DISCLAIMER © Copyright: 2016 · equity of redemption and the foreclosure action. LEGAL AND...

DISCLAIMER: This publication is intended for EDUCATIONAL purposes only. The information contained

herein is subject to change with no notice, and while a great deal of care has been taken to provide accurate

and current information, UBC, their affiliates, authors, editors and staff (collectively, the "UBC Group") makes

no claims, representations, or warranties as to accuracy, completeness, usefulness or adequacy of any of

the information contained herein. Under no circumstances shall the UBC Group be liable for any losses or

damages whatsoever, whether in contract, tort or otherwise, from the use of, or reliance on, the information

contained herein. Further, the general principles and conclusions presented in this text are subject to local,

provincial, and federal laws and regulations, court cases, and any revisions of the same. This publication is

sold for educational purposes only and is not intended to provide, and does not constitute, legal, accounting,

or other professional advice. Professional advice should be consulted regarding every specific circumstance

before acting on the information presented in these materials.

© Copyright: 2016 by the UBC Real Estate Division, Sauder School of Business, The University of British

Columbia. Printed in Canada. ALL RIGHTS RESERVED. No part of this work covered by the copyright

hereon may be reproduced, transcribed, modified, distributed, republished, or used in any form or by any

means – graphic, electronic, or mechanical, including photocopying, recording, taping, web distribution, or

used in any information storage and retrieval system – without the prior written permission of the publisher.

©Copyright 2016 by the UBC Real Estate Division

INTRODUCTION TO MORTGAGE LAW

C H A P T E R 1 5

Learning ObjectivesAfter studying this chapter, a student should be able to:

Explain the concept of a “mortgage”

Explain the difference between a legal mortgage and an equitable mortgage

Describe the implied and express terms of a mortgage

Explain the purpose of an acceleration, omnibus, and guarantor clause

Recognize and describe an interim blanket mortgage and a vendor take-back mortgage, and explain why each might be used

Differentiate between “mortgagee” and “mortgagor”

Understand the scope and effect of the federal Interest Act and be able to explain how it affects mortgages

Explain the scope and effect of relevant provincial legislation and how it affects mortgages

Explain how a lender assigns a mortgage, and the rights and obligations of the lender, the borrower, and the assignee

Explain how a mortgage can be assumed and what risks are involved

Apply the provisions of the Land Title Act to the issue of priorities between competing chargeholders

Describe the remedies available to a lender upon default by a borrower

Describe the steps involved in a foreclosure proceeding that ends in foreclosure or judicial sale and the rights of any parties involved

Describe an agreement for sale, and how it works when there is an existing mortgage


15.1Chapter 15 – Introduction to Mortgage Law

INTRODUCTION TO MORTGAGE LAW

Definition of a Mortgage

It is important to distinguish between the financial and legal aspects of a mortgage. In the chapters on mortgage finance, the emphasis is on the mortgage loan. Legally, however, a mortgage is not a loan. It is an interest in land created by contract as security for a loan made by a lender (the mortgagee) to the borrower (the mortgagor).

Although almost all mortgage agreements contain a promise to repay a debt, a mortgage is not a debt itself. It is evidence of a debt. More importantly it is a transfer of a legal or equitable interest in land on the condition that the interest will be returned when the terms of the mortgage contract are performed, usually upon repayment of the debt. A mortgage agreement usually transfers title of the borrower’s land to the lender. However, the transfer has a condition attached. If the borrower repays the loan, or performs some other obligation under the contract, the transfer becomes void or the lender must transfer the interest back to the borrower.

In almost all cases the obligation in a modern mortgage is the repayment of borrowed money. As a result, the relationship between parties to the mortgage is one of debtor and creditor. As you will see from Figure 15.1, the borrower is called the mortgagor and the lender is called the mortgagee. The mortgagor (borrower) grants the mortgage and receives the loan. The mortgagee (lender) receives the mortgage and grants the loan.

Historical Development

Mortgage law in Canada (except in Quebec) has its roots in the English feudal system of the 12th century A.D. In the early part of the English feudal period, the legal effect of a mortgage was to convey both the title to land and the possession of the land to the lender. This conveyance was absolute, subject only to the lender’s promise to reconvey the property to the borrower if the specified sum was repaid by the specified date. If the borrower failed to comply with the terms, the land became the lender’s and the borrower had no further claim to the property. Since the law at that time did not allow for an agreement to serve as security for a debt, the land and possession of it had to be transferred to the lender to provide the security.

There were two kinds of mortgage: a vivum vadium (live pledge), in which the income from the land was used by the lender to repay the debt, and the mortuum vadium (dead pledge), where the lender kept the income and the debtor had to raise funds elsewhere. The former was acceptable at law but the latter offended the prevailing laws against usury.

Common law and equity treated mortgages differently. The history of these two systems was discussed in the chapter on fundamentals of law. The common law courts took the view that a mortgage, like any other contract, had to be performed exactly according to its terms. This meant that if a borrower was even one day late in making a payment, the interest in land was forfeited to the lender and yet the borrower would remain liable for the debt.

mortgagea document evidencing a debt owed by the borrower (mortgagor) to the lender (mortgagee). Registration of the mortgage in the Land Title Office transfers the mortgagor’s interest in land to the mortgagee as security for the repayment of the debt

FIGURE 15.1: Parties to the Mortgage

LENDER BORROWER

• called a MORTGAGEE• provides loan to borrower• receives mortgage as security for the loan

• called a MORTGAGOR• obtains loan from lender• gives mortgage as security for loan

Essentials of a Mortgage

A mortgage is a conveyance of land ... as security for the payment of a debt or the discharge of some obligation for which it is given ... and the security is redeemable on the payment or discharge of such debt or obligation, any provision to the contrary notwithstanding....


15.2 Real Estate Trading Services – Licensing Course Manual

The courts of equity altered both the relationship of the parties to the mortgage contract and the remedies available. These courts recognized that the mortgage was only security for a loan. They therefore considered the lender’s right to be limited to interest on the loan and required the lender to make a full accounting for all income received from the land while in possession. As a result, there was no longer an advantage to be gained from actual possession of the land by the lender. Possession was of value only if the borrower did not honour the contract.

With this equitable development, the borrower had the right to possession of the land and to full use of the income from it to pay interest and to raise principal for debt repayment. The courts of equity also changed the rights of a borrower who did not repay on time through the development of the doctrine of the equity of redemption. This doctrine permits the borrower to repay the debt and regain the property even after the contractual date for repayment has passed.

The effect of the doctrine of the equity of redemption was to require that a lender, who would have legal title to the property on which the mortgage had been placed, would additionally have to apply to a court of equity for termination of the borrower’s equitable right to redeem the property, where the borrower was in default on the mortgage loan. The court would then set a time, usually six months, within which the

borrower had to pay the full amount owing. If the borrower did not make this payment on time, he or she would finally lose all interest in the property to the lender. The lender would then become the owner in fee simple and would be entitled to deal with the land in any way he or she saw fit. This action was the basis for what today is known as a foreclosure action, one of the remedies of a lender if the mortgage contract is not honoured. The current provisions for foreclosure will be discussed later in this chapter under remedies. As a result of the merger of the courts of law and equity, mortgage law in Canada retains both the doctrine of the equity of redemption and the foreclosure action.

LEGAL AND EQUITABLE MORTGAGES

In non-Torrens common law jurisdictions, the first mortgage granted against a property is the only “legal” mortgage. It is called a legal mortgage because it transfers legal title to the property from the borrower to the lender. However, the mortgage agreement will have a condition that the transfer will be void or that title will be transferred back to the borrower if the loan is repaid. This is referred to as the contractual right of redemp-tion. In other words, the borrower, under the contract, has the right to redeem title by repaying the loan. However, the borrower has another right of redemption. Even though he or she has transferred legal title to the property to the lender, the borrower retains an interest in land referred to as the equity of redemption. This interest gives the borrower the right to redeem the property even after the contractual right to redeem has been terminated.

Although the borrower has granted a mortgage, he or she still retains the right to deal with the mort-gaged property. However, any transaction concerning the mortgaged property is subject to the rights of the lender. Because a borrower still retains an equitable interest in land after granting a legal mortgage, the borrower is free to mortgage this equitable interest, by granting a second, or subsequent mortgage. These

subsequent mortgages are mortgages of the borrower’s equity of redemption and are therefore called “equitable” mortgages.

In BC, under the Torrens system of land title registration, all mortgages are regis-tered as charges against the title. The lender receives the right to have the legal title of the property conveyed to it in the event of default, subject to the equity of redemption. In BC therefore, the first registered mortgage will be like a legal mortgage, regardless of time of execution. The title, however, will continue to show the borrower as registered owner. Any subsequently registered mortgage will be an equitable mortgage charging the borrower’s equity of redemption.

A borrower will find it increasingly difficult to arrange subsequent mortgages, because each successive mortgage of the equity of redemption reduces the gap between the market value of the property and the total amount secured against the land. For this reason, second or subsequent mortgage loans will generally be for smaller amounts and bear higher rates of interest.

equity of redemptionthe mortgagor’s right to repay the mortgage

equitable mortgagethe transfer of equity in property as security for a debt. Technically, any mortgage registered on title subsequent to the first mortgage (i.e., second or third mortgage)



Equitable mortgages are created by the following methods: mortgage of the equity of redemption, by deposit of the duplicate Certificate of Title (or Title Deeds), by an agreement to give a mortgage, or by disguis-ing a mortgage as a transfer.

Mortgage of the Equity of Redemption

This type of equitable mortgage was discussed above. For example, if the owner of a property worth $75,000 grants a $50,000 mortgage, the borrower’s equity of redemption is still worth $25,000 at that time. Therefore, if the borrower wants to borrow more money on the same property, he or she can grant a second mortgage in respect of this remaining $25,000 interest, that is, a mortgage of the equity of redemption.

Deposit of the Duplicate Certificate of Title (or Title Deeds)

It was explained in the chapter on title registration that a fee simple owner of property which is free of any financial charges can apply to the registrar of the land title office for the duplicate certificate of title. This document can be used to create an equitable mortgage. This involves handing over to the lender the dupli-cate certificate of title. An example of this equitable mortgage occurs when a bank requires the duplicate certificate as collateral security for a demand loan. It is a simple means for taking temporary security. To be effective, there must be an actual delivery of the duplicate certificate as well as an intention of the parties to create a mortgage. If the documentation accompanying the duplicate certificate of title does not clearly express the intention to create an equitable mortgage, then a court may determine that the deposit is simply to keep the document safe or to ensure that the borrower doesn’t transfer or encumber title to the property (Royal Bank of Canada v. Mesa Estates Ltd.).

Section 33 of the Land Title Act prohibits registration of this type of equitable mortgage. This type of equitable mortgage is valid as between the parties, but because it cannot be registered, third parties are not affected by it. However, since a transfer or mortgage of the property will not be registered by the land title office without the duplicate certificate of title being returned, a lender does have some degree of security.

Agreement to Give a Mortgage

An agreement to grant a mortgage in the future is recognized as a present equitable mortgage. Also, a mortgage that is granted, but for procedural reasons is not registrable, is recognized as an equitable mortgage. In this case, the lender should file a caveat to protect its position until the document is in proper registrable form and registered on title. The mortgage must be one which is procedurally unregistrable (i.e., not in the required form), not one which is prohibited by statute. For example, an equitable mortgage by the deposit of the duplicate certificate of title cannot be registered. Therefore it cannot be protected by the filing of a caveat because one cannot do indirectly what cannot be done directly.

Example

Bob agrees to lend money to Chuck’s company if Chuck will grant a mortgage over his own home to secure the loan.

If Bob lends the money to Chuck’s company and Chuck refuses to sign a mortgage of his home, the court will enforce Chuck’s obligation to Bob (Bank of British Columbia v. Denenfeld). Until Chuck signs the legal mortgage, Bob has an equitable mortgage over Chuck’s home.

BOB

PROVIDES LOAN TO

GRANTS MORTGAGE TO

CHUCK’S COMPANY

CHUCK



Disguising a Mortgage as a Transfer

Under its equitable jurisdiction, a court can look beyond the form of an agreement to determine substance. An example of this was provided in the chapter dealing with residential and commercial tenancies where it was explained how a court may determine that what the parties have described as a licence is, in substance, a lease.

Sometimes a mortgage agreement is drawn up to appear as if it is transferring the estate in fee simple. This is done to circumvent the doctrine of the equity of redemption. If it is demonstrated that the main purpose of the transaction was to offer land as security for a loan, the court will find the arrangement to be a mortgage, and will recognize the equity of redemption.

In reviewing the facts of such a transaction, and which are based upon those of actual cases, a court would take into consideration the following relevant factors:

• the “sale price” is far below market value;• A, the “vendor”, is not required to give up possession of Whiteacre and gets to live there rent-free; and• the future sale proceeds will be shared with A, who on the face of the transaction would have no

continuing legal interest in Whiteacre.

