The Canadian Lawof Mortgages

SECOND EDITION

Joseph E. Roach

Emeritus ProfessorFaculty of Law, Common Law Section

University of Ottawa

Member of the Bar of Ontario

LexisNexis*

TABLE OF CONTENTS

About the Author viiPreface ixAcknowledgements xiTable of Cases xxv

PART I: INTRODUCTION 1

Chapter 1: Definition and Historical Background 3A. Types of Security Interests in Land 3

1. Common Law Mortgage 42. Statutory Mortgage or Charge 9

B. Historical Overview: The Mortgage of Land after theNorman Conquest 171. Glanville's Mortgage 182. Bracton's Mortgage 193. Jewish Mortgage 204. Littleton's Mortgage 215. Welsh Mortgage 246. The Effect of the Court of Chancellery Intervention 25

C. Lien as Distinguished from the Mortgage or the Charge 271. Common Law Lien 272. Equitable Lien 293. Statutory Lien 31

D. The Pledge as Distinguished from the Mortgage or theCharge 311. Common Law Pledge 312. Pledge under the Pawnbrokers Act 333. Main Differences Between the Common Law Pledge

and the Statutory Pledge 34

PART H: THE RIGHT TO REDEEM: REMEDY FOR THEMORTGAGOR 37

Chapter 2: Exercising the Right to Redeem 39A. Nature of the Equity of Redemption 39B. Exercise of the Right to Redeem 42

1. On the Due Date — General Rule 422. Before the Due Date — the Rule in Bovill v. Endle 42

(a) When Triggered by the Taking of Possession 45(b) When Triggered by Demand of Payment of the

Mortgage Debt 47(c) Interest Which May Be Claimed 51

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3. After the Due Date 54(a) Exercise of the Right of Redemption 54(b) Interest Which May Be Claimed 57

(i) The Rule of Practice Requiring Six Months'Interest in Lieu of Six Months' Notice Beforethe Mortgage Is Discharged 57

(ii) Instances Where the Rule Does Not Apply 57(iii) Jurisdictions Where the Rule Is Not in Force 59(iv) Jurisdictions Where the Rule Is in Force 62

4. Other Jurisdictions 72C. Further Right to Redeem in Equity 75

1. After a Final Order of Foreclosure — Rule in Campbell v.Holyland 75

2. After a Judgment for Immediate Foreclosure 803. After a Sale to a Bona Fide Purchaser Following a Final

Order of Foreclosure Obtained Through an Irregularity 824. After a Sale to a Bona Fide Purchaser Following a Final

Order of Foreclosure 835. After the Exercise of the Power of Sale 84

Chapter 3: The Anti-clogging Doctrine 89A. First Maxim or Rule: Once a Mortgage Always a Mortgage 91

1. Where the Borrower Executes a Deed Absolute — DisguisedMortgage 91

2. The Borrower Executes a Deed with an Option to Purchase —Disguised Mortgage 96

B. Second Maxim or Rule: The Lender Should Have No CollateralAdvantages 991. Necessity of Protecting Land Owners from Oppressive

Agreements 992. Criteria for Determining Whether the Transaction

Contravened the Mortgagor's Right to Redeem 102C. Third Maxim or Rule: There Must Be No Stipulation in the

Mortgage That Will Fetter the Property on Redemption 1041. Clogging the Equity 1042. Legislative Intervention: An Act Respecting the Mortgage

Financing ofRideau Centre in the City of Ottawa 108

Chapter 4: Redemption Action 111A. Source of Action I l lB. Rules of Civil Procedure 112C. Untraceable Mortgagee 118D. The Limitations Act 120E. Discharge of Mortgage 122

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PART III: REMEDY OF THE MORTGAGEE 127

ChapterS: Foreclosure 129A. Remedies of the Mortgagee: Choice of Remedies 129B. Characteristics of the Remedy of Foreclosure 130C. Advantages and Disadvantages of the Action for

Foreclosure 1321. From the Point of View of the Mortgagor 1322. From the Point of View of the Mortgagee 133

D. Action for Foreclosure 1351. Definition and Availability of the Remedy in Different

Provinces 1352. Foreclosure Under the Torrens System 1383. Forms of Judgment 141

(a) Default Judgment for Foreclosure 143(i) Without Reference 143(ii) With a Reference 143

(b) Final Order of Foreclosure 144(c) Default Judgment for Immediate Foreclosure 144

