Mortgage Enforcement: What Can Go Wrong?
Notice of Sale and Requisitions
If a purchase is made under power of sale, it is necessary to ensure that the vendor is authorized to conduct the sale and that the power of sale proceeding has been properly commenced. A requisition, in this respect, by purchaser’s legal counsel is expected to bring forth a statutory declaration attaching evidence of service of the notice of sale. The usual practice is to attach to the statutory declaration evidence of service of the notice of sale by registered mail, including the registered mail receipts. The Court of Appeal ruled in CIBC Mortgage Corp. v. Chopra that service by registered mail to the address provided for in the mortgage would be quite adequate for the purpose.
Typical Schedules to APS
Vendors of properties under power of sale more often than not include a schedule to the agreement of purchase and sale which significantly alters the usual terms of a sale/purchase transaction.
It is a misleading document because the Schedule is designed to protect the vendor, and to ensure that the purchaser knows that the sale is being conducted on an “as is, where is” basis. The Schedule provides that the vendor is not making any representations, warranty or conditions with respect to fitness, thereby avoiding lapses in such matters. It is imperative for purchasers under power of sale to satisfy themselves as to the purpose, condition, quality, zoning, or lawful use of the property. Requisitions to vendors regarding such issues will be invariably answered by, “Pursuant to the Schedule, kindly satisfy yourself.” The Schedule also arms the vendor with the flexibility to accept payment of the mortgage monies, and the option to resale from the agreement. Counsels should make it clear to their purchaser clients that an agreement of purchase and sale containing such a schedule can be cancelled unilaterally by the vendor mortgagee.
Injunctions to Restrain a Sale or an Eviction
Mortgagees are often likely to face a motion for an injunction to restrain a pending sale or an eviction by mortgagors attempting to save the property. As the case law in respect of such injunctions is clear, the Court will not admonish a mortgagee from the exercise of its rights on the basis of hardship and in the absence of an ability to redeem the mortgage. The Court in Arnold v. Bronstein was asked for a ruling to enjoin a mortgagee from exercising its power of sale. The Court observed as follows:
“The general rule developed from numerous cases is that a mortgagee, acting in good faith and without fraud, will not be restrained from a proper exercise of his power of sale, except upon tender by the mortgagor of the principal moneys due, interest, and costs.”
The defendants in Canada Trustco Mortgage Co. v. McLean requested for a stay of enforcement of a writ of possession on the grounds of hardship, Justice Potts ruled:
“If, as [counsel for the Defendants] asserts, the Court has jurisdiction to grant the relief requested, it is surprisingly strange that no decision could be found clearly recognizing such jurisdiction. Furthermore, so many decisions deny the existence of a jurisdiction to grant a stay, notwithstanding that the circumstances of those cases were more persuasive in favour of its recognition than are the circumstances of the instant applications. I am accordingly – and most regretfully – of the opinion that I am without jurisdiction to grant the relief sought.”
In addition to the clear language in the case law suggesting that such a motion is doomed to fail, there are other important reasons to refrain from launching such a motion. It is imperative for a mortgagor to keep in mind that the mortgagee’s legal fees are almost certainly to be paid out of the proceeds of the sale. Having regard to this, it is clear that mortgagors seeking an injunction are not only spending their own money on their lawyers, they are also spending whatever equity is left in the property on the lender’s lawyers. Such funds are almost certainly better spent in bringing the mortgage current or in redeeming the mortgage altogether.
Construction Liens and Power of Sale
There are a number of ways by which a construction lien can take priority over a prior registered mortgage. These rules are given in Section 78 of the Construction Lien Act. In determining priority, the first issue would be whether or not the mortgage is a “building mortgage”. A building mortgage is a mortgage to get money for an improvement. In that event, the lien takes priority over the mortgage. The magnitude of the priority is limited to the extent of any deficiency in the holdbacks required to be retained by the owner [ss.78(2)]. So, a non-building mortgage will have priority over a construction lien, unless the mortgage was granted (or funds were advanced) after the time the first lien presented itself [ss. 78(3)]. There could be priority issues if the land was “over-mortgaged”, in other words, where the value of the premises is less than the mortgage amount. Likewise, subsequent advances on a prior registered mortgage would lose priority if the mortgagee had notice of a lien [ss. 78(4)]. Such things often arise in the event of a mortgage, which secures a line of credit. It is extremely important to assess the priority issues in the event of ongoing advances under a mortgage, such as in the case of a collateral mortgage securing a line of credit.
In instances when a mortgagee sells under power of sale and there are construction liens not claiming priority over the mortgage, the mortgagee has to observe section 27 of the Mortgages Act in dealing with the proceeds of the sale. Section 27 gives a scheme for the distribution of the proceeds of sale. If it is an ongoing lien action, a mortgagee would be wise to pay the surplus funds into court and permit the lien claimants to pursue their claim without further involvement by the mortgagee.