*CLE16-0090401-A-PUB*

chair

Doug Bourassa Chaitons LLP

September 13, 2016

Mortgage Enforcement ESSENTIALS 2016

Practice Gems

DISCLAIMER: This work appears as part of The Law Society of Upper Canada’s initiatives in Continuing Professional Development (CPD). It provides information and various opinions to help legal professionals maintain and enhance their competence. It does not, however, represent or embody any official position of, or statement by, the Society, except where specifically indicated; nor does it attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein should be used prudently, as nothing in the work relieves readers of their responsibility to assess the material in light of their own professional experience. No warranty is made with regards to this work. The Society can accept no responsibility for any errors or omissions, and expressly disclaims any such responsibility.

© 2016 All Rights Reserved

This compilation of collective works is copyrighted by The Law Society of Upper Canada. The individual documents remain the property of the original authors or their assignees.

The Law Society of Upper Canada 130 Queen Street West, Toronto, ON M5H 2N6Phone: 416-947-3315 or 1-800-668-7380 Ext. 3315Fax: 416-947-3991 E-mail: cpd@lsuc.on.ca www.lsuc.on.ca

Library and Archives Canada Cataloguing in Publication

Practice Gems: Mortgage Enforcement Essentials 2016

ISBN 978-1-77094-768-9 (Hardcopy)ISBN 978-1-77094-769-9 (PDF)

1

Chair: Doug Bourassa, Chaitons LLP

Chair: Doug Bourassa, Chaitons LLP

September 13, 2016 1:00 p.m. – 4:00 p.m.

Total CPD = 2 h 30 m Substantive + 30 m Professionalism

The Law Society of Upper Canada

130 Queen, Street West Toronto, ON

SKU CLE16-00904

Agenda 1:00 p.m. – 1:10 p.m. Welcome and Opening Remarks

Doug Bourassa, Chaitons LLP

1:10 p.m. – 1:35 p.m. The Latest Law Affecting Mortgagees (Including

Additional Charges and Fees)

Doug Bourassa, Chaitons LLP

PRACTICE GEMS:

MORTGAGE ENFORCEMENT

ESSENTIALS 2016

2

1:35 p.m. – 2:00 p.m. NSIs (Notices of Security Interest) and other Title Issues

on Enforcement

Amanda Jackson, Gowling WLG (Canada) LLP 2:00 p.m. – 2:20 p.m. Collateral Mortgages: Special Documentary Issues, Rights

and Remedies Simon Crawford, Bennett Jones LLP 2:20 p.m. – 2:30 p.m. Go Ahead and Ask Us (Question and Answer Session) 2:30 p.m. – 2:45 p.m. Coffee and Networking Break 2:45 p.m. – 3:10 p.m. Mortgagees in Possession: Drawbacks and Benefits

Jerry Udell, C.S., McTague Law Firm LLP 3:10 p.m. – 3:40 p.m. Things I May Have Forgotten but Really Need to Know:

Protecting yourself in a Scary Market (30 minutes )

James Butson, Agueci & Calabretta

Joel Kadish, Kadish Law Professional Corporation

3:40 p.m. – 3:55 p.m. Procedure for Assessing of Accounts, Fees, and Expenses Robert Macdonald, Fogler, Rubinoff LLP 3:55 p.m. – 4:00 p.m. Go Ahead and Ask Us (Question and Answer Session) 4:00 p.m. Program Ends

September 13, 2016 SKU CLE16-00904

Table of Contents

TAB 1 Can a Mortgagee Sell to Itself Under Power of Sale? …….. 1 - 1 to 1 - 9

Doug Bourassa, Chaitons LLP Tushar Sabharwal, Chaitons LLP TAB 2 Title Issues: Notices of Security Interest and

Lodgements of Title …………………………………………………….. 2 - 1 to 2 - 18

Amanda Jackson, Gowling WLG (Canada) LLP James Riewald, Gowling WLG (Canada) LLP

TAB 3 Collateral Mortgages (including, but not limited to,

Mortgages on collateral) ……………………………………………… 3 - 1 to 3 - 30 Simon Crawford, Bennett Jones LLP Nicholas Arrigo, Student-at-Law, Bennett Jones LLP TAB 4 Mortgagees in Possession: Drawbacks and Benefits …….. 4 - 1 to 4 - 7

Jerry Udell, C.S., McTague Law Firm LLP Omar Raza, Barrister and Solicitor Adam Bulkiewicz, Student-at-Law, McTague Law Firm LLP Samuel Atkin, Student-at-Law, McTague Law Firm LLP

PRACTICE GEMS:

MORTGAGE ENFORCEMENT

ESSENTIALS 2016

TAB 5 Things I May Have Forgotten but Really Need to Know:

Protecting yourself in a Scary Market …………………………… 5 - 1 to 5 - 35 Investment Authority Investment Authority – Form 9D Report on Investment – Form 9E Mortgages and Record Keeping Requirements – By-Law 9 - Q&A (CanLII) Law Society of Upper Canada v. Tinianov Resource Links James Butson, Agueci & Calabretta Joel Kadish, Kadish Law Professional Corporation

TAB 6 Procedure for Assessing of Accounts, Fees and

Expenses ……………………………………………………………………… 6 - 1 to 6 - 5 Robert Macdonald, Fogler, Rubinoff LLP

TAB 1

Can a Mortgagee Sell to Itself Under

Power of Sale?

