierce v. Empey, [1939] S.C.R. 247................................................................................................................ 68– Krieck v. Wansbrough, [1973] S.C.R. 588...................................................................................................69

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E. Priorities............................................................................................................. 69

1. The Registry Act, sections 70 to 74 (specially section 73)..........................69

2. Land Titles Act, section 78(5) and section 93(4)...........................................72

3. Unregistered mortgage versus registered mortgage...................................72– McDonald v. The Royal Bank, (1933) O.R. 418........................................................................................72– Dominion Lumber v. Winnipeg District Registrar, (1963) 37 D.L.R. (2nd) 283..........................73

4. Subrogation – Refinance Mortgage................................................................73– The Mortgages Act, section 2.......................................................................................................................... 73– Gordon v. Snelgrove, (1932) O.R. 253.......................................................................................................... 73– Re Hallman Brierdale & Anton, (1979) 25 O.R. (2nd) 509...................................................................74– Lambton Lumber Ltd. v. Claran Homes Ltd., (1979) 23 O.R. (2nd) 673.........................................74– Nova Scotia (Housing Commission) v. Co-op Atlantic, (1980) 15 R.P.R. 201.............................75– Mutual Trust Co. v. Credit View Estate Homes, (1997) 34 O.R. (3rd) 583.....................................75– Armatage Motor Ltd. v. Royal Trust Corp. of Canada, (1995) 45 R.P.R. (2nd) 204...................76

F. Second and Subsequent Mortgages..............................................................77

1. What are they?................................................................................................... 77

2. Foreclosure by subsequent mortgagee.........................................................77– Rose v. Page, (1829) 57 E.R. 864............................................................................................................77

3. Suit on covenant by subsequent mortgagee after foreclosure by prior mortgagee............................................................................................................... 78– Union Bank of Canada v. Bates, (1913) 18 D.L.R. 269.................................................................78– Brown v. Weil, (1923) 53 O.L.R. 27..........................................................................................................78– Servais v. Shear, (1929) 63 O.L.R. 381.................................................................................................78– Geidlinger v. Kierans, (1967) 1 O.R. 217..............................................................................................79

4. Duty of mortgagor to protect his subsequent mortgage.............................79– The Mortgages Act, section 2......................................................................................................................79– Otter v. Lord Vaux, (1857) 43 E.R. 1381...............................................................................................80– Teevan v. Smith, (1882) 20 Ch. D. 724..................................................................................................80– Leitch v. Leitch, (1901) 2 O.L.R. 233.......................................................................................................80

5. The position of mortgagor where subsequent mortgage is created by the purchaser of equity of redemption......................................................................80– Kinnaird v. Trollope, (1888) 39 Ch.D. 636 at page 641.................................................................80– Queens College v. Claxton, (1894) 25 O.R. 282, at pages 283-289......................................81

6. Position of purchaser of equity of redemption who pays first of two mort-gages....................................................................................................................... 81– The Mortgages Act, section 10................................................................................................................... 81– Mahood Lumber Co. Ltd. v. M & J Roofing etc, (1982) 36 O.R. (2nd) 541...........................82

G. Sale of Equity of Redemption.........................................................................82

1. Generally............................................................................................................. 82– The Mortgages Act, sections 20 and 21................................................................................................82

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– Optional maturity clause, also known as standard due-on-sale clause................................83

2. Duty to pay mortgage debt as between mortgagor and purchaser of eq-uity of redemption

Methods by which a purchaser may assume the mortgage debt / re-lation-ship between purchaser and mortgagor/relationship between purchaser and mortgagee....................................................................................................... 84(a) Purchase subject to a mortgage.............................................................................................................84(b) Separate assumption agreement........................................................................................................... 84(c) A covenant in the deed itself.....................................................................................................................84(d) Case law.............................................................................................................................................................. 84

– Boyd v. Johnston, (1890) 19 O.R. 598.......................................................................................................... 84– Small v. Thompson, (1898) 28 S.C.R. 219.................................................................................................. 85– Campbell v. Douglas, (1916) 54 S.C.R. 28..................................................................................................85– Friedman v. James, (1938) O.W.N. 356....................................................................................................... 86– National Trust v. Fuciarelli, (1980) 30 O.R. (2nd) 289..........................................................................86– Crown Trust v. Moriarity, (1980) 14 R.P.R. 309......................................................................................87

3. Mortgagee versus mortgagor who has sold the equity of redemption......88– The Mortgages Act, section 20................................................................................................................... 88– Palmer v. Hendrie, (1859) 54 E.R. 136..................................................................................................88– Forster v. Ivey, (1901) 2 O.L.R. 480.........................................................................................................88– Re Thuresson, (1902) 3 O.L.R. 271.........................................................................................................89– Financeamerica Realty Ltd. v. Holloway, (1985) 53 O.R. (2nd) 3..............................................89

4. Is a mortgagor who sold the equity of redemption a proper party in an ac-tion for foreclosure?.............................................................................................. 90– Forster v. Ivey, supra........................................................................................................................................90

5. Covenant by purchaser to indemnify and assignment to mortgagee........90– The Mortgages Act, sections 20 and 21................................................................................................90– Smith v. Pears, (1896) 24 O.A.R. 82.......................................................................................................90– Maloney v. Campbell, (1897) 28 S.C.R. 228.......................................................................................91– Esser v. Pritzker, (1926) 2 D.L.R. 645....................................................................................................91

H. Guarantees......................................................................................................... 91

1. Different situations............................................................................................92(a) Guarantor joins in the mortgage itself..................................................................................................92

– Price v. Letros, supra.......................................................................................................................................... 92– Guaranty Trust Co. of Canada v. Lucky, (1982) 26 R.P.R. 146..........................................................92

2. Mortgagee assigns mortgage..........................................................................92– Farmers Loans v. Patchett, (1903) 6 O.L.R. 255..............................................................................92

3. Rights of a guarantor........................................................................................93(a) Generally............................................................................................................................................................. 93

– ManuLife Bank v. Conlin, 41 R.P.R. (2nd) 283...........................................................................................93(b) Reservation of rights......................................................................................................................................95

– Bristol Mortgage Co. v. Taylor, (1893) 21 O.L.R. 286...........................................................................95– Holland Consolidated v. Hutchins, (1936) 2 D.L.R. 481.......................................................................95

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4. Failure to preserve security.............................................................................95– Bank of Montreal v. Bauer, (1977) 15 O.R. 746................................................................................96– Bristol Mortgage Co. v. Taylor, supra......................................................................................................96– Bank of British Columbia v. Wren Development, (1974) 38 D.L.R. (3rd) 759.....................96– Farmer’s Loan v. Patchett, supra...............................................................................................................96– Taylor v. The Bank of New South Wales, 11 App. Cas. 596......................................................97– Rose v. Aftenberger, (1970) 1 O.R. 547................................................................................................97

5. Does a guarantor have the right to redeem?.................................................97– Gedye v. Matson, 53 E.R. 655....................................................................................................................98– Alisson v. Rent, (1926) 1 D.L.R. 885.......................................................................................................98– Canadian Financial Trust v. First Federal Construction, (1982) 34 O.R. (2nd) 681.........99– 394563 Ontario Ltd. v. Fuda, 42 O.R. (2nd) 779..............................................................................100

I. Marshalling........................................................................................................ 100– Victoria and Grey Trust Co. v. Brewer, (1970) 3 O.R. 704.............................................100

J. Construction Lien Act, sections 77 to 80.....................................................101– Norwon Electric Sault v. Ross, (1984) 7 C.L.R. 1............................................................104– Royal Bank of Canada v. Lawron Developments Inc., (1994) 16 O.R. (3rd) 450.........104– Park Contractors v. Royal Bank of Canada, (1998) 38 O.R. (3rd) 290..........................105

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Mortgage––––––––––––––––––––––––––––––––––––––––––––––

Professor: Laird Rasmussen.laird.rasmussen@gmail.com

Common terminology in MortgageMortgage

The conveyance of land as a security for the discharge of an obligation or the payment of a debt.

o A security which may be redeemed when the obligation or debt is dis-charged or paid.

A mortgage is a contract pursuant to which a borrower (mortgagor) pledges his/her land as security for the repayment of money he/she has borrowed from a lender (mortgagee).

A charge on land created merely for securing a debt or loan.

Mortgagee The owner of a mortgage. The person who assumes and receives a mortgage to secure a loan.

Mortgagor The person who borrows. The person who gives a mortgage to secure a loan. The owner or transferee of land or of any estate or interest in land pledged as se-

curity for a debt or loan.

Maturity date The maturity date (or renewal date) is the last day of the term of the current mort-

gage contract.o On, or before, this date the mortgage must be repaid in full, renewed with

the present mortgagee, or switched to another mortgagee.

Acceleration clause A clause in a mortgage or an agreement for sale of land or any agreement re-

garding either of them that stipulates that, if default is made in the payment of money due pursuant to the mortgage or agreement or in the observance of a covenant contained in the mortgage or agreement, the whole or a part of the out-standing balance of the principal money becomes immediately payable or is oth-erwise accelerated.

Collateral Security (or simply Security) Collateral security is defined as any property that is assigned or pledged to se-

cure the performance of an obligation and as additional thereto, and which upon the performance of the obligation is to be surrender or discharged.

A. Nature of a Mortgage and Means of Discharge

1. What is it?

Special form of contract that calls for a performance of financial obligations of terms of payment with a security of those payments by a way of mortgage on a real estate property.

o The creditor can access to the value of the asset if debtor does not per-form the obligation.

(a) Covenant and Security Covenant is a more general word, and can include any contractual promise.

o However, its scope is limited by the statutory context in which it is used: it must be a promise similar to a guarantee, security or indemnity.

E.g., covenant for payment is an agreement that the mortgagor will pay the mortgage money and interest.

Security for a debt, in the ordinary meaning of the term, carries with it the idea of something or somebody to which, or to whom, the creditor can resort in order to aid him/her in realizing or recovering the debt, in case the debtor fails to pay; the word implies something in addition to the mere obligation of the debtor.

o A security interest is a property interest created by agreement or by opera-tion of law over assets to secure the performance of an obligation, usually the payment of a debt.

(b) Concept of conveyance of fee simple or equity of redemption Legal right of redemption or equity of redemption is a mortgagor’s right to redeem

a mortgage on payment of the principal, interest, and costs.

(c) Right to possession until default The right of possession until default is the right enjoyed by the mortgagor who

currently holds and enjoys temporary ownership or full ownership over the object that secures his/her debt, as long as he/she provides installment payments as agreed by the conveyance for payment.

(d) Real Property Limitations Act, section 23(1)

23. (1) No action shall be brought to recover out of any land or rent any sum of money secured by any mortgage or lien, or otherwise charged upon or payable out of the land or rent, or to recover any legacy, whether it is or is not charged upon land, but within ten years next after a present right to receive it accrued to some person capable of giving a discharge for, or release of it, unless in the meantime some part of the principal money or some interest thereon has been paid, or some acknowledgment in writing of the right thereto signed by the person by whom it is payable, or the person’s agent, has been given to the person entitled thereto or that person’s agent, and in such case no action shall be brought but within ten years after the payment or acknowledgment, or the last of the payments or ac-knowledgments if more than one, was made or given.

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(e) Mortgages Act, section 1.

Definitions

1. In this Act,

“conveyance” includes assignment, appointment, lease, settlement and other as-surance and covenant to surrender made by deed on a sale, mortgage, demise or settlement of any property or on any other dealing with or for any property; and “convey” has a corresponding meaning; (“cession”, “céder”)

“encumbrance” includes a mortgage in fee or for a less estate, a trust for securing money, a lien, and a charge of a portion, annuity or other capital or annual sum; and “encumbrancer” has a corresponding meaning, and includes every person entitled to the benefit of an encumbrance, or to require payment or discharge thereof; (“sûreté”, “bénéficiaire de la sûreté”)

“land” includes tenements and hereditaments, corporeal or incorporeal, houses and other buildings, and also an undivided share in land; (“bien-fonds”)

“mortgage” includes any charge on any property for securing money or money’s worth; “mortgage money” means money or money’s worth secured by a mortgage; “mortgagor” includes any person deriving title under the original mortgagor or en-titled to redeem a mortgage, according to the person’s estate, interest or right in the mortgaged property; and “mortgagee” includes any person deriving title under the original mortgagee. (“hypothèque”, “hypothécaire”, “montant de l’hypothèque”, “débiteur hypothécaire”, “créancier hypothécaire”).

(f) Land Registration Reform Act, section 1

Definitions

1. In this Part,

“charge” means a charge on land given for the purpose of securing the payment of a debt or the performance of an obligation, and includes a charge under the Land Titles Act and a mortgage, but does not include a rent charge; (“charge”)

“charge book” means the book maintained under subsection 8 (5); (“registre des charges”)

“chargee” means a person in whose favour a charge is given; (“titulaire d’une charge”, “titulaire”)

“chargor” means a person who gives a charge; (“constituant d’une charge”, “con-stituant”)

“Director” means the Director of Titles appointed under subsection 9 (1) of the Land Titles Act; (“directeur”)

“Director of Land Registration” means the Director of Land Registration ap-pointed under subsection 6 (1) of the Registry Act; (“directeur de l'enregistrement des immeubles”)

“discharge” means a discharge of a charge and includes a cessation of charge under the Land Titles Act and a certificate of discharge of mortgage under the Registry Act; (“mainlevée”)

“document” includes an instrument as defined in section 1 of the Registry Act; (“document”)

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“land” means land, tenements, hereditaments and appurtenances and any estate or interest therein; (“bien-fonds”)

“land registrar” means a land registrar appointed under the Land Titles Act or the Registry Act; (“registrateur”)

“prescribed” means prescribed by the regulations; (“prescrit”)

“regulations” means the regulations made under this Part; (“règlements”)

“successor” means an heir, executor or administrator; (“successeur”)

“transfer” means a conveyance of freehold or leasehold land and includes a deed and a transfer under the Land Titles Act, but does not include a lease or a charge; (“cession”)

“transferee” means a person in whose favour a transfer is given; (“cessionnaire”)

“transferor” means a person who gives a transfer. (“cédant”).

(g) Land Registration Reform Act, sections 6 – 13

Charges

6. (1) A charge does not operate as a transfer of the legal estate in the land to the chargee.

Defeasance

(2) A charge ceases to operate when the money and interest secured by the charge are paid, or the obligations whose performance is secured by the charge are performed, in the manner provided by the charge.

Rights and remedies preserved

(3) Despite subsection (1), a chargor and chargee are entitled to all the legal and equitable rights and remedies that would be available to them if the chargor had transferred the land to the chargee by way of mortgage, subject to a proviso for redemption.

Charge: implied covenants

7. (1) A charge in the prescribed form shall be deemed to include the following covenants by the chargor, for the chargor and the chargor’s successors, with the chargee and the chargee’s successors and assigns:

Usual covenants

1. In a charge of freehold or leasehold land by the beneficial owner:

i. That the chargor or the chargor’s successors will pay, in the manner pro-vided by the charge, the money and interest it secures, and will pay the taxes as-sessed against the land.

ii. That the chargor has the right to give the charge.

iii. That the chargor has not done, omitted or permitted anything whereby the land is or may be encumbered, except as the records of the land registry office dis-close.

iv. That the chargor or the chargor’s successors will insure the buildings on the land as specified in the charge.

v. That the chargee on default of payment for the number of days specified in the charge or in the Mortgages Act, whichever is longer, may on giving the notice specified in the charge or required by that Act, whichever is longer, enter on and take possession of, receive the rents and profits of, lease or sell the land.

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vi. That where the chargee enters on and takes possession of the land on de-fault as described in subparagraph v, the chargee shall have quiet enjoyment of the land.

vii. That the chargor or the chargor’s successors will, on default, execute such assurances of the land and do such other acts, at the chargee’s expense, as may be reasonably required.

viii. That the chargee may distrain for arrears of interest.

ix. That on default of payment of the interest secured by the charge, the prin-cipal money shall, at the option of the chargee, become payable.

Covenant re freehold

2. In a charge of freehold land by the beneficial owner, that the chargor has a good title in fee simple to the land, except as the records of the land registry office disclose.

Covenant re leasehold

3. In a charge of leasehold land by the beneficial owner:

i. That, despite anything done, omitted or permitted by the chargor, the lease or grant creating the term or estate for which the land is held is, at the time the charge is given, a valid lease or grant of the land charged, in full force, unforfeited and unsurrendered, and that there is no subsisting default in the payment of the rents reserved by or in the performance of the covenants, conditions and agree-ments contained in the lease or grant at the time the charge is given.

ii. That the chargor or the chargor’s successors will, while the money secured by the charge remains unpaid, pay, observe and perform all the rents reserved by and all the covenants, conditions and agreements contained in the lease or grant and will indemnify the chargee against all costs and damages incurred by reason of any non-payment of rent or non-observance or non-performance of the covenants, conditions and agreements.

Multiple parties

(2) Where a charge to which subsection (1) applies is given by or to more than one person, the covenants deemed to be included by that subsection are made,

(a) by the chargors jointly and severally, unless the charge specifies other-wise; and

(b) with the chargees jointly, unless the money secured is expressly secured to them in several shares or distinct sums.

Amendment of implied covenants

(3) A covenant deemed to be included in a charge by subsection (1) may, in a schedule to the charge, or in a set of standard charge terms filed under subsection 8 (1) and referred to in the charge by its filing number, be expressly excluded or be varied by setting out the covenant, appropriately amended.

Enforcement of covenant

(4) A covenant deemed to be included in a charge by subsection (1) may be en-forced by a successor or assignee of the chargee.

Prescribed terms

(5) A charge in the prescribed form shall be deemed to include the prescribed standard charge terms, unless a set of standard charge terms filed under subsec-tion 8 (1) is referred to in the charge by its filing number.

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Amendment of prescribed terms

(6) A prescribed standard charge term deemed to be included in a charge by subsection (5) may, in a schedule to the charge, be expressly excluded or be var-ied by setting out the term, appropriately varied.

(7) REPEALED: 1998, c. 18, Sched. E, s. 94.

Filing of standard charge terms

8. (1) A person may file with the Director, in the prescribed manner and form, a set of standard charge terms and, with the consent of the Director, may file a set of standard charge terms in a form other than the prescribed form.

Amendment of set of standard charge terms

(2) A set of standard charge terms filed under subsection (1) may be amended by filing a further set of standard charge terms under subsection (1).

Duties of Director

(3) Where a set of standard charge terms is filed under subsection (1), the Direc-tor shall,

(a) promptly assign a filing number to the set and advise the person who filed the set of its filing number; and

(b) ensure that copies of the set, identified by its filing number, are provided to the land registry offices for the parts of Ontario designated under this Part within thirty days of the day on which the set was filed.

Public inspection

(4) Every set of standard charge terms filed under subsection (1) shall be made available in the prescribed manner and upon payment of the required fee for public inspection and copying in the land registry offices for the parts of Ontario desig-nated under this Part on a day not later than thirty days after the day on which the set is filed with the Director.

(5) REPEALED: 1994, c. 27, s. 85 (1).

Electronic filing

(6) The Director may require a person to file standard charge terms in an elec-tronic format and may require that the charge terms be delivered by direct elec-tronic transmission.

Effect of filing: incorporation by reference

9. (1) A charge shall be deemed to include a set of standard charge terms filed under subsection 8 (1) if the set is referred to in the charge by its filing number.

Amendment of standard charge terms in individual charge

(2) A term deemed to be included in a charge by subsection (1) may, in a sched-ule to the charge, be expressly excluded or may be varied by setting out the term, appropriately amended.

Only one set to be incorporated by reference

(3) Where a charge refers to more than one set of standard charge terms by their filing numbers, the charge shall be deemed to include only the set that was filed last.

Express term governs

(4) Where there is a conflict between an express term in a charge and a term deemed to be included in the charge by subsection (1), the express term prevails.

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When charge may be registered

10. (1) A charge that refers to a set of standard charge terms filed under subsec-tion 8 (1) by the set’s filing number shall not be registered before a copy of the set is available in the land registry office where the charge is to be registered, as de-scribed in subsection 8 (4).

Saving

(2) The fact that a charge is registered in a manner that contravenes subsection (1) does not, in itself, invalidate the registered charge.

Disclosure: offence

11. A person named as chargee in a charge containing standard charge terms that have been filed under subsection 8 (1) who takes the charge before providing the chargor or the chargor’s solicitor with a copy of the standard charge terms is guilty of an offence and on conviction is liable to a fine of not more than $5,000.

Director may require filing

12. (1) Where the Director is satisfied that a charge presented for registration con-tains terms that should be filed under subsection 8 (1) because of the frequency of their use in charges in favour of the chargee, the Director may give the chargee notice in the form and manner required by the Director that on and after a day specified by the Director, no charge in favour of the chargee that sets the terms out expressly shall be registered without the Director’s authorization.

Day to be specified

(2) The day specified by the Director in a notice given under subsection (1) shall be a day at least 120 days after the date of the notice.

No registration where filing required

(3) Where the Director has given a notice under subsection (1), no charge in favour of the chargee that sets the terms out expressly shall be registered without the Director’s authorization on or after the day specified by the Director.

Seal not required

13. (1) Despite any statute or rule of law, a transfer or other document transferring an interest in land, a charge or discharge need not be executed under seal by any person, and such a document that is not executed under seal has the same effect for all purposes as if executed under seal.

Guarantee

(2) Subsection (1) applies to a guarantee in a charge.

2. How is it created?

A mortgage is created by a contract.o See page 10 of the course pack for a sample of a contract of Mortgage.

(a) Review of Charge / Mortgage forms in case book A sample of a charge/mortgage form is on page 19 of the course pack.

o For the electronic one, see page 20 of the course pack.

The set of standard charge/mortgage terms are on page 15-18 of the course package.

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(b) Concept of conveyance or transfer of interest in lands subject to right of redemption

The concept of conveyance or transfer of interest in lands is subject to right of re-demption.

o However, a chargor and chargee are entitled to all the legal and equitable rights and remedies that would be available to them if the chargor had transferred the land to the chargee by way of mortgage – see section 6 (1) and (3) of Land Registration Reform Act above.

(c) Registration (for purpose of notice but not necessary for creation)

Registration is not necessary for the creation of the charge.o Registration is for the purpose of establishing priorities.

It follows the erga omnes principle. Registration gives notice to the world.

If registered, after satisfactory payment of the debt the mortgagor can ask for the redemption of the register.

o This is an operation of re-conveyance.

3. Concept of Redemption – Re-acquiring interest theoretically con-veyed

The concept of redemption presuppose the payment of the amount owing under a mortgage to, in effect, by back the title to the property.

o It is an equitable right of the mortgagor or those who claim under him/her.

Re-acquiring interest theoretically conveyed is the right to have property freed from a secured charge.

4. Discharge

A mortgage grants an interest in the real estate to the mortgagee, and once it is paid in full, a mortgage discharge must be recorded in the land records.

o A recorded mortgage discharge certifies that the mortgage has been satis-fied and releases the interest of the lender in the property and thereby clears the title.

(a) Mortgage Act, section 2 and section 12 (3) (8) and (9).

Obligation on mortgagee to transfer instead of reconveying

2. (1) Despite any stipulation to the contrary, where a mortgagor is entitled to re-deem the mortgagor may require the mortgagee, instead of giving a certificate of payment or reconveying and on the terms on which the mortgagee would be bound to reconvey, to assign the mortgage debt and convey the mortgaged prop-erty to any third person as the mortgagor directs, and the mortgagee is bound to assign and convey accordingly.

Idem

(2) The right of the mortgagor to require an assignment belongs to and is capa-ble of being enforced by each encumbrancer or by the mortgagor, despite any in-termediate encumbrance; but a requisition of an encumbrancer prevails over that

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of the mortgagor, and as between encumbrancers a requisition of a prior encum-brancer prevails over that of a subsequent encumbrancer.

Exception

(3) This section does not apply if the mortgagee is or has been in possession.

………………………………………………………………………………………………

12. […]

[…]

Where mortgagee cannot be found

(3) When a mortgagor or any person entitled to pay off a mortgage desires to do so and the mortgagee, or one of several mortgagees, cannot be found or when a sole mortgagee or the last surviving mortgagee is dead and no probate of his or her will has been granted or letters of administration issued, or where from any other cause a proper discharge cannot be obtained, or cannot be obtained without undue delay, the court may permit payment into court of the amount due upon the mortgage and may make an order discharging the mortgage.

[…]

Death of mortgagee, order for discharge

(8) When a mortgagee has died and all money due upon the mortgage was paid to him or her in the mortgagee’s lifetime or has been paid to a person entitled to receive the same after the mortgagee’s death or where in any other case it ap-pears that all money due upon the mortgage has been paid and for any reason a discharge or reconveyance cannot be obtained without undue delay and expense the court may make an order discharging the mortgage.

Registration of order discharging

(9) Upon the registration of an order discharging a mortgage it has the same ef-fect as the registration of a certificate of discharge signed by the mortgagee would have under the Registry Act.

(b) Registry Act, section 56 (1) (8) and (10), sections 62 and 63.

Discharge of mortgage

56. (1) A certificate of discharge, in the prescribed form, of a registered mortgage, executed by the mortgagee, the executor, administrator, estate trustee or assignee of the mortgagee, or by such other person as may be entitled by law to receive the money and to discharge the mortgage, may be registered.

[…]

Deletion of entries

(8) If the land registrar is satisfied that a registered instrument purporting to dis-charge a mortgage validly discharges the land described in the discharging instru-ment from any claim arising under the mortgage or under any other instrument re-lating exclusively to the mortgage, the land registrar shall,

(a) delete from the abstract index, in the manner that the Director of Titles specifies, the entry of the mortgage and all other instruments relating exclusively to the mortgage; or

(b) make an entry in the abstract index in the manner that the Director of Titles specifies indicating that the entry of the mortgage and all other instruments relating exclusively to the mortgage is deleted.