Although this agreement is described as a transfer, in essence it is a mortgage. B is lending $25,000 to A in exchange for half the future sale price. If the court characterizes the transaction as a disguised mortgage, then A will have the right to redeem Whiteacre free and clear upon repaying B. A disguised form of mortgage usually involves a borrower and a non-institutional lender such as a friend or relative who wants to assist the borrower for personal reasons but wishes to avoid the formalities imposed by a mortgage.

IMPLIED TERMS OF A MORTGAGE

The Prohibition Against Clogging

There is one principle which is fundamental to mortgage law: a borrower cannot be prevented by the terms of the mortgage from eventually redeeming his or her property free from the conditions contained in the

mortgage. This is what is meant by the expression: “there shall be no clog on the equity of redemption”. The effect of this principle is to render invalid any term in a mortgage which might prevent the borrower from being able to redeem his or her legal title free and clear of all encumbrances, upon repayment of the loan. If a borrower repays the loan, he or she must be able to have title reconveyed in the same state as it was at the time of the making of the mortgage. Any term in a mortgage seeking to provide other-wise will be of no effect (the lender cannot enforce it).

The most common example of a clog on the equity of redemption is an option to purchase the property provided to the lender at the time the loan is negotiated. If the option were to be exercised by the lender, the borrower would be prevented from redeeming the property. Such an option is therefore void. However, an

Example

A owns Whiteacre, which has a market value of $100,000. A enters into an agreement with B under which A is described as “vendor” and B as “purchaser”. The sale price of Whiteacre is $25,000. Under the agreement, A can remain in her home on Whiteacre for her life, or until Whiteacre is sold. When Whiteacre is sold, A will receive half the sale price. No rent is to be charged to A.

Example

F transferred ownership of his lands to his two friends, S and R, for $805.50. This amount was used to pay off an existing mortgage which was being foreclosed and to pay off outstanding taxes. The transfer documents allowed F to remain on the lands rent-free and to have the lands transferred back to him if, within 3 years, he paid S and R $805.50 plus interest and reimbursed them for any taxes they paid as “owners”. The court held that it was the intention of S and R to prevent their friend from losing his lands through foreclosure and, while it appeared that the transaction was a sale of land, it was actually a mortgage to secure the cash advanced to pay off F’s existing mortgage.

encumbrancea judgment, mortgage or lien or any other claim which is registered against the title to land



option to purchase granted after the loan is negotiated and which is independent of the loan agreement, is enforceable as a separate transaction unrelated to the mortgage.

A term which makes the redemption date so distant as to result, in practical terms, in the mortgage not being redeemable (for example, 100 years) will also be void. However, a term which merely prohibits or restricts prepayment or prevents assumption of the mortgage does not constitute a clog on the equity of redemption and can be enforced.

Stipulations for a Collateral Advantage

Although a mortgage term cannot clog the borrower’s equity of redemption, it is common for mortgages to contain terms giving the lender advantages in addition to the security and interest payments. For example, the borrower who owns a gas station may promise that during the term of the mortgage he or she will purchase only the lender’s automobile products. Originally, all collateral advantages which extended past the redemption date of the mortgage were void, because a mortgage had to be redeemable free from all condi-tions and such terms were regarded as clogs on the borrower’s equity of redemption. For the same reason, a collateral advantage which lasted only for the term of the mortgage would not be a clog and would be enforceable. This was because the collateral advantage would cease on redemption.

As the law now stands, a collateral advantage which extends past the term of the mortgage will not be a clog, and can be enforced unless it is viewed as a penalty, or as being unfair and unconscionable.

Problems related to collateral advantages usually arise under product agreements, where a borrower is required to purchase products from the lender for long periods of time which do not necessarily coincide with the term of the mortgage. The validity of such agreements is no longer debated in terms of clogs or stipulations for collateral advantage. Instead, arguments are made on the basis of unreasonable restraint of trade. The present law seems to be that a lender can require a product agreement as part of the mortgage arrangement if it is reasonable between the parties. If the terms are unduly restrictive they may be void as being unreasonable restraints of trade.

EXPRESS TERMS OF A MORTGAGE

An analysis of some of the basic clauses contained in most mortgages is set out below. It should be empha-sized, however, that the wording varies and the types of clauses may be changed to conform to the particular type of security mortgaged. The following discussion is an attempt to set out some of the most common provi-sions used in BC and to discuss their legal effect. When reading the basic clauses remember that the lender is called “the mortgagee” and the borrower is called “the mortgagor”.

Land Title Act

The Land Title Act was amended in early 1990, and one of the changes made was the adoption of a two-page, two-part mortgage document (see Legal Documents at the end of these materials) which is now the only mortgage document the land title offices will accept for registration. Part 1 of the document is in a prescribed form referred to as the “Form B” and contains the parties, the legal description, the signatures of the parties and their witnesses, and other specified information and terms. Part 2 contains all the other terms of the mortgage, which may be the new standard form prescribed by regulation under the Land Title Act, a set of the lender’s own standard terms which the lender has filed with the land title office, or express terms included in the mortgage document in Part 2 or an appendix to Part 2.

For the purposes of any particular new mortgage, a lender may modify any term contained in a set of standard terms filed by the lender by filling in a particular part of the mortgage document.

Example

A borrower agreed to sell its products to the lender for a period of 5 years. After two years the borrower repaid the mortgage loan and argued that it had no further obligation to continue to sell its products to the lender. In court this collateral advantage was held to be valid and enforceable and the borrowers were found to be bound by the contract to continue to supply their goods.



Where a set of standard mortgage terms is used in a mortgage, the borrower must receive, at or before the time the mortgage is signed by the borrower, an exact copy of the standard terms together with any modified terms included in the document. The lender must obtain an acknowledgement from the borrower that he or she has received these standard terms and modifications. Unless such delivery is made and acknowledge-ment obtained, the mortgage will take effect as though the parties had used the set of standard mortgage terms prescribed in the Land Title Act regardless of the fact that these may differ substantially from the terms actually intended to be used by the parties.

Land Transfer Form Act, Part 3

At the top of some formal mortgage documents is the phrase “in pursuance of the Land Transfer Form Act”. Where a mortgage of land is made pursuant to this Act, the use of certain words imports an expanded wording so that the mortgage document contains certain short, standard provisions, but has the legal effect of much longer and more complicated provisions. This makes the mortgage agreement much shorter and simpler. Therefore, the person drafting the mortgage can choose a provision from Column 1 of the Act, and it will be interpreted as if it said what is set out in Column 2. The Act provides that any changes made in the short forms of Column 1 will be deemed to have a corresponding change to the longer form of Column 2. There are pitfalls involved in changing the short forms which could void the amended clause, and the practice is to rewrite the clause in full if a change is to be made to the mortgage document. We will first consider the short forms set out in Column 1 and then clauses sometimes used in addition to, or in place of, the short forms.

Column 1 of Land Transfer Form Act, Part 3

When the borrower fulfils his or her obligation to repay the loan as described, the mortgage will be void and the lender will be bound to reconvey the legal interest (or equitable interest in the equity of redemption) to the borrower.

As you will note from the corresponding entry from Column 2 of the Act which appears below, the short form keeps the terms significantly easier to understand, and we will not refer to the longer version in the remainder of this chapter.

Section 1, from Column 2 of the Land Transfer Form Act, Part 3

1. Provided always and these presents are upon this express condition, that if the said mortgagor, his heirs, executors, administrators, or assigns, or any of them, do and shall well and truly pay or cause to be paid unto the said mortgagee, his executors, administrators, or assigns, the just and full sum [amount of princi-pal money] of lawful money of Canada, with interest thereof at the rate of [rate of interest] per centum per annum, on the days and times and in manner following, that is to say: [terms of payment of principal and interest], without any deduction, defalcation, or abatement out of the same for or in respect of any taxes, rates, levies, charges, rents, assessments, statute labour, or other impositions whatsoever already rated, charged, assessed, or imposed, or hereafter to be related, charged, assessed, or imposed by authority of Parliament or of the Legislative Assembly, or otherwise howsoever, on the said land and tenements, heredit-aments, and premises, with the appurtenances, or on the said mortgagee, his heirs, executors, administrators, or assigns, in respect to the said premises, or of the said money or interest, or any other matter or thing relating to these presents, and until such default as aforesaid shall and will well and truly pay, do, and perform or cause or procure to be paid, done, and performed all matters and things in this proviso hereinbefore set forth, then these presents, and everything in the same contained, shall be abso-lutely null and void; but nothing in this proviso or these presents shall make the mortgagor, his heirs, executors, administrators, or assigns, liable to pay the mortgagee, his heirs, executors, administrators, or assigns, any tax, rate, or charge imposed upon the mortgagee, his heirs, executors, administrators, or assigns, in respect of the income derived by him or them in respect of the mortgage money or in respect of the devolution of the interest of the said mortgagee in the said land or mortgage money.

All the covenants made by the borrower in the mortgage document will be binding upon the borrower and his or her heirs, executors and administrators. This is the case whether the legal interest (or equitable interest in the equity of redemption) is held by the lender, its heirs, executors, administrators or assigns.

1. “Provided: This mortgage to be void on payment of [dollars] of lawful money of Canada, with interest at %, as follows: [terms of payment of principal and interest] and taxes and performance of statute labour.”

2. “The mortgagor covenants with the mortgagee.”



This covenant is the personal covenant of the borrower. This is a personal contractual promise, and there-fore does not run with the land. It is important to understand that the mortgage agreement provides the lender with two types of security. First, the lender obtains the borrower’s promise to repay, known as the personal covenant. Second, the lender receives the security of the land. In the event of default, the lender can sue the borrower on the personal covenant, foreclose against the land, or both. The lender, in some circumstances, can sue the borrower on his or her personal covenant even though the borrower has sold the property to someone else who assumed the mortgage. Sometimes the borrower does not want to have any personal liability under the mortgage, so a special term is inserted and the transaction is called a “non-recourse mortgage”. This would require an amendment to the above clause. In that case the lender will only have a remedy against the property in case of default.

Here the borrower confirms that he or she is the owner in fee simple and therefore has all the rights and powers of such an owner.

This is the essence of the security for the loan. By granting the mortgage, the borrower transfers the legal interest or part of the equity of redemption to the lender. The lender has the interest in the land and the borrower has possession. However, on default, the borrower agrees to deliver possession to the lender subject to any encumbrances shown in the mortgage document (see clause 10). Where it is an equitable second mortgage, the document will state that the mortgage is subject to the first mortgage.

In the event of default, the borrower promises to do all that is necessary to permit the lender to obtain title to the property.

Under our land title system, this covenant is unnecessary. The certificate of title is kept at the particular land title office. Furthermore, the duplicate certificate must be deposited in the land title office before the mortgage will be accepted for registration.

The borrower sets out in the mortgage any charges which have priority over the mortgage. Otherwise, the lender expects to receive a first mortgage of the fee simple free from prior encumbrances.

This covenant is normally not used in practice because it is not broad enough to protect the lender’s interest. A substitute clause is set out later.

4. “That the mortgagor has a good title in fee simple to the land.”

5. “And that he has the right to convey the land to the mortgagee.”

6. “And that on default the mortgagee shall have possession of the land.”

7. “Free from all encumbrances.”

8. “And that the said mortgagor will execute further assurances of the land as may be requisite.”

9. “And also that the mortgagor will produce the title deeds enumerated hereunder and allow copies to be made at the expense of the mortgagee.”

10. “And that the mortgagor has done nothing to encumber the land.”

11. “And that the mortgagor will insure the buildings on the land to the amount of not less than currency.”

3. “That the mortgagor will pay the mortgage money and interest, and observe the above proviso.”



The borrower gives up any claims he or she may have against the lender with respect to the mortgaged property, except the right to demand that the lender reconvey the property to him or her when the mortgage loan is repaid.

Often, this clause is written with a one month default and provides for 30 days notice. The remedy of posses-sion and sale is discussed in detail later in this chapter.

You will recall that the right of distress allows a person to seize goods in satisfaction of a debt. This clause is normally not included in a residential mortgage because obligations imposed by various statutes on the party who distrains have made it an ineffective remedy.

This is known as an acceleration clause. This particular clause is generally not used and another acceleration clause is substituted (see below). The courts have held that even though a substituted acceleration clause is inserted, that clause will be read with the long form of Column 2 unless it is expressly excluded. If the long form is not excluded, the borrower can go to court for relief against acceleration.

At common law the lender was entitled to possession of the land. This is clearly not the intent of the parties in today’s mortgage transaction. The above clause simply reflects the intent of the parties.

Sample Substituted or Additional Mortgage Clauses

The following are some of the substantial clauses commonly used instead of certain standard clauses contained in Column 1.

Repayment Clause

In the repayment clause above, note that the full amount outstanding is due and payable on a fixed date after the loan is made. It is common in residential mortgages to calculate the (monthly) payment which will repay the principal amount over twenty, twenty-five or thirty years. This is called the amortization period. However, the term of the loan is typically five years or less. This means that after making five years of payments, the

13. “Provided that the mortgagee, on default of payment for month(s), may on notice enter on and lease or sell the land.”

14. “Provided that the mortgagee may distrain for arrears of interest.”