Doug Bourassa Chaitons LLP

Tushar Sabharwal

Chaitons LLP

September 13, 2016

Practice Gems:

Mortgage Enforcement

ESSENTIALS 2016

CAN A MORTGAGEE SELL TO ITSELF UNDER POWER OF SALE?

Doug Bourassa and Tushar Sabharwal

Chaitons LLP

Introduction

In today’s real estate market, aggressive and entrepenurial mortgagees are often concerned not

only with collecting their loaned monies, but will gaze longingly at the substantial equity upside

of owning the mortgaged property. The natural enforcement remedy would be foreclosure.

However, that remedy brings with it a lack of control over the process that is rarely attractive to a

lender. Instead, the question that is more often heard in today’s environment is whether the

lender can purchase the property itself under power of sale. Pejoratively, this is known as the

‘loan-to-own’ strategy.

The answer to this basic question turns out to be highly fact specific. As a starting point, one

must be familiar with a fundamental legal principle, which is that an individual cannot sell to

himself, including to a trustee for himself. Such a sale would be improvident and accordingly set

aside. An early, yet frequently cited decision from England, Farrar v. Farrars (“Farrar”)1,

succinctly summarized this basic proposition:

“A mortgagee cannot sell to himself, nor can two mortgagees sell to one of themselves,

nor to one of themselves and another. The reasons for this are obvious, and are not

merely formal but substantial. A man cannot contract with himself, and in the cases

supposed there cannot be any independent bargaining as between opposite parties. For

similar reasons a mortgagee cannot sell to a trustee for himself; he cannot buy in the

name of another”2

The passage above, though it may seem conclusive, actually raises further questions. Most

importantly, what are the parameters of “himself”? Will the courts uphold a sale by a mortgagee

to a spouse or a relative? What about a sale to corporation where the mortgagee is a shareholder?

Finally are there any special provisions for banks and financial institutions?

This paper will canvass the jurisprudence beginning from some of the earliest to some of the

most recent reported decisions on this question. This paper concludes that the principle from

Farrar is not absolute and as long as certain “duties” are followed by the mortgagee, the sale will

1 (1888) 40 Ch. D 396 2 Ibid at para 5 (lower court decision)

1 - 1

likely survive the court’s scrutiny. Whether it will attract litigation from the mortgagor is an

entirely different question.

Mortgagee as Shareholder of the Purchasing Corporation

(a) Farrar v Farrars Limited (1888) 40 Ch. D 396

The Farrar decision was referred to earlier for the legal principle that a mortgagee cannot sell to

himself. However, Farrar is also noteworthy because it opened to door for mortgagees to sell to

a corporation in which they held equity.

In Farrar, the defendant was one the three mortgagees of a property. The plaintiffs, being the

mortgagors, were in default and subsequently, the mortgagees took possession of the property.

Despite good faith endeavours to seek buyers for the property, the mortgagees failed to receive a

single offer. The mortgagees were advised by a “very competent person” named Mr. Hepper that

there was no prospect of a sale3. Accordingly, the defendant formed a limited company, in which

he was a significant shareholder, in order to use it as a vehicle to purchase the property. The

defendant successfully completed the transaction through the company; however, the plaintiffs

commenced an action to have the sale set aside on the grounds that the company was formed by

the defendant to purchase the property from the mortgagees at undervalue and as a result, the

transaction was fraudulent.

Despite outlining the principle that a mortgagee cannot sell to himself, the court decided in

favour of the defendant and the transaction was upheld. In arriving at its decision, the court was

cognizant of the deep-seated legal distinction between a natural person and a corporation at law:

“A sale by a person to a corporation of which he is a member is not, either in form or in

substance, a sale by a person to himself. To hold that it is, would be to ignore the

principle which lies at the root of the legal idea of a corporation body, and that idea is

that the corporate body is distinct from the persons composing it. A sale by a member of

a corporation to the corporation itself is in every sense a sale valid in equity as well as

law. There is no authority for saying that such a sale is not warranted by an ordinary

power of sale, and in our opinion, such a sale is warranted by such a power, and does not

fall within the rule to which we have at present referred.”4[Emphasis added]

3 Ibid at para 3 (lower court decision) 4 Farrar v Farrars Limited (1888) 40 Ch. D 396 at para 5 (court of appeal)

1 - 2

Even though the sale to the company was held not to offend the principle, the court in Farrar

created boundaries under which this exception to the principle could apply. The boundaries are

essentially the “duties” that the mortgagee selling under a power of sale as to abide by.

Essentially, the corporation has the burden of upholding the sale by demonstrating its fulfilment

of its duties. In Farrar, the duties outlined by the court included the duty to act in good faith and

the duty to take reasonable precautions to obtain a proper price. The defendant in Farrar fulfilled

his duties by doing his best to induce the mortgagors to pay him off, advertising the property in

the newspapers, putting the property up to auction and taking advice from a Mr. Hepper. In its

disposition on the issue of validity, the court stated the following:

“The evidence shows that the transaction was thoroughly honest and fair, and,,

notwithstanding its suspicious appearance, the company has proved its validity”5

This presents an interesting commingling of two different legal principles: (a) the validity of a

sale; and (b) the lender’s liability for an improvident sale. In Farrar, the purchaser was a risk of

having the sale set aside as invalid, whereas in a normal improvident sale transaction, the risk is

of a damages award, not usually a vacation of title. This additional risk can be understood as

premised on the principal of actual notice. A purchaser with knowledge of the sale at an

improvident basis takes title subject to that knowledge, and may therefore be liable to losing title.