[…]

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Effect of deletion

(10) If the land registrar has complied with subsection (8), the land described in the discharging instrument is not affected by any claim under the mortgage or un-der any other instrument relating exclusively to the mortgage.

………………………………………………………………………………………………

Partial discharge of mortgage

62. Where only part of the land mortgaged by a registered mortgage is to be dis-charged therefrom, a certificate of discharge, in the prescribed form, that includes a local description of the land, executed by the mortgagee, the executor, adminis-trator, estate trustee or assignee of the mortgagee, or by such other person as may be entitled by law to receive the money and to discharge the mortgage, may be registered.

Effect of registration of discharge of mortgage

63. (1) If a certificate of discharge under this Act and the regulations that complies with Part I of the Land Registration Reform Act and the regulations made under it is registered for a mortgage described in subsection (2), the certificate is valid and effectual as a conveyance to the mortgagor, the heirs or assigns of the mortgagor of the mortgagor’s original estate in the mortgaged land or in the part of the land described in the certificate, as the case may be.

Mortgage predating

(2) Subsection (1) applies to a mortgage executed,

(a) before September 6, 1984, in the case of a mortgage affecting land in the County of Oxford as it existed on December 31, 1980; or

(b) before January 17, 1985, in the case of a mortgage affecting land else-where in Ontario.

(c) Land Titles Act, section 102.

Cessation of encumbrance

102. (1) The land registrar shall, on the requisition of the registered owner of land and on due proof of the satisfaction of a charge thereon, or may, on the requisition of the registered owner of a registered charge or of the personal representative of the registered owner of the registered charge or on the certificate of such regis-tered owner or the personal representative of the registered owner of the satisfac-tion thereof, note on the register in the required manner the cessation of the charge, and thereupon the charge ceases.

Other encumbrances

(2) The land registrar may in like manner and with the like effect note the cessa-tion of any other encumbrance.

Partial cessation of charge

(3) On the requisition or certificate of the registered owner of a registered charge or of the personal representative of such owner authorizing or certifying the dis-charge of any part of the land therefrom, the land registrar may note on the regis-ter the discharge of such land from the charge, and thereupon the charge ceases as to the land discharged.

Death of person certifying to cessation of charge

(4) The death of the person who signed the requisition or certificate does not re-voke or otherwise affect the discharge.

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5. Basic Obligations of the Mortgagor

Mortgages Act, sections 7 – 9:

Covenants to be implied:

7. There shall, in the several cases mentioned in this section, be deemed to be included, and there shall in those several cases be implied, covenants to the effect stated in this section, by the person or by each person who conveys, as far as re-gards the subject-matter or share thereof expressed to be conveyed by that per-son or each person with the person, if one, to whom the conveyance is made, or with the persons jointly, if more than one, to whom the conveyance is made as joint tenants, or with each of the persons, if more than one, to whom the con-veyance is made as tenants in common, that is to say,

on mortgage by beneficial owner

(a) in a conveyance by way of mortgage, the following covenants by the person who conveys, and is expressed to convey as beneficial owner, namely,

(i) for payment of the mortgage money and interest, and observance in other respects of the proviso in the mortgage,

(ii) for good title,

(iii) for right to convey,

(iv) that, on default, the mortgagee shall have quiet possession of the land, free from all encumbrances,

(v) that the mortgagor will execute such further assurances of the said lands as may be requisite, and

(vi) that the mortgagor has done no act to encumber the land mortgaged,

according to the forms of covenants for such purposes set forth in Schedule B to the Short Forms of Mortgages Act, being chapter 474 of the Revised Statutes of Ontario, 1980, subject to the provisions of that Act;

on mortgage of leaseholds, by beneficial owner

(b) in a conveyance by way of mortgage of leasehold property, the following further covenants by the person who conveys and is expressed to convey, as ben-eficial owner, namely,

(i) that the lease or grant creating the term or estate for which the land is held is, at the time of conveyance, a good, valid and effectual lease or grant of the land conveyed, and is in full force, unforfeited, and unsurrendered, and in no wise become void or voidable, and that all the rents reserved by, and all the covenants, conditions and agreements contained in the lease or grant and on the part of the lessee or grantee and the persons deriving title under the lessee or grantee to be paid, observed and performed, have been paid, observed and performed up to the time of conveyance, and

(ii) that the person so conveying, or the persons deriving title under that per-son, will at all times, as long as any money remains on the security of the con-veyance, pay, observe and perform, or cause to be paid, observed and performed, all the rents reserved by, and all the covenants, conditions and agreements con-tained in the lease or grant, and on the part of the lessee or grantee and the per-sons deriving title under the lessee or grantee to be paid, observed and performed, and will keep the person to whom the conveyance is made and those deriving title under that person indemnified against all actions, proceedings, costs, charges, damages, claims and demands, if any, to be incurred or sustained by that person or those persons by reason of the non-payment of such rent, or the non-obser-

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vance or non-performance of such covenants, conditions and agreements, or any of them.

Implied covenants in mortgages are joint and several

8. In a mortgage, where more persons than one are expressed to convey as mort-gagors, or to join as covenantors, the implied covenants on their part shall be deemed to be joint and several covenants by them, and where there are more mortgagees than one the implied covenant with them shall be deemed to be a covenant with them jointly unless the amount is expressed to be secured to them in shares or distinct sums, in which latter case the implied covenant with them shall be deemed to be a covenant with each severally in respect of the share or distinct sum secured to each mortgagee.

Exception

9. Sections 7 and 8 do not apply to a mortgage of land in a part of Ontario desig-nated under Part I of the Land Registration Reform Act, that is executed on or after the day on which the land is designated under clause 14 (a) of that Act.

Land Registration Reform Act, section 7 (see above).o This section provides the statutory basic obligations of the Mortgagor,

which can be substituted by an agreement as seen in page 15-17 of the course pack.

(a) Covenant to pay principal and interest

The mortgagor is under a contractual obligation to perform the payment of the principal amount of money borrowed and its respectively interest.

(b) Taxes

Payment of taxes is commonly put as an obligation for the mortgagor because they have priority over any mortgage.

o Once it is put as a mortgagor’s obligation, he/she has the obligation to per-form this payment.

(c) Insurance – Mortgages Act, section 7 / Land Registration Reform Act, section 7

The mortgagee usually demands insurance because the value of the guarantee must be secure so the value of the debt protected by the mortgage is also se-cured.

The insurance can be used by the mortgagor to …

o … repair the object of the security …o … pay the loan; or …o … replace the security.

(d) Repair (not to commit waste – usually actions which diminish the value of the security)

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Another common obligation for the mortgagor is to repair the object of guarantee in a mortgage for obvious reason, that is, preserve its value so the value of the debt protected by the mortgage is secured.

6. Basic Rights of Mortgagee Following Default

A mortgagee has five (5) potential remedies:

i. An action for repayment.ii. An action for sale (based on a contract).

a. Judicial sale.b. Demand to court for a power of sale – Part III of the Mortgages Act.

Most common proceeding.

iii. An action for foreclosure.iv. An action for taking possession.v. An action for appointing a receiver.

(a) Foreclosure

Foreclosure is an action brought by a mortgagee when a mortgagor is in default asking that a day be fixe on which the mortgagor is to pay off the debt, and that in default of payment the mortgagor may be foreclosed of, that is, deprived of her or his right to redeem, the equity of redemption.

o That is, to terminate all subsequent rights of redemption.

Generally, an order of foreclosure transfers title to the mortgagee and terminates the mortgagor’s equity of redemption.

(b) Judicial sale / Power of sale

Judicial sale.o It involves the sale of the mortgaged property under the supervision of a

court, with the proceeds going first to satisfy the mortgage, and then to sat-isfy other lien holders, and finally to the mortgagor.

With this remedy any excess money from the sale of the property over and above the mortgage debt is distributed to the borrower.

Power of sale.o A clause generally inserted in mortgages gives the mortgagee the right

and power, on default by the mortgagor, to sell the mortgaged property by public auction, private contract or tender.

Thus, in a mortgage contract, the power of sale is the mortgagee's right to sell the mortgaged property if the mortgagor fails to pay their debt on time.

o In this context, power of sale property is referred to any real estate that has been put up for auction so that it may be sold to the benefit of the mortgagee.

o However, not all sale proceeds must go to the mortgagee, but only the necessary for the satisfaction of the debt.

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o Only if there is any sum remaining after the satisfaction of the mortgagee’s debt and other incidental debts, if any; it will be granted to the debtor.

o In a power of sale the mortgagee does not have to go court for the sale proceeding.

(c) Possession

If a mortgagor fail to pay the loan repayments in accordance with the mortgage and are in default of the mortgage, the mortgagor may exercise their right to take possession of the property that guarantee the debt.

(d) Action on covenant to pay

An action on covenant to pay is a legal remedy available to a mortgagee when a mortgage is in default.

o It gives the mortgagee the right to sue the mortgagor, even if the latter has since sold the property.

(e) Distress

A distress is a lawfully action of seizing the mortgaged property extrajudicially by the mortgagee in order to enforce his/her right such as payment of outstanding arrears elapsed from the contract and in default by the mortgagor.

B. Interest

1. The Interest Act – Review

RATE OF INTEREST

No restriction except by statute

2. Except as otherwise provided by this Act or any other Act of Parliament, any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on.

Interest rate when none provided

3. Whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum.

When per annum rate not stipulated

4. Except as to mortgages on real property or hypothecs on immovables, when-ever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recover-able on any part of the principal money unless the con- tract contains an express statement of the yearly rate or percentage of interest to which the other rate or per-centage is equivalent.

Recovery of sums paid otherwise

5. If any sum is paid on account of any interest not chargeable, payable or recov-erable under section 4, the sum may be recovered back or deducted from any principal or interest payable under the contract.

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2. The Meaning of Interest (Premium/Bonus)

Interest is a charge or compensation for the use of or retention of money.o That is, interest is the cost of using money.

o When a mortgagee lends money it is expected to receive interest for the money lent and, in absence of the contrary, once the mortgagee accepts the money, he/she has to pay the installments accordingly to the contract, even if he/she for some reason does not use the money as expected.

o Interest is usually accrues daily.

Bonus is something given or paid in addition to what is usual or expected.o That is, something given, paid, or received above what is due or expected.

o Bonus is a pre-payment privilege accorded to the mortgagor. It is a privilege that allows the mortgagor to advance payments any

time and without penalties when he/she is not in default. It is a privilege exercised without cost when available in a

contract.

o In the case of bonus, the mortgagee may lose some interest, but in other hand, it can use the money advanced to lend it to someone else.

3. Calculation of Interest

Interest can be totally calculated in advance, but payable in the end of the term, or on a maturity date.

Interest can also be calculated in half-term advance.o In this case, the other half of the interest is calculated over the balance of

the debt at the end of the first half of the term. Interest can be finally calculated in the end of the stipulated term, over the bal-

ance at the end of this stipulated term.o In this case the money paid until the calculation of the interest has no inter-

est.

In obiter: the fairer calculation is when the calculation is made monthly in advance and the payment of installments applies to reduce the interest pro-portionally to the calculation period, with the overpayment, if any, used to reduce the principal amount of the debt.

4. Re-investment of the principal received

All of the four cases bellow deal with re-investment of the principal received by the mortgagee.

The deemed reinvestment principle.o When interest is payable by the borrower more frequently than once each

period of compounding as expressed in the contractual interest rate, all in-terest mathematics are based on the theory that the lender re-invests the interest received from time to time, at the same rate.

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Therefore, the amounts of interest from the borrower, plus the theo-retical re-investment earnings on them, produce, for the lender, the effective yield contemplated in the borrowing instrument, be it mort-gage deed, promissory note, or otherwise.

If the payment frequency is greater than the calculation frequency, in the ab - sence of a contract provision of the contrary , the re-investment of the principal will apply to fix the interest at the rate agreed and eventually to reduce the princi-pal amount of the debt.

– Re Miglonn and Castleholm Construction Ltd., (1975) 5 O.R. (2nd) 444 Where a mortgage provides for the calculation of interest half-yearly, not in ad-

vance, with the payment of equal monthly installments to be applied, first in pay-ment of interest and then to reduce principal, the balance outstanding at any in-terest calculation date is not to be calculated by determining interest for a six-month period on the outstanding principal, adding that total to the principal sum and then deducting therefrom the blended payments made over the six-month period.

o Such a method of calculation charges interest in advance and gives no credit for the monthly payments made on account of principal.

Rather, the proper method to be used requires the mortgagee to use the capital portion of each monthly payment to write down the principal outstanding each month.

– Re Fabasco Ltd. and Abrams, (1976) 13 O.R. (2d) 342

This was a case where a mortgage was provided for payments of interest monthly with no payment of principal until the maturity date of the mortgage.

It deals with how interest is to be calculated in a mortgage providing monthly pay-ments of interest only.

The mortgagees asserted that the proper method to determine the amount of in-terest was to divide a full year's interest by 12 months.

The mortgagor took the position that this would result in an effective annual rate of interest significantly higher than the rate stipulated in the mortgage.

o The mortgagor submitted that the mortgagee must be deemed to re-invest each monthly payment immediately upon receipt.

The court decided that on an application to determine the correct method of cal-culating the monthly interest payments, held, the method adopted by the mort-gagor was the correct one.

Once it is conceded that a mortgage requires interest to be paid monthly and stip-ulates an annual rate, with compounding at yearly intervals not in advance, the deemed re-investment principle ought to be applicable unless some other terms are spelled out in the mortgage contract.

It does not matter whether the monthly payments of a fixed sum are blended with principal payments or are combined with fixed amounts of principal or whether, as in the present case, no principal payments are required.

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Where a specific rate of interest is contracted for, compounded annually but payable monthly, not in advance, the monthly payments must not be such as to result in a higher yield to the mortgagee than that stipulated for.

– Morenisch Land Development v. Metro Trust, (1979) 23 O.R. (2nd) 1

This case reinforces what was established in Re Fabasco Ltd. and Abrams that where a specific rate of interest is contracted for, compounded annually but payable monthly, not in advance, the monthly payments must not be such as to result in a higher yield to the mortgagee than that stipulated for.

o That is, the reinvestment principle.

– Brunn v. Lock, (1987) 61 O.R. (2nd) 772

The deemed reinvestment principle, although not a rule of law, applies whenever interest is to be calculated "not in advance" and the mortgagor agrees to pay in-terest more frequently (that is, at shorter intervals) than it is to be calculated.

o It is not necessary that the mortgage require the mortgagee to reinvest in-terest as and when paid during the calculation period.

– London Acres v. Sparcord Holdings, (1988) 67 O.R. (2nd) 583

This case reinforces Brunn v. Lock, applicable when the mortgagor can prepay the whole or any part of the principal at any time without notice or bonus.

5. Right to Tender Payment

(a) The Interest Act, section 10

When no further interest payable

10. (1) Whenever any principal money or interest secured by mortgage on real property or hypothec on immovables is not, under the terms of the mortgage or hypothec, payable until a time more than five years after the date of the mort - gage or hypothec, then, if at any time after the expiration of the five years, any person liable to pay, or entitled to pay in order to redeem the mortgage, or to extin-guish the hypothec, tenders or pays, to the person entitled to receive the money, the amount due for principal money and interest to the time of payment, as calcu-lated under sections 6 to 9, together with three months further interest in lieu of notice, [then] no further interest shall be chargeable, payable or recoverable at any time after the payment on the principal money or interest due under the mortgage or hypothec.

Exception

(2) Subsection (1) does not apply

(a) to any mortgage on real property or hypothec on immovables given by a joint stock company or any other corporation, nor to any debenture issued by them, for the payment of which security has been given by way of mortgage on real property or hypothec on immovables; or

(b) to any prescribed mortgage on real property or prescribed hypothec on immovables given by a prescribed entity, nor to any pre- scribed debenture issued

24

by it, for the payment of which security has been given by way of mortgage on real property or hypothec on immovables.

Regulations

(3) For the purposes of paragraph (2)(b), the Governor in Council may, by regu-lation,

(a) prescribe entities; and

(b) prescribe classes of mortgages and hypothecs given by those entities and classes of debentures issued by them.

This section can be used only from the day one after the fifth year, when ap-plicable.

To avoid the application of section 10(1) of Interest Act, the parties can modify the date of the mortgage, by re-dating it.

(b) The Mortgages Act, section 18

Right to redeem after 5 years

18. (1) Where any principal money or interest secured by a mortgage of freehold or leasehold property is not, under the terms of the mortgage, payable until a time more than five years after the date of the mortgage, then, if at any time after the expiration of such five years any person liable to pay or entitled to redeem tenders or pays to the person entitled to receive the money the amount due for principal money and interest to the time of such tender or payment, together with three months further interest in lieu of notice, no further interest is chargeable, payable or recoverable at any time thereafter on the principal money or interest due under the mortgage.

Exceptions

(2) This section does not apply to any mortgage given by a joint stock company or other corporation nor to any debenture issued by any such company or corpora-tion for the payment of which security has been given on freehold or leasehold property.

– Potash v. Royal Trust, (1986) 2 S.C.R. 351 at 161-163

The purpose of section 10(1) of the Interest Act is to ensure that mortgagors have the right to pay off their mortgages at the end of each five-year period.

o They cannot be "locked in" for more than five years.

Where the original term of a mortgage exceeds five years, the mortgagor has the right to pay it off at the end of five years in compliance with the section 10(1) of the Interest Act.

Where the original term of the mortgage is for five years or less and the term is extended by agreement beyond the five-year period (the "date of the mortgage" remaining unchanged), the mortgagor has the right to pay it off at the end of five years.

Where a mortgagor elects not to exercise his right under section 10(1) of the In-terest Act but instead enters into an otherwise valid and enforceable renewal

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agreement which "deems" the date of the original mortgage to be the date of ma-turity of the existing loan, and the term of the renewal agreement does not itself exceed five years, he cannot pay off the mortgage until the end of the five-year renewal period.

When a mortgagor makes a conscious decision on the basis of full knowledge of his statutory right to repay at the end of a five-year period not to do so, he does not "contract out of" or "waive" his statutory right; he simply decides not to exer-cise it.

o If, however, he purports in a mortgage or renewal agreement to relinquish his right to pay off the mortgage at the end of any given five-year period, such a provision could not be enforced against him at the instance of the mortgagee.

A contract cannot be made out of section 10(1) of the Interest Act. So, he would still be free to pay off the mortgage on compli-

ance with the statute.

– Litowitz v. Standard Life Assurance Co., (1997) 30 O.R. (3rd) 579

– Vale et al. v. Sun Life

– Re Glied and Confederation Life Insurance Company et al

These three cases were heard altogether

Individuals who were beneficial owners are not entitled to rely on the prepayment rights when mortgages were given by corporations acting as their nominee or trustee.

o When a mortgage is granted by corporations on property, and later individ-uals acquired the mortgaged property, then section 10(2) of the Interest Act applies.

o Therefore, individuals who acquired properties previously mortgaged can-not exercise the right prescribed by section 10(1) of the Interest Act.

o The exemption to the right to prepay is determined by the corporate status of the mortgagor.

Generally, when the mortgages were given by a corporation within the meaning of the exemption, the fact that a corporate mortgagor was acting as nominee or trustee for a non-corporate beneficial owner did not entitle the beneficial owner to the statutory right of prepayment.

However, when a corporation and an individual grant jointly a mortgage on a property, the provision of section 10(1) of the Interest Act is available.

o This is so because the individual is clearly shown on the mortgages as a co-mortgagor and assumes responsibility in his/her personal capacity.

Also, determining an individual's statutory rights by reference to whether he or she holds a minority or majority percentage interest is an approach not prescribed by the legislation and which cannot be imported therein.

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– Kucor Construction & Developments & Associates v. Canada Life Assur-ance Co., (1997) 32 O.R. (3rd) 548

The law regards only individuals and corporations as distinct legal entities. A partnership does not exist as a legal entity distinct or separate from its partners

and is not capable of holding title to property or of mortgaging or granting security on property.

o The property of a partnership is not owned by the partnership as a distinct legal entity but rather is property in which the partners have undivided ownership interests.

In a limited partnership, the legal title is held by the general partner for the benefit of all the partners.

Accordingly, the title to the property remained with the general partner, which held the property for the benefit of all the partners in the limited partnership.

The mortgage documents must be interpreted as having been entered into by the general partner of the limited partnership on behalf of all the partners.

The general partner was a corporation and not entitled to the right to redeem un-der section 18(1) of the Mortgages Act.

– Re Moore and Texaco, (1965) 2 O.R. 253

When the circumstances of the case indicate that the mortgage transaction as well as an eventual option to repurchase are parts of a vendor and purchaser ar-rangement, the equitable principle as to “any stipulation which restricts or clogs the equity of redemption is void” has no application and the option attached to such mortgage cannot on that ground be set aside or declared null and void.

6. The Interest Act, sections 6, 7 and 9

INTEREST ON MONEYS SECURED BY MORTGAGE ON REAL PROPERTY

No interest recoverable in certain cases

6. Whenever any principal money or interest secured by mortgage on real property or hypothec on immovables is, by the mortgage or hypothec, made payable on a sinking fund plan, on any plan under which the payments of principal money and interest are blended or on any plan that involves an allowance of interest on stipu-lated repayments, no interest whatever shall be chargeable, payable or recover-able on any part of the principal money advanced, unless the mortgage or hy-pothec contains a statement showing the amount of the principal money and the rate of interest chargeable on that money, calculated yearly or half-yearly, not in advance.

No rate recoverable beyond that so stated

7. Whenever the rate of interest shown in the statement mentioned in section 6 is less than the rate of interest that would be chargeable by virtue of any other provi-sion, calculation or stipulation in the mortgage or hypothec, no greater rate of inter-est shall be chargeable, payable or recoverable, on the principal money advanced, than the rate shown in the statement.

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[…]

Overcharge may be recovered back

9. If any sum is paid on account of any interest, fine or penalty not chargeable, payable or recoverable under section 6, 7 or 8, the sum may be recovered back or deducted from any other interest, fine or penalty chargeable, payable or recover-able on the principal.

If the blended payments of principal and interest amount to more than the princi-pal and interest at the rate stated, then, by section 7 no greater interest is recov-erable than the rate stated.

(a) Requirements for complying with Interest Act, section 6

The first requirement for complying with Interest Act, section 6 is:

i. A blended payment of principal money and interest. A combined payment of principal money with interest.

If the contract describes the value of payment of principal money and the value of the interest, then it is not blended for the purposes of section 6 of Interest Act.

Once the first requirement is met, the furthers requirements for complying with In-terest Act, section 6 in order to charge for interest are:

ii. A statement showing the amount of the principal money.iii. The rate of interest chargeable on that money.iv. That the interest has to be calculated yearly or half-yearly, not in advance.

o See the example on page 20 of the course pack.

– Canadian Northern Investment Co. v. Cameron, (1917) 33 D.L.R. 792; afford 55 S.C.R. 409, 422 at 429.

o The evil, which the section 6 of Interest Act aims to prevent, is the imposi-tion of an extortionate rate of interest through the medium of blended pay-ments of principal and interest.

Under this system without the protection, which this section affords a highly usurious rate of interest, might be wrapped up in these in-nocent-appearing blended payments without the slightest suspicion on the part of an ignorant or careless borrower that he was being made the victim of it.

So parliament stepped in and decreed that such a mortgage should itself tell the mortgagor exactly how much of the aggregate of these blended payments represents principal and exactly the rate at which the interest included in them calculated yearly or half-yearly not in advance is charged under penalty of the loss of all interest for breach of this direction.

o By this section the statement must show the interest calculated yearly or half-yearly but “not in advance” in each blended payment, and the rate of interest, so that the mortgagor might test its correctness.

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The “statement” referred to must be complete in itself, showing the essential facts, principal, interest and rate of interest on each blended payment.

The “statement” required by the sixth section is one showing sepa-rately in each blended stipulated payment how much of principal and how much of interest the blended payment comprised, and the rate of interest at which the calculation was made yearly or half-yearly, not in advance.

– Standard Reliance v. Stubbs, (1917) 55 S.C.R. 422

o What the prescribed statement of section 6 of Interest Act is to show is:

i. “the amount of such principal money advanced,” I.e., the amount of the principal money secured which has

been advanced and is to be repaid in the blended payments;

ii. “the rate of interest chargeable thereon,”. I.e., the rate at which the interest to be paid is to be com-

puted.

iii. that such interest shall be “calculated yearly or half-yearly not in ad-vance,” and that the “statement” must show that it is intended to be so computed.

o The adjective “chargeable” clearly relates to and qualifies the word “rate.”

o The participle “calculated” equally clearly relates to and qualifies the word “interest.”

It cannot apply to the word “rate”; a “rate of interest” is not “calcu-lated.”

o Thus, the statement to meet the requirements of the statute are satisfied if the mortgage shows the amount of principal money advanced and to be repaid, the rate of interest per annum which it is to bear and, if it be so in-tended, that such interest is to be calculated half-yearly.

o A stipulation for interest to be computed in advance or more frequently than half-yearly is altogether forbidden; a statement showing that interest is to be computed or is to be calculated in advance would not in either case render such a calculation legal; then no interest whatever would be "chargeable, payable or recoverable," on such a mortgage.

– Greymac Truscto v. Gould, (1983) 30 R.P.R. 157.

o This case superficially defines a plan that involves an allowance of interest on stipulated repayments purported by section 6 of Interest Act.

o In this case it was agreed between counsel that the principal or interest is not made payable on a sinking fund plan or on any plan under which the payments of principal money and interest are blended.

The defendants took the position that it is a mortgage where mon-eys are repayable on “any plan that involves an allowance of inter-est on stipulated repayments”.

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If that is correct, then s. 6 applies but if not, it does not apply.

o The court, turning to the section itself, noted that the section speaks of “payments” of money and interest and then speaks of a plan involving “an allowance” of interest.