4. Rules of Civil Procedure Governing Foreclosure Actions 145(a) Commencement of Action 145(b) Parties to the Action 146(c) Effect of Filing a Request to Redeem (Formerly a

D.O.R.) 147(d) Effect of the Failure to Pay the Sums Indicated in the

Default Judgment With or Without a Reference 148(e) Effect of the Failure to File a Request to Redeem or a

Statement of Defence 148(f) Conversion from Foreclosure to Sale 149(g) Reopening Foreclosures 150

E. Effect of Foreclosure on the Pursuit of Successive orAlternative Remedies 1511. Prior to Judgment — the Rule in Marshall v. Miles 1522. After a Default Judgment for Foreclosure with a Reference

— The Rule in Stevens v. Theatres, Ltd 156

Chapter 6: Judicial Sale 161A. Availability of the Judicial Sale in Various Provinces 161B. Advantages and Disadvantages of the Judicial Sale 164

1. From the Point of View of the Mortgagee 1642. From the Point of View of the Mortgagor 165

C. Rules of Civil Procedure Governing the Judicial Salein Ontario 1671. Commencement of the Proceeding 167

(a) By the Mortgagee 167

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(b) Conversion from Foreclosure to Judicial Sale 168(i) By the Mortgagor 168(ii) By a Subsequent Encumbrancer 170(iii) By the Referee 171

2. Types of Judgment 173(a) Default Judgment for Immediate Sale —

Forms 64H and 64J 174(b) Default Judgment for Sale with a Redemption Period —

Forms 64G, 641 and 64K 174(c) Final Order for Sale — Form 64L 176

3. General Procedure on Reference 176(a) Notice of Reference to Original Defendants —

Rule 64.06(8) and (9) 176(b) Adding Subsequent Encumbrancers — Rule 64.06(2),

(4)-(7) and (10) 177(c) Adding Parties Other Than Encumbrancers —

Rule 64.06(11) and (12) 1784. Power and Duties of the Referee in a Mortgage

Procedure 1795. The Conduct of the Sale 181

Chapter 7: Extrajudicial Sale — Power of Sale 185A. Origins of the Power of Sale 185

1. Advantages 1872. Disadvantages 188

B. Exercise of the Extrajudicial Sale 1881. The Statutory Power of Sale 190

(a) Ontario 190(b) New Brunswick 192

(i) Priority Given to the Power of Sale 192(ii) Effect of Service of Notice by Registered Mail 195(iii) Calculation of Deficiency 196

(c) Manitoba 1972. The Contractual Power of Sale in Ontario 199

(a) The Standard Power of Sale Clause 199(b) Condition Precedent for Exercising Power of Sale 200(c) Manner of Giving Notice 202(d) Effect of Service of Notice by Registered Mail 202

C. General Provisions with Respect to the Exercise of thePower of Sale 2041. The Rule in A rnoIdv. Bronstein 2042. Effect of the Exercise of the Power of Sale 208

(a) The Rule in Municipal Savings & Loan Corp. v.Wilson 208

(b) The Rule in Otter v. Lord Vaux 210

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3. Consequences of Irregularities in the Conduct of a Sale 2114. Action on the Covenant by the Mortgagee after Exercise

of the Power of Sale — The Rule in Rudge v. Richens 2135. Acquisition of the Property at Sale — The Rule in Farrar v.

Farrars Ltd 2146. Duty of the Mortgagee Exercising the Power of Sale 216

(a) The Rule in Cuckmere Brick Co. v. MutualFinance Ltd 216

(b) Adoption of the Rule 217(c) Application of the Rule: The Six Legal Principles

Adopted in Granada Investments for Determiningthe Mortgagee's Duties and Exercising thePower of Sale 222

7. Distribution of Proceeds of the Sale 225D. Effect of Section 42 of the Mortgages Act on the Exercise

of Successive and Concurrent Remedies by the Mortgagee 229

Chapter 8: Action on the Covenant 231A. Nature of Remedy 231B. Parties to the Action 233

1. Rules of Civil Procedure Governing the Action 2332. Execution of Mortgage by Mortgagor as Trustee 2343. Ultra Vires or Illegal Mortgage 2354. The Sealed Contract Rule 237

C. Effect of Legislation on the Action on the Covenant 237D. Effect of the Rule in Lockhart v. Hardy on the Action

on the Covenant 2431. First Mortgages 2432. Composite Mortgages 2443. Collateral Mortgages 247