(b) Ostrander v Niagara Helicopters Ltd6 [“Ostrander”]

The Ostrander decision is particularly interesting because it dealt with the validity of a sale of a

property by a mortgagee to a corporation in which the receiver-manager had a shareholding

interest.

In Ostrander a receiver-manager named Bawden was appointed privately by the debenture

holder, Roynat, upon default by the debtor. Ultimately, the debenture holder entered into an

agreement to sell the assets to New Unisphere, a corporation in which the receiver-manager held

a 2% interest. The debtor subsequently petitioned the court to declare the transaction void

because it alleged that the receiver and other defendants conspired against him, and that the

defendants wrongfully converted assets, thereby committing fraud.

5 Ibid at 17 6 1973 CanLII 467 (Ont. H.C.J.)

1 - 3

The court was of the view that even though the receiver-manager was an agent for the mortgagee

in possession and had a shareholding interest in the purchasing corporation, the transaction was

“While I find that the purchase by Mr. Bawden of the shares in New Unisphere, in the

amounts and at the times when he did, were purchases which he should better not have

made, I cannot find anything in these transactions to impugn the validity of the final sale

by tender. I am satisfied that Mr. Bawden and his principal Roynat did the very best they

could to protect their own security but at the same time went out of their way to assist

Ostrander in so far as his private negotiations had any hopes of success. Other than the

tactless purchase of these shares and the minor misjudgment with respect to certain

payments with which I have already dealt, I can find nothing censurable in Mr. Bawden's

conduct. I am satisfied that the power of sale was exercised in a fair and proper manner

and that in the opinion of Roynat and its advisers the better offer was obtained.”7

The court found that the transaction in question was completed only after other avenues to

sustain the business in receivership were exhausted. Further, even though there was another

competing offer, the court was of the view that such decisions were to be made at Roynat’s

discretion. Again, despite the suspicious circumstances surrounding the transaction, it was

ultimately upheld. Roynat and the receiver-manager had discharged themselves of the burden

placed upon them by demonstrating that they acted in good faith and took reasonable precautions

to obtain a proper price.

(c) 665456 Ontario Ltd. v. Barelan Management Inc.8[“Barelan”]

Barelan, is a more recent Ontario Court of Appeal decision and is another example of the courts

dealing with a transaction under a power of sale where a mortgagee is a shareholder of the

purchasing corporation.

The basic facts in Barelan were that the assignee of a mortgage exercised its power of sale and

sold the property to a numbered corporation at a price in excess of the appraised value. Most

importantly, it should be noted that the same person controlled the assignee and the purchasing

corporation. Prior to the closing of the sale, the mortgagor sought to redeem the mortgage. The

lender refused, asserting that, since a firm agreement to sell had been entered into, the right to

redeem had been extinguished.

7 Ibid at para 12 8 1990 CanLII 6907 (Ont. C.A.)

1 - 4

At trial, the court followed the reasoning in Farrar and decided to uphold the transaction entered

into by the assignee of the mortgage and the numbered company. The court was of the view that

the transaction amounted to a valid financing scheme by the assignee and the purchaser to

protect its investment, much as a company must often resort to a plan to overcome a hostile take-

over bid. Also working in their favour was the fact that the purchase price was in excess of the

appraised value. Similar to Farrar and Ostrander, this transaction at the trial stage passed the

scrutiny of the courts as the assignee had discharged the burden placed upon it.

The decision was appealed and the impugned transaction was set aside, albeit for reasons

unrelated to the validity of the sale. The Court of Appeal reasoned that, since on the particular

facts of this case, the sale agreement provided that the mortgage was to remain in force, the

mortgagor’s equity of redemption also remained in force:

“Under this agreement, the mortgage is to remain in effect and survive this sale. The

mortgagor’s equity of redemption is therefore not extinguished nor is its right to redeem.

The mortgagee has, to all intents and purposes, simply postponed payment of the

mortgage”9

Accordingly, the Court of Appeal’s decision must be viewed as restricted to its specific (and

unusual facts). Yet, the decision should not take away from the overarching theme from

Barelan, which is that the courts in Ontario are receptive to sales to related corporations under

power of sale.

(d) Lay v. 1222055 Ontario Inc10 [“Lay”]

The Lay decision can be considered the seminal authority on the duties of mortgagees during a

power of sale. Unlike Farrar, Barelan and Ostrander, Lay is an example of a case where the

mortgagee failed to fulfill its duties. As a consequence of that failure, the impugned transaction

was set aside. At issue in this case was the sale of a golf course by a mortgagee to a purchaser

under power of sale. The mortgagee owned a 60% interest in the purchasing company, which

served as the vehicle for completing the transaction.

Further, in Lay, the court articulated and expanded on the duties of a mortgagee acting under a

power of sale: 9 Ibid at para 16 10 2006 CanLII 30865 (ONSC).