The court then stated that “allowance” must mean something differ-ent than “payment” and on the basis of other cases cited, it appears that quite possibly the third category of mortgage is a mortgage in which a certain interest rate is stipulated but it is then pro-vided that the rate or the amount of interest will be reduced if the principal is paid at certain fixed times.

o By deciding the case, the court judged that at any rate, the mortgage in case constituted a mortgage of that third class.

Therefore it does not fell within section 6 of the Interest Act and that defence which is a defence as to interest only does not raise a tri-able issue.

(b) Meaning of blended payment

– Re Kilgoran Hotel Ltd. v. Samek, [1968] S.C.R. 3

o A blended payment is a payment mixed so as to be inseparable and indis-tinguishable.

When the amount of principal and the rate of interest are clearly stated and the arithmetical calculation involved on each payment date are simple, it appears impossible to say that it brings about the result that the payments of principal and interest are “blended”.

In this situation, section 6 of the Interest Act does not apply for it does not comply its requirements.

– Re McGoran v. Cowan, [1973] 3 O.R. 557

o When installment payments of a single sum of money include both princi-pal and interest but provided a specific formula for the division of that sum, then the payment is not blended.

o The definition of “blended” as meaning “mixed so as to be inseparable and indistinguishable” does not mean utterly incapable of separation or distinc-tion.

o No doubt any payment, which includes both principal and interest, can be separated or distinguished in some way.

However, the payment must be distinguishable or separable on the face of the mortgage without reference to implied terms.

– Ferland v. Sun Life Assurance Co., [1975] 1 S.C.R. 266.

o Principal and interest are “blended” only if the deed does not disclose the true rate of interest payable.

(c) Bonus on default – Interest Act, section 8 / Mortgages Act section 17

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No fine, etc., allowed on payments in arrears

8. (1) No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real prop-erty or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

Interest on arrears

(2) Nothing in this section has the effect of prohibiting a contract for the payment of interest on arrears of interest or principal at any rate not greater than the rate payable on principal money not in arrears.

………………………………………………………………………………………………

Payment of principal upon default

17. (1) Despite any agreement to the contrary, where default has been made in the payment of any principal money secured by a mortgage of freehold or lease-hold property, the mortgagor or person entitled to make such payment may at any time, upon payment of three months interest on the principal money so in arrear , pay the same, or the mortgagor or person entitled to make such payment may give the mortgagee at least three months notice, in writing, of the intention to make such payment at a time named in the notice, and in the event of making such pay-ment on the day so named is entitled to make the same without any further pay-ment of interest except to the date of payment.

Exception

(2) If the mortgagor or person entitled to make such payment fails to make the same at the time mentioned in the notice, the mortgagor or person is thereafter entitled to make such payment only on paying the principal money so in arrear and interest thereon to the date of payment together with three months interest in ad-vance.

Saving

(3) Nothing in this section affects or limits the right of the mortgagee to recover by action or otherwise the principal money so in arrear after default has been made.

– Tapio v. Kajander, [1965] 1 O.R. 431.

o Section 17 of Mortgage Act as a “penalty” is only available to the mortgagor. If he/she is not in default.

o If the mortgage contained a clause that, in the event of sale of foreclosure proceedings, the mortgagee should be entitled to add a stated sum to his mortgage-debt, this provision in the mortgage would have the effect against which section 17 of Mortgage Act is aimed.

It would be termed a bonus, but would be in effect a “penalty” for default in prompt payment.

It clearly would have the effect of increasing the charge on the ar-rears beyond the rate of interest payable on the principal money not in arrear, and so comes within the express prohibition of section 8 of Interest Act.

In short, the mortgagee cannot use the text of section 17 of Mort-gage Act in a contractual provision on his/her own favour because

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such clause would have the effect to contravene section 8 of Inter-est Act.

o A consideration of the authorities indicates that the only way to im-pose a penalty for failure to make prompt payments without falling foul of the Interest Act is to stipulate for a greater rate and provide for a lower rate if payments are made promptly.

– Glinert v. Kosztowniak, (1972) 2 O.R. 284

o A bonus clause requiring payment of three months interest in the event of the mortgagor’s default, payable on any proceedings taken by mortgagee on default of mortgage, is invalid as creating a penalty under section 8 of Interest Act.

– Parkhill v. Moher, [1977] 17 O.R. (2d) 543, 80 D.L.R. (3d) 754

o As regards to section 17 of the Mortgage Act, the court does not consider it as a penalty imposed because of the default.

The provision for three months’ notice or bonus applies only where the mortgagor seeks relief from the consequences of non-payment and restoration of the mortgagor's pristine position.

It is the agreed cost of the indulgence in exercising a statu-tory right.

o In deciding whether a bonus is payable one must distinguish between the case where the mortgagor is attempting to make payment after default, and the case where the mortgagee is attempting to recover moneys that are in default.

If there is default and the mortgagee is not taking any steps to en-force the mortgage, the mortgagor can exercise his/her right pre-scribed by section 17 of the Mortgage Act.

Conversely, this section is not applicable when the mortgagee takes action to recover the moneys after default.

Where a mortgage provides for the payment of a bonus of three months’ interest on any default, and where default oc-curs on the maturity of the mortgage, the mortgagee is not entitled to the bonus of three months’ interest.

o Such a provision in the mortgage is rendered nugatory or inoperative by section 8(1) of the Interest Act, even where the default occurs upon maturity, as it increases the charge beyond the rate payable on principal not in arrears.

[This is arguable because there’s no more prin-cipal not in arrears].

– Re 459745 Ontario Ltd. v. Wideview Holdings, (1987) 59 O.R. (2nd) 361, 37 D.L.R. (4th) 765.

o This case reinforces Parkill v. Moher.

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o The clause requiring three months’ interest on default amounted to a bonus or penalty, which had the effect of increasing the interest rate be-yond that stipulated by the mortgage, contrary to section 8 of the Interest Act.

– Dickson v. Bluestein (in Trust), (1990) 2 O.R. (3d) 131.

o This case supports Parkill v. Moher.

o Bonus clause requiring payment of additional three months’ interest in event of default by mortgagor is unenforceable as creating penalty and therefore contrary to section 8 of the Interest Act.

– Mastercraft Properties Ltd. v. El Ef Investments Inc., (1993) 14 O.R. (3rd) 519.

o The major issue in this case was whether or not the provisions of section 17(1) of the Mortgages Act are in conflict with the provisions of section 8 of the Interest Act.

The parties attacking the covenants took the position that section 17(1) was unconstitutional because it provides for a "fine" or "penalty" of the type prohibited by section 8 of the Interest Act.

o Section 17(1) gives a mortgagor a right, when in default of payment of principal, to repay that principal on giving three months’ notice to the mort-gagee of his intention to pay, and protects him from any further payment of interest except to the date of payment.

Such interest would merely constitute payment for the use of the principal during the notice period.

o The provision protects the mortgagor by permitting payment of arrears without penalty, or by permitting early redemption at a price; and it protects the mortgagee by giving him a three-month period during which to arrange for reinvestment of his principal, or monies to compensate for lack of that notice.

o Nevertheless, the option is that of the mortgagor.

o Covenants which go beyond what is provided for in section 17(1) of the Mortgages Act may well run into conflict with section 8 of the Interest Act.

However, that does not affect the constitutional validity of section 17(1), or the enforceability of covenants which do not go beyond its provisions.

Covenants which provide the protection intended by section 17(1) are in harmony rather than in conflict with the provi-sions of section 8.

Both enactments can stand as constitutionally valid federal and provincial law.

– O’Shanter Development Co. v. Gentra Canada Investments Inc., (1994) 43 R.P.R. (2nd) 131, affirmed (1995) 47 R.P.R. (2nd) 24.

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o The prepayment of a bonus does not contravene section 8 of the Interest Act, for the bonus is not a penalty being paid in punishment for breach of the mortgage agreement.

The prepayment bonus constituted a payment required for the privi-lege of paying off the mortgage in advance.

o If mortgagee gives notice to a mortgagor for redemption in a sum inferior than the real amount due, the mortgagee has to accept this amount as a redemption for the debt once payment is tender by the mortgagor within the notice’s period.

Only after the period expired without further payment, the mort-gagee can correct the value of the amount due.

– Ialongo v. Serm Investments Ltd., (2007) 54 R.P.R. (4th) 310

o After enforcement had begun, a mortgagor could not rely on section 17(1) to claim the prepayment bonus in order to pay off the mortgage in ad-vance.

o A mortgagor may only claim the bonus payment after enforcement if the mortgage contract provides for the bonus.

o In this case, since the bonus was disallowed, it could be concluded that the mortgage contract did not provide for the payment of the bonus.

– Peat Marwick Thorne Inc. (Trustee of the Estate of T.F.P. Investments Inc.) v. Beacon Realty Co., (1991) 5 O.R. (3rd) 567.

o In this case, one of the issues was of costs and whether the provisions of the mortgage for interest payable on default or maturity of 15 per cent of-fended section 8 of the Interest Act.

o In this case, although the mortgage did not provide for interest until default or maturity, the parties had made allowance for the cost of the money in arriving at the terms of the loan agreement.

o The effective rate of return prior to default was 56.3 per cent per annum compounded continuously.

o Accordingly, the stipulation for interest at maturity or upon default did not have the effect of increasing the effective interest component and the mortgage did not offend the principle of section 8 of the Interest Act.

– Reliant Capital Ltd. v. Silverdale Development Corporation et al., (2006) 270 D.L.R. (4th) 717.

o A lender made a mortgage loan to borrowers for a commercial real estate development on 40 acres of vacant land.

o The interest provision in the mortgage provided that the interest rate payable would be 14% per annum for the first 12 months following the In-terest Adjustment Date and 20% per annum thereafter.

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o One of the issues in this case was whether an increase in the rate of inter-est in a mortgage one month before the maturity date offended section 8 of the Interest Act.

o The appellant sought a declaration in BC Supreme Court that the interest clause in a mortgage was enforceable.

o A master of the court dismissed the application, holding that the stipulation for an increase in the interest rate one month before the mortgage was due was in the nature of a fine or penalty, and therefore unenforceable.

o The appellant’s appeal from the master’s order to a judge in chambers was dismissed.

o The chambers judge held that the true purpose or substance of the interest clause was “to create a penalty in the form of an increased rate of interest for non-performance”, and therefore violated section 8 of the Interest Act.

o The master and the chambers judge considered whether the interest provi-sion was saved as having a “legitimate commercial purpose” or a “busi-ness reason that did not amount to a penalty”.

o Both held that in the circumstances of the case the interest clause did not satisfy those tests.

o The BC Supreme Court held that the provision did not offend section 8 of the Interest Act.

o The fact that the increased rate was not dependant on default having oc-curred was not determinative.

Section 8 did not prohibit rates of interest that were higher on ar-rears than on monies owing that were not in arrears, only if the in-crease was dependant on default; the section prohibited higher in-terest charges on arrears than on other monies owing regardless of the contractual language that created such a charge.

o In this case, the interest rate became effective by the passage of time, not by payment falling into default.

o The interest clause did not charge more interest in the arrears that on the other monies owing.

It simply stipulated for a higher interest rate effective one month be-fore maturity, and applied equally to arrears and to monies owing that were not in arrears.

o Thus, it did not offended section 8 of the Interest Act.

6. Excessive Interest

(a) Criminal Code, section 347 (1)

Criminal interest rate

347. (1) Despite any other Act of Parliament, every one who enters into an agree-ment or arrangement to receive interest at a criminal rate, or receives a payment or partial payment of interest at a criminal rate, is

(a) guilty of an indictable offence and liable to imprisonment for a term not exceeding five years; or

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(b) guilty of an offence punishable on summary conviction and liable to a fine not exceeding $25,000 or to imprisonment for a term not exceeding six months or to both.

Following the Criminal Code, section 347 (2), “criminal rate” means an effective annual rate of interest calculated in accordance with generally accepted actuar-ial practices and principles that exceeds sixty per cent (60%) on the credit ad-vanced under an agreement or arrangement.

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(b) The Interest Act, section 2

RATE OF INTEREST

No restriction except by statute

2. Except as otherwise provided by this Act or any other Act of Parliament [section 347(1) of the Criminal Code], any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on.

(c) The Unconscionable Transactions Relief Act, R.S.O. 1990

Definitions

1. In this Act,

“cost of the loan” means the whole cost to the debtor of money lent and in-cludes interest, discount, subscription, premium, dues, bonus, commission, broker-age fees and charges, but not actual lawful and necessary disbursements made to a land registrar, a local registrar of the Superior Court of Justice, a sheriff or a trea-surer of a municipality; (“coût de l’emprunt”)

“court” means a court having jurisdiction in an action for the recovery of a debt or money demand to the amount claimed by a creditor in respect of money lent; (“tribunal”)

“creditor” includes the person advancing money lent and the assignee of any claim arising or security given in respect of money lent; (“créancier”)

“debtor” means a person to whom or on whose account money lent is advanced and includes every surety and endorser or other person liable for the repayment of money lent or upon any agreement or collateral or other security given in respect thereof; (“débiteur”)

“money lent” includes money advanced on account of any person in any trans-action that, whatever its form may be, is substantially one of money-lending or se-curing the repayment of money so advanced and includes and has always in-cluded a mortgage within the meaning of the Mortgages Act. (“prêt d’argent”).

The court may,

2. Where, in respect of money lent, the court finds that, having regard to the risk and to all the circumstances, the cost of the loan is excessive and that the trans - action is harsh and unconscionable , the court may,

reopen transaction and take account

(a) reopen the transaction and take an account between the creditor and the debtor;

reopen former settlements

(b) despite any statement or settlement of account or any agreement purporting to close previous dealings and create a new obligation, reopen any account al-ready taken and relieve the debtor from payment of any sum in excess of the sum adjudged by the court to be fairly due in respect of the principal and the cost of the loan;

order repayment of excess

(c) order the creditor to repay any such excess if the same has been paid or al-lowed on account by the debtor;

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set aside or revise contract

(d) set aside either wholly or in part or revise or alter any security given or agree-ment made in respect of the money lent, and, if the creditor has parted with the security, order the creditor to indemnify the debtor.

Exercise of powers of court,

3. The powers conferred by section 2 may be exercised,

in action by creditor

(a) in an action or proceeding by a creditor for the recovery of money lent;

in action by debtor

(b) in an action or proceeding by the debtor despite any provision or agreement to the contrary, and despite the fact that the time for repayment of the loan or any instalment thereof has not arrived;

in other proceedings

(c) in an action or proceeding in which the amount due or to become due in re-spect of money lent is in question.

Relief by way of originating notice

4. (1) In addition to any right that a debtor may have under this or any other Act or otherwise in respect of money lent, the debtor may apply for relief under this Act to the Superior Court of Justice which may exercise any of the powers of the court under section 2.

Appeal

(2) An appeal lies to the Divisional Court from any order made under subsection (1).

Saving holder for value, and existing jurisdiction

5. Nothing in this Act affects the rights of a assignee or holder for value without notice, or derogates from the existing powers or jurisdiction of any court.

The requirements for the Unconscionable Transaction Relief Act is applicable are:

i. The cost of loan must be excessive.ii. The transaction is harsh and unconscionable .

Those requirements are cumulative and prescribed by section 2 of the Act.

The approach in each case must be a teleological one (that is, on a case-by-case basis).

– Longley v. Barbick, (1963) 36 D.L.R. (2nd) 672

Although section 6 of Interest Act does not apply to exclude recovery of interest on a mortgage for twice the sum actually advanced when the 100% bonus was stipulated in a separate collateral agreement, nevertheless the Court has power to rectify the mortgage to secure the amount actually advanced where on the evi-dence it is satisfied that the collaterally agreed-upon bonus is unfair and uncon-scionable, as where it is exacted, in respect of a first mortgage on a valuable property which would stand a first mortgage, of up to twice the sum actually ad-vanced.

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o The result is that a collateral advantage may now be stipulated for by the mortgagee provided that he has not acted unfairly or oppressively, and provided that the bargain does not conflict with the third form of the princi-ple.

This is that a mortgage cannot be made irredeemable, and that any stipulation which restricts or clogs the equity of redemption is void.

Non est factum may properly be pleaded to avoid a 100% bonus provision ex-acted in an agreement collateral to a first mortgage on valuable property where the mortgagor was misled as to the contents of the documents she signed so that her mind did not go with her signature.

o Hence, even a bona fide purchaser of the mortgage cannot insist on pay-ment to the extent to which the mortgage incorporates the bonus as part of the principal sum, and the mortgagor is entitled to have the mortgage recti-fied.

– Collins v. Forest Hill Investments, (1967) 2 O.R. 351

Although there is no fiduciary relationship between mortgagee and mortgagor, a mortgagee who deals with inexperienced mortgagors of limited education must, at his/her own risk and in his/her own interest, ensure that they understand the transaction.

Evidence in this case showed that the recitals in the mortgage and other support-ing documents of a “collateral advantage” did not draw the attention of the mort-gagors (as the word “bonus” would very likely have done) to the fact that the 7% interest was to be charged on $2,450 and not merely on the $1,500 actually ad-vanced to them.

A mortgage with a bonus is not a document of a character sufficiently different from a mortgage without a bonus to justify a reliance by plaintiffs upon the de-fence of non est factum, nor did there appear to be any active misrepresentation or fraudulent non-disclosure by defendant.

o However , the transaction would be described as harsh and uncon-scionable both in equity and under the Unconscionable Transactions Relief Act, the excessive bonus and 23% to 63% realized by defendant (depend-ing upon the mode of calculation adopted) being evidence of “overreach-ing” by defendant and in itself sufficient to attract statutory relief.

The assignee of the impugned mortgage, although taking subject to such equities as an “overreaching” by the assignor of the original mortgagor, acted throughout in good faith and without notice of any impropriety and was protected by the laches of the plaintiffs. .

– All Canadian Peoples Finance Ltd. v. Marejan, (1970) 10 D.L.R. (3rd) 352

The court of equity exists for many purposes and one of these purposes is the protection of unsophisticated and defenseless persons against the exactions of conscienceless persons who seek to take advantage of them.

o The Unconscionable Transactions Relief Act provides one method of exer-cising that benevolent authority, but the courts are not empowered to re-

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lieve a man of the burden of a contract he has made under no pressure and with his eyes open, merely because his contract is an act of folly.

Therefore, regarding the facts on this case, when an experienced real estate agent, as mortgagor, entered into three related short-term mortgages with effec-tive annual rates varying from 60% to 74% depending upon when the loan was repaid, the Court cannot act to upon the Unconscionable Transactions Relief Act to relief the mortgagor debt.

o Besides being an experienced real estate agent, the mortgagor made no real effort to seek the best market but had entered into the transaction as part of a fast move in and out of the property market.

However , when the mortgagor sought a relief of one of the mortgages because he/she had entered into a contract to sell the property, and the mortgagee re-fused to discharge that mortgage unless the remaining mortgages were rewritten with additional bonus, it could not be said that the mortgagor had entered the subsequent rewritten mortgage transactions without pressure and with his eyes open.

o The Court may as a result revise the second mortgage transaction.

– William E. Thompson Associates Inc. v. Carpenter, (1990) 69 O.R. (2nd) 545 In this case, T. Inc. lent $250,000 to J. Ltd., and C. and M., directors of J. Ltd.,

guaranteed repayment of the loan, the liability of the guarantors being limited to $75,000 and $25,000 respectively.

Under the loan agreement, a facility fee (stated to be for services and expenses "incurred in connection with the loan agreement and related transactions") was payable to T. Inc. which, if "interest", offended section 347(1) [305.1 back then] of the Criminal Code, prohibiting interest at a rate of over 60%, and defining interest to mean all charges and expenses.

The Court held in this case that the facility fee fell within the definition of “interest” and, accordingly, the agreement was criminal, and the obligation to pay interest was unenforceable.

o However , the obligation to repay the principal was severable, and the guarantees enforceable in respect of that obligation.

Following the Court’s view, the facts favoring severance in this case were that it would not undermine the policy of the Criminal Code.

o Whether or not a contract tainted by illegality is completely unenforceable depends upon all the circumstances surrounding the contract and the bal-ancing of the considerations discussed in a case-by-case approach.

o It seems inadequate to say of an illegal contract simply that it is “void” with-out taking account of the effect that unjust enrichment should, where pos-sible, be prevented and that the law have not to come to the assistance of persons who behave illegally.

It is apparent that in this case, to prefer the latter effect would result in the unacceptable situation of unjust enrichment.

So, it seems that the only reasonable recourse is to adopt a position that would return the principal money advanced by

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the mortgagee only and thus prevent the unjust enrichment of the mortgagor.

o Furthermore, the purpose of section 347(1) [305.1 back then] of the Crimi-nal Code is to punish everyone who enters into an agreement or arrange-ment to receive interest at a criminal rate.

It does not expressly prohibit such behavior, nor does it declare such an agreement or arrangement to be void.

The penalty is severe, designed to deter persons from making such agreements, and to protect borrowers, so it is not designed to pre-vent persons from entering into lending transactions per se.

As regards subject matter, its scope and application are limited to agreements regarding interest.

– Transport North American Express Inc. v. New Solutions Financial Corp., (2001) 54 O.R. (3rd) 144.

This was a case where a mortgagee granted a loan to a mortgagor subject to se-curity at criminal rate of interest.

Following the rule of law brought by William E. Thompson Associates Inc. v. Car-penter above, the Court found that Transport North American Express Inc. (TNAE) was attempting on technical grounds to avoid performance on an impor-tant business obligation.

o This case was one of a financing transaction between arm’s-length parties experienced in business and represented by lawyers in the negotiations.

As a result, the Court found that TNAE’s conduct does not entitled it to any favor-able exercise of the Court’s discretion, and that the Court was not confined to strike out the illegal promises leaving the rest of the agreement untainted.

o Rather, with the support of recent authorities, the Court was entitled to make notional severance to enforce loan agreement, that is, to effect a severance notionally by reading down provisions so that the criminal rate of interest would not be exceeded.

Accordingly, the Court found that New Solutions Financial Corp. was entitled to enforce the agreement, except that the monthly interest rate was to be changed to reduce the effective annual interest rate to 60 per cent on the basis that all of the other payments were enforceable.

C. Promise to Lend Money – Promise to Borrow Money

1. Will a promise to lend or borrow money under a mortgage be specif-ically enforced if it is wholly executory?

The answer for this question is no.

– Rogers v. Challis, (1859) 54 E.R. 68

A Court of Equity will not decree the specific performance of a contract to borrow a sum of money on mortgage.

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o Courts of Equity decree the specific performance of contract because dam-ages at law may not, in the particular case, afford a complete remedy.

2. Will a promise to execute a mortgage be specifically enforced where part or all of the monies have been advanced?

The answer for this question is usually yes.

– Peel v. Peel, (1918) 15 O.W.N. 297

This is a case where part of the money to be lent subject to a promise to a secu-rity was advanced and given the facts the Court determined an equitable mort-gage upon the property promised as a security.

– Bank of British Columbia v. Denenfeld, (1974) 38 D.L.R. (3rd) 750

This is a case where the plaintiff agreed to lend money to a company controlled by the defendant if the defendant would place a mortgage on his home in favour of the plaintiff and repay part of the loan from the proceeds of the mortgage.

The loan was made to the company and the defendant refused to execute the mortgage.

In an action for a declaration that the plaintiff was the holder of an equitable mort-gage on the defendant’s home, the Court held that the plaintiff was entitled to specific performance of the mortgage contract since consideration had passed.

3. Will a promise to lend money under a mortgage be specifically en-forced where the parties have executed a mortgage?

The answer for this question depends on the circumstances of the facts –teleo-logical approach.

– Schwartzman v. Great West Life Assurance Company and Central Mort-gage and Housing Corporation, (1955) 17 W.W.R. 37

In this case, the defendants sought for damages for an alleged breach of contract to advance moneys under a mortgage.

Both the defendants relied upon a provision in the mortgage which provided that neither the execution nor registration of this mortgage, nor the advancing in part of the monies shall bind the mortgagees to advance the money or any unad-vanced portion thereof but that the advance of the monies or any part thereof from time to time shall be in the sole discretion of the mortgagees.

The parties have executed a mortgage, and the defendant advanced moneys. The mortgage after was cancelled.

o The plaintiff gave the defendants a notification to this order. The court held that the action should be dismissed because of the provision con-

tained in the mortgage.o Under this above-recited provision in the mortgage there was no obligation

placed upon the mortgagees, or either of them, to advance any money.

4. Will a promise to give a mortgage in consideration of a pre-existing debt be specifically enforced?

The answer for this question is yes, only if consideration is really given.

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o If not, this is a promise for a pre-existing legal duty towards a third party, which generally is not an acceptable consideration.

– Rooker v. Hoofsteter, (1896) 26 S.C.R. 41

This whole case describes facts where a promise to give a mortgage in consider-ation of a pre-existing debt was not held by the Court because there was no con-sideration.

5. Equitable mortgages, including mortgage by deposit of title deeds.

– The Registry Act, section 72 – notice of lodgement of title documents

Equitable liens, and tacking

72. No equitable lien, charge or interest affecting land is valid as against a regis-tered instrument executed by the same person, the heirs or assigns of the person, and tacking shall not be allowed in any case to prevail against the provisions of this Act.

– Zimmerman v. Sproat, 26 O.L.R. 448

An equitable mortgage may be created by the deposit of a deed, where the legal title is outstanding in another than the depositor of the deed.

o The law in respect of such mortgages is the same in Ontario as in Eng-land.

The intent to create an equitable mortgage by delivery or deposit of writings may be established by parol evidence; and it is sufficient if only some or one of the material documents of title be so delivered.

– Royal Bank v. Grobman et al, (1979) 18 O.R. (2nd) 636

It is not necessary to deposit all the title deeds, provided that which is deposited is material evidence of title and provided the requisite intention is present.

An equitable mortgage can be created only by the deposit of title deeds.o Moreover, it is not necessary for the prospective mortgagor, by his/her de-

posit of documents, to put such deposit beyond his/her power thereafter to dispose of or deal with the land in question.