15. “Provided that in default of the payment of the interest hereby secured, or taxes as hereinbefore provided, the principal hereby secured becomes payable.”

acceleration clausea term in the contract which brings the maturity date of the loan forward if the borrower defaults, so that the outstanding balance is immediately due and payable

16. “Provided that until default of payment, the mortgagor shall have quiet possession of the land.”

The principal sum of dollars, together with interest at the rate aforesaid shall be payable in equal consecutive monthly instalments in the amount of dollars each, commencing on the day of , 20 , and continuing on the day of , 20 , and the balance of principal outstanding on the last mentioned date, together with accrued interest, shall then become due and payable. Each of the monthly payments when received shall be applied firstly in payment of interest calculated at the rate aforesaid, and secondly in reduction of the principal sum. Interest shall accrue as well after as before maturity and both before and after default and instalments of principal and interest in arrears shall bear interest at the rate aforesaid, which interest shall be payable forthwith as it accrues, without notice or demand.

12. “And the mortgagor releases to the mortgagee all his claims on the land subject to the proviso.”



borrower must pay out the balance still owing, re-negotiate with the lender at the then current rate of interest, or change lenders. Because of fluctuating interest rates in today’s market many institutions offer six month, one, two or three-year terms as well.

Acceleration on Default

Note that the above acceleration clause operates at the option of the lender so that the borrower cannot compel the lender to act under it simply by failing to make payments or defaulting in some other way. The lender would not want a clause which forced it to act. For example, if a mortgage was at an interest rate of 15%, and the market rate was 9%, the lender would not want the mortgage to accelerate automatically on default. If it did, the lender would lose a good investment because it would not be possible to receive 15% on money in the current market.

A court will not always permit acceleration where the borrower can explain the default and can satisfy the court that he or she is willing and able to fulfil his or her obligations. Section 25 of the Law and Equity Act gives the court discretion to grant relief against acceleration clauses. However, under section 28 the court can only grant such relief once where the same party and the same covenant is involved.

Omnibus Clause

This clause gives the lender an alternative to accelerating the loan if the borrower defaults. It could be used where property taxes are unpaid but the mortgage is otherwise in good standing, or where the borrower is only in default under a prior mortgage.

Insurance

This is a wider clause than clause 11 in the short form of mortgage.

The principal and interest secured hereby shall become due and payable forthwith, at the option of the mortgagee in each of the following events:

(a) default in payment of principal or interest due under this mortgage;(b) default in payment of monies payable by the mortgagor under charges in priority to this mortgage, or for taxes, or for

insurance premiums; (c) the mortgagor or those claiming under him commit any act of waste or in any other way cause or permit the value of the

land to diminish.

In default of any payment of monies to be made by the mortgagor under the provision of this mortgage, the mortgagee may pay the same and the amount so paid shall forthwith be added to the principal hereby secured, carrying interest at the said rate and shall be payable to the mortgagee forthwith.

Example

Joe is a lender secured by a second mortgage registered against John’s property. Joe discovers that John has not paid his property taxes, and has defaulted on two payments under the first mortgage. To protect his security, Joe pays the taxes and the two mortgage payments and adds them to the amount John owes him under the second mortgage. Joe has several possible reasons for doing this. First, he may be receiving an interest rate that is much higher than he could get elsewhere. Second, the value of the property may be much higher than the total amount of the mortgages. Third, Joe may know that John is only having temporary financial problems that do not make him a continuing risk as a debtor.

The mortgagor will insure the buildings on the said lands to the amount of their replacement value or, if the mortgagee so elects, such lesser amounts as the mortgagee may determine, in Canadian currency; the mortgagee shall have a lien in the amount secured hereby against all insurance on the said buildings; in any event, the mortgagee shall not be liable for any failure to insure the buildings, the non-payment of premiums on any policy, or any loss arising out of any defect in any policy or failure of any insurer to indemnify for any loss; forthwith in the event of any loss or damage by fire, and at the expense of the mortgagor, the mortgagor will furnish all proofs and to do all acts necessary to enable the mortgagee to obtain payment of the insurance monies under such insurance.



Repairs

This clause sometimes provides that the borrower cannot make any alterations or improvements to the property without the lender’s consent. The purpose of this clause is to make sure that the value of the lender’s security is maintained.

Fixtures

In an earlier chapter we considered the problem of whether or not items placed on the property were to be considered chattels, or fixtures that had become part of the property. The purpose of this clause is to remove any doubt about the items named in it.

Lender’s Remedies

This gives the lender complete discretion in deciding the most suitable remedy if the borrower defaults.

Advances

For example, where part of the money has been advanced and then a builder’s lien is filed against the property, the lender will require the lien to be removed before advancing further funds.

Costs

It is customary for the borrower to pay all legal and registration costs. This clause also provides that in the event the lender has to commence an action in the courts to enforce the mortgage, his or her court costs will be on a solicitor-client basis, which provides for higher court costs than are normally recoverable. Court costs were explained in Chapter 1.

Charges in Priority

Again, this is to protect the lender’s security position, because it requires the borrower to keep prior charges in good standing, and to pay taxes, etc.

The mortgagor will keep the land and the buildings thereof in good condition and repair, and he will not abandon or commit waste upon the same.

As between the parties hereto, all heating, refrigeration, gas, electric, plumbing, cooling and air conditioning equipment and apparatus, and all wall-to-wall carpets, awnings and blinds upon or hereafter placed upon or installed in the land shall be deemed to be fixtures and comprised in the freehold whether or not attached to the land.

The mortgagee shall not be required to realize upon or enforce any security collateral to this mortgage before enforcing the security granted hereby, any rule of law or in equity notwithstanding.

The mortgagee shall not be bound for any reason whatsoever to advance any part of the money intended to be secured hereby.

The mortgagor shall pay to the mortgagee upon request all costs, charges and expenses of and incidental to:

(i) the preparation, execution and registration of this mortgage; and(ii) all proceedings taken by the mortgagee to enforce this mortgage or the mortgagee’s remedies under it.

All such costs, expenses and charges shall be determined and paid on a solicitor and client basis. In the event of non-payment of the said costs, expenses and charges within thirty (30) days of such request, the amount thereof shall be deemed to constitute principal under this mortgage and shall bear interest at the said rate and be paid forthwith.

The mortgagor shall pay as and when due all monies payable under charges in priority to this mortgage and observe and perform all the terms, provisos, covenants and conditions in the encumbrances prior hereto; and the mortgagor will duly pay all taxes, levies and assessments whatsoever affecting the land and all premiums for insurance effected pursuant to this mortgage.



Strata Titles Clause

As explained in the chapter on condominiums, the Strata Property Act provides that a lender can obtain the right to vote at meetings of the strata corporation on matters relating to insurance, maintenance, finance or other matters affecting the security of the mortgage. The lender must give notice to the strata corporation and the borrower of its intention to vote at a meeting before it can do so.

In addition, the lender will want the right, but not the obligation, to pay any assessments to the strata corporation not paid by the borrower.

Guarantor

This clause is used to create a separate personal covenant of a third party in addition to the borrower’s personal covenant to pay. This gives the lender additional security.

Indemnity

This clause is unenforceable although it is found in many mortgages. It demands an additional three months’ interest where the lender has had to recover the loan after default. However, section 8(1) of the federal Interest Act provides that the rate of interest on arrears cannot be greater than the rate under the mortgage when it is not in arrears. This legislation is discussed in greater detail below. As a result, a court will not enforce this clause.

Sales Clause

This clause effectively prevents the mortgage from being assumed by anyone unacceptable to the lender. If a mortgage does not contain this, or a similar clause, the mortgage will be assumable. A variation on this clause might provide that the mortgage is assumable only where the lender gives written approval prior to the sale.

(a) The mortgagor will duly observe all the provisions of the Strata Property Act and the bylaws of the strata corporation of which he is a member by reason of being owner of the land, or part thereof, and will duly pay all levies made by the said corporation in respect thereof and perform all his duties as an owner and member; and

(b) the mortgagor hereby assigns to and confers on the mortgagee the right to exercise the mortgagor’s power to vote on all matters as an owner and member of the said corporation.

The guarantor, in consideration of payment by the mortgagee to the mortgagor of any part of the monies to be secured hereby, covenants and agrees with the mortgagee as follows:

(a) to duly pay to the mortgagee the monies hereby secured;

(b) to be bound by and duly perform and observe each and every covenant and proviso herein by the mortgagor agreed to be performed and observed; and

(c) that the guarantor’s liability hereunder shall not be affected by any partial release of this mortgage or of any or all collateral or other securities held by the mortgagee or by the extension of time for payment, or the taking of any note or other obligation for payment of the monies hereby secured, or any indulgence to the mortgagor or any act whatsoever done either with or without notice to the guarantor.

guarantorone who becomes contingently or secondarily liable for another’s debt or performance

In case default be made and the mortgage moneys be recovered or payment be obtained before maturity by action or by any other remedy or means, or in case of sale, the mortgagee may collect and retain, whether out of the proceeds of sale or otherwise, an amount equal to three months’ interest at the rate aforesaid upon the capital so recovered by way of indemnity.

In the event that the Mortgagor sells, agrees to sell or otherwise disposes of the said lands, the full amount then owing of the principal and interest secured hereby shall become due and payable forthwith, at the option of the Mortgagee.



Portability

This clause allows a borrower to take his or her current mortgage to a new home thus allowing the borrower to maintain his or her current favourable interest rate. If additional money is required by the borrower, the lender usually allows for a blended rate combining the “old” loan amount at its rate of interest with the “new” loan amount at current interest rates.

SPECIAL TYPES OF MORTGAGES

Interim Blanket Mortgage

This type of mortgage is commonly used in condominium developments or subdivisions. In order to initially raise money for the project, a mortgage is placed on the whole development. However, the developer/borrower will want to release this mortgage from the individual strata lots or subdivision lots as they are purchased. Therefore, the blanket mortgage will contain a clause which permits the mortgage to be released from each individual lot as it is purchased, but keeps the security over the rest of the project. Of course the purchase price or part of it is paid to the lender. The following clause is typical:

For example, where a development involves strata lots 1 to 10, and a mortgage of $100,000 is placed over the development, the developer can pay the $10,000 purchase price of strata lot 2 to the lender and obtain a partial discharge of the mortgage. Therefore, the purchaser of strata lot 2 obtains title free of the mortgage, and the lender still has a mortgage over the remaining nine lots.

Vendor “Take Back” Mortgage

A vendor “take back” mortgage involves the seller “taking back” a mortgage for part of the sale price of the property.

A vendor “take back” mortgage and a conventional mortgage are very similar, except that the mortgage funds are not advanced by the vendor under a “take back” mortgage. Rather, the vendor and purchaser agree to defer payment of a specified portion of the purchase price, according to the terms of the “take back” mortgage.

Vendor financing may be used where the purchaser does not qualify for financing through a conven-tional lender such as a bank or trust company or because the vendor is willing to give a lower interest rate on the mortgage than will a conventional lender. Unlike conventional mortgages, which are limited by statute to 80% of the property value (or a maximum of 95% if the mortgage is insured), there is no such restriction with

If the mortgagor repays the mortgage money in connection with a genuine sale of the property to a person with whom the mortgagor deals at arm’s length and completes the purchase of a new residence within sixty days of repaying the mortgage money, the mortgagee will, on application by the mortgagor, provide financing for the purchase of the new residence on the security of a mortgage (the “New Mortgage”) on such residence, on the following basis...

When the land...is converted into strata lots...so long as the Mortgagor is not in default...the Mortgagor shall...be entitled to the release or discharge of this mortgage...from any of such strata lots sold in bona fide arm’s length sales, upon payment...of a sum equal to the greater of:

(a) The selling price of each strata lot after deduction of...commissions paid to licensed real estate agents...; or(b) “X” dollars per square foot for each such strata lot for which a discharge is requested PROVIDED

THAT no more than “Y” percent of the strata lots...shall be released or discharged...until such time as all monies owing hereunder have been paid in full.

Example

Laura is nearing retirement and wishes to sell her home to buy a small condominium. Her home is worth $150,000 and she has clear title. She only requires $50,000 to purchase the condominium she wants. Instead of accepting $150,000 cash for her house, Laura agrees to accept $50,000 and asks the purchaser to give her a mortgage of $100,000. Laura therefore gets the cash she needs, and “lends” part of the price to the purchaser, “taking back” a mortgage in exchange. The fee simple title is registered in the name of the purchaser, with a mortgage in favour of Laura registered against it.

vendor take-back mortgagea mortgage taken back by the vendor from the purchaser to facilitate a sale, whereby the vendor becomes the mortgagee and the purchaser becomes the mortgagor



Portability

This clause allows a borrower to take his or her current mortgage to a new home thus allowing the borrower to maintain his or her current favourable interest rate. If additional money is required by the borrower, the lender usually allows for a blended rate combining the “old” loan amount at its rate of interest with the “new” loan amount at current interest rates.

