Legal Blog

Sale or No Sale

You are acting for a purchaser from a mortgagee under a power of sale. The agreement has a clause regarding the right of redemption of the mortgagor. Just before closing, the mortgagor purports to redeem, the mortgagee wants to allow the mortgagor to do so, and your client is furious. The property has risen in value by $30,000 and is the only property suitable for your client. What do you advise? The Ontario Court of Appeal, in an unreported 1999 decision in Logozzo v. Toronto-Dominion Bank, has some answers.

Convoluted Drafting

Why are solicitors who act for real estate boards unable to draft clearly and succinctly? An agreement between a purchaser and a mortgagee contained the following clause: “The Purchaser understands and agrees that the mortgagor has the right to redeem the property up to the time of waiver or expiration of all rights of termination or fulfillment of all conditions, and this Agreement is subject to that right. In the event of redemption by the mortgagor, this agreement shall be null and void…” This is a standard clause drafted under the auspices of the Ontario Real Estate Association. Of course, it is so badly drafted that it engendered litigation.

Give It Back

The mortgagor wanted to redeem the property prior to the completion of the agreement. The mortgagee had sold the property for a price that was in excess of the mortgage debt and that was in accordance with the value set by its real estate broker. The mortgagor had subsequently received an offer for the property for close to 3 times that amount and, not surprisingly, wanted to redeem the mortgage using the sale proceeds received from the new purchaser. The mortgagee was willing to let the mortgagor do so as long as the mortgagee was not liable to the purchaser. The purchaser wanted the property. The mortgagor applied to the court for a declaration allowing it to redeem. The motions judge granted that declaration and the purchaser appealed.

Redemption

Section 22(1)(a) of the Mortgages Act permits a mortgagor to redeem property “at any time before sale under the mortgage.” The law is relatively clear: an unconditional agreement of purchase and sale constitutes a sale for purposes of the Mortgages Act. In the absence of bad faith or fraud or a price so low that it tends to support an allegation of fraud, the mortgagor is not entitled to relief unless the mortgagor has tendered payment of arrears and costs before the mortgagee entered into the agreement.

The Court determined that for purposes of section 22(1) (a), the mortgagee had sold the property and the mortgagor had not tendered the arrears and costs – not prior to the sale, not ever.

Effect of Redemption Clause

Did the redemption clause save the mortgagor? The answer to this depends on whether the clause is interpreted as making the agreement conditional. In a previous case a judge held that an agreement, conditional on financing, was not a “sale” until the condition was waived. The majority (Borins and MacPherson) specifically declined to rule on whether this was good law. They determined that it was not necessary to answer that question; they were able to dispose of the appeal even if it was good law. The majority held that the clause was not a condition of the agreement; it did not make the right of the purchaser to complete the agreement dependent on the happening of a future event. Rather it was an agreement between the mortgagee and the purchaser for the benefit of the mortgagee that allowed the mortgagee the ability to permit the mortgagor to redeem. The purchaser, not being a party to that agreement, could not enforce it.

However, in this case, the mortgagee wanted to allow the mortgagor to redeem. The majority still said no. The clause said that the mortgagor could redeem but the mortgagor did not redeem. It simply said that it wanted to redeem. Desire and action are not equivalent.

The minority (Goudge) disagreed on each point. For him, the usual clause for searching title was enough to make the agreement conditional. He also felt that it was sufficient for the mortgagor to want to redeem. At that point, a court could declare that the mortgagor had the right to do so. 

Why a Clause

There are two simple reasons for an “out” clause. First, it allows the mortgagee to look for more money from the mortgagor if the property was initially sold for less than the mortgage debt. Second, it ensures that if the mortgagor somehow is allowed to redeem, the mortgagee is not liable to the purchaser. The problem with the clause used in the Logozzo case was that it was a badly drafted clause. We use a more comprehensive version of the following clause when we act for a mortgagee:

“Purchaser agrees that Vendor, at its sole option, has the right to terminate this agreement, if this sale has been restrained by an interlocutory or final court order, regardless whether the court order is under appeal by any party to the court proceedings. If this Agreement is so terminated, the deposit shall be returned to Purchaser without interest or penalty. In no event shall Vendor be responsible for any costs, loss or damages incurred by Purchaser due to the termination of this agreement.”