It is sufficient if a deposit is made with an intention to secure the ad-vances to be made by the mortgagee.

– Sikorski v. Sikorski, (1978) 21 O.R. (2nd) 65

An equitable mortgage is a contract that creates in equity a charge on property that does not pass the legal estate to the mortgagee.

o However , an essential feature of an equitable mortgage is the com-mon intention of the parties to the mortgage contract to make the property in question security for the debt due.

o If this intention is lacking an equitable mortgage cannot be said to have been created.

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D. Redemption by Mortgagor and Remedies of Mortgagee

1. Remedies - Generally

As seen in topic A., number 6, the principal powers and remedies of a legal mort-gagee are the following:

i. An action for repayment. A mortgagee is not obligated to realize upon the security if the mort-

gagor has other assets to pay the debt.

ii. An action for sale (based on a contract).a. Judicial sale.b. Demand to court for a power of sale – Part III of the Mortgages Act.

Most common proceeding.

iii. An action for foreclosure.iv. An action for taking possession.

An action for taking possession does not affect subsequent rights of redemption.

An action for taking possession is aimed to satisfy the credit of the mortgagee, secured by property.

When a mortgagee takes possession in such an action, he/she has to administrate the land in a way to satisfy his/her credit (e.g. to lease), acting in every way as an owner (e.g. paying taxes, taking care of subsequent guarantees on the property etc).

v. An action for appointing a receiver.

2. Redemption - Generally

(a) Timing – Mortgages Act, section 18 / Interest Act, section 10

See topic B., number 5., above for section 18 of Mortgages Act, and for section 10 of Interest Act.

Subject to section 10 of Interest Act, the mortgagor can only redeem the mort-gage following the clauses governing the mortgage contract.

If a mortgagee wants to restrict the right to redeem for more than five (5) years, it has to make sure that section 10 of Interest Act does not apply.

o In order to do so, the mortgagee must make sure that the mortgage is given by a corporation.

o Also, the mortgagee and mortgagor can in common agreement modify the date of the mortgage, by re-dating it.

(b) Assignment – Mortgages Act, section 2

Obligation on mortgagee to transfer instead of reconveying

2. (1) Despite any stipulation to the contrary, where a mortgagor is entitled to re-deem the mortgagor may require the mortgagee, instead of giving a certificate of payment or reconveying and on the terms on which the mortgagee would be

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bound to reconvey, to assign the mortgage debt and convey the mortgaged property to any third person as the mortgagor directs , and the mortgagee is bound to assign and convey accordingly.

Idem

(2) The right of the mortgagor to require an assignment belongs to and is capa-ble of being enforced by each encumbrancer or by the mortgagor, despite any in-termediate encumbrance; but a requisition of an encumbrancer prevails over that of the mortgagor, and as between encumbrancers a requisition of a prior encum-brancer prevails over that of a subsequent encumbrancer.

Exception

(3) This section does not apply if the mortgagee is or has been in possession.

(c) Redemption Actions – Rules of Practice, 64.05

REDEMPTION ACTIONS

Persons to be Joined

64.05 (1) In an action for redemption of a mortgaged property, all persons inter-ested in the equity of redemption, other than subsequent encumbrancers, shall be named as plaintiffs or defendants in the statement of claim.

(2) In a redemption action, subsequent encumbrancers shall be added as defen-dants only where the plaintiff is declared foreclosed.

Claims that May Be Joined

(3) In a redemption action, a person interested in the equity of redemption may also claim possession of the mortgaged property.

Judgment

(4) In a redemption action, where the defendant has been noted in default, the plaintiff may require the registrar to sign judgment for redemption (Form 64M).

(5) Every judgment for redemption shall direct a reference, whether or not there are any subsequent encumbrancers.

Where Plaintiff Fails to Redeem

(6) On default of payment according to the report in a redemption action, the de-fendant is entitled, on motion to the court without notice, to a final order of foreclo-sure against the plaintiff or to an order dismissing the action with costs.

(7) Where the plaintiff is declared foreclosed, directions may be given, in the final order foreclosing the plaintiff or by a subsequent order, that the reference be con-tinued for redemption or foreclosure, or for redemption or sale, against any subse-quent encumbrancers, or for the adjustment of the respective rights and liabilities of the original defendants.

(8) Where the reference is continued under subrule (7),

(a) for redemption or foreclosure, the reference shall proceed in the same manner as in a foreclosure action;

(b) for redemption or sale, the reference shall proceed in the same manner as in a sale action,

and for that purpose the last encumbrancer shall be treated as the owner of the equity of redemption.

(9) Where the plaintiff is declared foreclosed, a subsequent encumbrancer who attends and proves a claim on the reference is entitled to thirty days to redeem the mortgaged property.

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Where Nothing Due to Defendant

(10) Where, on a reference in a redemption action, nothing is found due to the defendant, the defendant is liable for the costs of the action and the defendant shall pay any balance due to the plaintiff forthwith after confirmation of the report on the reference.

(d) General commentaries about redemptions

Hypothetical situation of multiple transactions with security on the same property.o “A” mortgages property to “B” to secure a debt of “x” dollars, then transfers

to “C” his right of redemption towards “B” for “y” dollars (second mortgage), following by a transfer to “D” of his right of redemption towards “C” for “z” dollars (third mortgage).

i. If “B” forecloses neither “A” nor “D” does something, but “C” re-deems “x” dollars to “B”, then accordingly to section 2(1) of Mort-gages Act “B” assigns the first mortgage to “C”.

In this scenario, “D” still has his credit that “A” owes to him, but “D” has no more security to realize upon.

Also, if “C” obtains a final order to foreclose, he becomes the owner of the mortgaged property in fee simple.

ii. If “B” forecloses neither “A” nor “C” does something, but “D” re-deems “x” dollars to “B”, then accordingly to section 2(1) of Mort-gages Act “B” assigns the first mortgage to “D”.

In this scenario, “C” still has his credit that “A” owes to him, but “C” has no more security to realize upon.

Also, if “D” obtains a final order to foreclose, he becomes the owner of the mortgaged property in fee simple.

In any of these situations, if the value of the security is superior to the total value of the mortgage and if one of the mortgagees takes an action to foreclose and if “A” has no moneys to redeem, then “A” can demand that the action for foreclosure be turned into an action for sale so everyone be paid and “A” stills get his equity on the prop-erty mortgaged.

Hypothetical situation of simultaneous proceedings took by different creditors with guarantee attached to property.

o “A” mortgages property to “B” to secure a debt of “x” dollars, and then transfers to “C” his right of redemption towards “B” for “y” dollars (second mortgage).

i. If “B” is foreclosing and “C” is exercising a power of sale, an even-tual purchaser can buy the property mortgaged subject to “B”’s mortgage.

ii. If “B” and “C” are exercising a power of sale and each one has a purchaser, then the purchaser in negotiation with “B” has priority over the purchaser in negotiation with “C” to buy the property mort-gaged.

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This is so because “B”’s rights has priority over “C”’s.

In both cases, if proceedings has been taken following the Part III of Mortgages Act, when a purchaser buy the property mortgaged, he/she receives it in fee simple – section 35 of Mortgages Act (see number 4 bellow.

A mortgagor can redeem a debt guaranteed by a mortgage any time after the mortgagee has taken action to exercise his/her rights under the mortgage, pro-vide that the result of this action has not been achieved, that is the action be still in effect.

When a mortgagee takes an action to foreclose, he/she takes the property mort-gaged in possession and payment (that is, in fee simple) and his/her credit totally disappears whether the value of the security is worth more or less than the value of the debt secured.

(e) Cases law

– Coplan v. Sparlin, [1969] 2 O.R. 166

The plaintiff is the owner of the mortgaged premises and has requested the de-fendants to be permitted to redeem the mortgaged premises but the defendants have refused him permission to redeem such mortgaged premises

The “grounds of action” specified in the endorsement of the writ before the Court simply showed that the defendants have refused redemption to the plaintiff after a request by the plaintiff.

A mortgage cannot be made forever irredeemable by any act of the mortgagor at the time he entered into the mortgage transaction.

A mortgage can be made irredeemable for a reasonable period, and as a general rule, it cannot be redeemed before the day fixed for payment of the principal.

The date for redemption may be accelerated by acts of the mortgagee, such as demanding payment of all sums secured pursuant to a mortgage acceleration clause, going into possession or taking other steps to recover payment, or claim-ing payment on breach of a mortgage condition or proviso

In this case, to show that the time is ripe for redemption is as essential to the plaintiff's case as it is essential for a mortgagee to show in an action for foreclo-sure that the mortgagor is in default.

– Municipal Savings & Loan Corp. v. Wilson, (1981) 127 D.L.R. (3rd) 127

A mortgagee who exercises a power of sale in a mortgage of land can only do so once and for all and completely and there is no means of which and whereby a purchaser can assume the mortgage.

o The mortgage is extinguished by the sale and the mortgagor then has no equity in the property and is entitled only to the surplus of the sale pro-ceeds.

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It is therefore a necessary implication that when such a mortgagee gives a notice of intention to sell under a power of sale, that he intends to realize on his whole security and in such a case, the mortgagor is entitled to redeem.

If the closed-end mortgage is indeed transformed into an open-ended one, it is not by virtue of the mortgagor's default that this occurs, but by virtue of steps taken by the mortgagee in response to that default.

o It is the service on the mortgagor of the notice of the mortgagee's intention to sell the property that triggers the mortgagor's equitable right to redeem.

o The mortgage is security only: the mortgagee's principal right is to its money.

o If the mortgagee elects to resort to its security, then equity steps in to protect the mortgagor and, if the mortgagor is able to pay the money, the mortgagee permits the mortgagor to do so and the latter get his land back.

A mortgagee cannot exercise a power of sale without giving the mortgagor an op-portunity to redeem.

o A mortgagor cannot contract himself out of his equitable right of redemp-tion.

o It is inherent in the nature of a mortgage and wholly unaffected by any pro-visions in the document, which have the effect of excluding it.

o A mortgagee cannot resort to the security and at the same time assert his option to prevent redemption.

His resort to the security triggers the mortgagor's right to redeem in equity notwithstanding the contractual provision in the document making the acceleration of the principal the option of the mortgagee.

– Graystone Properties Ltd. v. Smith et al., (1982) 39 O.R. (2nd) 709

The appellant mortgagors had bought land for development from the respondent mortgagees and given them a mortgage back.

The instrument provided that the mortgagor could prepay any amount on principal when not in default, and could obtain “partial discharges upon payment of the proportionate balance of principal plus accrued interest to the date of partial dis-charge”.

Upon the mortgagees’ refusal to grant partial discharges of certain lots upon ten-der of the appropriate sums, the mortgagor sought relief under section 11(3) [ac-tual section 12(3)] of the Mortgages Act.

o The purpose of s. 12(3) is to give relief to a mortgagor who desires to and who has the right to pay the mortgage money and to receive a discharge when that right has been denied for no valid reason.

Whether a mortgagor in default is entitled to a partial discharge depends upon the construction of the terms of the mortgage.

In this case, the pre-payment privilege was clearly subject to a no-default clause, but the partial discharge clause was not.

o Hence the mortgagor had a right to partial discharge upon payment. Also, there is not any rule of law preventing the grant of a partial discharge when

a mortgage is in default.

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In any case, the default is to be judged when the discharges are first requested, and the mortgagor was not in default at that time.

o The mortgagor was entitled to a partial discharge of mortgage.

– Re Shankman and Mutual Life Co. of Canada, (1985) 52 O.R. (2nd) 65

The appellant purchased certain lands subject to a mortgage in favour of the re-spondent.

The charge did not provide for early redemption. When the appellant defaulted, the respondent brought an action claiming the

amount of the arrears due and possession, but did not attempt to accelerate pay-ment of the principal amount.

The appellant then tendered a cheque to the respondent for the entire balance owing, which the respondent rejected.

Thereupon the appellant brought an application for a declaration that he was enti-tled to pay the entire balance due on the charge without bonus or penalty.

The application and the appeal were dismissed.

If the chargee resorts to the security in any ways, he cannot refuse tender of the principal and interest owing on the charge on the ground that he is entitled to no-tice or interest.

o A chargee resorts to the security if he forecloses the mortgaged property in order to obtain payment of the principal outstanding under the mortgage together with interest, or if he serves a notice of sale pursuant to his con-tractual power of sale.

If, however, the chargee takes possession to recover payment of arrears only, he is not resorting to the security, but is merely acting to protect his security.

o In those circumstances he is not, then, forced to permit the mortgagor to redeem.

– Eusanio v. Iaci, (1982) 136 D.L.R. (3rd) 569

In this case, second mortgagees sought to redeem a first mortgage in arrears.

The first mortgage provided that if any payments were not made on due date bal-ance, then principal outstanding under the mortgage together with interest would be immediately due and payable.

It also provided that, when not in default, the mortgagor may repay the mortgage upon payment of additional three months of interest as a bonus.

The Court interpreted the first proviso as an acceleration clause and decided that by the terms of this mortgage, unusual though they may be, a default in payment of an instalment of interest automatically accelerates the whole principal and in-terest so that all immediately becomes due and payable.

o Thus, as the terms of the mortgage must be applied, both for the benefit of the mortgagee and for the benefit of the mortgagor, and since the principal and interest was due and payable by contract after default in payment of any instalment, the second mortgagee had the right to redeem this mort-gage without payment of any bonus of interest.

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o Accordingly to the court, an acceleration clause did not give to the first mortgagee any option.

– Theodore Holdings Ltd. v. Anjay Ltd., (1990) 11 R.P.R. (2nd) 151

In this case, the mortgagee entered into an agreement of purchase and sale of the mortgaged property under power of sale.

After that, the mortgagee abandoned this agreement. The abandon by the mortgagee of the agreement entitled the mortgagor to re-

deem. While entering into a bona fide agreement to sell the mortgaged property in order

to redeem the mortgage, the mortgagor obtained an order restraining the mort-gagee from selling or entering into agreements to sell the mortgaged property.

Despite having notice of the order, the mortgagee entered into an agreement to sell the mortgaged property.

A motion was brought to determine whether the mortgagor or the mortgagee had the right to complete the agreement.

The court held that the agreement entered into by the mortgagee amounted to an illegal contract and was therefore null and void, since the restraining order was to be constituted for a period sufficient to permit the mortgagor to complete the sale and purchase transaction.

The mortgagor was ordered to pay into court the amount alleged to be due to the mortgagee, upon which payment the mortgages were to be discharged.

3. Judicial sale

As remarked before, a judicial sales involves the sale of the mortgaged property under the supervision of a court, with the proceeds going first to satisfy the mort-gage, and then to satisfy other lien holders, and finally to the mortgagor.

o With this remedy any excess money from the sale of the property over and above the mortgage debt is distributed to the borrower.

It is a rare situation where judicial sale is exercised because, the court is exten-sively involved ordering that the property be sold; confirming the sale procedure after it occurs; and, hearing any application for a deficiency judgment.

o The costs of a judicial sale are higher than in a power of sale.

4. Power of Sale – Part III of the Mortgages Act

See topic A., number 6., above for definition of power of sale.

PART III

NOTICE OF EXERCISING POWER OF SALE

Section 31 – Notice of power of sale

Section 32 – When notice may be given and power exercised

Section 33 – Manner of giving notice, general rules

Section 34 – When notice by mail effective

Section 35 – Statutory declarations conclusive

Section 36 – Impeachment of title

Section 37 – Abridgement of time

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Section 38 – Notice rules paramount

Section 39 – Exercise of power of sale without notice

Section 40 – Transitional provision

Section 41 – Part III does not apply to bond mortgages

In a power of sale a mortgagee must give notice to some people determined by statute – section 31 of Mortgages Act.

o If the mortgagee has a second mortgage and wants to exercise a power of sale, this mortgagee has the right to sell the land subject to the first mort-gage.

Section 32 of Mortgages Act stipulates a when a notice the exercise of power of sale can be served and the circumstances under with this notice can be given.

o Even when the power of sale is not provided in a contract, it can still be ex-ercised following section 24, subject to section 26 of the Mortgages Act.

Section 33 of Mortgages Act provides for rules regarding the manner of giving no-tice so it can be valid, and section 34 of the same Act provides when notice given under section 33 is effective.

Section 35 of Mortgages Act determines declarations that have to contain in a no-tice in order to comply with Part III of the Mortgages Act, that is power of sale.

o In this case, if the notice is given with all those declarations and complies with Part III of the Mortgages Act, once a deal following a power of sale is closed, the purchaser receives the mortgaged property in a good title, that is in fee simple.

Section 38 of Mortgages Act ensures that its Part III is paramount.

Section 39 of Mortgages Act is quite important for it provides the exercise of power of sale without notice.

o This section can be useful in case of failure of notice everyone section 31 of the Act demands in order to proceed with the sale.

It is important to remark that where, pursuant to any condition or proviso con-tained in a mortgage, there has been made or given a demand or notice either re-quiring payment of the money secured by the mortgage, or any part thereof, or declaring an intention to proceed under and exercise the power of sale therein contained; until after the lapse of the time at or after which, according to such de-mand or notice, payment of the money is to be made or the power of sale is to be exercised or proceeded under, no further proceeding and no action to enforce the mortgage shall be commenced or taken until an order permitting the same has been obtained from a judge of the Superior Court of Justice – section 42 of Mort-gages Act.

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(a) Notice prescribed by section 58 of Mortgages Act.

– Scollard Investments v. Halsid, (1975) 9 O.R. 402

The plaintiffs were owners of lands subject to two mortgages that have been as-signed to, and were then owned by, the defendant.

When the mortgages became overdue, such defendant served notices of sale of such lands.

The plaintiff owners sought to enjoin the defendants from selling such lands pur-suant to such notices with the argument that the notices are null and void be-cause there was conflict between the provisions in the mortgage as to the time that must elapse between the giving of such notice and the sale, and the similar provisions in Part II of the Mortgages Act.

A power of sale conferred in a mortgage providing for a notice period shorter than that period provided by section 25 [actual section 26] of the Mortgages Act, is not void for inconsistency with the Act.

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Section 29 [actual section 30] of the Act provides in part that so much of the Mort-gages Act as confers a power of sale does not apply in the case of a mortgage that contains a power of sale.

Therefore, in this case, the period of time in which the notice of sale must be given before the power is exercised as set out in the Mortgages Act has no appli-cation and there is no inconsistency between the mortgage and the Act. .

– Confederation Trust v. Mac-Don Builders Inc., (1990) 75 O.R. (2nd) 278

In this case, a mortgagee served notice to a mortgagor declaring an intention to proceed under and exercise the power of sale to an address provided in mort-gage form, even though the mortgagee had another address of mortgagor in its file.

Section 32 [actual section 33] of the Mortgages Act creates a number of alterna-tive methods for service of a notice of sale.

o No one method is to be preferred over others unless the mortgagee knows that the proposed method of service will not bring the notice to the atten-tion of the mortgagor.

The evidence revealed that the service of the notice at the address provided in mortgage would not fail to bring it to the attention of the mortgagor.

o Therefore, the court declared the service of the notice valid.

With respect to the guarantor of the mortgage, the Court ruled that a mortgagee need not serve a guarantor with notice unless the guarantor had made payment to the mortgagee on behalf of the mortgagor, which was not the case here.

– Sierra Garden Homes v. 668417 Ontario Ltd., (1990) 1 O.R. (3rd) 446

A mortgagee issued a notice to a mortgagor declaring an intention to proceed un-der and exercise the power of sale.

During the redemption period the mortgagee spoke to a real estate agent about selling property after the redemption period expired.

The mortgagor moved for an injunction to restrain the mortgagee from acting on the notice of sale on the grounds that it was contrary to section 40 [actual section 42] of the Mortgages Act for the defendants to commence selling the property be-fore the termination of the redemption period.

Section 40 [actual section 42] of the Mortgages Act is directed to allow persons entitled to redeem to have the redemption period to do so without proceedings being taken which might hinder or prejudice the right of redemption or increase the cost thereof.

o Section 40 [actual section 42] does not preclude a mortgagee from talking to real estate agents in general terms where no listing is promised.

Informal discussions about selling the property do not interfere with the mort-gagor's ability to sell the property in the redemption period.

o There was no action or proceeding taken which would interfere with the mortgagor's right to redeem or result in any additional cost to the mort-gagor.

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Assuming a breach of section 40 [actual section 42], this did not void the notice of sale.

o The result of a contravention of section 40 [actual section 42] is that the notice will remain valid but further proceedings during the currency of the notice will be set aside as invalid

In this case, the Court dismissed the motion.

– Grenville Goodwin Ltd. v. MacDonald, (1988) 50 R.P.R. 222

The mortgagee sought to exercise its power of sale under a mortgage and gave the mortgagor a notice of sale as required under section 30 [actual section 31] of the Mortgages Act.

Subsequently, the mortgagee accepted an offer for the purchase of the premises but the mortgagor moved for an order declaring the notice of sale invalid.

o The notice of sale included an amount of municipal taxes that greatly over-stated the amount due, but which was already been paid.

The court held that the notice given pursuant to section 30 [actual section 31] of the Mortgages Act must accurately state the amounts due in order that the mort-gagor or, indeed, subsequent encumbrancers may intelligently assess their posi-tion with respect to redemption of the mortgage in order to determine whether they should redeem.

o The statutory conditions under which a power of sale contained in a mort-gage may be exercised must be strictly complied with.

o They are there for the benefit of the defaulting mortgagor and they are re-quirements imposed by the Legislature on the exercise by the mortgagee of a self-help remedy.

Accordingly to the Court, this was not a case of an inadvertent minor variance that might be excused by the operation of section 27(d) of the Interpretation Act.

Such an error resulted in the notice failing to comply with section 30 [actual sec-tion 31] of the Mortgages Act and, therefore, being invalid.

The result was that the respondent could not exercise its power of sale pursuant to section 30 [actual section 31] of the Mortgages Act.

5. Foreclosure Situations

Foreclosure is rarely exercised as a remedy. To execute foreclosure, the secured party needs to petition the court, and the or-

der is made in two stages (nisi and absolut), making the process slow and cum-bersome.

o A decree nisi is a provisional decree which will become final or absolute unless there is reason shown not to do so.

o A decree absolut is a final decree.

– Soloway v. Sheahan, (1971) 3 O.R. 652

This is a case of redemption.

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In this case, the mortgagors obtained an order extending redemption period. Thereafter, the mortgagor obtained an order abridging the redemption period with

interest to be paid to abridged date.o The order permitted the mortgagors to pay off the mortgage indebtedness

on the day following the date of the order without any payment of interest from that date to the original date of redemption.

The issue here was whether the Master was entitled to grant an order relieving mortgagors from payment of interest for the period between abridged date and date originally fixed for redemption.

The answer of the Court was no.o Although the Master had the right to exercise the inherent jurisdiction of

the Court to make an order abridging the redemption period, the rights of both the mortgagor and mortgagee should have been considered.

o One of the purposes of the redemption period is to allow the mortgagee a reasonable time to reinvest his money, and during that period of time, the mortgagor should continue to pay interest.

– Marshall v. Miles, (1970) 13 D.L.R. (3rd) 158

In this case, the mortgagee commenced an action for foreclosure. The mortgagor gave notice of intention to redeem. Moreover, after the commencement of the action for foreclosure and trusting on

her ability to retain the property by redemption, the mortgagor expended substan-tial sums on property and continued to make payments on a second mortgage, thereby worsening his financial position commenced.

After all, the mortgagee abandoned the foreclosure action and pursued the mort-gagor on a power of sale contained in mortgage.

The Court held that the mortgagee had no right to sell after the decree nisi in a foreclosure action, for, since the judgment was for the benefit of the mortgagor as well as for the mortgagee, the latter could not vary it without leave.

o It is a good rule to apply as far as possible in all judicial proceedings, that where anything is sought by a party he/she should be treated as prepared to receive what he/she asks for.

o Thus, the mortgagor was entitled to assume that the mortgagee had elected to foreclose and thereby give to the first the right to redeem for it is quite obvious that a mortgagee cannot both recover the title to the property by virtue of foreclosure and at the same exercise his power of sale.

– Petranik v. Dale, (1977) 2 S.C.R. 959

The mortgagor brought an action against mortgagee and purchaser of her prop-erty, claiming that a mortgage purportedly executed by her in favour of the mort-gagee was null and void and that the purchaser who purchased the property from the mortgagee under the power of sale held the property in trust for her, the mort-gagor.

The mortgagee had started foreclosure proceedings and a specially endorsed writ was issued against the mortgagor.

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The mortgagor failed to appear and a default judgment was taken. The judgment directed a reference and, when originally drawn up in typed form,

contained a clause providing for a reconveyance to the mortgagor upon payment of the amount due to the mortgagee.

The mortgagee did not however proceed with the reference directed in the default judgment but instead purported to act under the power of sale contained in the mortgage.

The majority of the Supreme Court held that the default judgment was a judgment nisi for foreclosure.

o The mortgagor would have been entitled to invoke the equitable jurisdic-tion of the Court to claim a right to redeem on payment of the amounts found owing on the reference and on such other terms as the Court might fix.

o The mortgagee was not entitled to improve his/her position by proceeding to a sale under the mortgage without leave when he/she had crystallized his/her remedies through a judgment nisi which called for a reference.

Having obtained a judgment of the type obtained, the mortgagee must carry out that judgment or obtain the leave of the Court to do otherwise.

The minority held that the fact of obtaining such a judgment nisi did not preclude the mortgagee from exercising his/her power of sale under the mortgage since the sale did not prejudice any rights asserted by or accorded to mortgagor in the foreclosure proceeding.

– Price v. Letros, (1974) 2 O.R. (2nd) 292

In this case, the mortgagor gave a mortgage to the mortgagee in a first property. The mortgagor also gave a mortgage in a second property to the mortgagee as

collateral security to the first mortgage. The mortgagee then obtained a final order of foreclosure on the first property and

obtained a judgment for the amount owing against the mortgagor and his/her guarantor.