SPECIAL TYPES OF MORTGAGES

Interim Blanket Mortgage

This type of mortgage is commonly used in condominium developments or subdivisions. In order to initially raise money for the project, a mortgage is placed on the whole development. However, the developer/borrower will want to release this mortgage from the individual strata lots or subdivision lots as they are purchased. Therefore, the blanket mortgage will contain a clause which permits the mortgage to be released from each individual lot as it is purchased, but keeps the security over the rest of the project. Of course the purchase price or part of it is paid to the lender. The following clause is typical:

For example, where a development involves strata lots 1 to 10, and a mortgage of $100,000 is placed over the development, the developer can pay the $10,000 purchase price of strata lot 2 to the lender and obtain a partial discharge of the mortgage. Therefore, the purchaser of strata lot 2 obtains title free of the mortgage, and the lender still has a mortgage over the remaining nine lots.

Vendor “Take Back” Mortgage

A vendor “take back” mortgage involves the seller “taking back” a mortgage for part of the sale price of the property.

A vendor “take back” mortgage and a conventional mortgage are very similar, except that the mortgage funds are not advanced by the vendor under a “take back” mortgage. Rather, the vendor and purchaser agree to defer payment of a specified portion of the purchase price, according to the terms of the “take back” mortgage.

Vendor financing may be used where the purchaser does not qualify for financing through a conven-tional lender such as a bank or trust company or because the vendor is willing to give a lower interest rate on the mortgage than will a conventional lender. Unlike conventional mortgages, which are limited by statute to 80% of the property value (or a maximum of 95% if the mortgage is insured), there is no such restriction with

If the mortgagor repays the mortgage money in connection with a genuine sale of the property to a person with whom the mortgagor deals at arm’s length and completes the purchase of a new residence within sixty days of repaying the mortgage money, the mortgagee will, on application by the mortgagor, provide financing for the purchase of the new residence on the security of a mortgage (the “New Mortgage”) on such residence, on the following basis...

When the land...is converted into strata lots...so long as the Mortgagor is not in default...the Mortgagor shall...be entitled to the release or discharge of this mortgage...from any of such strata lots sold in bona fide arm’s length sales, upon payment...of a sum equal to the greater of:

(a) The selling price of each strata lot after deduction of...commissions paid to licensed real estate agents...; or(b) “X” dollars per square foot for each such strata lot for which a discharge is requested PROVIDED

THAT no more than “Y” percent of the strata lots...shall be released or discharged...until such time as all monies owing hereunder have been paid in full.

Example

Laura is nearing retirement and wishes to sell her home to buy a small condominium. Her home is worth $150,000 and she has clear title. She only requires $50,000 to purchase the condominium she wants. Instead of accepting $150,000 cash for her house, Laura agrees to accept $50,000 and asks the purchaser to give her a mortgage of $100,000. Laura therefore gets the cash she needs, and “lends” part of the price to the purchaser, “taking back” a mortgage in exchange. The fee simple title is registered in the name of the purchaser, with a mortgage in favour of Laura registered against it.

vendor take-back mortgagea mortgage taken back by the vendor from the purchaser to facilitate a sale, whereby the vendor becomes the mortgagee and the purchaser becomes the mortgagor

private vendor financing. Also, the purchaser (borrower) may not have to pay certain fees for arranging the mortgage (such as appraisal, survey or administrative expenses) if the mortgage is given by the vendor of the property instead of by a financial institution.

On the other hand, a seller may be willing to “take back” a mortgage on the property rather than receive cash for the full price if he or she will receive a higher rate of interest on the mortgage than if the money were invested in a savings account. The property may also sell faster if low rate financing is available, since a larger group of potential buyers will be able to afford the lower mortgage payments. However, buyers will usually pay more for a property with lower rate financing. In the next chapter, the method of calculating the market (or cash) value of an offer using a vendor “take-back” mortgage will be shown.

There are a number of important issues which may arise with vendor financing of which a licensee must be aware. When the licensee is acting for the vendor, the licensee must protect the vendor’s best interests. Specifically, the licensee must ensure that the vendor receives a fair price for his or her property, and that the vendor receives adequate security for the “loan”. The true market value of an offer which involves the vendor “taking back” a mortgage at an interest rate lower than the current market rate must be calculated and disclosed to the vendor.

If an offer states that the purchaser will arrange a first mortgage on terms “to be arranged”, and requires the vendor to “take back” a second mortgage, a vendor should be advised not to accept. If the terms of the first mortgage have not been set, it is possible that the purchaser will arrange a first mortgage representing such a large portion of the value of the property that the vendor will be unsecured for all or part of his or her mortgage.

Another offer may show the purchaser making a down payment of $20,000, for example, with the balance to be financed by a first mortgage loan from an institutional lender. However, the purchaser then seeks to make a secondary agreement with the vendor in which the vendor agrees to refund all or part of the down payment to the purchaser, and take back a second mortgage in its place. This allows the purchaser to buy using little or no cash. The arrangement is probably a criminal act as far as the first mortgage lender is concerned because no real down payment is being made and yet the sale contract presented to the first mortgage lender indicates there is one. Such an arrangement may be dangerous as far as the vendor is concerned, because if the property value drops, the purchaser may just walk away from his or her obligations under both mortgages. If the licensee suspects the existence of such an agreement, his or her duty is to advise the vendor of the dangers involved.

Reverse Annuity Mortgage (RAM)

In a reverse annuity mortgage, the lender makes a series of payments or advances to the borrower over the term of this mortgage. At the end of the loan term or upon the death of the borrower, the loan balance, consisting of the accumulated principal advances and the interest due, is repaid by refinancing, by sale of the property, or from the proceeds of the borrower’s estate. This inno-vative mortgage has been introduced in Canada as a means of supplementing aged homeowners’ income, typically upon retirement. The arrangement allows the borrower to keep their home for a period of time while subsidizing a low retirement income.

The Real Estate Council of British Columbia has cancelled a licence in circumstances where the licensee had:

• been a party to the preparation of an offer which provided for a vendor take-back second mortgage in a situation where the total of the 1st and 2nd mortgages would exceed the purchase price of the property, thereby leaving the vendor under-secured; and

• misrepresented the actual purchase price to the prospective 1st mortgagee.

(see: In the matter of a Hearing before the Real Estate Council held January 9, 1979)

ALERT!

reverse annuity mortgagean innovative loan arrangement in which the lender makes periodic payments to the borrower during the loan term. At the end of the term, the borrower will have to repay the balance owing by refinancing or selling the property



Wrap-Around Mortgages

Wrap-around mortgages were a creative form of providing additional financing where an existing mortgage encumbered property. It allowed a borrower to obtain additional funds at a rate below the market rate for such funds. This was achieved by means of a clause in the second mortgage agreement which directed the first mortgage payments, in addition to the wrap funds payments, to the wrap lender, who would then control payment to the first mortgagee.

These mortgages have restricted use in Canada, as a result of legal decisions limiting their function. However, Appendix 15.1 contains a description of this form of mortgage financing.

FEDERAL LEGISLATION OVER MORTGAGES

Interest Act

The federal Interest Act imposes no limit on the rate of interest which can be charged in a mortgage transac-tion. However, a rate of interest can be attacked under provincial legislation if it is oppressive or unconscio-nable, or under the federal Criminal Code if it constitutes a criminal rate of interest. Both of these restrictions are discussed below. Under section 3 of the Interest Act, if a document does not mention interest, no interest can be charged. Further, if a document requires interest to be paid but the rate is not set out, then the rate allowed by law is 5% per annum.

A mortgage can require either payments of principal with interest to be calculated and paid separately, or “blended” payments of principal and interest. Blended payments are those payments which do not separate the interest portion from the principal portion. Where a mortgage requires blended payments, sections 6 and 7 of the Interest Act apply. The purpose of these provisions is to provide the borrower with an interest rate he or she can understand and compare. Section 6 requires that the mortgage document contains a statement of the interest rate calculated either “yearly or half-yearly not in advance”. This requirement is more commonly expressed in practice as “annually or semi-annually”. If the mortgage document does not contain the required statement, no interest can be charged. Further, section 7 provides that where the rate in the required state-ment is lower than the rate in the repayment clause, only the lower rate can be collected.

The required statement may be worded as follows:

These sections have been interpreted somewhat liberally. The Interest Act will be complied with as long as the mortgage contains all of the information required by the Act, even though the above statement is not included. In addition, recent cases indicate that payments will not be considered “blended” unless the portions of principal and interest in the payments specified are so mixed that they cannot be readily discerned. Note that if a mortgage merely requires interest at a set rate per annum, it will be assumed that it is to be calculated yearly, not in advance.

Sometimes the lender requests a “bonus” when negotiating a mortgage. For example, the lender may agree to a mortgage which has a face-value of $100,000, but only $90,000 is advanced to the borrower. The borrower must still repay $100,000. The $10,000 difference is called a bonus. Is this considered interest? The case law indicates that the amount of the bonus becomes part of the principal sum and is not “interest” for the purposes of section 6 of the Act.

Section 8 deals with the payment of interest on arrears. If the mortgage does not require interest at a set rate after maturity or default, the lender can only collect interest at the rate of 5%. Compound interest (i.e., “interest on interest”) can be collected only if the mortgage expressly provides for it. Finally, the interest rate on arrears cannot be greater than the regular rate payable on the principal. It is this restriction which makes indemnity clauses unenforceable.

Section 10 is concerned with the right of an individual borrower to prepay his or her mortgage. Generally, any right of prepayment is a contractual matter governed by the specific agreement between the

wrap-around mortgagea second mortgage, registered on title, which includes a prior existing mortgage. It may be written for an amount equal to the outstanding balance of the first mortgage or may also add additional funds for a larger loan balance than currently exists. Payments under the new mortgage include the payments under the original mortgage and the new mortgagee undertakes the responsibilities as mortgagor under the original mortgage

For the purposes of the Interest Act it is declared that the principal sum hereby secured is $ and the rate of interest charged thereon is percent per annum calculated half-yearly not in advance.



borrower and the lender. However, where the criteria necessary for section 10 to apply are met it is possible for a borrower to tender prepayment. Section 10 applies in the following circumstances:

• the borrower is an individual; and• the mortgage provides that it is not payable for more than five years from the date of the mortgage.

Where these requirements are fulfilled, it is possible at any time after the expiry of five years from the date of the mortgage for the borrower to tender payment of all principal and interest outstanding plus an additional three months’ interest in lieu of notice. After this tender, no further interest may be charged by the lender. Therefore, the lender is unlikely to refuse such a tender from a borrower since no further interest could be charged.

Where a mortgage is renewed and the date of the mortgage is changed from the original date to the date of the renewal, then the renewal will have to exceed five years for section 10 to apply and the five year waiting period for prepayment will also run from the date of the renewal. If on the other hand, the term of the mortgage is extended and the date remains the original date, then for the purposes of section 10 the borrower will have the right to prepay at anytime after five years from the original date.

There is no requirement that the property mortgaged be residential; the important requirement is that the borrower must be an individual. Limited corporations (and joint-stock companies) have always been prevented from relying on section 10 of the Interest Act. Since January 1, 2012, partnerships, unlimited liability corporations and trusts settled for business or commercial purposes are also expressly prohibited from benefitting from this right of prepayment. However, these entities may still use section 10 to prepay a mortgage that was granted before 2012 if the other requirements of the Act are met.

The Criminal Code

Interest Rate

Under the Criminal Code it is an offence for a person or corporation to enter into an agreement to receive interest at a criminal rate, which is defined as an effective annual rate of over sixty percent. This provision applies to all types of loans of any amount.

Mortgage Fraud

The Criminal Code contains various prohibitions against theft or fraud related to mortgage transactions. For example:

• Section 331 makes it an offence for a person who acts under a power of attorney for the mortgage of property to fraudulently use the proceeds of a mortgage loan for an unauthorized purpose;

• Section 385 makes it an indictable offence for the agent of a seller to fraudulently conceal certain title information, including mortgage information, to induce a purchaser or lender to accept the title offered; and

Example

In 1980, Alexandra grants a mortgage due to mature in 1985 with no right of prepayment. In 1985, Alexandra signs a renewal agreement which extends the agreement for a further 5 years until 1990, and provides that the date of the mortgage be deemed to be changed from 1980 to 1985. In 1986, Alexandra receives an inheritance and wants to pay out the mortgage. However, even though the mortgage has been in existence for 6 years, section 10 does not operate to allow Alexandra to prepay. This is because the date was changed from 1980 to 1985 when the renewal was made and so the waiting period under section 10 begins to run in 1985. Alexandra is locked in for the whole of the renewal term because it is 5 years, the same as the waiting period under section 10.

Example

Quin grants a mortgage in 1980 for a 5 year term with no right of prepayment. In 1985, Quin negotiates an extension to the mortgage for a further 5 years, maturing in 1990. The date remains the same. In 1986, Quin wins the lottery and wants to pay out the mortgage. Will section 10 apply? Yes, Quin can prepay. 6 years have elapsed since the date of the mortgage (which remained the same when the mortgage was extended), and therefore Quin is entitled to tender payment in full along with the 3 months’ interest in lieu of notice to the lender. After making that tender the lender is prohibited from charging any more interest.



• Section 387 makes it an indictable offence for a person who knows about an unregistered mortgage to fraudulently sell the property. The section does not define the word “fraudulently” nor specify in what circumstances the sale of a property with an unregistered mortgage would violate this provision.