1 - 5

“In Broos v. Robinson (1984) 23 A.C.W.S. (2nd) 556 (H.C.J.) the court set out a list of

specific “duties” that should be followed, or at least considered by the mortgagee during

the power of sale procedure. Not all of these steps will be necessary or appropriate in

every case. The list is, however, helpful to flesh out in greater detail the scope of the

mortgagee’s duty “to take reasonable precaution to obtain the true market value of the

mortgaged property” at the date of sale. “True” market value is synonymous with “fair

market value” for these purposes. These steps include:

(1) act bona fides in the exercise of the power of sale;

(2) attempt to realize fair market value in the sale;

(3) give some consideration to the interests of the mortgagor as well as the

mortgagee’s own interests;

(4) do not conduct the sale in bad faith (which is the reverse side of (1));

(5) see that the property comes to the attention of a wide segment of the market;

(6) obtain proper appraisals;

(7) advertise the property for sale;

(8) place “For Sale” signs on the property;

(9) place the property with the Multiple Listing Service; and

(10) ensure that efforts are conducted over a reasonable period of time.”11

In Lay, a number of factors outlined above were not followed and were ultimately detrimental to

the interests of the mortgagee and purchaser. First, the mortgagee made no serious effort to test

the public market for the sale of the golf course. The marketing effort of the mortgagee consisted

of a single fax broadcast to the Golf Course Owners Association (Canada), a relatively small

segment of the potential market. This was considered a mere “Token Effort”12. Second, they

took no steps independently to establish the fair market value of the golf course. The failure of

the mortgagee to obtain an appraisal or to even seek the advice of real estate professionals was

also considered damaging to its interests. Third, the mortgagees created a document named “a

business scenario”, which outlined their long-term plan to take over the golf course and make it

profitable. Of utmost importance, was the fact that this document was made in anticipation of the

default by the mortgagor. The existence of the plan spoke volumes of the mortgagees’ intentions

under the power of sale. The mortgagees were not interested in protecting their investment;

rather, they were interested in acquiring the golf course for themselves. In the eyes of the court,

this amounted to bad faith. The combination of failures by the mortgagees resulted in the

transaction being labeled a sham by the court and ultimately set aside.

11 Ibid at para 31. 12 Ibid at para 38.

1 - 6

In summary, from the Farrar decision to the Lay decision, it is clear that sales under power of

sale to related parties, such as corporations controlled by the principals of the lender, are not

strictly prohibited. The court will place the burden on the mortgagee to demonstrate the

fulfillment of its duties, to act in good faith to canvass the market and obtain an approximation of

market value. If these duties are complied with in good faith, there is no reason why such a

transaction would be set aside by the courts.

Mortgagee’s Spouse and Relatives

The mortgagee’s spouse and relatives may purchase the mortgaged property. Generally speaking,

the rationale is that the mortgagee is not “selling to himself”. In Bell v Smith (1916), 10 O.W.N.

414 (H.C.), it was held:

“The mortgagee was entitled to find a purchaser, if she did it fairly; and her husband did

not, in the absence of any suggestion to the contrary, come within the prohibited classes,

mentioned in Farrar v. Farrars, Ltd. (1888), 40 Ch. D. 395 (C.A.)." [Emphasis added]

As such, absent any indication of fraud or a failure of the mortgagee to perform one of his/her

duties, the transaction will be upheld. In Lake Apartments Ltd. v. Bootwala13, a decision from

Newfoundland, the mortgagee dealt with transactions between two brothers, one being the

mortgagee and the other the purchaser. The sale in this case was undervalued; however, it was

still upheld by the court. In its reasoning, the court was of the view that in such transactions,

without corruption or collusion between the mortgagee and purchasers, the court will not

interfere. The court was unable to find any evidence of collusion in this case.

Sale to a Third Party and Subsequent Reconveyence

There can be no doubt that a transaction valid in form and not in substance will not stand up to

judicial scrutiny. For example in the early Ontario case McLaren v. Fraser14, the mortgagee

exercised the power of sale contained in his mortgage by improperly selling to his own clerk who

13 37 D.L.R. (3d) 523. 14 1870 CarswellOnt 100

1 - 7

bought the property and subsequently conveyed it back to the mortgagee. Not surprisingly, the

transaction was set aside and the court in its reasons stated:

“The purchase made by Fraser (the defendant) under the power of sale was set aside upon

the application of that politic rule of equity which forbids the purchase by a trustee for

sale”15

Therefore, anyone who may think they have outsmarted the principle outlined in Farrar, by

creating a transaction which is in form compliant, but not in substance will be disappointed. It is

clear that such transactions will be met with equal scrutiny.

Are There Any Special Considerations for Banks?

Interestingly, if one looks at s. 433 of the Bank Act, it may lead to the conclusion that banks are

immune from the strictures of the Farrar decision and thus, have a free reign to purchase

property that it is selling under power of sale proceedings. The relevant parts of the section have

been reproduced below:

Purchase of realty

433 A bank may purchase any real property offered for sale

(c) by the bank under a power of sale given to it for that purpose, notice of the sale by

auction to the highest bidder having been first given by advertisement for four weeks in a

newspaper published in the county or electoral district in which the property is situated,

in cases in which, under similar circumstances, an individual could so purchase, without

any restriction as to the value of the property that it may so purchase, and may acquire

title thereto as any individual, purchasing at a sheriff’s sale or sale for taxes or under a

power of sale, in like circumstances could do, and may take, have, hold and dispose of

the property so purchased.16

However, it is important to note three factors that undermine the conclusion that banks are

immune from the common law principle in Farrar. First, there are no reported decisions

considering the provisions of s. 433(c) of the Bank Act. It is therefore unclear how s. 433(c) of

15 Ibid 16 Bank Act, SC 1991, c. 46, s. 433(c)

1 - 8

the Bank Act would be applied in light of the well established legal principle in Farrar. Second,

the requirements under this section are quite stringent. The requirements include four weeks of

advertising in a newspaper and going through an auction process. Auctions are a rare method of

conducting a power of sale in Canada. Third, the Bank Act only applies to Canadian Chartered

Banks and to some Canadian subsidiaries of foreign Banks. By no means does this provision

apply to all mortgage lenders across Ontario or to individual mortgagees.

