The Mortgages Act contains many provisions governing the relationship between mortgagors and mortgagees and, additionally, some provisions protecting purchasers of property under power of sale. However, can a breach of a provision protecting a mortgagor create havoc with what would normally seem to be an ordinary real estate transaction? In 2544176 Ontario Limited v. 2394762 Ontario Inc, a 2022 decision of the Ontario Court of Appeal, an application judge said yes; the Court of Appeal said no.
So that the reader does not get confused between mortgagor and mortgagee terminology, we will refer to a mortgagor as an owner.
The applicable (uncontested) facts follow:
- Owner defaults under the mortgage and mortgagee issues a notice of sale.
- After the 35-day redemption/standstill period expires, owner enters into a highly conditional offer to sell the mortgaged property for $7.9 million, closing Feb. 15, 2021.
- On Jan. 14, 2021, its lawyer notifies mortgagee’s lawyer of the sale and requests a mortgage discharge statement. Upon mortgagee’s request, owner’s lawyer immediately provides a copy of the agreement for sale to mortgagee’s lawyer.
- Mortgagee’s lawyer takes the position that, once the 35-day period expired, owner’s “equity of redemption has now expired;” that is, owner has lost the right to cure the default.
- The next day, Jan. 15, 2021, mortgagee lists the property for sale.
- On Feb. 4, 2021, owner’s sale becomes firm at a significantly reduced price of $5.4 million, closing Mar. 31, 2021. Owner does not tell mortgagee of the new terms of the deal and mortgagee never enquires.
- On Feb. 10, 2021, mortgagee enters into an agreement to sell the property to purchaser for $4.9 million. The transaction closes Mar. 2, 2021.
- Mortgagee never complies with owner’s request for a mortgage discharge statement.
Owner almost immediately brings its application to set aside the sale to purchaser and gets before a judge in record time. The judge delivers reasons for decision on Apr. 16, 2021.
The motions judge first noted the following ground rules:
- A mortgagee may attempt to sell a property under power of sale at the same an owner is trying to sell it and vice versa.
- Once a mortgagee “sells” the property (which means entering into an agreement to sell), under normal circumstances the owner loses its right to cure the mortgage default.
- If an owner agrees to sell the property and the sale is to close before the mortgagee “sells” the property, then the owner either will fully pay the mortgage debt on closing (and all will be well) or will not have sufficient funds to do so and the sale will founder.
- The equity of redemption does not expire at the end of the 35-day notice period; it expires when a mortgagee “sells” the property.
- A mortgagee has no right to require an owner to supply a copy of the owner’s agreement to sell the property. The mortgagee may, however, request to see the agreement to determine whether to hold off on marketing the property for sale and the owner may wish the mortgagee to do so and will, as in this case, comply with that request.
Section 22(1) of the Mortgages Act (“Act“) allows an owner to cure a default of a mortgage by paying all arrears and costs at any time before a “sale” of the property. Section 22(2) requires a mortgagee, upon request, to deliver a statement of the amount in default so that the owner can exercise its right to cure the default. Section 22(3) states that if the mortgagee fails to give the statement within 15 days of its request and has no reasonable excuse for its failure, then any rights it may have to enforce the mortgage are suspended until it does so.
The parties agreed that a reference to a discharge statement includes a reference to an arrears statement. Mortgagee argued that it had a reasonable excuse for failing to deliver the discharge statement – because it felt that owner’s agreement to sell was for an unrealistic sale amount and was therefore just a stall.
The judge disagreed that an agreement for a high amount was a stall. The agreement was conditional and that high amount may have been reduced, as it was, after due diligence. Had mortgagee enquired, it may have found the price had been reduced to a significantly lesser amount. Regardless, the judge did not much care what mortgagee thought subjectively about the reason for the discharge request; what mattered was whether mortgagee had an objectively reasonable excuse to fail to provide the discharge statement. The judge held that it did not. Who cares whether owner’s transaction was a good faith transaction? If it closed, mortgagee would be paid and, in the meantime, mortgagee could continue to attempt to sell the property. As the judge noted, it was not a big deal to provide the statement; mortgagee merely had to hit “print.”
The judge held that, at the time of the sale to purchaser, mortgagee’s rights to enforce the mortgage were suspended.
Effect of Breach
Did mortgagee’s breach affect the validity of the sale of the property to purchaser?
Purchaser relied on sections 35 and 36 of the Act, which state that if a mortgagee gives the appropriate statutory declarations as to default, service, and compliance with Part II of the Act, then a buyer’s title cannot be challenged regarding Parts II and III of the Act.
Purchaser’s problem was that owner challenged the propriety of the sale process under Part I of the Act so that judge held that sections 35 and 36 and s. 99(1.1) of the Land Titles Act did not protect purchaser. The judge therefore held that the sale, which was completed at a time when mortgagee’s rights to sell the property were suspended, was invalid.
This is where the Court of Appeal took issue with the judge’s ruling. It held that (i) the cited sections went further than what the judge stated; these sections stipulated that, on registration under the Land Titles Act system, a transfer gives an innocent purchaser good title to the property; and (ii) s. 22 did not eliminate a mortgagee’s substantive rights; it suspended the mortgagee’s ability to enforce them. Accordingly, owner had its remedies against mortgagee improperly exercising suspended rights, but had no recourse to invalidate purchaser’s title.
The application judge was alive to, and commented on, the following problems that would arise from his decision:
- A buyer from a mortgagee has no way to protect itself from s. 22 of the Act. Even if it obtains a representation that the mortgagee complied with s. 22, that representation could be false, knowingly or not.
- A buyer might try to get an estoppel certificate from the owner regarding a discharge statement, but good luck getting the owner to comply with that request.
- How does purchaser get back its money?
- Purchaser’s mortgages are similarly void. What happens to them?
- Even if the sale is invalidated, nothing stops mortgagee from issuing a discharge statement and again immediately closing with purchaser. However, mortgagee may not want to do so if owner’s buyer is still willing to pay $500,000 more than the sale price to purchaser.
The judge did not attempt to deal with these issues; he merely held that the sale was invalid and stated: “I cannot tell how the chips will fall when all is said and done.” When the decision was reversed, the chips, fortunately, did not fall at all and certainty in mortgage sales reigns supreme again.
Image courtesy of OleksandrPidvalnyi.
Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.