E. Action on the Covenant by Second Mortgagee — Rulein Beatty v. Bailey 251

F. Action on the Covenant after Final Order of Foreclosure —Rule in Munsen v. Hauss 256

G. Action on the Covenant after Power of Sale or JudicialSale — Rule in Rudge v. Richens 261

H. Action on the Covenant after Sale of the Equity ofRedemption 2631. Liability of the Original Mortgagor after the Transfer of the

Property 2632. Obligations of Original Mortgagor 265

(a) The Rule in Forster v. hey 265(b) Circumstances Where the Rule in Forster v. Ivey

Does Not Apply 267(i) The Rule in Palmer v. Hendrie 267

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(ii) The Rule in General Trust Corp. of Canada v.Di Carlo 268

(iii) Statutory Provisions Extinguishing the OriginalMortgagor's Liability: British Columbia and PrinceEdward Island 269

(iv) Novation 2733. Obligations of Purchaser of the Equity of Redemption 273

(a) Rule in Waring v. Ward 274(b) Section 20 of the Mortgages Act 276(c) Exception to the Rule in Waring v. Ward 280

I. Action on the Covenant and Circuity of Action 282J. Acceleration or Forfeiture Clauses upon Default of Payment 283

Chapter 9: Possession 285A. Object 285B. Right to Possession — In General 286

1. At Common Law 2862. Mortgagor's Rights 2863. The Mortgagee's Rights 289

C. Action for Possession 2921. Taking of Possession 2922. Writ of Possession 2953. Stay of Proceedings 2984. Effect of Taking Possession upon Alternative Remedies 300

D. Mortgagee's Rights as Against Tenant 3011. Lease Prior to Mortgage 3012. Lease Subsequent to Mortgage 303

E. Rights and Duties of the Mortgagee Taking Possession 3091. Improvements 3102. Repairs 3153. Management of the Property 3184. Rents 320

(a) Mortgagee's Occupation Rent 320(b) Receipt of Rents by Mortgagee in Possession 322(c) Receipt of Rents by Agent 324

5. Credits for Payments Made to Prior Mortgagee 326F. Receiver 326

1. Substitute for Taking of Possession 3262. Appointment 327

(a) By the Court 328(b) By Express Provision of the Mortgage Deed 330

3. Powers of Receiver-Manager 332

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PART IV: THE MORTGAGE DEED 335

Chapter 10: the Mortgage Deed 337A. Form and Content 337

1. Requirement of Deed 3372. Form of the Instrument 3383. Execution of the Instrument 3394. Implied Covenants 3395. Standard Terms 342

B. Enforcement of the Mortgage 3431. Where the Agreement Is in Writing 3432. Where a Mortgage Deed Has Been Executed 3453. Where Full or Partial Advances Have Been Made 3484. Where a Promise to Execute a Purchase-Money Mortgage

Has Been Made 3515. Where a Promise to Give a Mortgage to a Building

Contractor Has Been Made 3526. ThePleaofAfonEttFacfKm 352

C. Equitable Mortgages 3561. Agreement to Give a Mortgage 3582. Mortgage by Deposit of Title Deeds 3603. Second or Subsequent Mortgages 365

Chapter 11: Novation 367A. Introduction 367B. Obligations of the Original Mortgagor 368C. Classification of Novation 370

1. Where Novation Arises by Reason of an ExpressAgreement 370

2. Where Novation Arises by Implied Agreement 371D. Application of the Doctrine of Novation in the Context of

Mortgage Law 3731. Definition and Application of Novation 3732. Standard of Proof Where Novation Is Raised 3753. Purposive Construction of Mortgage Instruments for

Determining Whether or Not Novation Occurred 3774. Effect of Agreements Surrounding the Mortgage

Transaction and Conduct of Parties on Novation 378(a) Effect of Assumption Agreements 378(b) Effect of Extension or Renewal Agreements 379(c) Effect of "No Prejudice" Clauses 381(d) Effect of the Conduct of the Parties 382

E. Reassessment by Wilson J. of Key Cases Where NovationArises Through the Conduct of Parties 383

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1. Effect of Mead in Adopting a Commercial Interpretation ofInstruments Surrounding the Sale of the Equity ofRedemption 383

2. Cases Which Received the Court's Disapproval in Meadfor Disallowing the Claim for Novation 385(a) Central & Eastern Trust Co. v. Rosebowl