Conclusion

There can be no doubt that a direct sale to oneself clearly offends the common law rule

established in Farrar. However, when a mortgagee purchases under a power of sale as a

shareholder of a corporation, the courts will not set aside the transaction automatically; rather,

the transaction will be scrutinized. So long as the mortgagee fulfills its duties under a power of

sale, the transaction should stand. Similar considerations apply to sales to spouses or other

relatives. Further, there can be no doubt that transactions compliant in form but not in substance

will clearly fail. On the other hand, although s. 433 of the Bank Act may seem to provide some

assistance to banks, the provision has yet to be considered by the judiciary. As it stands, s. 433

provides a very restrictive and unattractive means of completing a power of sale.

For the entrepeneurial lender, it may be able to successful complete this ‘backdoor foreclosure’.

It is not a strategy without risk. Related party transactions often attract litigation from

mortgagors who feel, rightly or wrongly, that the lender has not fulfilled its duties to obtain

market value. In assessing the value of the property as a potential purchase, a lender should add

a legal fee component to its cost/benefit analysis. There will be little chance of collecting any

costs award against a mortgagor who unsuccessfuly challenges a sale. After all, they couldn’t

pay their debts in the first place.

1 - 9

TAB 2

Title Issues: Notices of Security Interest

and Lodgements of Title

Amanda Jackson Gowling WLG (Canada) LLP

James Riewald

Gowling WLG (Canada) LLP

September 13, 2016

Practice Gems:

Mortgage Enforcement

ESSENTIALS 2016

TITLE ISSUES: NOTICES OF SECURITY INTEREST AND LODGEMENTS OF TITLE

James Riewald and Amanda Jackson Gowling WLG (Canada) LLP September, 2016

Introduction

It is not uncommon for equipment such as furnaces and air conditioners to be sold to a

consumer with a payment plan stretching over several years. A financier will typically

protect the priority of its security by registering a Notice of Security Interest. A less

popular registration achieving a similar purpose is a Lodgement of Title. These

registrations can often create priority issues between a mortgagee and the financier and

lead to title problems when a mortgagee seeks to convey a property under power of

sale. The purpose of this paper is to identify both types of registration, analyze typical

priority issues and discuss the treatment of both in the sale process.

Notice of Security Interest

A Notice of Security Interest is a creature of statute. The Personal Property Security

Act1 permits the registration of a notice of security interest (in the required form) in the

proper land registry office where the collateral is or includes fixtures or goods that may

become fixtures.2 The form of notice is prescribed by Minister’s Order, pursuant to

section 25 of the PPSA.

By registering the notice in the land registry office, a secured party is able to give notice

of its interest in the collateral to subsequent mortgagees and purchasers. Where a

1 R.S.O. 1990, c. P10

2 Ibid., s. 54(1)

2 - 1

notice has been registered, every person dealing with the collateral is deemed to have

knowledge of the security interest for the purpose of s. 34(2) of the PPSA.3

Section 34 of the PPSA is the starting point for determining priorities between secured

creditors and persons with an interest in the real property on which the fixture is located.

The general rule is that where the security interest in goods attaches before the goods

become a fixture, the security interest has priority over the claim of any person with an

interest in the real property (i.e., mortgagees). Where the security interest attaches

after the goods become a fixture, the security interest will have priority over

subsequently acquired interests in the real property but not over persons with registered

interests in the real property at the time the security interest attached and who have not

consented in writing to the security interest or disclaimed an interest in the fixture.4

Generally, the key issue for determining priorities is the timing of when the security

interest attaches to the goods. A security interest attaches when value is given, the

debtor has rights in the collateral or the power to transfer rights in the collateral to a

secured party and the debtor has signed a security agreement that contains certain

legislated information.5

The exceptions to the general rule stated above are twofold: (i) subsequent purchasers

for value of an interest in the real property; or (ii) creditors with prior encumbrances to

the extent that subsequent advances are made, if the purchase or subsequent advance

is made without knowledge of the security interest and before notice of the security

interest is registered in accordance with s. 54.6

3 Ibid., s. 54(5)

4 Ibid., s. 34(1)

5 Ibid., s. 11

6 Ibid., s. 34(2)

2 - 2

The deemed knowledge provision of s. 54 is important because by registering a notice

of security interest, a secured creditor is able to extend its priority over the fixture to

persons that would otherwise fall within the two exceptions set out above. Registration

of the notice protects the secured party’s priority over the fixture as against the claims of

subsequent purchasers or creditors making subsequent advances who might otherwise

claim they had no knowledge of the security interest.

The usual process when registering a transfer under power of sale is that the land

registrar will delete the entry of instruments (such as mortgages) that rank subsequent

to the mortgage under which the land is sold.7 However, there are a number of

instruments and entries that will not automatically be deleted even where notice of the

sale has been given.8 A Notice of Security Interest is one such instrument.