R. v. Frebold illustrates the criminal liability of a licensee who participates in mortgage crime. The client was an overseas investor who purchased a commercial building in BC. The client formed a company to hold and operate the building and engaged the licensee to manage the property. The client gave the licensee a power of attorney to carry out activities for the client’s company in connection with the building.

On behalf of the client’s company, the licensee took out a mortgage of $1.725 million dollars on the property. Without the client’s knowledge or consent, the licensee used $672,000 of the mortgage proceeds to lend money to the licensee’s own company. When the licensee sent a copy of the mortgage by fax to his client in Germany, the licensee altered the document to show the amount as $1.053 million dollars, being $672,000 less than the actual amount of the mortgage. A jury convicted the licensee of fraud and forgery contrary to the Criminal Code. The court sentenced the licensee to 30 months imprisonment.

PROVINCIAL LEGISLATION OVER MORTGAGES

Business Practices and Consumer Protection Act

Eight of the provinces (Manitoba and Saskatchewan being the exceptions) have statutory provisions dealing with interest rates, including interest rates in mortgage transactions. These provisions allow a court to inter-vene where, having regard to the risk and to all the circumstances, the cost of the loan is excessive and the transaction is harsh and unconscionable. BC has gone one step further and allowed the courts to give relief where the transaction is “so harsh or adverse...as to be inequitable”, as well as in the above situation.

In the other two provinces the provisions allow the court to intervene where the cost of the loan is exces-sive or if the transaction is harsh and unconscionable.

Once the court has the power to intervene, it can, in effect, rewrite the whole transaction. This can include varying the amount owing, ordering repayment of money already received or revising the terms of security already provided. The factors the courts will consider are:

• the amount of risk borne by the lender and the potential profit. A high rate of interest alone is not decisive;

• whether the lender has met its responsibility to make sure that the borrower fully understands the terms and effect of the transaction;

• how “desperate” the borrower was. The lender seems to have the problem of finding out how much the borrower needs the funds. The courts have held that the more the borrower needs the money the more likely he or she will be given relief; and

• whether the borrower could have obtained similar financing elsewhere and what interest rates would have been charged.

Part 5 of the Business Practices and Consumer Protection Act (the “Act”), came into force on July 1, 2006, and requires that disclosure be given by mortgage brokers and lenders to individuals who borrow for primarily personal, family, or household purposes, regardless of whether the broker or lender is charging additional fees or expenses.

Part 5 requires that a Disclosure Statement, Notice or Statement of Account must be given to the borrower:

• two days prior to the borrower incurring an obligation under a credit agreement, unless the two-day period is waived;

• once every 12 months if the interest rate is floating;

• within 30 days of any one percent or greater increase in the interest rate for credit agreements with fixed interest rates subject to change;

• within 30 days of the borrower missing a payment or a default charge being imposed by the lender if the outstanding principal changes as a result of the default and the total amount of the payments which the borrower is scheduled to make over a payment period does not cover the interest that will accrue in the payment period;



• within 30 days after an amendment to the credit agreement;

• within 21 days prior to the end of a mortgage term, if the mortgage is being renewed; and

• every month if the loan is for open credit.

The Act does not contain prescribed disclosure forms, notices or statements of account. It does however, prescribe required content in sections 84 to 92 of the Act. The Act and other information is available on the FICOM website at www.fic.gov.bc.ca.

Although the above summary is not exhaustive, it gives some indication of how the courts might inter-pret these statutes. Clearly, the responsibility of the lender to take precautions is becoming greater as the law regarding consumer protection expands.

Mortgage Brokers Legislation

Most provinces have legislation to regulate persons who deal in mortgages within the province. The British Columbia Mortgage Brokers Act defines a mortgage broker as a person:

• who carries on the business of lending money which is completely or partially secured by mortgages. It does not matter whether the money is the broker’s own or someone else’s;

• represents him or herself as a mortgage broker, for example, by an advertisement or sign;• who carries on the business of buying and selling mortgages or agreements for sale;• who receives at least one thousand dollars per year in fees for arranging mortgages for other people;• who makes at least ten mortgage loans in a year; or• who carries on a business of collecting money secured by mortgages.

A sub-mortgage broker is like a representative in some ways. He or she is the person who does any of the things that a mortgage broker does and is employed by a mortgage broker or is a director or a partner of a mortgage broker. Mortgage brokers and sub-mortgage brokers must be registered in the mortgage broker register, maintained by the provincial Registrar of Mortgage Brokers.

There are some exemptions from the registration requirements. These include:

• insurers licensed under the Insurance Act;• banks under the Bank Act (Canada);• credit unions;• trust companies;• a lawyer, if the loan transaction is made in the course of practice as a lawyer;• any person acting for Her Majesty or for an agency of the Crown;• a liquidator, receiver, trustee in bankruptcy, or a person acting under the authority of any court

or an executor or trustee acting under the terms of a will or marriage settlement while acting as mortgage brokers or sub-mortgage brokers under their proper names;

• a person lending money, directly or indirectly, on the security of land to provide housing for employees; or

• any other people who are exempted by the registrar.

The registrar has the power to investigate any complaints regarding a breach of the Act including criminal fraud. The registrar’s powers of investigation are wide and allow him or her to enter, inspect all books of account and other records and seize any relevant information. Authority is also given to freeze the trust funds of any mortgage broker pending the outcome of an investigation. A bond can be required from each broker. A mortgage broker who breaches the Act can have his or her registration suspended or cancelled. The broker can also be required to pay a fine or be imprisoned, or both. Finally, an innocent party may take action against the broker to enforce any common law rights he or she may have.

Environmental Legislation and Mortgage Loan Application Procedures

The Environmental Management Act (which replaced the old Waste Management Act in 2005) creates an exemption from remediation liability for lenders who act primarily to protect their security interests. Prior to this legislation, lenders had identified several concerns associated with existing contaminated sites provisions



in the Waste Management Act. One such concern was the broad language used, which caused lenders to fear that they may be held liable for remediation of contaminated sites simply on account of exercising their rights as lenders. Another concern surrounded the uncertainty over what constituted a “contaminated site” and “remediation”. This produced a high degree of risk for lenders evaluating a borrower’s financial viability. As well, lenders had concerns that they may be unfairly called upon to contribute financially to remediation which was made necessary by the actions of others.

The Environmental Management Act provides that a secured creditor (lender) is not liable if he or she:

• participates only in purely financial matters related to the site;

• has the capacity or ability to influence any operation at the contaminated site in a manner that would have the effect of causing or increasing contamination, but does not exercise that capacity or ability in such a manner as to cause or increase contamination;

• imposes requirements on any person, if the requirements do not have a reasonable probability of causing or increasing contamination at the site (for example, lenders are allowed to insist on environmental conditions within a security agreement); or

• appoints a person to inspect or investigate a contaminated site to determine future steps or actions that the secured creditor might take.

However, there are two instances when lenders can become liable for remediation. The first is where they exercise control over or impose requirements which cause a site to become contaminated. The Contaminated Sites Regulation clarifies that certain types of control, including undertaking realization proceedings, do not attract liability. The second situation which can attract liability for remediation is where lenders become the registered owner of contaminated property, for example, as the result of foreclosure where the lender obtains an order absolute (discussed later). However, this exposure to liability ends once the lender disposes of the property.

If a lender takes possession of property as a result of foreclosure proceedings, the lender (through its receiver) must also provide a site profile to the Director of Waste Management within ten days of taking control of the property. However, this requirement only applies if the property was used for an industrial or commercial purpose listed in the Contaminated Sites Regulation. There are also other exemptions contained in the Regulation. Site profiles provide the director with the necessary information to determine if further steps should be taken, such as ordering a site investigation or issuing a remediation order for the property. The Contaminated Sites Regulation also provides guidance for receivers and trustees in bankruptcy.

Under the legislation, a director of waste management is authorized to issue an approval in principle for a remediation plan. Lenders may benefit from approvals in principle by requiring loan applicants to obtain such approval. This provides a degree of certainty that the borrower has obtained approval for a remedia-tion plan, and all that remains is satisfactory implementation of the plan. A director of waste management may issue a certificate of compliance for sites where remediation has met the numerical standards provided in the Contaminated Sites Regulation. The British Columbia Ministry of Environment will continue to allow for onsite management of contaminants, provided these contaminants are managed according to acceptable risk-based standards. A director may issue a conditional certificate of compliance where a risk assessment and environmental impact assessment document acceptable long-term human health and environmental impacts and show that on-site risk-based standards can be met.

The legislative framework provides greater certainty and fairness to all contaminated sites stakehold-ers. For lenders and their agents, the clarity brought by the amendments to liability issues is particularly important as it changes the loan application procedures used by banks and other financial institutions when considering whether to lend money to current or prospective owners of commercial or industrial property. The institutions may take advantage of the more transparent legislative rules to determine if the properties might be contaminated enough to attract liability for remediation.

ASSIGNMENT OF THE MORTGAGE

The concept of assignment of rights under a contract was introduced in the chapter dealing with the law of contracts. The lender can assign its interest in the land without the consent of, or prior notice to, the borrower. After the assignment has taken place, and written notice of the assignment has been given to the borrower by the assignee, the assignee of the debt is then entitled to enforce the lender’s rights directly against the borrower.

assignto transfer over to another (e.g., “I assign all right, title and interest in Blackacre to my wife, Elaine”)



in the Waste Management Act. One such concern was the broad language used, which caused lenders to fear that they may be held liable for remediation of contaminated sites simply on account of exercising their rights as lenders. Another concern surrounded the uncertainty over what constituted a “contaminated site” and “remediation”. This produced a high degree of risk for lenders evaluating a borrower’s financial viability. As well, lenders had concerns that they may be unfairly called upon to contribute financially to remediation which was made necessary by the actions of others.

The Environmental Management Act provides that a secured creditor (lender) is not liable if he or she:

• participates only in purely financial matters related to the site;

• has the capacity or ability to influence any operation at the contaminated site in a manner that would have the effect of causing or increasing contamination, but does not exercise that capacity or ability in such a manner as to cause or increase contamination;

• imposes requirements on any person, if the requirements do not have a reasonable probability of causing or increasing contamination at the site (for example, lenders are allowed to insist on environmental conditions within a security agreement); or

• appoints a person to inspect or investigate a contaminated site to determine future steps or actions that the secured creditor might take.

However, there are two instances when lenders can become liable for remediation. The first is where they exercise control over or impose requirements which cause a site to become contaminated. The Contaminated Sites Regulation clarifies that certain types of control, including undertaking realization proceedings, do not attract liability. The second situation which can attract liability for remediation is where lenders become the registered owner of contaminated property, for example, as the result of foreclosure where the lender obtains an order absolute (discussed later). However, this exposure to liability ends once the lender disposes of the property.

If a lender takes possession of property as a result of foreclosure proceedings, the lender (through its receiver) must also provide a site profile to the Director of Waste Management within ten days of taking control of the property. However, this requirement only applies if the property was used for an industrial or commercial purpose listed in the Contaminated Sites Regulation. There are also other exemptions contained in the Regulation. Site profiles provide the director with the necessary information to determine if further steps should be taken, such as ordering a site investigation or issuing a remediation order for the property. The Contaminated Sites Regulation also provides guidance for receivers and trustees in bankruptcy.

Under the legislation, a director of waste management is authorized to issue an approval in principle for a remediation plan. Lenders may benefit from approvals in principle by requiring loan applicants to obtain such approval. This provides a degree of certainty that the borrower has obtained approval for a remedia-tion plan, and all that remains is satisfactory implementation of the plan. A director of waste management may issue a certificate of compliance for sites where remediation has met the numerical standards provided in the Contaminated Sites Regulation. The British Columbia Ministry of Environment will continue to allow for onsite management of contaminants, provided these contaminants are managed according to acceptable risk-based standards. A director may issue a conditional certificate of compliance where a risk assessment and environmental impact assessment document acceptable long-term human health and environmental impacts and show that on-site risk-based standards can be met.

The legislative framework provides greater certainty and fairness to all contaminated sites stakehold-ers. For lenders and their agents, the clarity brought by the amendments to liability issues is particularly important as it changes the loan application procedures used by banks and other financial institutions when considering whether to lend money to current or prospective owners of commercial or industrial property. The institutions may take advantage of the more transparent legislative rules to determine if the properties might be contaminated enough to attract liability for remediation.

ASSIGNMENT OF THE MORTGAGE

The concept of assignment of rights under a contract was introduced in the chapter dealing with the law of contracts. The lender can assign its interest in the land without the consent of, or prior notice to, the borrower. After the assignment has taken place, and written notice of the assignment has been given to the borrower by the assignee, the assignee of the debt is then entitled to enforce the lender’s rights directly against the borrower.

assignto transfer over to another (e.g., “I assign all right, title and interest in Blackacre to my wife, Elaine”)

The assignee takes his or her interest subject to the state of the mortgage account between the original parties. As a result, if no money had been advanced by the lender to the borrower, the assignee would take subject to that state of accounts and would not be able to sue the borrower on the personal covenant. The assignee would have no rights against a borrower in these circum-stances. Therefore, an assignee should always find out from the borrower the amount owing on any mortgage he or she is considering buying and, if possible, have the borrower joined as a party to the assignment.

