When a mortgagor of a piece of real estate defaults on its payments, its mortgagee may initiate power of sale proceedings to recoup the debt it is owed. But what happens if the mortgagor arranges the sale of the property without the mortgagee being aware? This was the dilemma posed in the recent decision of the Ontario Court of Appeal in 2544176 Ontario Inc. v. 23947562 Ontario Inc.
The Mortgagor and Mortgagee sold the same property in separate transactions
In this case, one company (the Mortgagor) owned property that a mortgage had encumbered to the benefit of another company (the Mortgagee). The Mortgagee had purchased the property for about $5.4 million in October 2017. It financed its purchase with a mortgage of $3.79 million. Three years later, in November 2020, the Mortgagor had defaulted on the mortgage. The Mortgagee demanded payment. Eleven days after the Mortgagee’s demand, the Mortgagor entered into a conditional Agreement of Purchase and Sale to sell the property for $8.7 million without notifying the Mortgagee.
In December 2020, the Mortgagee began private power of sale proceedings. It served a notice of sale on the Mortgagor, who did not act during the 35-day standstill. As the closing date approached for the Agreement of Purchase and Sale entered into by the Mortgagor, it notified the Mortgagee in January 2021.
The Mortgagee questioned the legitimacy of the sale and asked for a copy of the Agreement. The Mortgagor quickly gave this to them, but the Mortgagee failed to provide a default statement that the Mortgagor had requested. The day after, the Mortgagee listed the property for sale. However, because the Mortgagee had not provided the Mortgagor with a default statement, the Mortgagee’s enforcement rights were suspended as per section 22(3) of the Mortgages Act.
Days later, the Agreement of Purchase and Sale was finalized at a reduced price of $5.4 million. The sale was to close on March 31, 2021. The Mortgagor, again, did not inform the Mortgagee of the sale. Within a week, the Mortgagee entered into an Agreement of Purchase and Sale with a different Purchaser for $4.49 million. The Mortgagee assured the Purchaser on two occasions that they had complied with the legal requirements for a power of sale. The sale closed on March 2, 2021. The Purchaser granted a mortgage to a third-party lender for $4.3 million, with a second mortgage for $1 million going to the Mortgagee.
Section 22 of the Mortgages Act suspends enforcement rights if certain documents not shared with mortgagor on request
After title to the property was transferred to the Purchaser, the Mortgagor applied to have it set aside based on section 22 of the Mortgages Act. Section 22 reads:
Statement of arrears, expenses, etc.
22(2) The mortgagor may, by a notice in writing, require the mortgagee to furnish the mortgagor with a statement in writing,
(a) of the amount of the principal or interest with respect to which the mortgagor is in default; or
(b) of the nature of the default or the non-observance of the covenant, and of the amount of any expenses necessarily incurred by the mortgagee.
22(3) The mortgagee shall answer a notice given under subsection (2) within fifteen days after receiving it, and, if without reasonable excuse the mortgagee fails so to do or if the answer is incomplete or incorrect, any rights that the mortgagee may have to enforce the mortgage shall be suspended until the mortgagee has complied with subsection (2).
The judge at the initial hearing set aside the transfer
The Mortgagor had requested the Mortgagee produce the default statement, as outlined in section 22 of the Mortgages Act. Because the Mortgagee’s enforcement rights were suspended when the property was sold to the Purchaser, the application judge focused on whether the Mortgagee had transferred good title. The application judge believed himself to be bound by 1173928 Ontario Inc v. 1463096 Ontario Inc, which held that some sales are invalid when executed during a suspension of enforcement rights under section 22 of the Mortgages Act. He held that the purpose of the Mortgages Act was to:
“protect the mortgagees’ ability to take and enforce security to support lending. But it also imposes limits to protect mortgagors from the ‘well-known history of abuses of mortgage lenders,’ with s. 22 being added specifically to protect a mortgagor’s equity of redemption.”
The application judge determined that a breach of section 22 trumped any claims the Purchaser had under the Land Titles Act. The transfer of the title to the Purchaser was therefore set aside.
The Purchaser was an “innocent purchaser” protected by registration under the Land Titles Act
Upon appeal, the Court of Appeal sided with the Purchaser. Even though the Mortgagee’s enforcement rights were suspended when the transfer of title occurred, the Purchaser was an innocent purchaser with title registered under the Land Titles Act system. This is in line with the principles of the land titles system:
“The philosophy of a land titles system embodies three principles, namely, the mirror principle, where the register is a perfect mirror of the state of title; the curtain principle, which holds that a purchaser need not investigate the history of past dealings with the land, or search behind the title as depicted on the register; and the insurance principle, where the state guarantees the accuracy of the register and compensates any person who suffers loss as the result of an inaccuracy. These principles form the doctrine of indefeasibility of title and [are] the essence of the land titles system[.]”
It was the Purchaser seeking to enforce rights, not the Mortgagee
At no time was the Purchaser given notice that there may have been any defects in the power of sale process. In fact, the Mortgagee had informed the Purchaser of compliance with the power of sale process on two occasions.
The Court of Appeal stated that the application judge had incorrectly interpreted section 22 of the Mortgages Act as an exception to the mirror principle of the land titles system. As far as the Purchaser knew, they had obtained good title to the property.
Moreover, the fact that the Mortgagee’s enforcement rights were suspended does not mean their substantive rights had also been suspended. It merely could not enforce the mortgage until it complied with the Mortgagor’s request for the default statement. In this case, the only party seeking to enforce rights was the Purchaser. For that, the appeal was allowed. The Mortgagor’s application to set aside the transfer was dismissed.
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