A Notice of Security Interest will not be deleted unless the mortgagee or its solicitor

make a statement attesting to the following:

1. That to the best of his/her knowledge and belief the security interest was

attached to the goods after they became fixtures and that the mortgagee did

not consent in writing to the security interest nor disclaim any interest in the

goods as fixtures; or

2. That to the best of his/her knowledge and belief the security interest was

attached to the goods before they became fixtures and that to the best of

his/her knowledge and belief a subsequent advance, as set out in the PPSA,

was made or contracted for under the mortgage without actual notice of the

security.9

7 Land Titles Act, R.S.O. 1990, c. L.5, s. 99(2)

8 Electronic Registration Procedures Guide, Version 11, January 2016, pp. 68 and 69

9 Electronic Registration Procedures Guide, Version 11, January 2016, p. 68

2 - 3

The statements set out above attest to the priority of the mortgage over the security

interest. In the case of the first statement, a person with an existing mortgage

registered on title will have priority over a secured creditor where the security interest

attaches to the goods after they become fixtures where the mortgagee did not consent

to the security interest or disclaim any interest in the goods as fixtures.10 In the case of

the second statement, the mortgage will have priority, even where the security interest

attached before the good became a fixture, where a subsequent advance was made

under the mortgage without actual notice of the security.11

Essentially, if a mortgagee can attest to the priority of its mortgage over the security

interest by making the above statements, the land registrar may delete the Notice of

Security Interest. The difficulty from a mortgagee’s perspective is that priorities

between a secured party and a mortgagee are often complicated. Consider, for

instance, the case of G.M.S. Securities & Appraisals Ltd. v. Rich-Wood Kitchens Ltd.12

The Ontario Court of Appeal considered the relative priorities between a first

mortgagee, a secured creditor whose security interest attached before the goods

became fixtures and a third mortgagee (a second mortgage had been previously paid

out). Subsequent to the registration of the first mortgagee, the goods became affixed to

the property. After the date the goods became attached, the first mortgagee made a

subsequent advance and the third mortgagee registered its mortgage. The secured

creditor registered a Notice of Security Interest after registration of the third mortgage.

The scenario created a circular priority problem. The first mortgagee had priority over

the secured creditor as to the amount of its subsequent advance only, the third

mortgagee had complete priority over the secured creditor but the first mortgagee had

priority over the third mortgagee for its mortgage.

10 PPSA, s. 34(1)(b); Home Trust Company v. Kitchener (City), 2013 ONSC 2190 (CanLII) at para. 29.

11 PPSA, s. 34(2)(b)

12 [1995] O.J. No. 44 (ONCA)

2 - 4

Practical Options

There are several other practical options for dealing with a Notice of Security Interest in

the context of a power of sale.

In the case of a Notice involving a security interest in goods subject to a rental

agreement (such as a furnace or water heater), the Agreement of Purchase and Sale

should make provision for the assumption by the purchaser of the rental agreement. In

such a case, provided the purchaser agrees, the Notice of Security Interest will simply

remain on title and there will be no issues.

In the case of a sale where there will be a surplus sufficient to pay out the interest of the

secured creditor, the sale transaction may close if the parties agree to an undertaking

by the mortgagee’s solicitor to obtain a discharge of the Notice of Security Interest.

Where there is likely to be a deficiency on sale, the mortgagee may want to consider

negotiating with the secured creditor to accept something less than what is owed in

respect of the security interest.

A final option is to insist that the secured creditor remove the fixture and discharge the

Notice of Security Interest. While the PPSA grants rights to a secured creditor to

remove a fixture13 there is no provision granting rights to a person with an interest in the

real property to insist that the secured creditor remove the fixture. The absence of a

provision does not necessarily mean that a person with an interest in the land does not

otherwise have such a right. The PPSA is clear that the principles of law and equity

shall supplement the PPSA and continue to apply unless they are inconsistent with the

express provisions of the PPSA. In Gari Holdings Ltd. v. Langham Credit Union Ltd.14,

the Saskatchewan Court of Appeal did not rule out that a person with an interest in land

13 See PPSA, s. 34(3)

14 2005 SKCA 97

2 - 5

who wished to have a fixture removed could seek a mandatory injunction against the

financier to do so. Moreover, the Court held that there was no reason why a person

should not be able to recover for loss occasioned by a commercially unreasonable

failure on the part of a financier to remove a fixture after having given notice of its

intention to do so. The Court reasoned that denying a remedy in such a situation would

effectively allow financiers to store fixtures on the property of others at no cost.15 In

G.M.S. Securities, supra, the Ontario Court of Appeal reasoned that a first mortgagee

converted the right of a financier to remove its fixture when it sold the subject property

under power of sale and held that against the first mortgagee when considering what

the reasonable commercial expectations of the parties were in resolving a priority

dispute. Perhaps it is within the reasonable commercial expectations of a mortgagee

and financier that if a mortgagee insists that a financier remove or waive its right to a

fixture, the financier will do so allowing the mortgagee to sell the property under power

of sale free and clear of any Notice of Security Interest.

The PPSA sets out circumstances where a person can demand that a secured party

register a discharge of a Notice of Security Interest (i.e., where all the obligations under

the security agreement have been performed).16 However, there is no provision for the

discharge of a Notice of Security Interest where the fixture once located on the subject

property is no longer present. In Home Trust Company v. Kitchener (City), supra, the

mortgagee took possession of the mortgaged property. At the time it took possession,

there was no air conditioner, which was subject to a security agreement, located on the

property. The mortgagee sold the property and the financier insisted on payment under

its Notice of Security Interest. The Court held that a Notice of Security Interest was not

an interest in land and that the reasonable commercial expectations of the parties

dictated that the financier should bear the loss.17 Accordingly, in situations such as the

15 Ibid, at paras. 25-28

16 PPSA, s. 56

17 Home Trust Company v. Kitchener (City), supra, at paras. 25 and 33

2 - 6

above, a mortgagee ought to be entitled to a discharge of the Notice of Security

Interest.

Lodgement of Title/Deposit of Title Deeds

A lesser known instrument sometimes found on title is a Lodgement of Title or Deposit

of Title Deeds.