The mortgagee then sold the second property under the power of sale in the mortgage and, after selling the first property, obtained a writ of fieri facias1 with respect to the deficiency that existed from the sales of both properties.

On appeal, the Court struck the writ of fieri facias from the record.

o The mortgagee elected to recover the first property by way of foreclosure.o The subsequent sale of that property put it out of the reach of the mort-

gagor and, therefore, precluded the mortgagee from taking any further ac-tion on the covenant or the guarantee.

It was proper for the defendants to seek to set aside the writ of exe-cution by motion in the action rather than by originating motion.

1 Writ of fieri facias is a writ of execution after judgment obtained in a legal action for debt or damages.

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Furthermore, the Court held that the mortgagee was liable to the mortgagor for the sale of the property under the collateral mortgage and had to account to him/her for the sale price.

6. Further Right to Redeem in Equity

As foreclosure is an equitable remedy, a Court, acting as a court of equity, can reopen it given further right to the mortgagor to redeem in equity.

– Campbell v. Holyland, (1877) 7 Ch.N. 166

Even if a court makes a decree absolut and orders foreclosure, as a court of eq-uity, the Court retains an absolute discretion to reopen the foreclosure after the making of the order, subject to the following criteria:

i. The nature of the property foreclosed.

ii. How fast the mortgagor acted after the foreclosures through an application to reverse this situation.

iii. The validity and strength of the mortgagor’s reasons for failure to redeem before foreclosure.

– Concord Securities Ltd. v. Phayre, (1960) O.W.N. 419

This case support the rule developed in Campbell v. Holyland.

In this case, the mortgagee made a claim in a writ for foreclosure. A judgment was rendered by default and the writ for foreclosure was served to

the mortgagee. The mortgagee listed the property and at the same day the mortgagor received

notice to vacate the property pursuant the judgment for possession. The day after the mortgagor informed the mortgagee that he/she, the mortgagor,

whished the right to redeem the property and that he/she would do so three days form this information.

The mortgagee stated that an offer for the property had just been received for the purchase of the property and that accordingly, the mortgagor would be liable for the commission.

The mortgagor objected to this commission and the present motion was subse-quently brought.

The Court reopened the foreclosure, ruled that the mortgagor was not entitled to add to the mortgage debt any claim that might be made for the commission, and allowed the mortgagor to redeem the mortgage.

– Hutel v. Guilmette, (1961) O.W.N. 83

In this case, a mortgagor sought to set aside a final order of foreclosure for irreg-ularities in obtaining it, sufficient to have vitiate it as between the original parties and, therefore, to declare void the sale of the property.

o The irregularities were that the mortgagee obtained the final order of fore-closure before the date fixed for redemption and that the mortgagee and

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the purchaser had been negotiating the sale and purchase prior to that the final order had been issued.

In this case, the Court held that a purchaser form the mortgagee, who has ob-tained a final order of foreclosure, under a contract made after granting of the fi-nal order is entitled to the benefit of the Act regarding the conveyance of the property, although there were irregularities in obtaining the final order sufficient to have vitiated it as between the original parties.

o The equities that arose in favour of the mortgagor were outweighed in favour of the purchaser by reason of the mortgagor’s failure to bring the irregularities complained of to the attention of the Court prior to foreclo-sure, and in delaying the application to set aside such final order until after the purchaser had completed the sale.

– Nickerson v. Alexanian, (1964) 1 O.R. 145

This case deals with a distinction between seeking to enlarge the time for re-demption before the fixed day arrives and seeking to open a foreclosure after the final order has been made.

It also shows that courts are more open to enlarge the period of redemption for a mortgagor than to reopen it after it has been expired.

A mortgagor sought to set aside a final order of foreclosure and, therefore, to de-clare void the subsequent sale of the property.

The Court held that the mortgagor will not succeed to set aside a final order of foreclosure and, therefore, to declare void the subsequent sale of the property, where he/she made no serious effort to raise the money before expiry of the time for redemption and, indeed, failed to take advantage of the mortgagee's offer to accept the mortgage arrears and outstanding taxes to avoid foreclosure absolute.

– Camp Wee-Gee-Wa for Boys v. Clark, (1972) 1 O.R. 374

In this case, the mortgagor sought to redeem mortgage after a completed sale of property mortgaged under a power of sale.

The mortgagee sold the mortgaged property before the redemption date condi-tionally upon mortgagor failing to redeem by that date.

o Also, the mortgagee gave notice to mortgagor that property would be sold if the mortgage would not be redeemed by redemption date.

The mortgagor informed the mortgagee of an intention of redeem before that date but the funds for redemption would be not available until after the redemption date.

Regarding the particularities of the facts in the case, the Court decided that the mortgagor was entitled to redeem in such circumstance upon payment of money into Court by the date fixed therein.

This case shows that Courts do not approve a sale proceeded by a mortgagee within the period of redemption, even if conditional to the expiration of the said period of redemption.

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7. Stay Mortgagee’s Proceedings

(a) Mortgages Act, sections 22 and 23

If the mortgagor is in default and opts to stay in default, then the mortgagee can use an acceleration clause, provides this clause is on the mortgage contract, to recover the whole amount of the contract.

o However, sections 22 and 23 of the Mortgages Act tempers the mort-gagee’s right to use an acceleration clause and thus charge the whole amount of the contract from the mortgagor, opening to the latter another opportunity to redeem the arrears, plus interest and cost, before and even after the commencement of an action, subject to certain conditions.

Relief before action

22. (1) Despite any agreement to the contrary, where default has occurred in making any payment of principal or interest due under a mortgage or in the obser-vance of any covenant in a mortgage and under the terms of the mortgage, by rea-son of such default, the whole principal and interest secured thereby has become due and payable,

(a) at any time before sale under the mortgage; or

(b) before the commencement of an action for the enforcement of the rights of the mortgagee or of any person claiming through or under the mortgagee,

the mortgagor may perform such covenant or pay the amount due under the mortgage, exclusive of the money not payable by reason merely of lapse of time, and pay any expenses necessarily incurred by the mortgagee, and thereupon the mortgagor is relieved from the consequences of such default.

Statement of arrears, expenses, etc.

(2) The mortgagor may, by a notice in writing, require the mortgagee to furnish the mortgagor with a statement in writing,

(a) of the amount of the principal or interest with respect to which the mort-gagor is in default; or

(b) of the nature of the default or the non-observance of the covenant,

and of the amount of any expenses necessarily incurred by the mortgagee.

Idem

(3) The mortgagee shall answer a notice given under subsection (2) within fif-teen days after receiving it, and, if without reasonable excuse the mortgagee fails so to do or if the answer is incomplete or incorrect, any rights that the mortgagee may have to enforce the mortgage shall be suspended until the mortgagee has complied with subsection (2).

Relief after action commenced

23. (1) Despite any agreement to the contrary, where default has occurred in making any payment of principal or interest due under a mortgage or in the obser-vance of any covenant in a mortgage and under the terms of the mortgage, by rea-son of such default, the whole principal and interest secured thereby has become due and payable, in an action for enforcement of the rights of the mortgagee or of any person claiming through or under the mortgagee, the mortgagor, upon pay-ment into court of the sum of $100 to the credit of the action as security for costs, may apply to the court and, conditional upon performance of such covenant or upon payment of the money due under the mortgage, exclusive of the money not

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payable by reason merely of lapse of time, and upon payment of the costs of the action, the court,

(a) shall [no option] dismiss the action if judgment has not been recovered ; or

(b) may [discretionary] stay proceedings in the action , if judgment has been recovered and if no sale or recovery of possession of the land or final foreclosure of the equity of redemption has taken place.

Idem

(2) Despite clause (1) (b), where judgment has been recovered and recovery of possession of the land has taken place, the court may stay proceedings in the ac-tion upon the application of a person added as a party in the master’s office, made under subsection (1) within ten days after service of notice of the judgment has been made upon the person.

Subsequent default

(3) Where proceedings have been stayed under clause (1) (b) or under subsec-tion (2) and default again occurs under the mortgage, the court upon application may remove the stay.

Those sections differ from section 17 of Mortgages Act in the sense that section 17 is only used during the term, when there is no acceleration clause under the mortgage; or, if there is one, it has not been exercised by the mortgagee; or, if the default occurs at the date of maturity of the mortgage.

As regards or section 17 of Mortgages Act, one cannot contract out of sections 22 and 23.

– Re Mission Construction and Seele Investments, (1973) 33 D.L.R. (3rd) 285

Although section 21(1)(a) of Mortgage Act permits a mortgagor to put the mort-gage in good standing “at any time before sale”, the benefit of this section ceases to flow to the mortgagor when the mortgagee accepts a bona fide offer from a third party.

o The acceptance of the offer by the mortgagee is “subject to the rights, if any … [of the mortgagor] … to put the … mortgage in good standing”.

o Once the offer is accepted, the right of the mortgagor to put the mort-gage in good standing is at an end.

– Theodore Daniels Ltd. v. Income Trust Co., (1982) 37 O.R. (2nd) 316

The mortgagor had fallen into arrears under a mortgage containing an accelera-tion clause.

When the mortgagee commenced power of sale proceedings the mortgagor sought an order under section 21 of the Mortgages Act, giving him/her the right to pay up the arrears owing and staying the power of sale proceedings.

The trial judge allowed the mortgagor two weeks to pay off the principal amount of the mortgage, including interest, taxes and costs.

The mortgagor appealed.

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Section 21 of the Mortgages Act gives the mortgagor in default an unqualified right to relief at any time prior to a sale upon payment of the arrears and any ex-penses necessarily incurred by the mortgagee.

The words “exclusive of the money not payable by reason merely of lapse of time” indicate that the money due under the acceleration clause need not be paid in order to obtain relief.

Therefore, the Court ruled that the trial judge had no discretion to order payment of the principal amount and his order amounted to a complete denial of relief un-der section 21.

– MacDonald v. Dakar Investments, (1959) O.W.N. 9

In this case, default under the mortgage having been made, the mortgagor sued for foreclosure and obtained an interlocutory judgment.

The mortgagor redeemed and the mortgagee agreed not to take further proceed-ings in the action until further default.

The mortgagor again was in default and relying on the interlocutory judgment, the mortgagee erected a barricade on the property and had the sheriff take formal possession.

The same day this happened the mortgagor tendered the payment and three days after commenced an application for stay under section 19a [actual section 23] of the Mortgages Act, which was granted.

o Under section 19a (b) (ii) [actual section 23(1)(b)] of the Mortgages Act, the token taking of possession by the mortgagee was not such a recovery of possession as disentitled the Court to grant a stay.

The mortgagee did not contemplate obtaining any advantage from the taking of possession which was inherent in the taking of pos-session itself and which was what was contemplated by “recovery of possession” in the section of the Act.

Thus, the acts of the mortgagee did not amount to recovery of possession.

o The validity of the tender not being disputed, the mortgagor was entitled to a stay of proceedings.

The Court held the grant for its reasons.

– Van Minnen Construction v. Murphy et al. (Murphy as a Third Party), (1977) 19 O.R. (2nd) 125

For the purpose of the mortgagor's entitlement to the relief provided by section 21(1) of the Mortgages Act, an auction sale that concludes with a successful bid is a sale within the meaning of section 21(1).

Accordingly, a tender by the mortgagor to cure the default after the conclusion of the successful bid is too late.

o It is not necessary that the transaction be closed before one can conclude that a sale has occurred within the meaning of the section.

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8. Remedies of Mortgagee

(a) Action on the covenant

(i) Practical points

– Shiner v. Varadeff, (1975) 7 O.R. (2nd) 684

o In this case, a mortgagor paid less than the amount owed on mortgage Mortgages and received discharge, due to a common mistake on part of both mortgagor and mortgagee.

o The issue arose was whether mortgage debt was extinguished by the dis-charge.

o The Court ruled in this case that where, by a mistake common to both mortgagor and mortgagee, a discharge of mortgage is given for less than the amount owing, it is proper to reopen the account and to order the mort-gagor to pay the proper balance owing on the covenant in the mortgage.

The section 61 [actual section 622] of the Registry Act, which provides that the registration of a certificate of discharge is valid and effectual as a conveyance of the original estate, does not extin-guish the rights and obligations of the parties with respect to the covenant for payment.

– Beaty v. Gregory, (1897) 24 O.A.R. 325

o The duly appointed trustees of a religious congregation, to whom by that description the site for a church has been conveyed, and who by that de-scription give to the vendor to secure part of the purchase money a mort-gage with the ordinary covenant for payment, are a corporation and are not personally liable upon the mortgage although it is signed and sealed by them individually.

In this case, trustees are treated as corporation without any per-sonal liability under the act relating to the property of religious insti-tutions.

(ii) In judicial sale

– Gordon Grant v. Boos, [1926] A.C. 781

o A mortgagee who has obtained an order for sale, and, bidding with the leave of the Court, has purchased the mortgaged property, is not pre-cluded form suing the mortgagor upon his personal covenant in the mort-gage for the difference between the sum due under the mortgage and that realized by the sale.

o In this case it was irrelevant and not material that the mortgagee has resold the property at a profit, because he obtained the property with the leave of the Court.

2 See topic A., number 4., letter b above for the transcription of section 62 of Mortgages Act.

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Besides, conversely and for various reasons, the mortgage could have resold the property at a loss.

(iii) In power of sale Review Mortgages Act, sections 24 to 43

o See pages 80 to 92 if the course pack.

– Rudge v. Richens, (1873) L.R. 8 C.P. 358

o In this case, the mortgagor could not redeem the mortgage because as a result of his/her default the mortgagee efficiently exercised his/her rights by taking possession of the property mortgaged and selling it.

The mortgagee has exercised his rights on the land and the land has been sold to a third party.

o Furthermore, in this case the mortgagee could pursue the mortgagor for the short fall on the mortgage contract.

– Farrar v. Farrars Ltd., (1888) 40 Ch. D. 395

o This is case of power and sale under a contract of mortgage where a mort-gagee sold the mortgaged property to a company formed for the purpose of purchasing the property, in which himself, the mortgagee, was a share-holder.

o The Court held that the sale could not be set aside on the simple ground that the mortgagee was a shareholder in the company, for that sale by a person to a corporation o which he/she is a member is not either in form or substance a sale by him/her to himself/herself along with other people.

o However, the Court held that there was such a conflict of interest and duty in the mortgagee shareholder, of which the company had notice, as to throw upon the company the burden of upholding the sale.

Nevertheless, in the case, the Court found that the company had discharged itself of this burden by showing that the mortgagee shareholder had taken all reasonable and careful efforts to secure a purchaser at the best price, and that the price given was not at the time inadequate, though more might have been obtained by post-poning the sale.

– Re Nunes, (1972) 21 D.L.R. (3rd) 97

o In this case, one of the several mortgagors purchased the mortgaged property at a mortgage sale.

o The District Registrar of Winnipeg refused to permit registration under the argument that it was not in a position to properly determine the bona fide of a purchase by one of several registered owners.

o As a consequence, the purchaser moved for an order that he was a bona fide purchaser for value of the property, and that he was entitled to be reg-istered as owner in fee simple of the said land in accordance with the terms of purchase.

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o The court found that the facts showed that there was no collusion between the purchaser and the mortgagee.

One is not precluded from purchasing at a mortgage sale merely because of already having an interest in the property being sold.

Thus, a second mortgagee may purchase and obtain an irre-deemable title.

Similarly, one of two co-owners of the equity of redemption can purchase without being bound to account to the other.

o Accordingly, the Court ruled that the co-mortgagor purchasing a mort-gaged property at a mortgage sale was entitled to do so and granted the application.

(iv) In foreclosure

– Lockhart v. Hardy, (1964) 50 E.R. 378

o After foreclosure, the mortgagee fairly sold the estate for less than what was due to him.

o Where a debt is secured by mortgage, covenant, and bond, the mortgagee may pursue all his/her remedies at the same time.

If mortgagee obtains full payment on the bond or covenant, the mortgagor becomes entitled to the estate, but if the mortgagee ob-tains part payment only, he/she may go on with his/her foreclosure suit and foreclose for the remainder.

On the other hand, if the mortgagee forecloses first, and the value of the estate proves insufficient to satisfy the debt, he/she may, while the mortgaged estate remains in his power , sue on the bond or covenant, but he thereby opens foreclosure, and the mortgagor may thereupon redeem.

If the mortgaged estate does not remain in the mortgagee’s power, than he could not afterwards recover from the mort-gagor, upon mortgagor’s personal securities, the amount still remaining unpaid.

– Munsen v. Hauss, (1875) 22 Grant’s Ch. 279

o This was a case where a mortgagor sought to restrain the mortgagee from suing at law for the amount due upon a mortgage, on the ground that the defendant had previously obtained an order for final foreclosure; and had since obtained such final order mortgaged the property, and had allowed the buildings thereon, which where the chief value of the property, to fall into decay.

o The court held that although the fact of a mortgagee having a final order of foreclosure, it does not preclude him from suing for the mortgage money.

On another hand, it would seem that the mortgagor is not entirely helpless as he/she may offer to pay the mortgage, and if the mort-gagee declines receiving the money, the Court would restrain him from afterwards suing for the mortgage debt.

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o Also, the Court ruled that if after a mortgagee has obtained a final order of foreclosure he/she has mortgaged the property, that fact alone will not de-prive him of the right to sue for the mortgage money if, at the time of bring-ing the action, he/she has paid off the mortgage created by himself and is in a position to reconvey the property.

o Finally, the Court stated that the fact alone of the mortgagee having al-lowed the property to fall into decay does not prevent him from suing for the mortgage money.

– Dowker et al. v. Thompson, [1941] O.R. 44

o In this case, the mortgagor having defaulted in the payments under the mortgage, the mortgagees issued a writ of foreclosure.

o The mortgagees signed default judgment for foreclosure and for a remain-ing sum on the covenant.

o A writ of fieri facias was issued to the sheriff and the mortgagor took out a final order of foreclosure two months after, and then went into possession of the property.

o At the time of the final order there were arrears of taxes and the mort-gagees neglected to pay any taxes as they accrued and made no pay-ments on arrears.

As a result there was owing for taxes an outstanding sum when the town advertised the property for sale for taxes.

At the tax sale the town itself became the purchaser. o The writ of fieri facias lapsed three years form its first issue, but an alias

writ was issued five months later, after the tax sale had taken place.

o The defendant moved for an order setting aside the writ of fieri facias and it was held that the writ of fieri facias should be set aside.

After foreclosure the mortgagee, in order to be entitled to recover payment of the mortgage debt from the mortgagor by virtue of the covenant in the mortgage, must be in a position to reconvey the mortgaged property.

The mortgagee cannot invoke a suggested exception that this rule does not apply where the property was lost through the act or de-fault of the mortgagor.

Once a final order has been taken out it is difficult to con-ceive how the property can subsequently be lost through any act or default on the party of the mortgagor.

Even though the taxes were substantially in default when the final order was taken out, the mortgagees must be presumed to have known that such was the condition and they accepted it.

When they took out the final order the mortgagees elected to take the property subject to maintaining it in position to reconvey if they

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realized on the writ of fieri facias and they cannot have both the property and the money.

There was nothing the mortgagor could have done and nothing he/she was obliged to do towards payment of taxes after the final order of foreclosure.

(b) Right to distrain for arrears of interest

– Mortgages Act, sections 14 to 16

Exemption from liability to distress

14. Despite any stipulation in the mortgage to the contrary, the right of a mort-gagee to distrain for interest in arrear upon a mortgage is limited to the goods and chattels of the mortgagor, and to such of them as are not exempt from seizure un-der execution.

Limitation upon right to distrain

15. (1) As against creditors of a mortgagor, or person in possession of mortgaged premises under a mortgagor, the right, if any, to distrain upon the mortgaged premises for arrears of interest or for rent, in the nature of or in lieu of interest un-der the provisions of any mortgage is restricted to one year’s arrears of such inter-est or rent.

When restriction to apply

(2) This restriction does not apply unless some one of such creditors is an exe-cution creditor, or unless there is an assignee for the general benefit of such credi-tors appointed before lawful sale of the goods and chattels distrained, nor unless the officer executing such writ of execution or such assignee, by notice in writing to be given to the person distraining or the attorney, bailiff, or agent of the person be-fore such lawful sale, claims the benefit of this restriction.

Duty of distrainor when restriction applies

(3) When such notice is given, the distrainor shall relinquish to the officer or as-signee the goods and chattels so distrained, upon receiving one year’s arrears of such interest or rent and the reasonable costs of distress, or if such arrears and costs are not paid or tendered the distrainor shall sell only so much of the goods and chattels distrained as is necessary to satisfy one year’s arrears of such inter-est or rent and the reasonable costs of distress and sale, and shall thereupon re-linquish any residue of them, and pay any residue of money, proceeds thereof so distrained, to such officer or assignee.

Reimbursement of officer or assignee

(4) An officer executing an execution, or an assignee who pays any money to relieve goods and chattels from distress under this section, is entitled to reimburse himself, herself or itself therefore out of the proceeds of the sale thereof.

– Contractual right to distrain for principal

Right to distrain is the right of a landlord to seize the property of a tenant which is in the premises being rented, as collateral against a tenant that has not paid the rent or has otherwise defaulted on the lease, such as deliberate disrepair or de-struction of the premises.

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(c) Right to take possession

– Considerations

In most cases the mortgagee does not want to be in possession (unless the mort-gagee wants to protect the property or to take profits out of the property), be-cause in this situation the mortgagee has to act as a prudent owner of the prop-erty mortgaged.

o Once in possession of the mortgaged property, the mortgagee incurs the obligations of a mortgagee in possession and is liable to account for the revenues that were or should have been received from the mortgaged property.

o The mortgagee should take reasonable steps to secure the mortgaged property against vandalism and the elements.

o As well, the mortgagee should arrange for the mortgaged property to be adequately insured and inspected on a frequent basis.

o The mortgage has not only the right but also the duty to make all neces-sary and proper repairs to maintain and preserve the mortgaged property and to prevent waste.

A mortgagor will be liable for all damages occasioned by gross neg-ligence in repairing the mortgaged property.

However, the mortgage is liable for neglect to repair only if there is a surplus of rents after payment of interest on the mortgage.

o The mortgagor is not bound to expend its own monies on repairs.

Nevertheless, the court will not allow the mortgagee to re-cover the cost of repairs and improvements where it appears that the he/she is over-improving the mortgaged property in an attempt to prevent the borrower from redeeming the mort-gaged property.

o A mortgagee in possession cannot itself charge a commission for the col-lection of rents.

A mortgagee in possession may, however, in appropriate circum-stances, appoint an agent to collect the rents and charge the cost of the agent against the mortgaged estate.

The mortgagee has the onus of satisfying the court that the appointment of a manager was reasonably necessary.

o So long as the mortgagee in possession has not interfered with the mort-gagor’s right to redeem the mortgage, the mortgagee has the right to lease the whole or any portion of the mortgaged property.

In addition, most standard form mortgages contain a power to lease as well as a power of sale.

The courts will not interfere with this power of lease where the term of the lease did not expire until after the time fixed for redemption,

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and the mortgage by its terms gives the mortgagor a power to lease the mortgaged property.

Having taken possession of the mortgaged property, the mortgagee is required to continue to perform the obligations imposed upon the property.

o The mortgagor is not entitled to relinquish possession of the mortgaged property without the consent of the mortgagor or the approval of the court.

o Generally, the court will not approve the appointment of a receiver simply to relieve a mortgagee, who has taken possession of the mortgaged prop-erty, of his/her responsibilities.

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9. Redemption of Disguised Forms of Mortgages

(a) Where the grantor has executed a deed absolute in form to pay a debt

– Barton v. Bank of New South Wales, (1890) 15 App. Ca. 379

In this case, the plaintiff Barton had deposited with the defendant his title-deeds to certain property in order to secure a cash credit and afterwards executed an absolute conveyance thereof to the defendant in pursuance of an agreement re-cited therein to the effect that the price paid should be by deducting a sum from the amount due.

The Court held that although collateral evidence was admissible to show that, notwithstanding the plain terms of the deed, the relationship of defendant and plaintiff still subsisted between the parties, yet in this case this deed was wholly insufficient to overcome the presumption that the deed of conveyance truly stated the transaction.

– Arnal v. Arnal, (1969) 6 D.L.R. (3rd) 245

In this case, the plaintiff’s deceased father conveyed certain lands to the defen-dant by a deed absolute in form in response of a loan not paid in full.

o The defendant paid a balance of the purchase price of the lands assumed by him under the agreement of purchase, consisting of certain debts of the plaintiff’s deceased father.

On parol evidence, the trial judge found the conveyance by a deed absolute in form as a security for a loan made by the defendant.

The Court upheld the trial judge’s findings and stated that the evidence was ad-missible to show the parties’ intention to create a mortgage notwithstanding the Statute of Frauds.

o In order to determine whether it is or is not a mortgage, equity has always looked to the real intention of the parties, to be gathered not only from the terms of the particular instrument but found from all the circumstances of the transaction, and has always admitted parol evidence in cases where the real intention was in doubt.

o The evidence required to induce a Court to declare a deed, absolute on its face, to have been intended to operate as a mortgage only must be of the clearest, most conclusive and unquestionable character.

(b) Where the grantor has executed a deed with an option to purchase

– Wilson v. Ward, [1930] S.C.R. 212

In this case, the defendant Wilson owed moneys to the plaintiff Ward. They entered into an agreement where the plaintiff would buy the property, the

value of the execution of the agreement being the value owed by the defendant to the plaintiff.

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The agreement provided the defendant had ninety (90) days as an option to pur-chase back the property for some amount superior to the value of the alleged ex-ecution to the agreement.