The borrower must receive notice of the assignment because the assignee’s right to sue the borrower depends upon whether notice has been given. The notice is the event which “freezes” the state of the accounts between the borrower and the lender and obliges the borrower to make payment to the assignee.

It is the actual state of accounts between the borrower and the lender that is relevant in determining an assignee’s rights against a borrower. It does not matter how much may appear to be owing under a registered mortgage. There is an exception to this rule, however, which is that when the borrower has, by conduct or statements, represented certain facts about the mortgage account to the assignee, the borrower will not subse-quently be allowed to deny the truth of those facts.

The assignee also takes subject to any right of set-off which the borrower has against the lender at the time he or she receives notice of the assignment. For example, where a portion of the borrower’s monthly payment is paid to cover future taxes, and the actual tax bill is lower than the amount paid, the borrower may be entitled to “set-off ” the overpayment from the next payment, even after receiving a notice of assignment.

Unless the lender fraudulently misrepresents the balance due on the mortgage, the lender will not be liable to the assignee if the borrower fails to repay the debt. If the assignee wants to obtain that type of protec-tion, he or she must require the lender to guarantee the payment of the debt. If the lender agreed to be a guarantor, the assignee could then sue the lender if the borrower did not pay. A sample guarantor clause in a mortgage was presented earlier in the chapter. At common law, a guarantor’s liability is removed if the assignee makes a material alteration in the terms of the mortgage, for example, giving the borrower an exten-sion of time. Note that the sample clause expressly changes this rule. This is a common practice.

ASSUMPTION OF THE MORTGAGE

Continuing Liability of the Original Borrower

Many lending institutions offer mortgages which can be assumed by future purchas-ers, with or without qualification. These assumable mortgages are attractive to many purchasers. However, recent court decisions have made it clear that the original borrower may remain liable on the personal covenant if the purchaser who assumes the mortgage defaults on his or her payment. Sometimes the original borrower may not be advised of defaults in payment until long after they occur.

Example

On January 1, E, a mortgage lender, assigns a mortgage worth $2,000 to A. No notice is given to the borrower, M. On February 1, M pays E $1,000 on the mortgage. If on February 2, M receives notice of the assignment from A, M will only be liable to A for $1,000 even though as between A and E the date of the assignment was January 1. A, of course, can sue E for the $1,000. On the other hand, if after receiving the notice of assignment from A on January 15, M paid E $1,000 on February 1, M would still be liable to A for the full $2,000. M, of course, could attempt to recover the $1,000 paid to E, but that payment to E would not affect M’s liability to A.

Example

E obtains and registers a mortgage in the amount of $3,000 against the property of M. However, E has not yet advanced any money. If M confirms the $3,000 debt to A, a potential assignee, (when, in fact, M owes nothing), M will be prevented from later denying the representation. If A takes an assignment on the strength of M’s representation, M will be liable to A for the $3,000.

assumable mortgagea mortgage that allows a purchaser to assume or take over the responsibilities and liabilities under the mortgage from the vendor



It is important for vendors to understand the risks of allowing a purchaser to assume a mortgage. Special caution is necessary where the purchaser is a limited liability company, which may have no assets, or where the purchase involves a revenue-producing property but the purchaser has no independent source of income from which to make payments.

When a borrower transfers his or her interest in a property to a purchaser who assumes the mortgage, the borrower will usually require the purchaser to sign an agreement promising to make all the necessary payments to the lender. In addition, the purchaser will usually promise to reimburse the borrower if the lender starts a court action against the borrower on his or her personal covenant. Even without such an agree-ment, the Property Law Act will imply these promises unless the parties specifically exclude them in their agreement. However, even though the purchaser signs the agreement, the liability of the original borrower on his or her personal covenant may continue. If the purchaser defaults, the promise to reimburse the borrower is worth very little if the purchaser has no money.

Direct Action by a Lender Against a Current Owner

Under contract law principles (the doctrine of privity of contract) it would not be possible for a lender to sue a purchaser who assumes a vendor’s mortgage under the covenant to pay contained in the mortgage. This is because the purchaser assuming the mortgage was not a party to the original agreement, which therefore cannot be enforced against him or her.

However, the Property Law Act provides for the right of a lender to maintain a direct action against a purchaser who has assumed the mortgage or taken over a vendor’s interest under an agreement for sale. This right is available to all lenders, regardless of the purpose of the loan (i.e., it does not matter if the loan is for a residential or other purpose). This means that where a vendor sells property subject to a mortgage which is assumed by the purchaser, if the purchaser defaults, the lender is allowed to sue the purchaser directly to recover the debt just as if the purchaser were a party to the mortgage between the lender and the vendor (original borrower). This direct action is available where the purchaser is obligated to indemnify the vendor.

Limitation of a Vendor’s Liability Under the Property Law Act

The Property Law Act limits the vendor’s liability to the lender where the vendor sells property subject to a mortgage or an agreement for sale to a purchaser who assumes the vendor’s mortgage or to whom the vendor’s interest under an agreement for sale is transferred.

There are restrictions to the application of the Property Law Act protection. In the first place, the loan (either the mortgage or the agreement for sale) must be for a “residential purpose”. This means the loan must be either:

• to acquire the residence;• to make improvements to the residence;• to make expenditures for a household or family purpose; or• to refinance for one of the above three purposes.

Example

Bob buys a house and grants a mortgage to Elaine to finance the purchase. Bob later sells the house to Whitney who assumes Bob’s mortgage. Subsequently Whitney defaults under the mortgage. At common law, Elaine would be unable to sue Whitney. However, the Property Law Act changes that rule and allows Elaine to sue Whitney directly as if Whitney were a party to the original mortgage contract between Elaine and Bob.

Example

A purchases Whiteacre for $100,000 and finances the purchase by means of a mortgage of $90,000 with a 2 year term. The lender agrees that the $90,000 mortgage can be assumed by any future purchaser. Later, A sells Whiteacre to B, who agrees to assume the mortgage. The lender is advised that B has assumed the mortgage. Six months later, B becomes unemployed and defaults on the mortgage payments. A year later, after giving B numerous extensions, the lender starts court proceedings to recover the debt. The amount outstanding on the mortgage is now $120,000 as a result of the delays, accrual of interest, etc. Whiteacre’s value is now $90,000 because of a decline in prices. The property is sold by judicial sale, and after commission, taxes, etc., are paid, the lender is still owed $40,000. The court gives the lender judgment against A for $40,000.



If the purpose of the loan for which the property is security is not for one of the above four purposes then the Property Law Act protection will not be available. For example, if a businesswoman were to borrow money for the purposes of her business and used her house as security by way of a mortgage, she would not be able to claim the Property Law Act protection if she sells the house to a purchaser who assumes the mortgage.

The Property Law Act limits the continuing liability of a vendor under a mortgage or agreement of sale in the following circumstances:

• Where the term of the mortgage has expired and the lender does not make a demand for payment within 3 months of the expiry then the assignor of the mortgage or agreement for sale will no longer be liable under the mortgage or agreement for sale;

• Where the mortgage assumed or agreement for sale transferred is payable upon demand, then if the lender doesn’t demand payment from the vendor within 3 months of receiving notice of the assump-tion of mortgage or transfer of agreement for sale, the vendor’s liability will be extinguished; and

• Where a lender expressly approves a purchaser’s assumption of the mortgage or agreement for sale then the vendor’s liability will cease, subject to the following requirements:

◦ the approval must be in writing and the request for it must be made within 3 months of the transfer; and

◦ the lender is entitled to reasonable financial information about the purchaser and may claim reasonable expenses for obtaining a credit report and handling costs.

Where the above requirements have been met, the lender is not allowed to withhold its approval unreason-ably. If a lender does unreasonably refuse to approve a purchaser, the vendor may seek a court order approv-ing the purchaser and extinguishing the vendor’s personal liability.

Clearly, the third option is going to be the one most desirable from a vendor’s point of view. Upon selling a residential property subject to a mortgage or agreement for sale, the vendor is going to want to be released immediately from any continuing liability in respect of a property which he or she no longer owns.

A licensee should be aware of the risks posed when a purchaser assumes a vendor’s mortgage or agree-ment for sale and should make the vendor aware of them also. Since the licensee will usually be the person who drafts the contract of purchase and sale (and will be liable if it is done negligently), where an assumption is involved the licensee must draw the contract of purchase and sale so as to adequately protect the vendor.

Example

In September 1985, Betty mortgages her house as a means of financing its purchase. The mortgage term is 5 years terminating in August 1990. In 1988, Betty sells her house to Amanda who assumes Betty’s mortgage. By December 1990, if the lender has not demanded that Betty pay the amount outstanding, Betty’s liability under the mortgage will be extinguished.

Where a buyer intends to assume the seller’s mortgage, a licensee may choose to include in the contract of purchase and sale a clause similar to the following:

ASSUMPTION OF EXISTING MORTGAGE CLAUSE

The sum of approximately $ (amount A) by way of cash down payment.

The Buyer will assume all obligations under the existing (rank) mortgage held by (name of lender) with an outstanding balance of approximately $ (amount B) at an interest rate of % per annum calculated (select either half-yearly or monthly) not in advance, with a “balance due” term date of (date) with blended payments of $ (payment amount) per month including principal and interest (plus 1/12 of the annual taxes, if required by mortgagee).

NOTE: Amounts (A) and (B) must equal total purchase price.

Subject to the mortgagee approving the Buyer in writing by (date) , thereby releasing the Seller from liability under Section 24 of the Property Law Act.

This condition is for the benefit of both the Buyer and the Seller.

Source: Professional Standards Manual, online: The Real Estate Council of British Columbia. www.recbc.ca/licensee/psm.html

As a Licensee...



NOVATION AND IMPAIRMENT OF THE SECURITY

Apart from situations in which a borrower can rely on the Property Law Act to extinguish continuing liabil-ity to a lender, there are other circumstances in which a borrower will be released. One of these is where a novation occurs. With a novation, the original borrower will be released from further liability. The doctrine of novation applies to any type of mortgage or agreement for sale so its scope is broader than the Property Law Act sections which are limited to residential mortgages or agreements for sale. A novation is the substitution of one contract for another. In the context of assumptions of mortgages or agreements for sale, this means that the original contract between the lender and the vendor is replaced by a new contract between the lender and the purchaser. Where a lender approved the assumption and subsequently enters into a renewal of the mortgage with the purchaser a court will be likely to find that a novation has occurred, releasing the original borrower, the vendor, from any further liability under the mortgage.

Another way in which a borrower will be released from liability occurs when the lender does something which prevents the lender from being able to restore the property in its original state to the borrower upon the borrower repaying the mortgage debt. This is referred to as impairing the security.

PRIORITIES

Competing Mortgages

An issue can arise as to which mortgage document is the “first mortgage” and which is the “second mortgage”. In BC, priority depends upon order of registration in the land title office.

The date the contract is made is not the important date. This same principle of priority will apply to a third or subsequent mortgage. However, there is one exception. Where a mortgage document expressly states that it is subject to another mortgage, the other mortgage will have priority even if registered later in time. Most second or third mortgages will have such a clause. Which mortgage has priority is very important to the lender, because the higher priority a mortgage has, the better security it provides.

Redeem Up, Foreclose Down

Refer to the interests set out in Figure 15.2. Note that Blackacre has a fair market value of $100,000. The regis-tered owner has received loans of $50,000, $25,000, $10,000 and $5,000, each secured by a mortgage.

Foreclosure by the First Mortgage Lender

If you refer to the title search at Legal Documents.4 at the end of the text, you will see that it is similar to Figure 15.2, although the borrower’s name is placed at the top as “owner” of the fee simple interest. To under-stand mortgage priorities, it is better to place the borrower at the bottom of the list as in Figure 15.2. The

person with first priority is the first mortgage lender. If the payments on the first mortgage are not made, the first mortgage lender has the right to foreclose. If the first mortgage lender is granted an order absolute of foreclosure by the court, he or she “forecloses,” or removes from the title, all interests which rank below the first mortgage. Foreclosure by the first mortgage lender would not occur in this particu-lar case (where the value exceeds the total mortgage secured) because one of the other mortgage lenders or the borrower would ask the court to have the property sold and have the proceeds of the sale divided among them.

Example

A obtains a loan on January 1st from B and grants B a mortgage as security. On January 2nd, A obtains a second loan from C and grants C a mortgage on the same property. If C applies in the land title office to register the mortgage before B does, C will become the first mortgagee and B will hold the second mortgage.

foreclosureA legal action taken by a mortgagee to obtain possession of a property, by reason of the mortgagor’s default in payment of the principal and/or interest of the mortgage debt



Foreclosure by the Fourth Mortgage Lender

If payments on the fourth mortgage are not made, the result is a little different. The only person the fourth mortgage lender can foreclose is the borrower. This is because only the borrower has lower priority than the fourth mortgage lender in this example. The first, second and third mortgage lenders are not concerned about a foreclosure by the fourth. If the fourth mortgage lender obtains an order of foreclosure, he removes the borrower from the title and therefore becomes the fee simple owner, subject to the first, second and third mortgages. Again, it is unlikely that this would happen in this case because there is some equity in the property. The borrower could probably raise the amount owing on the fourth mortgage from another lender and pay it out. A new fourth mortgage charge would replace the old one on title to Blackacre.