A Lodgement of Title will typically provide that the borrower has delivered to the creditor

the title deeds to a property and that the creditor will have security over the property

until all obligations under an agreement have been performed. Security over real

property by way of Lodgement of Title is a recognized form of equitable mortgage in

Ontario.18 There does not have to be actual delivery of the title deeds - an agreement to

deliver the deeds is sufficient.19

Pursuant to s. 71 of the Land Titles Act20, any person entitled to or interested in any

unregistered estates, rights, interests or equities in registered land may protect same by

registering a notice under the section as authorized by the Director of Titles. A Notice of

Lodgement is a notice for which approval has been given by the Director Titles.21

In contrast to a Notice of Security Interest, a Notice of Lodgement is an entry that will be

deleted upon the registration of a transfer by a mortgagee under power of sale provided

that the Notice is registered subsequent to the mortgage under which the property is

conveyed. Any priority issues between the holder a Notice of Lodgement and a

mortgagee will be the typical priority issues as between mortgagees and order of

registration will prevail.

18 Walter M. Traub. Falconbridge on Mortgages, Fifth Edition, pages 5-7 and 5-8; Budzyk v. Thunder Bay Ventures, [1997] O.J. No. 658 at paras. 16 and 17.

19 Ibid.

20 R.S.O. 1990, c. L.5

21 Electronic Registration Procedures Guide, Version 11, January 2016, p. 106

2 - 7

Upon deletion of the Notice of Lodgement in a power of sale, the interest of any person

claiming under the Notice of Lodgement ceases to affect the land.22

Notwithstanding that the Notice of Lodgement will be deleted in a power of sale if it

ranks subsequent to the mortgage under which the property is conveyed, a purchaser

may want to consider if the Notice of Lodgement and/or communications from the

mortgagee or mortgagee’s lawyer in the course of the sale transaction puts the

purchaser on notice of some knowledge of a security interest. It may be that the

Lodgement of Title is part of a larger, multi-faceted consumer sale contract and that the

financier also has a security interest in a good affixed to the property.

A subsequent purchaser only obtains priority over a fixture if the purchase is made or

contracted for without knowledge of the security interest and before a Notice of Security

Interest is registered. The registration of the Notice of Security Interest deems a

purchaser to have knowledge but the registration is not necessary for the financier to

retain priority. While a financier may choose to register a Lodgement of Title in

accordance with the provisions of its consumer sale contract, it may be that the

consumer sale contract also creates a security interest. It could be argued by the

financier that the Notice of Lodgment also provides notice to a purchaser of an interest

in a fixture located on the property. Such an argument would be factually dependent on

the wording of the Notice of Lodgement and any other knowledge a purchaser may

have gained in the course of the sale negotiations. If a financier can successfully argue

that the purchaser had knowledge of the security interest then it would maintain priority

as against the purchaser.

However, it is unclear what level of knowledge is required. Arguably, the purchaser

would have to have knowledge of the security interest in the goods and that the security

interest had attached. The purchaser would need to have knowledge of each of the

conditions required for attachment:

22 Land Titles Act, s. 99(2)

2 - 8

a) value given;

b) the debtor has rights in the collateral or the power to transfer rights in the

collateral to a secured party; and

c) the debtor has signed a security agreement that contains a description of the

collateral sufficient to enable it to be identified.23

It seems unlikely that a purchaser would have such knowledge but, as stated above,

such a finding would be factually dependent on the particular transaction and the

wording of the Notice of Lodgement.

Conclusion

In conclusion, registrations of a Notice of Security Interest or Notice of Lodgement can

create complications where a property is being conveyed under power of sale. Where

there are sufficient proceeds to satisfy the financier’s interest or where the purchaser

agrees to assume the existing contract, problems are avoided. Where there are

insufficient proceeds a priority dispute between the interested parties may arise.

23 PPSA, s. 11(2)

2 - 9

Personal Property Security Act, R.S.O. 1990, c. P.10

Attachment required to enforce security interest 11. (1) A security interest is not enforceable against a third party unless it has attached. 2006, c. 8, s. 129. When security interest attaches to collateral (2) Subject to section 11.1, a security interest, including a security interest in the nature of a floating charge, attaches to collateral only when value is given, the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party and, (a) the debtor has signed a security agreement that contains, (i) a description of the collateral sufficient to enable it to be identified, or (ii) a description of collateral that is a security entitlement, securities account or futures account, if it describes the collateral by any of those terms or as investment property or if it describes the underlying financial asset or futures contract; (b) the collateral is not a certificated security and is in the possession of the secured party or a person on behalf of the secured party other than the debtor or the debtor’s agent pursuant to the debtor’s security agreement; (c) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under section 68 of the Securities Transfer Act, 2006 pursuant to the debtor’s security agreement; or (d) the collateral is investment property and the secured party has control under subsection 1 (2) pursuant to the debtor’s security agreement. 2006, c. 8, s. 129. Same (3) If the parties have agreed to postpone the time for attachment, the security interest attaches at the agreed time instead of at the time determined under subsection (2). 2006, c. 8, s. 129. Attachment in securities account (4) The attachment of a security interest in a securities account is also attachment of a security interest in the security entitlements carried in the securities account. 2006, c. 8, s. 129. Attachment in futures account (5) The attachment of a security interest in a futures account is also attachment of a security interest in the futures contracts carried in the futures account. 2006, c. 8, s. 129.

2 - 10

Perfecting as to proceeds 25. (1) Where collateral gives rise to proceeds, the security interest therein, (a) continues as to the collateral, unless the secured party expressly or impliedly authorized the dealing with the collateral free of the security interest; and

(b) extends to the proceeds. R.S.O. 1990, c. P.10, s. 25 (1); 2000, c. 26, Sched. B, s. 16 (3).