Up to the Supreme Court it was held that the agreement embodied in the docu-ment in question between the parties was not for the sale of land from the defen-dant to plaintiff with an option of repurchase, but for a loan from plaintiff to defen-dant on security of the land.

o The document, taken by itself, in certain respects favoured the latter con-struction, but, further, the parties' rights were not to be determined exclu-sively by examining the terms in the document.

o Evidence was admissible, not only of the surrounding circumstances, but also of all the oral or written communications between the parties relating to the transaction, for the purpose of determining its true nature.

o Even where the instrument professes fully and clearly to give the reasons and considerations on which it proceeds, collateral evidence is admissible to show that the transaction is not thereby truly stated, although, in such cases, only the most cogent evidence avails to rebut the presumption to the contrary.

The Supreme Court upheld what was until then held stating that, in view of the summary character of the document and the superficial incoherence of its terms, resort to parol evidence was peculiarly appropriate; and upon all the evidence (as viewed by this Court) the substance of the transaction must be held to have been a loan on security.

o In such case the court will disregard, as repugnant to the equitable right of redemption, a stipulation professing to confer upon the lender the right of purchase, even if the parties, between themselves, had intended that it should be binding.

– Pierce v. Empey, [1939] S.C.R. 247

The plaintiff, a mortgagor in default, executed a quit claim deed of the mortgaged land to the defendant, the mortgagee, who was then in possession under pro-ceedings taken in a foreclosure action.

A letter from the defendant's solicitors to the plaintiff's solicitor agreed that that plaintiff was to have the right for a period of three months to purchase the land upon payment of the mortgage, including all interest, taxes and costs up to date.

There was no payment or tender within said period. In an action for redemption, the plaintiff attempted to show that by the true ar-

rangement the mortgage debt remained undischarged and the period for redemp-tion was extended for three months.

o There is, that the relation of mortgagor and mortgagee still subsisted.

In this case, the Supreme Court held that on the evidence, the plaintiff's said at-tempt must fail, and that the true arrangement must be held to be that disclosed by the documents (namely, that the land became vested in defendant in fee sim-

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ple in possession free from the equity of redemption, but that plaintiff had the op-tion of re-purchase according to the terms in said letter).

o It is true, in principle, that a conveyance absolute in form may be shown even by parol evidence to have been, according to the real agreement be-tween the parties, accepted as security only, and the Statute of Frauds will not prevent the proof of this by parol evidence.

However, for this purpose convincing evidence is always required and it behooves the one who alleges to adduce evidence of the most cogent character.

A plaintiff invoking the aid of the court for the enforcement of an op-tion for the sale of land to him/her must show that the terms of the option as to time and otherwise have been strictly observed, and that the owner incurs no obligation to sell unless the conditions precedent are fulfilled or as the result of the owner's conduct the holder of the option is on some equitable ground relieved from the strict fulfillment of them.

– Krieck v. Wansbrough, [1973] S.C.R. 588

In this case, there was an agreement for sale of land for an amount exceeding the vendor’s indebtedness to purchaser with an option to repurchase the land for the amount of indebtedness.

o The purchaser had to pay the balance of purchase price if the vendor does not exercise the option to repurchase the land for the amount of indebted-ness.

The Court below sustained the vendor's position that the transaction must be viewed as a mortgage

However, the Supreme Court ruled that the appeal should be allowed and set aside the judgment below, directing that the agreement should take effect accord-ing to its terms.

o There was no basis for recasting the transaction to make it a security one alone to the exclusion of the overriding element of sale.

o Therefore, the purchaser was entitled to a decree of specific performance.

E. Priorities

1. The Registry Act, sections 70 to 74 (specially section 73)

REGISTRATION AND ITS EFFECT

Effect of unregistered instruments

70. (1) After the grant from the Crown of land, and letters patent issued therefor, every instrument affecting the land or any part thereof shall be adjudged fraudulent and void against any subsequent purchaser or mortgagee for valuable considera-tion without actual notice, unless the instrument is registered before the registra-tion of the instrument under which the subsequent purchaser or mortgagee claims.

Exception as to certain leases

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(2) This section does not extend to a lease for a term not exceeding seven years where the actual possession goes along with the lease, but it does extend to every lease for a longer term than seven years.

Exception as to certain by-laws

(3) This section does not extend and shall be deemed never to have extended to,

(a) a by-law passed before the 6th day of April, 1954 under section 390 of The Municipal Act, being chapter 243 of the Revised Statutes of Ontario, 1950 or a pre-decessor of that section;

(b) a by-law passed after the 5th day of April, 1954 under section 390 of The Municipal Act, being chapter 243 of the Revised Statutes of Ontario, 1950 or under section 34 of the Planning Act or a predecessor of that section of the Planning Act; or

(c) any other municipal by-law, heretofore or hereafter passed, affecting land that does not directly affect the title to land.

Actual notice

71. Priority of registration prevails unless before the prior registration there has been actual notice of the prior instrument by the person claiming under the prior registration.

Certificate of title

71.1 A certificate of title that is registered in accordance with the Certification of Titles Act, as that Act read immediately before subsection 2 (1) of Schedule 17 to the Good Government Act, 2009 came into force, is conclusive as of the day, hour and minute stated in the certificate that the title of the person named as owner of the land described in the certificate was absolute and indefeasible as regards the Crown and all persons whomsoever, subject only to the exceptions, limitations, qualifications, reservations, conditions, covenants, restrictions, charges, mort-gages, liens and other encumbrances mentioned in the certificate.

Equitable liens, and tacking

72. No equitable lien, charge or interest affecting land is valid as against a regis-tered instrument executed by the same person, the heirs or assigns of the person, and tacking shall not be allowed in any case to prevail against the provisions of this Act.

Effect of subsequent registered conveyances on mortgage money paid sub-sequently

73. A registered mortgage is, as against the mortgagor, the heirs, executors, ad-ministrators, estate trustees, assigns of the mortgagor and every other person claiming by, through or under the mortgagor, a security upon the land comprised therein to the extent of the money or money’s worth actually advanced or supplied under the mortgage, not exceeding the amount for which the mortgage is ex-pressed to be a security, although the money or money’s worth, or some part thereof, was advanced or supplied after the registration of a conveyance, mort-gage or other instrument affecting the mortgaged land, executed by the mortgagor, the heirs, executors, administrators or estate trustees of the mortgagor, and regis-tered subsequently to the first-mentioned mortgage, unless before advancing or supplying the money or money’s worth, the mortgagee in the first-mentioned mort-gage had actual notice of the execution and registration of such conveyance, [sub-sequent] mortgage or other instrument, and the registration of such conveyance,

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mortgage or other instrument after the registration of the first-mentioned mortgage, does not constitute actual notice.

Registration to be notice

74. (1) The registration of an instrument under this or any former Act constitutes notice of the instrument to all persons claiming any interest in the land, subsequent to such registration, despite any defect in the proof for registration, but neverthe-less it is the duty of a land registrar not to register any instrument except on such proof as is required by this Act.

Where subs. (1) does not apply

(2) Subsection (1) does not apply to an instrument entered in the by-law index or to an instrument registered as a general registration under subsection 18 (1) or (6) or under predecessors of those subsections,

(a) unless an entry of the instrument appears in the abstract index;

(b) unless an entry of a declaration under section 25 or a predecessor of that subsection referring to the instrument appears in the abstract index; or

(c) unless the instrument is mentioned in a subsequently registered instrument and an entry of the latter instrument or of a declaration referring thereto, as men-tioned in clause (b), appears in the abstract index.

Deemed notice

(3) For the purposes of subsection (1), the registration of a notice under section 113 or a statement under section 25 constitutes registration of the instrument re-ferred to in the notice or statement.

Idem

(4) The registration of a notice under subsection 22 (7) or (8) constitutes notice only of the particulars contained in the notice.

Where no notice

(5) After the expiry of a notice registered under subsection 22 (8), the notice shall not constitute notice of the agreement, option or assignment or of any partic-ulars referred to in the notice.

Priorities are important in determining which creditors must be paid first when the value of the mortgaged property is not sufficient.

Priorities are established by mortgage’s priority of creation, subject to register of that creation, unless the subsequent mortgagee had actual notice of an unregis-tered mortgage prior to his/her.

Mortgagees can enter into an agreement to re-inverse priorities of mortgage, al-though no one can re-inverse the order of registration.

Registration constitutes registration actual to notice to the world.o Nevertheless, registration is not necessary to create rights.

Registration indicates the maximum value secured by the property mortgaged.

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2. Land Titles Act, section 78(5) and section 93(4)

GENERAL

Registration

78. (…)

(…)

Priorities

(5) Subject to any entry to the contrary in the register and subject to this Act, in-struments registered in respect of or affecting the same estate or interest in the same parcel of registered land as between themselves rank according to the order in which they are entered in the register and not according to the order in which they were created, and, despite any express, implied or constructive notice, are entitled to priority according to the time of registration.

(…)

CHARGES AND ENCUMBRANCES

Charges

93. (…)

(…)

Where advances under registered charge to have priority over subsequent charges

(4) A registered charge is, as against the chargor, the heirs, executors, adminis-trators, estate trustees and assigns of the chargor and every other person claiming by, through or under the chargor, a security upon the land thereby charged to the extent of the money or money’s worth actually advanced or supplied under the charge, not exceeding the amount for which the charge is expressed to be a secu-rity, although the money or money’s worth, or some part thereof, was advanced or supplied after the registration of a transfer, charge or other instrument affecting the land charged, executed by the chargor, or the heirs, executors, administrators or estate trustees of the chargor and registered subsequently to the first-mentioned charge, unless, before advancing or supplying the money or money’s worth, the registered owner of the first-mentioned charge had actual notice of the execution and registration of such transfer, charge or other instrument [subsequent mort-gage], and the registration of such transfer, charge or other instrument after the registration of the first-mentioned charge does not constitute actual notice.

3. Unregistered mortgage versus registered mortgage

– McDonald v. The Royal Bank, (1933) O.R. 418

In this case, an assignee of a registered mortgage of land claims under an unreg-istered assignment that he has priority over the claim of a subsequent execution creditor of the assignor of the mortgage, even where the sheriff has, pursuant to section 24 of the Execution Act registered a notice of seizure of the mortgage without knowledge of the prior unregistered assignment of the mortgage.

o The court held that the assignee was right. An execution creditor can only acquire the debtor's real and actual

beneficial interest and nothing more.

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The Registry Act does not improve the position of an execution creditor where the sheriff has registered a notice of seizure because the notice of seizure is not an instrument within the meaning of the Registry Act and because the Registry Act deals with the protection of rights of purchasers or mortgages under registered instruments as against claims under unregistered instruments and does not deal with the rights of creditors.

Moreover, under section 19 of the Execution Act, the sheriff is only empowered to seize mortgages “belonging to the person against whom the execution has been issued,” and section 24 of the Execution Act only provides for the mode of taking in execution a mortgage which is made exigible under section 19, that is, a mort-gage which belongs to the execution debtor.

– Dominion Lumber v. Winnipeg District Registrar, (1963) 37 D.L.R. (2nd) 283

As in McDonald v. The Royal Bank, this case deals with priorities between an un-registered mortgage followed by registered certificates of judgment.

Here, accordingly to the Real Property Act of Manitoba, an unregistered mort-gage takes priority against subsequently registered certificates of judgment against the same land.

o At common law, an unregistered mortgage creates rights in the mort-gagee, and these are acknowledged by the Real Property Act of Manitoba as against a registered certificate of judgment, this being by way of excep-tion to the general principle of the Act that priority is determined by regis-tration.

So, accordingly to this Act, it is only against a bona fide transferee that rights under an unregistered instrument are extinguished, and judgment creditors do not qualify as such.

4. Subrogation – Refinance Mortgage

– The Mortgages Act, section 2

See topic A., number 4., letter a, above for the transcription of section 2 of Mort-gages Act.

– Gordon v. Snelgrove, (1932) O.R. 253

This is a case where the plaintiff mortgagee claims a declaration that his/her mortgage is prior to the defendant's, although registered subsequent thereto.

It was established by this case that a person who pays off a first mortgage on property and accepts a new mortgage on the property and a discharge of the old first mortgage is entitled to rank as first mortgagee upon the property although there is a mortgage subsequent to the original mortgage but prior to his mortgage registered upon the property.

o Where a third party, at the request of the mortgagor, pays off a first mort-gage, with a view to himself/herself becoming a first mortgagee of the property, he/she becomes, in default of evidence to the contrary, entitled in equity to stand, as against the property, in the shoes of the first mort-gagee.

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– Re Hallman Brierdale & Anton, (1979) 25 O.R. (2nd) 509

In this case, a mortgagor requested assignment of mortgage upon payment of sum owing in lieu of discharge.

The mortgagee refused assignment because the property was subject to other mortgage held by subsequent encumbrancer, and here the mortgagor had notice of the third and fourth mortgages to another person.

o Accordingly to the mortgagee, without the second mortgagee's consent and because the latter did not consent to the assignment, he/she, the first mortgagee, could only give a discharge.

The Court held that, because of section 2 of Mortgages Act, specially section 2(2), the first mortgagee was not entitled to refuse the assignment to the mort-gagor on the ground that subsequent encumbrancer was not agreeing to assign-ment rather than discharge.

o Section 2(2) of Mortgages Act makes clear that the mortgagor has a right to require an assignment regardless of subsequent encumbrances al-though his/her right might be subject to and subservient to a contempora-neous claim to an assignment by an intermediate encumbrancer.

The subsection says nothing about the need for consent from such intermediate encumbrancer.

– Lambton Lumber Ltd. v. Claran Homes Ltd., (1979) 23 O.R. (2nd) 673

In this case, the mortgagee was a holder of a first registered mortgage against certain lands.

The discharge of that mortgage was registered. On the same date of the discharge, a second mortgage was executed in favour of

another mortgagee, which was registered three days after. Then again three days after this latter registration, a mortgage in favour of the

original first mortgagee was registered.o The registration of the discharge of the original first mortgage was inadver-

tent and the subsequent registration of the first mortgagee's mortgage was to secure the indebtedness owing under the original first mortgage.

Second mortgagee knew of the indebtedness and the registered first mortgage when its mortgage was executed.

o He/she did not know of the registration of the discharge of the first mort-gage, nor did he/she know that there was an agreement by the mortgagor to give a subsequent mortgage to the first mortgagee to secure that exist-ing indebtedness.

The question was whether the original first mortgagee was entitled to priority over second mortgagee.

The Court confirmed the trial judgment and held that the registration of the dis-charge constituted actual notice to the second mortgagee that first mortgagee no longer had security in the real property for the indebtedness owing to it.

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The fact that second mortgagee had knowledge that the indebtedness to first mortgagee was still outstanding would not be sufficient for the second mortgagee to lose its priority under section 69(1) [actual section 63(1)] of the Registry Act.

– Nova Scotia (Housing Commission) v. Co-op Atlantic, (1980) 15 R.P.R. 201

This is a case where Nova Scotia as the first mortgagee advanced further sum to a mortgagor, releasing first mortgage and replacing it with mortgage subsequent to date of second mortgage given to Co-op Atlantic, the second mortgagee.

o The subsequent mortgage contained a postponement clause, postponing it in priority to all past and future advances made under the first mortgage between the mortgagor and Nova Scotia.

The mortgagor sought additional funds, and the Nova Scotia’s solicitor, instead of obtaining a further charge from the mortgagor to be secured and leaving the origi-nal first mortgage undisturbed, advised the him/her to take a new mortgage for the full amount of the first mortgage plus the additional amount requested, and to release the original mortgage.

This advice was followed, and Nova Scotia attempted to rely on the postpone-ment clause.

The question in this case was whether Nova Scotia’s subsequent mortgage had priority over Co-op Atlantic’s mortgage, for to the postponement clause.

The Court held that the postponement clause only assured priority of the first mortgage and advances under it so long as it continued in force.

The formal released completely erased any priority Nova Scotia would otherwise have had, and the later mortgage stood alone unaided in equity or otherwise by the cancelled first mortgage.

o Arguments based on subrogation or other equitable preservation of the ini-tial priority fails because the initial mortgage was released and must now be regarded as if it had never existed.

o The Court cannot properly relieve from the consequences of a lawyer's misunderstanding of the legal effect of the mortgages and their covenants by disregarding the legal instruments it produced or by distorting the priori-ties which legally resulted.

– Mutual Trust Co. v. Credit View Estate Homes, (1997) 34 O.R. (3rd) 583

In this case, Mutual Trust advanced funds to the mortgagor in order to discharge existing mortgages.

In this period, a pending litigation between Credit View and the mortgagor was already registered and Mutual Trust’s lawyer failed to advise his/her client about it.

The funds were advanced and the existing mortgages were discharged. Later, the pending litigation became effective as against the mortgagor.

The question in this case was whether Mutual Trust’s charge had priority over a certificate of pending litigation.

The Court held that Mutual Trust’s charge had priority over a certificate of pend-ing litigation by operation of doctrine of subrogation.

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o The fundamental principle underlying the doctrine is one of fairness in the light of all the circumstances.

Within this principle is an understanding that no injustice is done by the appropriate subrogation of a party to the rights of original mort-gagees.

o In this case, the argument was that, in the absence of subrogation, a lender would be denied the priority for which it had bargained and Nova Scotia would receive a windfall in the form of a higher priority than for which it had bargained.

o The doctrine of subrogation was not precluded by the negligence of the party claiming subrogation, nor was it precluded because the subject lands were under the land titles system.

Mutual trust is entitled upon the ground of mistake to be subrogated to the rights of the original mortgagees to the extent of allowing him a priority over Credit View for the amount Mutual Trust paid to dis-charge the mortgages.

It is clear beyond question that Mutual Trust would not have discharged these mortgages had he been aware of the exis-tence of the pending litigation.

o He would either have refused to make the advance altogether, or he would have had the mortgages as-signed to him instead of discharging them.

It is equally clear that Credit View has not been in any way prejudiced by what has happened, and that no injustice will be done by replacing him in his former position, for he knew about the mortgages when pending litigation was registered.

– Armatage Motor Ltd. v. Royal Trust Corp. of Canada, (1995) 45 R.P.R. (2nd) 204

In this case, Armatage had a second mortgage on a property. The mortgagors were seeking to refinance and to roll the amounts of the first and

second mortgages into one new mortgage. The mortgagors subsequently obtained financing from Royal Trust. However, the mortgage funds were used to discharge the existing first mortgage

on the property only. The respondent solicitor had not searched title and had registered Royal Trust’s

mortgage without realizing that it stood second in priority to the Armatage’s mort-gage.

Royal Trust sought declaration that it had priority over the Armatage’s mortgage by virtue of the application of the doctrine of subrogation.

The Court held that Armatage’s mortgage had priority over the Royal Trust’s mortgage.

o The doctrine of subrogation is an equitable doctrine and allows for a sub-sequent mortgagee to assume the rights of a prior mortgagee in certain circumstances and is an exception to the general rule established by the Registry Act as to the priority of registration.

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However , Royal Trust had a remedy at law against its solicitor in ei-ther contract or negligence.

By determining the appropriate remedy in any case, the Court must be satisfied first, that there is a substantive cause of action or violation of the plaintiff's rights; second, that sub-stitutionary relief would not adequately vindicate those rights; and finally, that no discretionary factors incline against spe-cific relief.

o The question is whether it is a case in which the rem-edy at law is so inadequate that the Court ought to in-terfere, having regard to the legal remedy, the rights and interests of the parties, and the consequence of this court's interference.

Thus, a Court should not apply an equitable remedy, as the doctrine of subrogation, where there exists an equal remedy at law to rectify a party’s loss.

Royal Trust would not be prejudiced by the failure to impose the equitable doctrine of subrogation in the circumstances of the case.

F. Second and Subsequent Mortgages

1. What are they?

Second and subsequent mortgage are charges or mortgages which rank after a prior charge or mortgage

o That is, second and subsequent mortgages typically refer to a secured loan (or mortgage) that is subordinate to another loan against the same property.

Second and subsequent mortgages are called subordinate be-cause, if the loan goes into default, the first or prior mortgage get paid off first before the second and subsequent mortgage.

Thus, second and subsequent mortgages are riskier for lenders and generally come with a higher interest rate than first mortgages.

2. Foreclosure by subsequent mortgagee

– Rose v. Page, (1829) 57 E.R. 864

In this case a second mortgagee filed a bill of foreclosure against the mortgagor and the third mortgagee, in whose deed the prior mortgage was recited.

The defendants demurred because the first mortgagee was not a party.

The question was whether it is necessary that prior mortgagees should be a party.

The Court held that a second mortgagee may file a bill of foreclosure against sub-sequent mortgagees and the mortgagor, subject to prior mortgages, without mak-ing prior mortgagees a party.

o There is no reason for preventing a second mortgagee from asserting his/her rights against the persons who comes in under him/her.

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The case is different where a first mortgagee omits to make the sec-ond mortgagee a party to the suit, for by doing so first mortgagee gives the right of redemption to the third mortgagee.

3. Suit on covenant by subsequent mortgagee after foreclosure by prior mortgagee

– Union Bank of Canada v. Bates, (1913) 18 D.L.R. 269

This case deals with a mortgaged property sold under a power of sale by a mort-gagee to a subsequent mortgagee.

The Court stated that where a prior mortgagee duly exercises a power of sale, and a subsequent mortgagee becomes the purchaser subject to other priors mortgages, if any, such subsequent mortgagee, in the absence of any thing to impeach the bona fides of the transaction, acquires the same irredeemable title as if he/she were a stranger.

– Brown v. Weil, (1923) 53 O.L.R. 27

In this case, a first mortgagee recovered a judgment for foreclosure on first mort-gage.

Subsequently, a second mortgagee brought an action against the mortgagor upon covenant for payment.

The mortgagor opposed to this action sustaining that the second mortgagee had consented to a foreclosure by the first mortgagee and that the second mortgagee could not reconvey the mortgaged lands.

The Court held that the rule that a mortgagee is not entitled to enforce payment personally by the mortgagor unless he/she is in a position to reconvey the mort-gaged property is confined to cases where the covenantee has made himself/her-self unable to reconvey.

o Thus, where the first mortgagee has foreclosed, the second mortgagee is entitled to succeed in an action against the mortgagor upon his covenant.

– Servais v. Shear, (1929) 63 O.L.R. 381

In this case, the municipality sold the rights on a mortgaged property to a third party, subject to the mortgagor fails to pay all the taxes due within a period of one year.

During this year the third party sold his rights to a first mortgagee of the said property.

Failing to pay all the taxes after one year, the municipality evicted the mortgagor from the property and the mortgagee became the owner of this property in fee simple.

Subsequently, the first mortgagee sued the mortgagor on covenant for payment, putting it out of his power to transfer the land to the defendants in case they paid the mortgage money.

The mortgagor sought judgment against the action because the first mortgagee removed the power to reconvey the property from it.

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The Court held that the mortgagee, being the transferee of the title under a tax-sale, was entitled to recover in an action upon the covenant in the mortgage deed, notwithstanding that he had put it out of his power to transfer the land to the defendants in case they paid the mortgage money.

o The municipality, by statutory title paramount, has evicted the mortgagee and everybody else, quoad the estate under the mortgage.

It is, no doubt, true that the mortgagor by paying the taxes might have prevented this eviction; but he/she was no more bound to re-deem the previous encumbrance or to delay the prior encumbrancer in realizing on his security.

The first mortgagee was in no way responsible for the municipality action that wiped out the mortgagee’s bound to reconvey on being paid the mortgage-money.

He/she did not owed some duty to his mortgagor in respect of the land in which he had that estate, nor abused his posi-tion-or used it.

– Geidlinger v. Kierans, (1967) 1 O.R. 217

In this case, a mortgagor was in default under the first and second mortgage. The second mortgagee quitclaimed3 to the first mortgage for a sum. The first mortgagee realized upon security and the mortgagor conveyed to him/

her the mortgaged property. Subsequently, the second mortgagee brought an action on the covenant against

the mortgagor. The mortgagor alleged that the action should be dismissed because the second

mortgagee was unable to reconvey to mortgagor.

The Court ruled that the principle that a mortgagee is not entitled to enforce pay-ment by the mortgagor in an action on the covenant unless he/she is in a position to reconvey the mortgaged property does not apply to a second mortgagee where the inability to reconvey results from the first mortgagee's exercise of his right to realize his security as a result of the mortgagor's default.

Accordingly, where a mortgagor is in default under both a first and second mort-gage on the same property, and the mortgagor conveys his interest in the mort-gaged property to the first mortgagee, the fact that the second mortgagee subse-quently quitclaimed to the first mortgagee for a sum in order to avoid a foreclo-sure action, does not have the effect of precluding recovery by the second mort-gagee against the mortgagor in an action on the covenant.

4. Duty of mortgagor to protect his subsequent mortgage

– The Mortgages Act, section 2

3 Quitclaim is a formal renunciation or relinquishing of a claim.

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See topic A., number 4., letter a, above for the transcription of section 2 of Mort-gages Act.

– Otter v. Lord Vaux, (1857) 43 E.R. 1381

In this case, a mortgagor having made two successive mortgages of his estate to different persons purchased the estate from the first mortgagee selling under a power of sale contained in the mortgage.

The second mortgagee sued the mortgagor on the covenant and the mortgagor alleged that second mortgagee was precluded by the power of sale exercised by the first mortgagee.

The Court held that when a mortgagor pays off a prior mortgage by purchase of the property for himself/herself, he/she could not be heard to plead the prior mort-gage as a shield against the subsequent encumbrancer.

o That is, the mortgagor could not by his/her purchase defeat the title of sec-ond mortgage.

– Teevan v. Smith, (1882) 20 Ch. D. 724

In this case, a mortgagor having made a first and second mortgages, tendered to the first mortgagee the amount due on this first mortgage and then claimed under the Conveyancing Act a transfer to his own nominee of the mortgage debt and security.

The Court held that the mortgagor was not entitled to transfer to his own nominee of the mortgage debt and security, to the prejudice of the second mortgagee and that the consent of the latter in this case was necessary.