Holdings Ltd 385(b) Central Trust Co. v. Bartlett 386(c) Eaton Bay Trust Co. v. Ling 386

3. Cases Which Received the Court's Approval in Mead forAllowing a Claim for Novation 387(a) Prospect Mortgage Investment Corp. v. Van-5

Developments Ltd 387(b) Bank of Nova Scotia v. Vancouver Island Renovating

Inc 389(c) Canada Permanent Trust Co. v. Neumann 392

F. Post-Mead Cases 3931. Apparent Difficulties in Applying Mead to Specific Cases 3932. Where the Doctrine of Novation Has Been Successfully

Invoked 3953. Where the Doctrine Has Not Been Successfully Invoked 399

(a) Cabot Trust Co. v. D'Agostino 399(b) North West Trust Co. v. Henry Singer Ltd 401(c) Bank of Montreal v. Fireside Place Ltd. 404(d) National Trust Co. v. Hodgson 407(e) Citadel General Assurance Co. v. Iaboni 411

G. Impact of Mead on the Operation of the Doctrine of Novation 413

Chapter 12: Acceleration and Due-on-Sale Clauses 417A. Acceleration or Forfeiture Clauses upon Default of Payment 417

1. Effect of the Acceleration Clause 4172. Statutory Limitations on Acceleration Clauses 4193. Stay of Proceedings under the Mortgages Act of Ontario 421

(a) Section 22: Before an Action or Sale 422(b) Section 23: After an Action 430(c) Effect of the Stay of Proceedings on the Terms of

the Mortgage 434B. Stay of Proceeding under Section 42 of the Mortgages Act 439C. Due-On-Sale Clauses 440

1. Principal Characteristics of Due-on-Sale Clauses 440(a) Types of Due-on Sale Clauses 440(b) Effect of Due-on Sale Clauses 442(c) Status of Due-on-Sale Clauses 444(d) Ability of Mortgagor to Trigger Clause 445

2. Enforceability of Due-on-Sale Clauses 446

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(a) Due-on-Sale Clauses in Alberta 448(b) Due-on-Sale Clauses in Ontario 457(c) Due-on-Sale Clauses in Newfoundland 462

3. Stay of Proceedings under the Alberta Judicature Act 466

Chapter 13: Assignment and Subrogation 471A. Assignment by the Mortgagee 471

1. Assignment of Mortgage Debt 4712. Statutory Formalities 4733. Notice 4734. Effect of Assignment 4745. Derivative Mortgage or Submortgage 4756. The Right to Set-Off 477

B. Assignment by the Mortgagor 4781. The Assignment of the Mortgage Security: The

Position at Common Law 4782. Legislative Provisions Governing Assignments 4793. Subrogation 484

C. The Doctrine of Merger and the Assignment of aMortgage 4921. At Common Law and in Equity 4922. Section 10 of the Mortgages Act 494

Chapter 14: The Contract of Guarantee 497A. The Contract of Guarantee 497B. The Guarantor's Remedies 499C. Release of the Guarantor's Obligations 499

1. Following the Creditor's Delay in Taking Action toRecover the Debt 500

2. Following a Material Variation to the Contract ofGuarantee 502(a) The Rule in Holme v. Brunskill 502(b) The Rule in Bauer v. Bank of Montreal —

Provisions Varying the Terms of the Guarantee 5053. Following an Improper Dealing with the Security 5064. By Operation of Statutory Provisions 5075. Where the Contract of Guarantee Is Tainted with

Illegality 5106. Where the Exercise of the Power of Sale Is Carried out

Without Notice to the Guarantor 512

PART V: PRIORITIES 515

Chapter 15: Priority at Common Law and under theRegistry Systems 517

A. Introduction 517

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B. At Common Law — Two Basic Rules 5181. First in Time Is First in Right 5182. Where the Equities Are Equal, the Law Shall Prevail 524

C. Under the Torrens System 5251. Principal Characteristics of the Torrens System 5262. Effect of the Doctrine of Actual Notice on Priorities 527

(a) Western Provinces 527(b) Ontario 529(c) New Brunswick 533

3. The Effect of Fraud on the Validity of a RegisteredMortgage 533(a) The Theories of Immediate and Deferred

Indefeasibility of Title under Land Titles Systems 534(i) Deferred Indefeasibility 534(ii) Immediate Indefeasibility 536

(b) The Choice Between the Two Theories in CommonLaw Jurisdictions 538(i) Saskatchewan 539(ii) British Columbia 540(iii) Ontario 543