Redemption by the Borrower

In most cases, the borrower will make the required payments. Once the borrower pays the amount owing on the fourth mortgage, he or she can redeem it. The fourth mortgage lender will provide a discharge of the mortgage, which can be registered in the land title office. The discharge removes the mortgage from the title. Note that the mortgage in favour of Ella Laing on the first example of a title search at Legal Documents.4 has been discharged (cancelled). The borrower can then redeem the third, second and first mortgages. Once all mortgages are paid out, the borrower will have redeemed the legal title to Blackacre free and clear of all charges.

FUTURE ADVANCES

Description

Often a registered first mortgage provides that future advances will be made by the lender over a period of time. For example, where a builder is constructing a house on a lot, he or she may wish to borrow $100,000 to do so. The builder would secure this loan by a mortgage registered against the lot. However, since the builder does not need the money all at once, and does not want to pay interest on any part of the loan that is not necessary, he or she can negotiate a mortgage with a running account. In this case, the face value of the mortgage will be $100,000, but the mortgage money will be advanced in stages: for example, $25,000 immediately; $25,000 after the foundation is in; $25,000 when the frame is completed; and $25,000 after the occupancy permit is issued. Note that this system also protects the lender, because it requires the project to progress at a set rate, which protects its security.

Priorities

Because having first priority is important, the first mortgage lender who has agreed to make future advances must be sure to maintain its priority respecting those further advances.

Type of Mortgage Amount of Loan Interest Held in Land

LEGAL $50,000 first mortgage The right to the legal title to Blackacre as security for the loan

EQUITABLE $25,000 second mortgage The right to redeem first mortgage (equitable interest)

EQUITABLE $10,000 third mortgage The right to redeem second mortgage (equitable interest)

EQUITABLE $5,000 fourth mortgage The right to redeem third mortgage (equitable interest)

N/A N/A Owner of equity of redemption (value of approx. $10,000)

FIGURE 15.2: Mortgage on Blackacre with Market Value of $100,000

Example

ABC Loan Company has agreed to lend Better Builders Co. $100,000 in exchange for a mortgage on Better Builders’ lot. Better Builders plans to build a small commercial building on the lot and needs the $100,000 to finance the project. ABC agrees to 4 equal instalments of $25,000. On the day ABC registers as first mortgagee, it advances $25,000. A month later, XYZ Ltd. registers as second mortgagee, having loaned Better Builders $15,000. Two months after that, it is time for ABC Ltd. to advance the next $25,000. If ABC advances the money, does it have priority over XYZ for the full $50,000 or only for $25,000?



The answer is that a first mortgage lender keeps its priority in three cases:

• if it has received no written notice of the second mortgage;

• if its mortgage agreement contractually requires it to make the future advance. Remember that most standard mortgages do not do this. There is usually a clause stating that the lender has no obligation to advance any money; or

• if it has received a “priority” or “postponement” agreement from the second mortgage lender. In practice, this is the most common approach. A new mortgage is drawn for the total of the balance owing under the existing first mortgage plus the amount of the new advance, with the second mortgage lender joining as a third party agreeing to give the new mortgage priority over its subse-quent mortgage.

The first option needs some explanation. If the second mortgage lender gives written notice to the first mortgage lender when the second mortgage is registered, the first lender loses priority with respect to any subsequent advances. Oral notice is not sufficient. Therefore, in the above example, if XYZ had given written notice to ABC, unless ABC was contractually obligated to pay the second instalment, ABC would not have priority for the full $50,000.

Statutory Priorities

A first mortgage lender can lose its priority over certain other charges even though they were registered against the title after the mortgage. Some examples are discussed below.

Builders Lien Act. Every province has legislation which allows the filing of builders’ liens by workmen. In BC, persons who have worked on or supplied material for improvements on the land have this right. In relation to mortgages and advances thereunder, the Builders Lien Act gives priority to the lien as of the date the lien is filed in the land title office. The lien claimant therefore has priority over any advances made by a registered mortgage lender after that date. As a result, a lender should not make any advances under a mortgage until it has checked to see if any builders’ liens have been filed against the property in the land title office.

Employment Standards Act. This Act sets minimum employment requirements in BC for businesses under provincial jurisdiction. Borrowers who are employers are subject to this legislation. The director of employ-ment standards has the power under the Act to issue a certificate to any employee who has wages owing from an employer. The director can have the certificate filed in the Supreme Court Registry. Once filed, the certificate can be enforced like a judgment or order of the court. Therefore, it can be registered in the land title office against any land owned by the employer.

The Act provides that unpaid wages constitute a lien, charge and secured debt in favour of the director of employment standards, dating from the time that the wages were earned, against all the real and personal property of the employer (including money due to the employer from any source). This lien has priority over all liens, judgments, charges or any other claims or rights including those of the Crown. There is an excep-tion. Money advanced under a mortgage registered in the land title office before the certificate is registered will have priority over the wage claim. However, any money advanced under the mortgage after the certificate was registered in the land title office will lose priority.

LENDERS’ REMEDIES

Foreclosure

Description. This remedy was introduced briefly above in the discussion on competing mortgages. The purpose of a foreclosure proceeding is to extinguish the borrower’s equitable right to redeem. Because the borrower has defaulted, the legal or contractual right to redeem is already extinguished. Refer to Figure 15.3 for the usual or standard procedure for a foreclosure.

In BC, foreclosure proceedings are commenced by a document called a petition. The petition is filed in the Supreme Court and must be served on all respondents. The lender is the petitioner and the respondents are those whose “interest or claim to the mortgaged property is sought to be extinguished”. All persons whose interests appear below the petitioner’s on title at the time the action is commenced will be respondents.

Lenders have an obligation under the Residential Tenancy Act to name the residential tenant(s), if any, as a party in the foreclosure proceedings. Generally speaking, provided that this is done, a lender will be able



to obtain an order for vacant possession of the property once it is sold, meaning that the tenant(s) will be required to vacate the premises, even if the tenancy agreement stipulates a later expiry date.

Remedies Available. The remedies usually claimed in a foreclosure action are as follows:

• an accounting of all monies owing under the mortgage; The registrar of the Supreme Court will review the mortgage agreement and evidence of payments, and will determine the amount owing under the mortgage. The registrar will also provide the amount by which the debt is increasing each day. This will allow the borrower to repay the mortgage at any time during the redemption period.

• judgment on any personal covenants in the mortgage for the amount found to be due;The original borrower may be liable on his or her personal covenant even if the property has been sold. Judgment may also be obtained against any guarantors, or any new purchasers of the property if they are liable under the Property Law Act.

• in default of payment, foreclosure of the respondents’ interests in the mortgaged land;The effect of foreclosure is to extinguish the rights of all respondents. Remember, the petitioner has priority over the interests of all the respondents. Persons whose interests are prior to the petitioner’s cannot be affected by the petitioner’s action, and do not appear as respondents.

• the appointment of a receiver;If the mortgaged property has been abandoned or contains a commercial operation, (e.g., an apart-ment building, or a single family residence used as revenue property by the borrower), a receiver may be requested. The receiver’s job is to collect the rents, pay the bills, and generally keep the business going. The receiver is accountable to the court for his or her actions and the receiver’s fee will be added to the amount outstanding under the mortgage.

• possession of the property; The borrower will be required to vacate. If he or she refuses, a writ of possession can be obtained.

• certificate of pending litigation;In the chapter on title registration, this type of notice was mentioned in reference to the discussion of caveats. A certificate of pending litigation can be registered in the land title office to indicate that legal action is pending against the property. A certificate of pending litigation is normally filed at the time the petition is filed.

• costs of the action;Court costs were explained in the chapter on fundamentals of law.

• Order Nisi; At the first court appearance, the judge will grant the order nisi. The order nisi will grant the relevant remedies outlined above, and will fix the length of time before the final order of foreclosure will be granted and within which any of the respondents can redeem the mortgage by paying into court the amount found to be due and owing. This period of time is referred to as the redemption period. Normally, this period will be six months, but it may vary according to the circumstances.

• Order Absolute; If payment of the amount found due by the registrar is not made within the time set for redemption, the petitioner may apply to court for an order absolute. This order declares that the respondents are foreclosed of any right, title, or interest in the mortgaged property and it directs them to deliver up possession of the property to the petitioner.

Once the petitioner has been granted the order absolute, he or she can apply for a certificate of indefeasible title in his or her name at the land title office. Once this is done, the petitioner is free to deal with the property as his or her own. If the petitioner later sells the land, there is no requirement to account to the borrower for any money received or any profit which might be realized in excess of the mortgage debt.

When a petitioner has received an order absolute of foreclosure he or she may not then sue the borrower on the borrower’s personal covenant. This means that if a petitioner elects to foreclose on the property, any short-fall between the property’s value and the mortgage debt cannot be recovered from the borrower. The only



way a petitioner can sue on the judgment in those circumstances is if the court, in its discretion, orders the order absolute to be reopened. If a petitioner has disposed of the property after obtaining the order absolute, the court will not reopen the order. This is because the petitioner must be in a position to restore the property to the borrower upon repayment of the debt (which the petitioner is not, if the property has been sold to the third party). In the unusual event that the order absolute is reopened, the borrower’s right to redeem is revived and a new period for redemption will be fixed.

JUDICIAL SALE

Description

It is the judicial sale process which involves licensees most frequently. The petitioner or any of the respon-dents can apply for a judicial sale, also known as a court-ordered sale. A judicial sale is a sale of land carried out under the supervision of the court. The application can be made when the order nisi is sought or at the expiry of the redemption period. Where a respondent applies for such an order, he or she must satisfy the court that the value of the property is high enough to satisfy the costs of the sale and the claim of the petitioner. The application would normally be made by the petitioner if the property is worth less than the

FIGURE 15.3: Steps in a Foreclosure Proceeding

Demand LetterLetter accelerating the loan and giving borrower short period of time to pay out the mortgage or else face forclosure

PetitionFiled in BC Supreme Court registry. The lender is the petitioner, while the borrower and all other charge holders whose interests rank in priority behind the lender are respondents

Order NisiThe first order of the court. It establishes amongst other things, the amount required to redeem the mortgage and the time period given to the borrower to redeem

Judicial SaleThe petitioner may choose to have the property listed for sale. Unless special circumstances exist the petitioner only seeks this order at the expiry of the redemption period

Order Approving SaleThe court approves the sale of the property. If the sale proceeds do not pay the petitioner in full, the petitioner will seek the deficiency from the respondent borrower under a court action

Order Absolute of ForeclosureIf the redemption period has expired and if:

1. the property is worth the same amount as the mortgage debt or more;

2. the respondent borrower is judgement-proof (i.e., no assets or money to apply towards a deficiency); or

3. there are no offers under a judicial sale, the petitioner can seek an order absolute of foreclosure which results in the petitioner becoming the new registered owner and all respondents being wiped off title. No further action can be taken against the respondent borrower after the order absolute has been granted by the court



mortgage debt. As explained above, once an order absolute of foreclosure is granted, the petitioner cannot enforce the judgment on the personal covenant. However, if the property is sold by judicial sale, the petitioner is entitled to recover the difference between the sale proceeds and the mortgage debt from the borrower. If the property is worth more than the mortgage debt, the petitioner would want to try to obtain an order absolute because there is no requirement to account to the borrower for any profit on a resale.

How Is It Accomplished?

Formerly, judicial sales were by public auction. In BC, judicial sale by public auction seldom occurs. Rather, the court, with the consent of all parties, can order that the property be sold by private sale. The usual proce-dure is to have the property appraised and listed for sale with a real estate firm – a simpler and therefore cheaper procedure than a sale by auction.

The petitioner can, with the court’s permission, make an offer on the property. If the court approves the sale to the petitioner and the proceeds are not sufficient to pay both the mortgage debt and the costs of the sale, the petitioner can sue on the personal covenant to recover the difference. The petitioner may do this even though he or she later sells the property for a profit.

The court will fix the terms and conditions of the sale and can require the party requesting the sale to deposit a sum of money into court to make sure these terms are performed. Every offer to purchase the property must be made subject to the court’s approval. The court will review an offer and accept or reject it, just as an ordinary vendor would. When the sale has taken place, the mortgages and other charges will be paid off according to their priority and the borrower will receive any balance remaining.

Refer to Figure 15.4. A has started foreclosure proceedings. An order for a judicial sale has been granted to B because the value of the property is approximately $110,000. The property is sold and the net proceeds are $100,000. A would receive $70,000 and B would receive $30,000. B would sue the borrower on the borrow-er’s personal covenant for the deficiency of $20,000. C’s only remedy is against the borrower’s personal covenant with respect to C’s mortgage.

Although the court has the discretion to reopen an order absolute, it cannot set aside a judicial sale, once completed, even if the borrower has succeeded in raising the money necessary to redeem the mortgage.