– Leitch v. Leitch, (1901) 2 O.L.R. 233

The owner of land mortgaged it and then, reserving a life estate to himself, con-veyed it to his son in fee subject to the mortgage.

The son tried to pay the mortgage and assign it to himself in order to extinguish his father’s equitable right.

The Court held that the son grantee was not entitle on payment of the mortgage to an assignment an a conveyance of it to himself or his nominee under section 2(1) and (2) of the Mortgages Act; the mortgagee having notice of the equitable right of the grantor to have his life estate and that the grantee’s intention was to relieve the it of the burden by payment of the mortgage.

o However, the son grantee was entitled to have the mortgage assigned in such a way that it would remain an encumbrance on the remainder in fee vested in him.

5. The position of mortgagor where subsequent mortgage is created by the purchaser of equity of redemption

– Kinnaird v. Trollope, (1888) 39 Ch.D. 636 at page 641

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In this case, a mortgagor assigned his right of equity of redemption under a mort-gage contract to a third party.

The third party mortgaged the property in favour of the original mortgagees. The third party became insolvent and the mortgagee started an action on

covenant against the original mortgagors for both mortgages.

The Court held that the original mortgagor was entitled to reconveyance on pay-ment of first mortgage debt only.

o The original mortgagor is under no responsibility for the second mortgage, and if he pays off the first mortgage there is no equity in the mortgagee’s favour as against the mortgagor which would entitle the mortgagee to refuse to reconvey the property to the mortgagor.

o A second mortgage given by a third party assignee creates in the mort-gagee a fresh interest in the equity of redemption, but it does not impose any additional burden or liability on the first mortgagor assignor.

– Queens College v. Claxton, (1894) 25 O.R. 282, at pages 283-289

In this case, a mortgagor of land conveyed his equity of redemption to several grantees.

One of the grantees agreed to pay off the mortgage; others executed further mortgages upon the land.

The first mortgagee proceeded to foreclose and to sue the first mortgagor upon his covenant.

The first mortgagor requested the first mortgagee to assign his mortgage to a third party who had advanced the money and paid off the mortgage.

The first mortgagee refused to do so because of subsequent encumbrancers.

The Court held that the first mortgagee was bound under section (2) of the Mort-gages Act to execute the assignment and reconveyance as asked, notwithstand-ing the subsequent encumbrances.

o The first mortgagor had not created a subsequent mortgage and the equity of redemption was conveyed absolutely; so that as between him and sub-sequent owners there was no equity.

There was no mortgagee claiming through the original mortgagor as mortgagor.

In other words there was no one who could compel the origi-nal mortgagors to pay the mortgage money, except the first mortgagee, and he only, because of the covenant to pay.

o The mortgagee having sued on the covenant to pay principal and interest contained in the mortgage, the mortgagor, although having absolutely as-signed his equity of redemption, acquired a new right to redeem, and is en-titled upon payment of the mortgage money to a reconveyance to himself, subject to the equity of redemption vested in the other purchasers, if they want to proceed accordingly, as they were entitled under the statute to re-deem the first mortgage.

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6. Position of purchaser of equity of redemption who pays first of two mortgages

– The Mortgages Act, section 10

Release of equity of redemption without merger of debt

10. (1) A mortgagee of freehold or leasehold property may take and receive from the mortgagor a release of the equity of redemption in the property, or may pur-chase the same under any judgment or decree or execution without thereby merg-ing the mortgage debt as against any subsequent mortgagee or person having a charge on the same property.

Position of subsequent mortgagee

(2) Where a prior mortgagee so acquires the equity of redemption of the mort-gagor no subsequent mortgagee is entitled to foreclose or sell the property without redeeming or selling, subject to the rights of such prior mortgagee, in the same manner as if such prior mortgagee had not acquired the equity of redemption.

Priority under registry

(3) This section does not affect any priority or claim any mortgagee may have under the registry laws.

– Mahood Lumber Co. Ltd. v. M & J Roofing etc, (1982) 36 O.R. (2nd) 541

In this case, following the registration of a third mortgage on a certain piece of property, executions were filed against it.

The third mortgagees subsequently took a transfer of the mortgagor’s equity of redemption in the property.

When the second mortgage caused the property to be sold under a power of sale, the execution creditors resisted the claim of the third mortgagees to the residue of the fund, arguing that upon the conveyance to the latter of the equity of redemption, the mortgage debt merged therein.

The Court held that the third mortgagees were entitled to the money ahead of the execution creditors.

o Section 9(1) [actual section 10(1)] of the Mortgages Act creates a pre-sumption against merger which can be rebutted by showing that it was the intention of the transferee of the equity of redemption that merger should occur.

o An examination of the deed and the surrounding circumstances did not aid in determining the parties’ intention, and in such cases it is presumed that the transferee intended what was most for his advantage.

Here it was clearly to the advantage of the third mortgagees to avoid merger, and thus the execution creditors failed to discharge the onus upon them to rebut the presumption created by section 9(1) [actual section 10(1)] of the Mortgage Act.

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G. Sale of Equity of Redemption

1. Generally

– The Mortgages Act, sections 20 and 21

Mortgagee’s right of action

20. (1) In this section,

“original mortgagor” means any person who by virtue of privity of contract with the mortgagee is personally liable to the mortgagee to pay the whole or any part of the money secured by the mortgage.

Right of mortgagee to recover personal judgment

(2) Despite any stipulation to the contrary in a mortgage, where a mortgagor has conveyed and transferred the equity of redemption to a grantee under such cir-cumstances that the grantee is by express covenant or otherwise obligated to in-demnify the mortgagor with respect to the mortgage, the mortgagee has the right to recover from the grantee the amount of the mortgage debt in respect of which the grantee is obligated to indemnify the mortgagor; provided that the right of the mortgagee to recover the amount of the mortgage debt under this section from the grantee of the equity of redemption shall as against such grantee terminate on the registration of a grant or transfer of the equity of redemption by such grantee to another person unless prior to such registration an action has been commenced to enforce the right of the mortgagee.

Limit of right of action

(3) Where a mortgagee has the right to recover the whole or any part of money secured by a mortgage from an original mortgagor and also has a right by virtue of this section to recover from a grantee of the equity of redemption from a mort-gagor, if the mortgagee recovers judgment for the amount of the mortgage debt against the original mortgagor, the mortgagee thereupon forever ceases to have a right to recover under this section from a grantee, and if the mortgagee recovers judgment under this section against a grantee the mortgagee thereupon forever ceases to have a right to recover from the original mortgagor; provided that where there is more than one original mortgagor this section does not affect the right of a mortgagee after the recovery of judgment against one original mortgagor to re-cover judgment against the other original mortgagor or mortgagors.

Building mortgages

21. (1) In this section,

“building mortgage” means any mortgage made for the purpose of financing the construction of a building.

When no action may be brought

(2) Where, in any building mortgage made on or after the 1st day of July, 1942, it is expressly stated that it is a building mortgage made pursuant to this section, no action may be brought by the mortgagee after the expiration of one year from the date of the maturity of the mortgage whereby to recover payment from the per-son who executed the mortgage of the whole or any part of the money therein se-cured, if such person has made a sale in good faith of the property and has con-veyed and transferred the equity of redemption to a grantee under such circum-stances that the grantee is by express covenant or otherwise obligated to indem-nify such person with respect to the mortgage.

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– Optional maturity clause, also known as standard due-on-sale clause

An optional maturity clause, also known as standard due-on-sale clause, is a clause that accelerates payment of the entire debt upon sale of the mortgaged property to a purchaser not approved by the lender or mortgagee.

o This kind of clause was designed to protect lenders from sale of the prop-erty to high-risk purchasers.

2. Duty to pay mortgage debt as between mortgagor and purchaser of equity of redemption

Methods by which a purchaser may assume the mortgage debt / re-lationship between purchaser and mortgagor/relationship between purchaser and mortgagee

(a) Purchase subject to a mortgage

In this situation, the purchaser or grantee buy the mortgaged property (actually, the right of redemption) subject to the existing mortgage.

o It means that the mortgagor is not paying off the existing mortgage and the grantee is taking over the payments.

The unpaid balance of the existing mortgage is then calculated as part of the buyer's purchase price – credit against purchased price.

(b) Separate assumption agreement

A separate assumption agreement on the mortgage is used by a mortgagor when transferring an interest in property mortgaged to another person.

o Under the assumption agreement, the grantee of the property agrees to assume or take over the existing mortgage on the property and the mort-gagee agrees to permit it, making them parties of another covenant.

That is, the mortgagee has an agreement between himself/herself and the mortgagor, as well as between himself/herself and the grantee of the mortgage, so the mortgagee can recover the amount of the mortgage from both.

(c) A covenant in the deed itself

In this situation, the mortgagor transfer the interest in property mortgaged to pur-chaser and the mortgagor receives all the money to, under the deed itself, pay off the mortgage debt.

o Thus, if there is default on the payment and the mortgagee realizes on the property mortgaged, then the mortgagor must indemnify the purchaser.

(d) Case law

– Boyd v. Johnston, (1890) 19 O.R. 598

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In this case, there was an exchange of lands, where the lands were subject to mortgages.

The question that arose was about the liability of the purchaser to pay the mort-gage upon the lands.

A purchaser of an equity of redemption is bound as between himself/herself and his/her vendor to pay off the encumbrances, and this quite irrespective of the frame of the contract between the parties.

o The doctrine is not confined to mortgage transactions, which are but the particular instances of the application of the general rule that the purchaser of an estate subject to encumbrances is bound to indemnify the vendor against them, even though no covenant to that effect has been entered into; and it does not proceed upon any technicality whatever, but upon clear principles of reason and justice.

Where therefore lands were exchanged between the plaintiff and defendant which were subject to certain mortgages, the defendant was held bound to pay off those on the lands conveyed to him, and to protect the plaintiff from liability thereon.

– Small v. Thompson, (1898) 28 S.C.R. 219

In this case, the plaintiff had conveyed the lands to a third party by deed, whereby the third party assumed a mortgage thereon and covenanted with the plaintiff that he would pay the same.

The third party conveyed the lands to the respondent by a deed made in consid-eration of the assumption by her of the said mortgage and eventually to indemnify him and his assigns from all payments on account thereof.

The respondent did not sign the deed which contained her covenant in favour of the third party, but she took possession and enjoyed the lands there under until the mortgagees took possession in default.

The Court decides that where a deed of lands to a married woman, but which she did not sign, contained a recital that as part of the consideration the grantee should assume and pay off a mortgage debt thereon and a covenant to the same effect with the vendor his executors, administrators and assigns, and she took possession of the lands and enjoyed the same and the benefits thereunder with-out disclaiming or taking steps to free herself from the burthen of the title, it must be considered that in assenting to take under the deed she bound herself to the performance of the obligations therein stated to have been undertaken upon her behalf and an assignee of the covenant could enforce it against her separate es-tate.

– Campbell v. Douglas, (1916) 54 S.C.R. 28

In this case, Douglas advanced money to a third person, who conveyed to him certain properties.

Further, this third person entered into an agreement with Campbell to exchange the property conveyed for lots on another place, which was carried out by con-veyances between Campbell and Douglas.

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In his deed Campbell stated that the consideration was “an exchange of lands and $1.00,” and conveyed the lots, subject to certain mortgages, the description being followed by the words, “the assumption of which mortgages is part of the consideration herein.”

Later, Campbell was obliged to pay these mortgages, and brought suit against Douglas to recover the amount so paid.

The Court held that Douglas was a purchaser of power's land, not a mortgagee.

o Whichever he was, Douglas assumed the mortgages as part of the consid-eration, and, therefore is liable in this action.

o The assumption of the mortgages amounted to an express covenant to pay them.

Even if it did not, as Campbell would not have conveyed without this clause for assumption, such a covenant should be read into the contract.

– Friedman v. James, (1938) O.W.N. 356

In this case, one Gray sold a property to one Morgan, subject to a mortgage in favour of the plaintiff Friedman, and Morgan specifically covenanted in such agreement to indemnify Gray against such mortgage.

Some months later Gray purchased another property from the defendant James and offered as part of the purchase price the debt owing by Morgan under the aforesaid agreement of sale (such as in a transfer of credit).

o Gray assigned this agreement to James, Morgan also being a party to such assignment, wherein Morgan admitted the amount of his liability and covenanted that the assignment by Gray to James did not in any way re-lease him, Morgan from his obligation under the agreement to indemnify Gray.

Morgan then further covenants to pay to James the balance of purchase price owing by him.

James covenants that upon Morgan paying the balance of the purchase money he will convey the premises to Morgan subject to the existing encumbrances, in which was included the mortgage sued on in this action.

On the same date Gray executed a deed in favour of James.

The issue in this case was whether there was a transfer of equity of redemption or even an implied covenant to indemnify.

The Court said that there was no transfer of equity of redemption nor an implied covenant to indemnify.

o The transaction is quite different in substance from one where two persons exchange properties subject to mortgages.

In such case each party is a real purchaser, and there is no reason why the usual implied covenant in favour of his vendor should not arise.

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o Here, the assignment of the agreement, which was, of course, signed by Gray, shows plainly that the contemplation of the parties was that James was to be in the position of a temporary holder of the property subject to the encumbrances, and then pass it on to Morgan when Morgan paid the cash which he owed.

James's position in essence was more that of a second mortgagee than of a purchaser.

– National Trust v. Fuciarelli, (1980) 30 O.R. (2nd) 289

In this case, a mortgagor intended to sell property subject to mortgage. However, the covenants in deed did not express that the selling was to be subject

to mortgage, that is, the mortgagor failed to obtain express covenant for indemni-fication.

The purchaser subsequently resold the land. Later after, the mortgage was under default. The mortgagee then sold the property under power of sale and sued the mort-

gagor for the deficiency. The mortgagor paid for the deficiency.

The question in this case was whether the mortgagor was entitled to recover from the purchaser.

The Court held that where a mortgagor sells land subject to the mortgage, which is being assumed by the purchaser, but fails to exact an express covenant of in-demnification from the purchaser and to modify the covenants in the deed, an im-plied covenant on the part of the purchaser nevertheless arises to indemnify the mortgagor for any loss sustained in an action against him by the mortgagee.

o The implied covenant arises not by virtue of the deed but by virtue of the sale and, therefore, parol evidence is admissible to establish the consider-ation for the sale and the assumption of the mortgage by the purchaser.

o Moreover, the obligation to indemnify continues even though the purchaser has resold the property before the mortgagee’s action.

o Section 19 [actual section 20] of the Mortgages Act, which empowers the mortgagee to bring an action against the purchaser from the original mort-gagor if there is an express or implied covenant to indemnify, but which terminates that right where the purchaser has resold the property before the action is commenced, does not affect the obligation to indemnify.

– Crown Trust v. Moriarity, (1980) 14 R.P.R. 309

In this case, Moriarity sold a property to a third party. This third party placed a first mortgage on the property in favour of Crown Trust

and gave a second mortgage to Moriarity for the balance of the purchase price owing.

The second mortgage went into default, and Moriarity accepted a quitclaim from the third party, registered in the ordinary course.

First mortgage went into default, so Crown Trust sold the property under a power of sale and sued Moriarity for this deficiency.

Moriarity alleged the quitclaim to avoid the suit.

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The Court decided that the quitclaim could not be opposed as against Crown Trust.

o It is true there is no express covenant in the quitclaim deed to assume the existing first mortgage, but the circumstances of this transaction are such that Moriarity under the circumstances where obligated to indemnify the third party with respect to the first mortgage.

[It seems that the situation would be different if the first mortgage has paid the deficiency and tried to recover it from Moriarity].

o Had Moriarity merely wished to release the third party from the second mortgage, they could have given a release of the mortgage only.

o Instead, Moriarity accepted and registered a quitclaim, and in the absence of special circumstances the law will imply that a purchaser will indemnify his/her vendor against all personal liability in respect of a pre-existing mort-gage debt.

It's established law that the purchaser of an equity of redemption is bound to indemnify the vendor against all personal liability in re-spect of the mortgage debt unless there is something in the deed or the circumstances showing a contract intention.

A covenant that the purchaser will do this is implied by law.

3. Mortgagee versus mortgagor who has sold the equity of redemption

– The Mortgages Act, section 20

See topic G., number 1., above for the transcription of section 20 of Mortgages Act.

– Palmer v. Hendrie, (1859) 54 E.R. 136

In this case, a mortgagor transferred the equity of redemption. After the transaction, transferees and mortgage partially alienated the property. The mortgage went into default. The mortgagees got an order for final foreclosure and sued the mortgagor under

the covenant to pay for the deficiency. The mortgagor took a motion for an injunction to stay proceedings.

The Court held that if a mortgagee so deals with the mortgaged estate as to ren-der it impossible for him/her to restore it on full payment, Courts will prevent his/her suing at law to recover the mortgage money.

o The mortgagee may after foreclosure put in force collateral securities or sue on the covenants, but he thereby opens the foreclosure.

If, after an order of foreclosure absolute, the mortgagee sues the mortgagor on his/her covenant, the mortgagor acquires a new right to redeem even though he has parted with the equity of redemption.

However, if the mortgagee cannot restore the security on full pay-ment of the debt, once the mortgagee has obtained a foreclosure order absolute, he/she cannot sue on the personal covenant to pay

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the loan even though the property is worth less than the amount outstanding.

– Forster v. Ivey, (1901) 2 O.L.R. 480

This is a case where the mortgagor Ivey transferred upon a covenant a mort-gaged property, subject to a mortgage, to a third person, who transfer it under the same conditions to a fourth party.

The mortgage went into default and the mortgagee sued the mortgagor upon the covenant.

The Court decided that when land subject to mortgage is sold by the mortgagor and the purchaser assumes and covenants to pay the mortgage the mortgagor does not become to the mortgagee a surety in the technical sense and the doc-trines as to the discharge of sureties do not apply to him to their full extent.

o The mortgagor is liable therefore upon his/her covenant notwithstanding a previous extension of time granted by the mortgagee to the purchaser, if, when the liability is enforced, the right of the mortgagor to redeem is not affected.

– Re Thuresson, (1902) 3 O.L.R. 271

In this case, a mortgagee dealt with the property mortgaged after the mortgagor had sold the right of redemption.

o A mortgagee not only discharged a portion of the mortgaged lands upon part payment as he was entitled to under the mortgage, but also assented to a right of way across the whole of the property granted by the then own-ers of the equity to a subsequent purchaser of a portion of it, and released such right of way from his mortgage.

The Court decided held that the mortgagee, having debarred himself from restor-ing the mortgaged lands unaltered in character and in a manner unauthorized by the terms of the mortgage owing to quantity, right of way, an assignee of the mortgage, could not claim under the covenant therein in an administration of the mortgagor's estate.

o However, the Court stated that in such a case, the mortgagee should have an opportunity within a limited time to get into a position so to restore the land, and twenty days were here allowed for that purpose.

– Financeamerica Realty Ltd. v. Holloway, (1985) 53 O.R. (2nd) 3

In this case, a mortgage provided that an extension agreement or other dealings with equity of redemption would not relieve mortgagor.

The mortgagors sold the equity of redemption and mortgagee extended the mort-gage with purchasers at higher interest rate.

When the purchasers defaulted, the mortgagee brought action on the covenant against the defendants and the parties stated a case for the opinion of the court on the mortgagors’ liability.

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The Court held that the mortgagors were liable on the covenant at the original in-terest rate.

o Mortgagors are not converted into sureties but they are liable on the covenant at original interest rate.

o Section 19(2) [actual section 20(2)] of the Mortgages Act does not convert the defendant mortgagors from primary debtors into sureties.

In any event, the express provision in the mortgage had the effect of preserving the mortgagee’s rights against the mortgagor despite the extension agreement.

However, since mortgagors were liable on the covenant, their liabil-ity was limited to the interest rate which they themselves covenanted to pay and not the increased rate provided for under the extension agreement.

4. Is a mortgagor who sold the equity of redemption a proper party in an action for foreclosure?

No . An action for foreclosure is an action that terminates the equity right of re-demption.

o Thus, a mortgagor who sold his/her equity right of redemption is no longer the owner of such a right.

o In a situation where a mortgagor sells his/her equity right of redemption, the purchaser of the equity right of redemption is the proper party in an ac-tion for foreclosure.

– Forster v. Ivey, supra

See topic G., number 3., above for the Forster v. Ivey case.

5. Covenant by purchaser to indemnify and assignment to mortgagee

Whenever there is a transfer from the mortgagor to purchaser and purchaser is giving credit against purchased price, then purchaser must eventually indemnify the mortgagor.

– The Mortgages Act, sections 20 and 21

See topic G., number 1., above for the transcription of sections 20 and 21 of Mortgages Act.

– Smith v. Pears, (1896) 24 O.A.R. 82

In this case, the mortgagor transferred upon a covenant a mortgaged property, subject to a mortgage, to a third party, who transferred it under the same condi-tions to a fourth party, who finally, transferred it to the defendant Pears.

However, in the last transaction, while still in good standing with payments under the last covenant, Pears obtained from the third party a release of all claims against the fourth party, his vendor.

The fourth party, her vendor, assigned his covenant to the plaintiff Smith. Therefore, Smith brought the action against Pears to recover from him personally

the amount due upon the mortgage.

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By dismissing the action, the Court held that Smith was trying to gain an advan-tage by acquiring from Hewlett an assignment of the covenant, and Pears had an undoubted right to protect himself by satisfying his obligation by obtaining the re-lease, which he has procured from the third party.

o [That is, there was no credit against purchased price as Pears paid the full amount].

o A covenant by a purchaser with his vendor that he will pay the mortgage moneys an interest secured by a mortgage upon the land purchased, and will indemnify and save harmless the vendor from all loss, costs, charges and damages sustained by him/her by reason of any default, is a covenant of indemnity merely.

Thus, if before default the purchaser obtains a release from the only person who could in any way damnify the vendor (i.e. prior vendor), he/she has satisfied his liability.

– Maloney v. Campbell, (1897) 28 S.C.R. 228

In this case, a mortgagor sold the equitable right of redemption of a mortgage with property as security to a third party.

The third party sold again this right to another one.

The issue in this case was whether the mortgagee had a right of action against the latter assignee.

The Court held that the obligation of a purchaser of mortgaged lands to indemnify his grantor against the personal covenant for payment may be assigned even be-fore the institution of an action for the recovery of the mortgage debt and, if as-signed to a person entitled to recover the debt, it gives the assignee a dire right of action against the person liable to pay the same.

– Esser v. Pritzker, (1926) 2 D.L.R. 645

This is a case where the mortgagor of land covenanted it for payment of the mort-gage debt.

The plaintiff was the assignee of the mortgage from the mortgagee. The defendants, purchasers of the equity of redemption from the mortgagor, had

covenanted to assume the encumbrances on the land. The plaintiff and assignee, in consideration of the assignment to him of that

covenant, called “the covenant of indemnity,” and released the mortgagor from all liability upon his personal covenant contained in the mortgage-deed.

Later after, in this action, the plaintiff sought to enforce the covenant of indemnity.

The court held, that the mortgage-debt was not wiped out by the release, and the plaintiff, assignee of the mortgage, was entitled to succeed.

o Where a mortgagor sells the mortgaged property taking from the pur-chaser a covenant to assume the mortgage, the mortgagee may, upon ob-taining an assignment of the purchaser’s covenant, release the mortgagor from personal liability and still sue the purchaser upon the assignement.

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H. Guarantees A guarantee is a contract between a guarantor and the mortgagee.

o The subject of the guarantee is a debt owed to the mortgagee by a mort-gagor.

o In the contract of guarantee, the guarantor agrees to repay the mortgagee if the mortgagor defaults.

The exact nature of the obligation owed by the guarantor to the mortgagee depends on the construction of the contract of guaran-tee.

Generally, the liability of the guarantor is usually made coter-minous with that of the principal debtor.

1. Different situations

(a) Guarantor joins in the mortgage itself

– Price v. Letros, supra

See topic D., number 5., above for the Price v. Letros case.

– Guaranty Trust Co. of Canada v. Lucky, (1982) 26 R.P.R. 146

In this case, the defendant Lucky executed a mortgage as guarantor for mort-gagor.

Mortgagor sold the mortgaged land to a purchaser, who assumed the mortgage, but later defaulted.

The mortgagee obtained judgment on the covenant against the purchaser and took possession and then proceeded to sue the guarantor on the guarantee.

The guarantor applied for an order dismissing the action against him on the ground that the action was barred by section 19 [actual section 20] of the Mort-gages Act.

The Court held that the action should be perpetually stayed (i.e. interrupted).

o Section 19(1) [actual section 20(1)] of the Mortgages Act defines “original mortgagor” as “(…) any person who by virtue of privity of contract with the mortgagee is personally, liable to the mortgagee (…)”.

o On the ordinary and natural reading of these words, defendant was, by virtue of the clause of guarantee, an “original mortgagor”.

o However, since mortgagee had already recovered judgment from pur-chaser, section 19(3) [actual section 20(3)] of the Mortgages Act applied to forever prevent it from recovering judgment against the defendant, guaran-tor.

2. Mortgagee assigns mortgage

– Farmers Loans v. Patchett, (1903) 6 O.L.R. 255

Acting as guarantor, the defendant (mortgagee), when assigning a mortgage on lands to the plaintiffs (further mortgagees), covenanted that the mortgagor would pay.

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The further mortgagees afterwards, without guarantor’s consent (former mort-gagee), discharged half the lands from the mortgage on payment of half the mort-gage debt.

The mortgage went into default and further mortgagees sued guarantor (former mortgagee) upon the covenant.

In this case, the Court held, that this was such an alteration of the contract guar-anteed as to release the guarantor from his liability, whether the amount paid was the full value of the part released or not.

o It is not open to question that any alteration of the contract guaranteed, without the assent of the surety, discharges him/her absolutely unless it be without inquiry evident that the alteration is unsubstantial.

3. Rights of a guarantor

(a) Generally

Generally the guarantee has a right of subrogation of the mortgagee’s rights as against the mortgagor guaranteed.

o The right of subrogation includes the right to the benefit of the security af-ter the creditor is satisfied.