D. Under the Registry System 5541. Principal Characteristics of the Registry System 5542. Effect of the Registry Act in Determining Priorities 556

(a) Priority Between Unregistered and SubsequentRegistered Deeds — Effect of Subsection 70(1) 558

(b) Priority Between Registered Deeds 560(c) Registration Constitutes Notice 563

3. Effect of Actual Notice on Priorities 564(a) Where Actual Notice of a Prior Forged Mortgage 564(b) Where There Is Actual Notice of a Prior Bona Fide

Mortgage 565(c) Where the Solicitor Has Actual Notice of a Prior

Mortgage 568(d) Precise Moment Where Actual Notice of a Prior

Instrument Renders a Subsequent MortgageFraudulent 568

4. Doctrine of Sheltering 570E. Priority of Subsequent Advances by First Mortgagee 571

1. The Rule in Hopkinson v. Rolt 5712. Statutory Provisions Affecting Subsequent Advances 574

F. Priority of First Mortgage Amended after Registrationof Second Mortgage 576

G. Priority According to the Doctrine of Tacking 579H. Priority of Pre-purchase Money Mortgage 581

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Chapter 16: Priority under the Doctrines of Consolidationand Marshalling 585

A. Priority Under the Doctrine of Consolidation 585B. Priority Under the Doctrine of Marshalling 590

PART VI: INTEREST RATE AND PREPAYMENT 597

Chapter 17: The Interest Act 599A. The Interest Act — Introduction 599B. Rate of Interest — Sections 2 and 3 of the Interest Act 601C. Disclosure of Rate of Interest: Section 6 of the Interest Act 602

1. Statement Showing the Rate of Interest 602(a) Sinking Fund Plan (Straight-Line Amortization) 602(b) Blended Payments (Amortization Plan) 603(c) Plan That Involves an Allowance of Interest on

Stipulated Payment 6032. Calculation of Interest 6043. Premiums and Bonuses 6054. Blended Payments (Amortization Plan) 607

D. Validity of Penal Clauses — Section 8 of the Interest Act 6111. Clauses Requiring Payment of a Fine, Penalty, Indemnity

or Bonus after Maturity of the Mortgage 612(a) Ontario 612(b) Other Jurisdictions 618

(i) Alberta 618(ii) British Columbia 618(iii) Manitoba 620(iv) Quebec 621

2. Clauses Requiring Payment of a Fine, Penalty, Indemnityor Bonus upon Default of Payment 622

3. Cases Where Substantial Administration Fees Are Chargedfor Advancing Money on the Mortgage Loan 625

4. Clauses Providing for a Preferential Rate of Interest or aWaiver of Interest if Principal Is Paid on or Beforethe Due Date 626

5. Clauses Providing for a Variation of Interest RateImmediately Before the Due Date 630

E. Right of Prepayment: Section 10 of the Interest Act 6331. Historical Overview and Object of the Legislation 6332. Prepayment of the Mortgage Debt Where There Is No

Renewal Agreement 6363. Prepayment of the Mortgage Debt Where There Is a

Renewal Agreement 6384. Three Months'Interest or Three Months'Notice 642

F. Calculation of Interest and Reinvestment Principle 643

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G. May the Mortgagee Call in the Mortgage? 646

Chapter 18: Unconscionable and Criminal Interest Rate 649A. The Unconscionable Transactions Relief Acts 649

1. Purpose of the Legislation: Granting Relief Where UnfairAdvantage of the Borrower Has Been Taken 649

2. Prerequisites under the Legislation Which Must Be Proven:Cost of the Loan Excessive and Transaction Harsh andUnconscionable 652

3. Application of the Legislation 653B. Criminal Interest Rate 657

1. Purpose of the Legislation 6572. Section 347 of the Criminal Code: Separate but

Complementary Offences 6603. Definition of "Interest" under Section 347 of the

Criminal Code 6624. Severability of Illegal Provisions 6675. The Adoption of Notional Severance Where the

Annual Interest Rate Is Reduced to Sixty (60) Per Centto Comply with Section 347 671

PART VII: APPENDICES 675

Appendix A: Mortgages Act 677

Appendix B: Rules 64 and 65 of the Rules of Civil Procedure 703

Appendix C: Applicable Forms of the Rules of Civil Procedure 717

Appendix D: Set of Standard Charge Terms 753

Index 787