Legal Blog
Trouble
There are times in the professional life of every real estate lawyer when trouble walks through the door. In Cook v. Craig, an unreported 2001 decision of the Ontario Superior Court of Justice, trouble came in the form of a 63 year-old female with a grade 10 education who, at the time of a mortgage transaction, had no income and was subsisting on social assistance payments of $700 per month. As you read this lead-in, you say to yourself: “Whoops, there goes another otherwise valid mortgage.” Do not get ahead of us; not everything is black and white.
ILA Given
Our story commences in 1987. A woman and her estranged spouse had agreed by way of a separation agreement that the woman would become the owner of a house but would ensure that her estranged spouse was removed from his covenant on the mortgage. In 1993, that mortgage matured and the woman went to a broker to obtain a new mortgage to pay out the existing one. We assume that the existing mortgagee had refused to allow the estranged spouse to be removed from the covenant, probably for good reason because the prospective new mortgagee, National Trust, insisted on more security than that provided by the house.
This was easily arranged; the woman had since re-married and went to her new-found mother-in-law (“MIL”) who agreed to provide her house as additional security. MIL was the female named in the lead paragraph. The broker insisted that MIL obtain independent legal advice. The lawyer, who acted for MIL, daughter-in-law, and National Trust, arranged for another lawyer to give the independent legal advice. He did so and the advice was “sufficient and effective for this purpose.”
New Mortgage
In 1995, the National Trust mortgage came due. However, it was not until 1996 that the same mortgage broker obtained a replacement mortgage from mortgagee no. 3, an individual. The same lawyer acted and, again, acted for all of the parties. The National Trust mortgage had a principal of $76,000 with interest at 11% per year. Mortgage no. 3 had a principal of $78,000 with interest at 11% per year. MIL again gave a collateral mortgage. This time, the lawyer did not arrange for independent legal advice. Presumably, he felt that the mortgages were virtually identical and, accordingly, this new advice would be unnecessary.
It seems, however, that no one told MIL, at the time of the granting of mortgage no. 3, that realty taxes were in arrears of $3,351, the National Trust mortgage had arrears of $1,941, and there were hydro arrears of $1,045. We have to assume that the daughter-in-law paid all of these arrears on or before closing because the additional principal amount of $2,000 would not have covered all of the arrears, the mortgage brokerage fees, and the legal fees associated with the new mortgage. We also assume that the solicitor would not have closed the mortgage transaction without the arrears paid.
Inevitable Defence
Mortgage no. 3 went into default. The mortgagee sold daughter-in-law’s house but there were significant expenses to be deducted from the sale proceeds: $16,000 for repairs made to the house to help effect a sale; $10,000 for realty tax arrears; and $17,000 for costs of the sale, such as real estate commission and legal fees. In addition, interest had accumulated. When all was said and done, there was still a deficiency of $58,000 when mortgagee no. 3 turned his sights on MIL.
MIL claimed that she did not understand her responsibilities under the mortgage. She thought that she was liable under mortgage no. 2 for only one year and that at the end of that year, her daughter-in-law would “either be required to get another ‘backer’ or sell the subject property.”
Inevitable Decision
It did not matter that MIL had received independent legal advice three years before mortgage no. 3. It did not matter that the protestations as to her lack of knowledge sounded hollow given that initial independent advice. She was a 63 year-old unsophisticated, uneducated welfare recipient whose sole asset was about to go up in smoke. The judge held that she should have had independent legal advice and the lawyer who had acted for all parties had a duty to ensure that MIL had all of the facts (e.g. the arrears) at the time she signed mortgage no. 3.
The judge held that most of the repairs and the realty tax arrears were necessitated by events occurring after the giving of mortgage no. 3 and that had MIL been given all of the facts, she would have insisted that daughter-in-law’s house be sold to pay out National Trust. The fact that she would never have insisted on this did not deter the judge. He did not want MIL to lose her home and, therefore, made findings of fact to support his feel for the equities in the action.
Lawyer’s Actions
The lawyer exhibited all of the natural tendencies of old-time real estate lawyers. He had no notes of his meeting with MIL. In his evidence, he was not able to speak of what exactly happened. The judge noted that he spoke in terms of “I would have … “. Even better, guess who initiated the power of sale proceedings, first against the daughter-in-law and then against MIL? The lawyer, of course. Do you think the judge missed that? No way. He noted that the lawyer was in conflict of interest when he commenced the power of sale proceedings and the action itself.
Consequences
The fall guy in this action was the lawyer who acted for everybody. He should have known that the situation called for independent legal advice, not so much as to inform MIL, but so as to protect the mortgagee and his own backside. We do not doubt that mortgagee no. 3 will be looking to him for the mortgage shortfall.
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NASTY ALLEGATIONS
It seems that judges are becoming more disposed to awarding substantial indemnity costs (formerly solicitor-client costs) if the losing party makes nasty allegations that it cannot prove. Can-Pick Marine Crane & Construction v. C. & R. Transmission Service, an unreported 2001 decision of the Ontario Superior Court of Justice is a case in point.
The allegation in this case was not even made in the pleadings. The defendant’s lawyer subsequently wrote to the plaintiff’s lawyer and notified him that the defendant would be raising evidence at trial “to the effect that the transmission currently in the crane is not the same transmission that the defendant worked on.”
Plaintiff Reacts
The plaintiff did not let that notice slip by. It made further enquiries and incurred significant expense to be able to meet this allegation at trial. Conversely, the defendant did no further investigation, other than to consult with an expert witness who never even inspected the transmission. The defendant never withdrew this warning; it also never cross-examined the plaintiff’s witnesses at trial on this matter.
Judge Reacts
The judge noted that the defendant’s contention was essentially that the plaintiff had switched the transmission, an allegation of dishonesty, and that the tenor of the trial switched as a result of that allegation. The judge held that the defendant never presented credible evidence in support of the allegation and made the allegation without proper investigation. The judge allowed solicitor and client costs from the date that the defendant made the allegation.