ACTION ON THE PERSONAL COVENANT

Description

Since the basis of the mortgage relationship is that of debtor and creditor, the lender can exercise the remedy of an ordinary creditor. The lender can sue the borrower on the borrower’s promise to pay. This remedy can be exercised separately from a foreclosure application, although it is usually part of the foreclosure action. Earlier in the chapter, the circumstances under which this right is extinguished were explained.

One set of circumstances is where the lender can no longer restore the property. However, if the first mortgage lender has foreclosed, a second mortgage lender can still sue on the covenant even though he or she cannot reconvey the estate when the mortgage debt is repaid. This is because it is not the second mortgagee’s fault that the property cannot be restored. The borrower is at fault for not making the payments as required.

The following example illustrates how the foreclosure, the judicial sale and action on the covenant remedies operate.

FIGURE 15.4: Distributing Proceeds Under a Judicial Sale

A holds 1st mortgage – $70,000

B holds 2nd mortgage – $50,000

C holds 3rd mortgage – $20,000

If the net proceeds were $150,000, all three mortgages would be paid, and the borrower would receive $10,000 for his or her equity.



QUITCLAIM DEED

If the borrower is unable or does not wish to redeem the mortgage, the borrower may wish to quitclaim his or her interest in the property to the lender. The borrower must receive some consideration for doing so. When the quitclaim is registered it transfers title to the lender. Unless there is an agreement that provides otherwise, it also extinguishes the mortgage debt. A quitclaim deed is simply a deed without any covenants. When it is signed by the borrower it results in a merger of the lesser interest (the mortgage) into the greater (the fee simple), unless the parties have a contrary intention.

In the context of a mortgage, the lender is owner of the legal mortgage (the lesser interest), and receives the equity of redemption from the borrower under the quitclaim. The mortgage then merges with the equity of redemption, and is extinguished, leaving the lender as owner.

A quitclaim is a simple and inexpensive method by which the borrower can extinguish any interest in the property in favour of the lender. However, it should be noted that a quitclaim deed given at the time of signing the mortgage will be void as a clog on the equity of redemption.

POSSESSION AND SALE

Description

Refer to clause 13 of the standard clauses reviewed earlier in this chapter. This provision permits the lender to take possession of the land either for its own use or for the purpose of renting it to tenants. The lender must give the borrower the required notice after default. If the borrower will not peacefully surrender the property, the lender can obtain a writ of possession from the court which will be enforced by the sheriff. If the lender takes possession and discovers that the borrower has leased the land, the lender should give notice to the tenant to pay any future rents to the lender. The tenant, if he or she desires to remain, must follow this direction even if the tenant’s lease has priority over the mortgage. In this situation, the lender is referred to as a “mortgagee in possession”.

Example

A son is a tenant renting his father’s land. The father dies, leaving his estate to the son. As a result, the son becomes his own landlord, i.e., he is both the tenant and now the fee simple owner. Unless a contrary intention exists, the smaller estate (the leasehold) will “merge” into the larger estate (the fee simple), making the son the fee simple owner only.

Example

A is the registered owner of Blackacre, which has a market value of $200,000. The following mortgages are registered against the title:

1st mortgage – $100,000 outstanding – Lender = B 2nd mortgage – $ 75,000 outstanding – Lender = C 3rd mortgage – $ 50,000 outstanding – Lender = D

A has defaulted on all payments. B forecloses. Based on the above facts, you should know:

• B is the petitioner and A, C and D are respondents.

• Because the property is worth $200,000 and B’s mortgage is worth $100,000, both C and D would want a judicial sale. NOTE: If the property were worth $75,000, B would want a judicial sale so he could sue A for the remaining $25,000. If the property were worth $300,000, A would also want a judicial sale so A could get the balance after paying B, C and D.

• If the property were sold by judicial sale for $210,000 (and the real estate commission and legal costs were exactly $10,000 so only $200,000 was available for the various lenders) the proceeds would be distributed as follows:

Commission, costs, etc., ................................ $ 10,000 To B ................................................................. $ 100,000 To C ................................................................. $ 75,000 To D ................................................................. $ 25,000 To A ................................................................. $ 0 Total ................................................................ $ 210,000

• D would now collect the $25,000 balance by obtaining judgment against A on A’s personal covenant to pay.



Duties of a Mortgagee in Possession

A lender who is a mortgagee in possession must account to the borrower for all monies received or which, but for the lender’s wilful neglect or default in not finding a suitable tenant, might have been received. If the lender goes into possession, the lender will be charged with an occupation rent, which is credited to the account of the borrower. The lender is not allowed any compensation for its own efforts in managing or administering the property. Payments made to agents or employees are justified only when their employment is warranted by the circumstances. The rents and profits received by the mortgagee in possession are in the first instance used to pay current expenses, e.g., fire insurance premiums. The balance is then applied in the payment of interest accruing due on the mortgage debt, any legitimate improvements, and the repayment of the principal, in that order.

A mortgagee in possession of a property must manage it in the same manner that a prudent owner would manage his or her own property and will be liable for deterioration due to his or her gross or willful negligence. However, the mortgagee has the right to recover expenses, from the borrower, that are necessary to protect the property. Practically, the associated costs are added to the mortgage balance that the lender owes. These expenses, called protective disbursements, must be reasonably incurred and related to the sale or security of the property. Often, a mortgagee will have to justify any amount claimed as a protective disburse-ment to a court.

How the Remedy is Exercised

The usual form of contractual power of sale in a mortgage provides that in the event of default continuing for a specified time (usually one to three months) the lender, upon giving notice (usually thirty days), may enter upon and lease or sell the land. The requirements of the contract with respect to notice, etc., must be strictly observed.

In practice, the power of sale can be unsatisfactory because the lender must account to the borrower for the proceeds of the sale and will be liable in damages if found not to have taken reasonable precautions to obtain the best price. The lender cannot purchase the property itself, nor can a solicitor or agent acting for the lender. If the lender agrees to a vendor “take-back” mortgage, the lender must credit the borrower’s account for the total sale price as if the sale has been for all cash unless the mortgage contract provides otherwise. The proceeds of the sale go first to cover the costs of the sale, then to discharge the principal and interest outstand-ing on the mortgage. The surplus, if any, belongs to the borrower. In BC the use by a lender of the contractual power of sale has been virtually eliminated as a result of the decision in South West Marine Estates Ltd. v. Bank of British Columbia. The Court of Appeal stated that as a general rule the courts will not permit a sale to be made under a contractual power of sale until the expiry of a six-month redemption period. Accordingly, it is more advantageous for a lender to proceed with a foreclosure action and judicial sale rather than utilizing the provisions of the contractual power of sale.

AGREEMENTS FOR SALE

Description

If the purchaser cannot pay cash for the property, he or she will normally arrange a mortgage loan with a third party or with the vendor. This mortgage is then registered as a charge against the title. An alternative to the transfer and mortgage arrangement is to sell the property under an agreement for sale. It is an agree-ment under which the vendor agrees to sell real property to the purchaser on credit terms. Under most agreements for sale, the purchaser agrees to pay the purchase price in a particular manner, usually a downpayment plus monthly payments of principal and interest. In exchange for the purchaser’s promises, the vendor grants possession of the property to the purchaser immediately and promises to execute a freehold transfer as soon as the final payment towards the purchase price is made.

Financially there is no difference between the vendor selling by way of agreement for sale or selling the fee simple and “taking back” a mortgage. Legally, however, under an agreement for sale, the vendor remains on the title as registered owner, and the agreement for sale is registered as a charge against

agreement for saleA contract by which the owner of land (vendor) agrees to sell land to another (purchaser) who agrees to purchase it. The purchaser’s interest is registered in the Land Title Office as a charge against the vendor’s certificate of title. The contract provides that the purchase price will be paid by instalments



the title. In a vendor “take back” mortgage, the fee simple is transferred to the purchaser, and the vendor’s mortgage is registered as a charge.

An agreement for sale (referred to in land titles offices as a right to purchase or RP) must be registered in the land title office using Form C of the land title forms.

Where the Vendor Has a Mortgage on Title

A vendor may have a first mortgage on the property at the time he or she sells by way of agreement for sale. If so, a properly drawn agreement for sale will ensure that the mortgage is paid off prior to or at the same time as the agreement for sale.

There are two possible approaches to repayment of the mortgage. First, the purchaser can be required to assume the existing first mortgage payments plus make some monthly payment to the vendor. The last payments to the lender and to the vendor will coincide, allowing the purchaser to obtain title free of the mortgage. Second, the agreement for sale can simply provide for the payment of so much per month to the vendor and say nothing at all about the first mortgage. In that case, the vendor will continue to look after the payments on the first mortgage, making them out of the monthly payments received from the purchaser and retaining the balance. Under a properly written agreement, when all the purchase monies have been paid, the first mortgage will have been paid off. In either case, the vendor will have received the money covering his or her equity in the property, and the purchaser will be able to demand a freehold transfer conveying the legal title to the purchaser.

Which method is used by the parties is a matter for negotiation. Both parties may want to retain control over the mortgage payments. Strictly speaking, there is no equity of redemption for a purchaser under an agreement for sale because the purchaser has no legal title to redeem. The legal title remains in the vendor, or owner of the land. If the purchaser fails to pay according to the terms of agreement, the purchaser may forfeit everything he or she has paid.

Remedies

Essentially the remedies under an agreement for sale parallel those under a mortgage agreement. A vendor under an agreement for sale commences a court action and usually seeks an order for specific performance of the agreement or cancellation of the agreement and forfeiture of all the monies paid under it. As with a mortgage foreclosure, the court first grants an order nisi and sets a “redemption” period (usually 6 months). The petitioner/vendor can also apply for a judicial sale. If the payments under the agreement for sale are not brought up to date by the expiry of the redemption period, the petitioner will apply to the court for an order cancelling the agreement.



For legal reasons, wrap-mortgages are not in use in Canada today. However, they are used in other jurisdic-tions and for that reason it may be of interest to know how they operate.

Where a first mortgage is already registered against a property and the owner requires additional financ-ing, the owner has several alternatives: (a) if the first mortgage allows, it can be paid out and a new, larger first mortgage on the title can be arranged; or (b) a conventional second mortgage can be arranged to raise the extra funds and the existing first mortgage can be kept in place; or (c) the borrower may wish to arrange a second mortgage containing a wrap-around clause. This type of second mortgage is called a wrap-around mortgage. A borrower would prefer (b) or (c) if the first mortgage has a very low interest rate or if the first mortgage has a large prepayment penalty.

In both (b) and (c) there are two mortgages registered against the property. However, the flow of payments is different. Figure 15.A1.1 shows the way in which payments flow in each case.

With a wrap-around mortgage, the borrower makes only one payment to the wrap-around lender. The wrap-around lender keeps its part of the payment and forwards the first mortgage payment amount to the first mortgage lender. Since the wrap-around lender controls the first mortgage payments, there is less risk of payments being late. Because of the lower risk, the wrap-around lender charges a lower interest rate on the wrap-around mortgage than a lender would charge on a conventional second mortgage.

The mortgage contract for the wrap-around mortgage will show an amount equal to the outstanding balance on the first mortgage plus the extra funds the borrower is borrowing. Therefore, it will appear as if the borrower owes more than he or she does, because the first mortgage contract will show the amount borrowed under that mortgage loan and the wrap-around will show the amount still owed under the first mortgage, plus the new amount being borrowed. However, a clause in the wrap-around mortgage will state that only the new amount and interest on it need to be repaid to obtain a discharge of the wrap-around. In practice, wrap-around loans have a rate of interest higher than the rate on the existing first mortgage but roughly the same as rates on new conventional first mortgages. An example of a wrap-around clause is shown below:

APPENDIX 15.1Wrap-Around Mortgages

The said payments, when made, shall be applied firstly in payment of the monthly instalments due and payable under the First Mortgage, secondly in payment of interest as aforesaid, thirdly on all other amounts due hereunder and the balance, if any, upon principal monies secured hereby.

AND THE MORTGAGOR covenants and agrees to pay the monthly instalments under the First Mortgage up to and including the payment due on the first day of , 20 .

PROVIDED, however, that after redemption of the First Mortgage each of the said monthly instalments shall be applied firstly in payment of interest as aforesaid, secondly on all other amounts due hereunder and the balance, if any, upon principal monies secured hereby.

It is further acknowledged by the Mortgagor that although the amount actually advanced to the Mortgagor hereunder is the principal sum less the amount owing under the First Mortgage for the purpose of computation of interest hereunder, the principal sum shall be deemed to have been fully advanced.



FIGURE 15.A1.1: Flow of Payments

CASE (B)First Mortgage and Second Mortgage

CASE (C)First Mortgage and Wrap-Around Mortgage

Borrower Borrower

Wrap-around mortgage payment

Wrap-around mortgage lender

1st mortgage payment

1st mortgage lender

1st mortgagepayment

2nd mortgagepayment

1st mortgagelender

2nd mortgagelender

APPENDIX 15.1, continued

Wrap-Around Mortgages


DISCLAIMER © Copyright: 2016 · equity of redemption and the foreclosure action. LEGAL AND...

Documents

Transcript of DISCLAIMER © Copyright: 2016 · equity of redemption and the foreclosure action. LEGAL AND...