That right exists regardless if security was obtained at the mortgage contract or later.

But if a security exists and the mortgagee release mortgagor from that security, then the guarantor has a right to be dis-charged totally or partially from the guarantee, depending on the terms of the contract of guarantee and also the circum-stances.

Guarantor has the right to recover debt paid only from the primary debtor.

Guarantor has no interest in the property.o He/she is liable to the debt of the primary debtor.

Primary debtor under a guarantee cannot recover credit from his/her own guaran-tor.

– ManuLife Bank v. Conlin, 41 R.P.R. (2nd) 283

ManuLife made a loan to the spouse of Conlin, guarantor, which was secured by a first mortgage on an apartment building.

The guarantor covenanted to be bound by all conditions of the mortgage, and to remain so bound, notwithstanding an extension of time for payment of the loan or an increase in the interest rate charged for the loan.

Prior to the mortgage maturing, the respondent agreed to extend the time for re-payment of the loan for a further three years in consideration of a higher interest rate.

At that time, the guarantor had separated from his spouse, and had no notice or knowledge of the renewal.

The spouse, mortgagor, executed the renewal agreement although the document provided for the signature of the guarantor as well.

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The mortgage went into default, and the respondent commenced proceedings for recover the mortgage debt.

The issue was whether the guarantor was liable for the renewal agreement or not.

The majority of the Court held that:

i. A guarantor can contract out of the normal rule that an increase in the in-terest rate or an extension of the term of the mortgage is a material varia-tion in the original contract that operates to extinguish the liability of the guarantor.

However , the issue in this case was whether the language in the mortgage covered the renewal agreement.

On balance and keeping in mind that the documents were drawn and presented by the mortgagee, it was not clear that the guarantor contemplated a renewal agreement.

The resolution of this case was not assisted by the references in the mortgage to the guarantor as principal debtor because there is a major difference between a contract of guarantee and of indemnity and it was necessary to determine the overriding intention.

In this case, the references to the guarantor as principal debtor should be ignored as extraneous and repugnant.

ii. A guarantor's rights may be contracted away, but the language used, par-ticularly when drafted by the lender, must be clear.

Here, the contract of guarantee did not use the word “renewal”, which was significant because the word “renewal” is common in mortgage parlance and would normally be used if contemplated.

The clause of the contract of guarantee was not explicit enough to embrace a renewal.

As for another clause, strictly construed, it was divided into two independent parts, the first dealing with extensions and the second part dealing with renewals.

o For renewals, this clause only authorized a renewal which the mortgagee hoped would stand against sub-sequent encumbrancers.

o It did not stipulate that the guarantor need not be a party to the renewal, and, since the first clause desig-nated the guarantors as principal debtors and not sureties one would expect them to be signatories to the renewal agreement.

The minority of the Court sustained that the general rule is that the guarantor will be discharged if the principal contact is varied or altered without the guarantor's consent in a material way not necessarily beneficial to the surety.

o However , a guarantor can contract out of the general rule, and whether he or she has done so depends upon the construction to be given the contract and the intention of the parties as evidenced by the transaction viewed as a whole.

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o Here the contract clearly provided for the extension of time for payment and the increase in the mortgage rate.

o The contract authorized the mortgagee to give additional time for the pay-ment of the mortgage, which is what the renewal agreement did, without releasing the guarantor.

o It permitted the mortgagee to vary, that is, to change or alter, the terms of payment and the rate of interest.

o There was no requirement that the guarantor be given notice or agree to such variation.

o The guarantor signed the guarantee as a “principal debtor”, which was ob-viously intended to keep the guarantor liable until payment in full of the moneys secured by the mortgage.

(b) Reservation of rights

– Bristol Mortgage Co. v. Taylor, (1893) 21 O.L.R. 286

In this case, the mortgagor renewed the mortgage contract initially guaranteed and secured by a mortgage on property to extend the time with an increase in rate of interest.

The mortgage went into default, and the respondent commenced proceedings for recover the mortgage debt.

The issue was whether the guarantor was liable for the renewal agreement or not.

The Court held that a new agreement between the debtor and creditor extending the time for payment of the debt and increasing the rate of interest, without the consent of the surety, is a material alteration of the original contract, and releases the surety.

Moreover, a provision in such agreement reserving the rights of the creditor against the surety, though effectual as regards the extension of time, is idle [use-less] as regards the stipulation for an increased rate of interest, and, notwith-standing such reservation, the surety is discharged.

– Holland Consolidated v. Hutchins, (1936) 2 D.L.R. 481

In this case, the mortgagor changed the terms of the mortgage contract initially guaranteed and secured by a mortgage on bonds to extend the time with an in-crease in rate of interest, and discharged some of the sureties.

The mortgage contract went into default, and the respondent commenced pro-ceedings for recover the mortgage debt.

The Court held that sureties to a mortgage are discharged from liability by an ar-rangement between mortgagor and mortgagee changing the terms of the original obligation and increasing the rate of interest without fully disclosing the particulars to them.

o Likewise, for withholding information that other sureties, jointly and severally liable with them, refused their assent to the new terms and were thus discharged, thereby affecting their right to contribution.

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o A provision in the suretyship contract, that “no matter what dealings” be-tween the mortgagor and mortgagee the obligation shall remain in full force so long as any money remains unpaid under the mortgage or “any renewal or extension thereof,” does not entitle the creditor to make a new contract with the principal debtor and to hold the sureties to the bond of the original obligation.

o A renewal or extension with an increased rate of interest is not something collateral to but a definite alteration of a material part of the original con-tract.

4. Failure to preserve security

A failure from the mortgagee to preserve security set the guarantor free from the obligation guaranteed under the mortgage on a dollar per dollar basis, propor-tional to the prejudice or the loss.

o That is because the mortgagee spoiled guarantor’s rights of subrogation.

o However , this can be set aside by the terms of the contract as the exam-ples on pages 22 and 26 of the course pack show.

– Bank of Montreal v. Bauer, (1977) 15 O.R. 746

In this case, the creditor failed to register the assignment of book debts, and therefore failed to preserve security.

There was a suretyship and a guarantor for the contract.

The issue in this case was whether the guarantor discharged or not.

The Court decided that where a creditor holds security for a debt, payment of which is guaranteed by a guarantor, it is the creditor's duty to preserve the secu-rity for the benefit of the guarantor for assignment to him/her on his/her honouring the guarantee.

o Thus, where a creditor fails properly to register an assignment of book debts so that it is declared void as against the debtor's trustee in bank-ruptcy, the guarantor is entitled to be discharged to the extent that he/she is prejudiced by the error.

o The onus of proof is on the creditor in such circumstances to show that the guarantor has not been prejudiced.

– Bristol Mortgage Co. v. Taylor, supra

See topic H., number 3., letter (b), above for the Bristol Mortgage Co. v. Taylor case.

– Bank of British Columbia v. Wren Development, (1974) 38 D.L.R. (3rd) 759

In this case, the creditor sold the securities for a contract, and therefore failed to preserve them.

The creditor renewed the contract with the debtor and misled the guarantor as to the fact that the securities still existed, so the latter signed the renewal.

The creditor sued the debtor for the debt in arrears and included the guarantor.

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The issue in this case was whether the guarantor discharged or not.

The Court held that in the absence of evidence that the missing securities could now replaced, the claim of the creditor must fail.

o The rule in equity is to be that, if a creditor holding security sues for his debt; he/she is under an obligation on payment of the debt to hand over the security; and if, having improperly made away with the security, he/she is unable to return it to his/her debtor, he/she cannot have judgment for the debt.

– Farmer’s Loan v. Patchett, supra

See topic H., number 2., above for the Farmer’s Loan v. Patchett case.

– Taylor v. The Bank of New South Wales, 11 App. Cas. 596

In this case, Taylor became sureties to the Bank on the faith of a mortgage granted by the principal debtor to the respondents upon certain sheep.

The sureties claimed to be released on the ground that the respondents had sold the sheep without notice to them in a manner not warranted by the mortgage and that inasmuch as the purchaser had failed to pay the price they had been de-prived of a security upon which they were entitled to rely for protection.

However, evidence showed that the sale in question had been effected by the mortgagor with the consent of the mortgagees in the due course of management and in a manner contemplated by the mortgage.

The issue in this case was whether the guarantor discharged or not.

It was held by the Judicial Committee of the Privy Council that the liability of the sureties was not affected thereby.

o Where the principal debtor had given to the creditor as collateral security a mortgage of a flock of sheep containing provisions for the management of the flock by the mortgagor, a sale of part of the flock in due course of man-agement with the knowledge of the creditor is not an alteration of the secu-rity so as to discharge the surety.

– Rose v. Aftenberger, (1970) 1 O.R. 547

In this case, the plaintiff, acting as a mortgagee, took the title to certain real prop-erty (subject to two mortgages) as security for an advance of $4,500 to a certain mortgagor towards its purchase price.

Mortgagee also received a promissory note made by purchaser and guaranteed by the defendant, guarantor.

After mortgagor had defaulted on the mortgages and the mortgagee had incurred further debt of $2,000 in respect to the property, mortgagee, without notifying guarantor, conveyed the title to mortgagor, taking a third mortgage as security.

In mortgagee’s action on the note, the guarantor pleaded that they were dis-charged by plaintiff's improper dealing with the security.

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The Court held in this case that, although a surety is discharged if either the prin-cipal contract is varied without his/her consent in some matter not plainly unsub-stantial, or if the terms of the contract of guarantee itself are breached by the se-cured creditor; where there is simply a wrongful dealing with the security, such as conveying it to the debtor without the consent on the surety, the surety is only relieved up to the value of the security thus lost to the guar-antor.

Also, the onus of proving the amount of the partial discharge is upon the creditor.

5. Does a guarantor have the right to redeem?

A guarantor has not the right of redemption (interest in the land).o A guarantor only has the right for the benefit of security flowing from the

right of an eventual subrogation.

– Gedye v. Matson, 53 E.R. 655

A debtor mortgaged a leasehold property and his son joined in the mortgage as surety for him by covenanting to pay the mortgage money.

The mortgagor died and the guarantor paid off part of the debt. The mortgagee brought an action for foreclosure against the representatives of

the mortgagor and the guarantor.

The issue in this case was whether the guarantor was a proper party in an action for foreclosure or not.

The Court held that if a man makes a mortgage and induces a third person to be-come his surety and to covenant to pay the debt, the surety is entitled to stand in the place of the creditor and to have the benefit of all the remedies and advan-tages which the creditor had against the principal debtor.

o The condition being that no interest which the surety can acquire can have priority over the creditor, but to the extent to which the surety has paid off the debt he has a right to the benefit of the remedies of the mort -gagee.

[This case brings therefore two rules:

i. A surety for a mortgagor who pays part of mortgage is entitled as against the mortgagor to a charge on the estate.

ii. A surety who covenants for payment of the mortgage money is not a party to a foreclosure suit if he has paid nothing .]

– Alisson v. Rent, (1926) 1 D.L.R. 885

Three mortgages were executed by the defendants Rent, wife and husband, to the plaintiffs as trustees, to secure advances made.

Default was made in the payments and an action has been brought for foreclo-sure and sale of the mortgaged premises against the mortgagors, but it was served against only one mortgagor, the wife.

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The mortgagees contend that they are entitled to an order for foreclosure and sale upon the theory that the husband was not a necessary party to the foreclo-sure.

The Court held that the husband in this case was a necessary party to the action for foreclosure and sale.

o The estate in mortgage may be redeemed, not only by the persons speci-fied in the proviso for redemption and their representatives, but also by all persons who have any interest in or lien upon the estate

o Thus, no order for foreclosure and sale should be made unless the per-sons entitled to redeem are parties to the action.

It is the right to redeem which is to be barred and foreclosed and if the husband defendant has the right to redeem, then it follows that this right cannot be taken away without his being heard or given the opportunity to be heard.

– Canadian Financial Trust v. First Federal Construction Ltd., (1982) 34 O.R. (2nd) 681

Mortgages — Power of sale proceedings — Requirement of notice to guarantors of mortgage debt — Mortgages Act, R.S.O. 1970, c. 279, s. 30(1).

Guarantee and suretyship — Nature of guarantors' interest in mortgaged property — Guarantors' interest appearing in mortgage instrument but not on register of title — Whether "register of title" includes instruments mentioned therein.

The plaintiff mortgagee sold real property belonging to the defendant corporation

pursuant to a power of sale upon the defendant's default. When a deficiency arose, the plaintiff sought to have it made good by the three

individual defendants, officers and directors of the defendant corporation, who had guaranteed the mortgage debt.

The plaintiff served a valid notice under Part III of the Mortgages Act, upon the defendant corporation, but did not serve the individual defendants, although two of them received copies of the notice and were at all relevant times fully aware of its contents.

The trial judge held that the individual defendants were absolutely discharged from the guarantee because of failure to give notice pursuant to section 30 [actual section 31] of the Mortgages Act.

The plaintiff appealed.

The Court held that the appeal should be allowed for the following reasons:

i. Section 30 paragraph 1 [actual section 31(1)1 requires that where the mortgaged property is registered under the Land Titles Act, notice be given “to every person appearing by the register of title . . . to have an interest in the mortgaged property”.

Section 30(2) [actual section 31(2)] extends the definition of “regis-ter of title” to include “instruments received for registration before 4:30 p.m. on the day immediately prior to the day on which a notice of exercising the power of sale is given”.

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Section 30(2) [actual section 31(2)] refers only to late-filed instru-ments which would not have appeared on the register at the rele-vant time.

It does not extend the “register of title” to include all instruments re-ferred to therein.

o Here the guarantor's interest, if any, appeared only in the mortgage in-strument itself and not "by the register".

ii. The guarantors did not have an “interest in the mortgaged property” as re-quired by section 30(1) paragraph 1 and paragraph 4 [actual section 31(1)1 and 4].

Upon paying a guaranteed mortgage debt, but not before doing so, a guarantor is entitled to an assignment of the security held by the creditor relating to that debt, and to be subrogated to the rights of the creditor against the principal debtor under the security.

Such a guarantor is entitled to notice in any foreclosure or power of sale proceeding.

o But here the guarantors had paid no part of the mortgage debt prior to the exercise of the power of sale.

They consequently had no interest in the property and were not en-titled to notice.

iii. There was no contractual obligation upon the plaintiff to give notice be-cause the mortgage instrument required only that “notice ... as provided in the Mortgages Act” be given.

– 394563 Ontario Ltd. v. Fuda, 42 O.R. (2nd) 779

This case confirms the rule set on the previous cases above that a guarantor not having paid any part of debt and having no charge upon the property is not enti-tled to notice in an action for foreclosure.

I. Marshalling Marshalling is an equitable remedy.

The doctrine of marshalling, in its application to mortgages or charges upon two estates or funds, may be stated as follows.

o If the owner of two estates mortgages them both to one person, and then one of them to another, either with or without notice, the second mort-gagee may insist that the debt of the first mortgagee shall be satisfied out of the estate not mortgaged to the second, so gar as that will extend.

o This right is always subject to two important qualifications:

i. Nothing will be done to interfere with the paramount right of the first mortgagee to pursue his remedy against either of the two estates.

ii. The doctrine will not be applied to the prejudice of third parties.

– Victoria and Grey Trust Co. v. Brewer, (1970) 3 O.R. 704

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Mortgages — Foreclosure — Marshalling — Mortgagee holding mortgages on two parcels — One parcel subject to additional second mortgage — Both parcels are subject to a subsequent mortgage to third party — Whether second mort-gagee of one parcel entitled to insist upon marshalling on remaining parcel.

Brewer mortgaged lands on Bruce and Brant Townships to Victoria & Grey Trust Co.

He then mortgaged both lands to the Toronto-Dominion Bank. Finally, he mortgaged both lands to Industrial Development Bank. Victoria & Grey Trust Co. obtained a judgment for foreclosure of both parcels and

in the proceedings the local master held that the Victoria & Grey Trust Co. should first realize its claim on the Bruce lands before having recourse to the Brant lands.

On appeal by the Industrial Development Bank, the Court held that the appeal should be allowed.

o The local master erred in applying the doctrine of marshalling since the doctrine should not be applied when its operation prejudices a third party.

o Since a large deficiency existed, Industrial Development Bank could be caused great prejudice if the entire proceeds of the Bruce lands on which it had a second mortgage were to be applied in first payment of Victoria & Grey Trust Co.’s mortgage.

o Accordingly, the claim of Victoria & Grey Trust Co. ought to be satisfied out of the proceeds of both parcels rateably according to their sale values.

J. Construction Lien Act, sections 77 to 80PART XI

PRIORITIES

Priority of liens over executions, etc.

77. The liens arising from an improvement have priority over all judgments, exe-cutions, assignments, attachments, garnishments and receiving orders except those executed or recovered upon before the time when the first lien arose in re-spect of the improvement.

Priority over mortgages, etc.

78. (1) Except as provided in this section, the liens arising from an improve-ment have priority over all conveyances, mortgages or other agreements affecting the owner’s interest in the premises.

Building mortgage

(2) Where a mortgagee takes a mortgage with the intention to secure the fi - nancing of an improvement , the liens arising from the improvement have priority over that mortgage, and any mortgage taken out to repay that mortgage, to the ex - tent of any deficiency in the holdbacks required to be retained by the owner un-der Part IV, irrespective of when that mortgage, or the mortgage taken out to repay it, is registered.

Prior mortgages, prior advances

(3) Subject to subsection (2), and without limiting the effect of subsection (4), all conveyances, mortgages or other agreements affecting the owner’s interest in

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the premises that were registered prior to the time when the first lien arose in respect of an improvement have priority over the liens arising from the improve-ment to the extent of the lesser of,

(a) the actual value of the premises at the time when the first lien arose ; and

(b) the total of all amounts that prior to that time were,

(i) advanced in the case of a mortgage, and

(ii) advanced or secured in the case of a conveyance or other agreement.

Prior mortgages, subsequent advances

(4) Subject to subsection (2), a conveyance, mortgage or other agreement affecting the owner’s interest in the premises that was registered prior to the time when the first lien arose in respect of an improvement, has priority, in addition to the priority to which it is entitled under subsection (3), over the liens arising from the improvement, to the extent of any advance made in respect of that con-veyance, mortgage or other agreement after the time when the first lien arose , unless,

(a) at the time when the advance was made, there was a preserved [regis-tered and not discharged] or perfected lien against the premises ; or

(b) prior to the time when the advance was made, the person making the ad-vance had received written notice of a lien .

Special priority against subsequent mortgages

(5) Where a mortgage affecting the owner’s interest in the premises is regis - tered after the time when the first lien arose in respect of an improvement, the liens arising from the improvement have priority over the mortgage to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV.

General priority against subsequent mortgages

(6) Subject to subsections (2) and (5), a conveyance, mortgage or other agreement affecting the owner’s interest in the premises that is registered after the time when the first lien arose in respect to the improvement, has priority over the liens arising from the improvement to the extent of any advance made in respect of that conveyance, mortgage or other agreement, unless,

(a) at the time when the advance was made, there was a preserved [regis-tered and not discharged] or perfected lien against the premises ; or

(b) prior to the time when the advance was made, the person making the ad-vance had received written notice of a lien .

Advances to trustee under Part IX

(7) Despite anything in this Act, where an amount is advanced to a trustee ap-pointed under Part IX as a result of the exercise of any powers conferred upon the trustee under that Part,

(a) the interest in the premises acquired by the person making the advance takes priority, to the extent of the advance, over every lien existing at the date of the trustee’s appointment; and

(b) the amount received is not subject to any lien existing at the date of the trustee’s appointment.

Where postponement

(8) Despite subsections (4) and (6), where a preserved or perfected lien is post-poned in favour of the interest of some other person in the premises, that person shall enjoy priority in accordance with the postponement over,

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(a) the postponed lien; and

(b) where an advance is made, any unpreserved lien in respect of which no written notice has been received by the person in whose favour the postponement is made at the time of the advance,

but nothing in this subsection affects the priority of the liens under subsections (2) and (5).

Saving

(9) Subsections (2) and (5) do not apply in respect of a mortgage that was regis-tered prior to the 2nd day of April, 1983.

Financial guarantee bond

(10) A purchaser who takes title from a mortgagee takes title to the premises free of the priority of the liens created by subsections (2) and (5) where,

(a) a bond of an insurer licensed under the Insurance Act to write surety and fidelity insurance; or

(b) a letter of credit or a guarantee from a bank listed in Schedule I or II to the Bank Act (Canada),

in a form prescribed is registered on the title to the premises, and, upon regis-tration, the security of the bond, letter of credit or the guarantee takes the place of the priority created by those subsections, and persons who have proved liens have a right of action against the surety on the bond or guarantee or the issuer of the letter of credit. R.S.O. 1990, c. C.30, s. 78 (10); 1997, c. 19, s. 30.

Home buyer’s mortgage

(11) Subsections (2) and (5) do not apply to a mortgage given or assumed by a home buyer.

Persons who comprise class

79. All persons having a lien who have supplied services or materials to the same payer comprise a class, and a person who has supplied services or materials to more than one payer is a member of every class to the extent to which the per-son’s lien relates to that class.

Priority between and within class

80. (1) Except where it is otherwise provided by this Act,

(a) no person having a lien is entitled to any priority over another member of the same class;

(b) all amounts available to satisfy the liens in respect of an improvement shall be distributed rateably among the members of each class according to their respective rights; and

(c) the lien of every member of a class has priority over the lien of the payer of that class.

Where conveyance or mortgage void

(2) Any conveyance or mortgage in respect of the premises to any person enti-tled to a lien on the premises, in payment of or as security for that claim, whether given before or after that lien arises, is void against all other persons entitled to a lien on the premises.

The construction lien is a creature of statute only.o It grants to one class of creditors a security or preference not enjoyed by

other creditors of the same debtor.

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o It gives those who supply labour, services and materials to an improve-ment an extra-contractual charge against the interest of the owner in the improved lands and lands used and enjoined therewith.

o It attaches to interests in land only.

The object of lien legislation is to prevent owners of land from benefiting from improvements to their land without payment.

Holdback is the charge upon the land that secures payment of a statutory hold-back.

o Owners are obliged to retain out of all payments made under the contract to the contractor a percentage (10%) of the value of the work done at the time the payment is made.

o This percentage retained, or “holdback”, forms a fund out of which the claims of the subcontractors and material suppliers are eventually paid in priority, according to the scheme of the Act.

The Ontario Act grants lien claimants a general priority over registered interests.o Mortgages generally have priority over liens if they were registered prior to

the date the lien arose, but that priority is limited to the lesser of the value of the premises at the time the lien arose and the total amounts advanced before that time.

o In addition, the Act gives such prior mortgages additional priority with re-spect to advances made in the absence of a preserved lien or written no-tice.

Generally, mortgages registered after the first lien arose rank after the lien.o However , unlike other provinces, the Ontario Act provides that building

mortgages, i.e., mortgages taken with the intent of financing an improve-ment, rank after the lien, regardless of when they were registered.

– Norwon Electric Sault v. Ross, (1984) 7 C.L.R. 1

This was a case where the main issue was the existence and extent of priority as between the Royal Bank of Canada, mortgagee who made numerous mortgages advances over period of time, and subsequent lien claimants.

By interpreting the Construction Lien Act in force back then, the Court held that all lien claimants had priority over mortgage where one lien was already registered at the time of an advance.

o A reasonable interpretation of section 80(1) leads one to the conclusion that if at the time a mortgage advance is made, there is a lien registered against the premises, all liens “arising from the improvement” have priority to all advances made subsequent to the registration of the first lien.

o Section 80 distinguishes between “liens arising from the improve-ment” and liens “preserved or perfected” against the premises.

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The former deals with work and service performed, the latter with registration.

– Royal Bank of Canada v. Lawron Developments Inc., (1994) 16 O.R. (3rd) 450

In this case, a mortgagee advanced money under a single mortgage for several different intentions, such as to purchase land and also to secure the financing of an improvement.

The issue in this case was to establish the priorities of the mortgage in respect of the construction liens.

The Court held that the priorities between mortgage and construction liens should be determined by segregating the several intentions for the mortgage loan for the purpose of application of section 78(2) of the Construction Lien Act.

o Under section 78(2) of the Construction Lien Act, it was possible:i. to recognize that a mortgagee may have more than one intention;ii. to segregate those intentions and the associated advances; and,iii. to assign different priorities to the different advances.

o The result is consistent with the principles and purposes of the Act.o In line with the general principle that the rights of the lien claimants begin

when they begin to add value, it made sense that, where a bank agrees to take a mortgage with the dual intentions of financing the acquisition of the land and thereafter financing the erection of a building upon it, the section should be interpreted in a way that is consistent with convenient commer-cial practice, so as to allow the Bank to take a single mortgage for more than one purpose.

o The result was that the Bank had priority for the first advance moneys with the purpose to buy the premises.

– Park Contractors v. Royal Bank of Canada, (1998) 38 O.R. (3rd) 290

In this case, Park Contractors registered a construction lien with respect to envi-ronmental work.

However, Royal Bank of Canada had a mortgage registered prior to a construc-tion lien.

In respect to the priority, the Court held that following section 78(3) of Construc-tion Lien Act, Royal Bank’s mortgage had priority over Park Constractors’ con-struction lien to extent of actual value of property at time when first lien arose.

o Under section 78(3) of the Construction Lien Act, mortgages registered prior to the time when the first lien arises in respect of an improvement have priority over the lien to the extent of the lesser of the actual value of the premises at the time when the lien arose, and the total of all amounts that were advanced under the mortgage prior to that time.

Nevertheless, the fact was that the property had no actual value at time when the first lien arose.

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o Actual value means market value; that is, the price that would likely result from negotiations between a willing vendor and a willing purchaser.

Therefore, Park Constractors’ construction lien acquired priority over Royal Bank’s prior registered mortgage.

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