Idem (2) Where the security interest was perfected by registration when the proceeds arose, the security interest in the proceeds remains continuously perfected so long as the registration remains effective or, where the security interest is perfected with respect to the proceeds by any other method permitted under this Act, for so long as the conditions of such perfection are satisfied. R.S.O. 1990, c. P.10, s. 25 (2). Idem (3) A security interest in proceeds is a continuously perfected security interest if the interest in the collateral was perfected when the proceeds arose. R.S.O. 1990, c. P.10, s. 25 (3). Idem (4) If a security interest in collateral was perfected otherwise than by registration, the security interest in the proceeds becomes unperfected ten days after the debtor acquires an interest in the proceeds unless the security interest in the proceeds is perfected under this Act. R.S.O. 1990, c. P.10, s. 25 (4). Motor vehicles classified as consumer goods (5) Where a motor vehicle, as defined in the regulations, is proceeds, a person who buys or leases the vehicle as consumer goods in good faith takes it free of any security interest therein that extends to it under clause (1) (b) even though it is perfected under subsection (2) unless the secured party has registered a financing change statement that sets out the vehicle identification number in the designated place. R.S.O. 1990, c. P.10, s. 25 (5).

2 - 11

Fixtures 34. (1) A security interest in goods that attached, (a) before the goods became a fixture, has priority as to the fixture over the claim of any person who has an interest in the real property; or

(b) after the goods became a fixture, has priority as to the fixture over the claim of any person who subsequently acquired an interest in the real property, but not over any person who had a registered interest in the real property at the time the security interest in the goods attached and who has not consented in writing to the security interest or disclaimed an interest in the fixture.

Exceptions (2) A security interest mentioned in subsection (1) is subordinate to the interest of, (a) a subsequent purchaser for value of an interest in the real property; or

(b) a creditor with a prior encumbrance of record on the real property to the extent that the creditor makes subsequent advances,

if the subsequent purchase or subsequent advance under a prior encumbrance of record is made or contracted for without knowledge of the security interest and before notice of it is registered in accordance with section 54.

Removal of collateral (3) If a secured party has an interest in a fixture that has priority over the claim of a person having an interest in the real property, the secured party may, on default and subject to the provisions of this Act respecting default, remove the fixture from the real property if, unless otherwise agreed, the secured party reimburses any encumbrancer or owner of the real property who is not the debtor for the cost of repairing any physical injury but excluding diminution in the value of the real property caused by the absence of the fixture or by the necessity for replacement.

2 - 12

Notice in land registry office 54. (1) A notice of security interest, in the required form, may be registered in the proper land registry office, where, (a) the collateral is or includes fixtures or goods that may become fixtures or crops, or minerals or hydrocarbons to be extracted, or timber to be cut; or

(b) the security interest is a security interest in a right to payment under a lease, mortgage or charge of real property to which this Act applies. R.S.O. 1990, c. P.10, s. 54 (1); 1998, c. 18, Sched. E, s. 198 (1).

Consumer goods, registration period (2) Where the collateral is consumer goods, a notice registered under clause (1) (a) or an extension notice registered under subsection (3), as the case may be, shall set out an expiration date, and the notice or extension notice is effective until the end of the expiration date. 2015, c. 20, Sched. 35, s. 2. Idem (3) A registration to which subsection (2) applies may be extended before the end of the registration period by the registration of an extension notice. R.S.O. 1990, c. P.10, s. 54 (2, 3).

Discharge (4) A notice registered under subsection (1) may be discharged or partially discharged by a certificate in the required form and the certificate may be registered in the proper land registry office. R.S.O. 1990, c. P.10, s. 54 (4); 1998, c. 18, Sched. E, s. 198 (2). Effect of registration (5) Where a notice has been registered under subsection (1), every person dealing with the collateral shall be deemed for the purposes of subsection 34 (2) to have knowledge of the security interest. Loss of claim (6) Where the collateral is consumer goods and the expiration date set out in a notice registered under clause (1) (a) has passed and an extension notice has not been registered or has expired, the land described in the notice is not affected by any claim under the notice but this subsection does not prevent the registration of a new notice under clause (1) (a). R.S.O. 1990, c. P.10, s. 54 (5, 6).

2 - 13

Discharge or amendment

Discharge where security interest existed 56. (1) Where a financing statement or notice of security interest is registered under this Act, and, (a) all the obligations under a security agreement to which it relates have been performed; or

(b) it is agreed to release part of the collateral covered by a security agreement to which it relates upon payment or performance of certain of the obligations under the security agreement, then upon payment or performance of such obligations,

any person having an interest in the collateral covered by the security agreement may deliver a written notice to the secured party demanding registration of a financing change statement referred to in section 55 or a certificate of discharge or partial discharge referred to in subsection 54 (4), or both, and the secured party shall register the financing change statement or the certificate of discharge or partial discharge, or both, as the case may be. R.S.O. 1990, c. P.10, s. 56 (1); 2006, c. 34, Sched. E, s. 18 (1).

Discharge where no security interest acquired (2) Where a financing statement or notice of security interest is registered under this Act and the person named in the financing statement or notice as the secured party has not acquired a security interest in the property to which the financing statement or notice relates, any person having an interest in the property may deliver a written notice to the person named as the secured party demanding registration of a financing change statement referred to in section 55 or a certificate of discharge referred to in subsection 54 (4), or both, and the person named as the secured party shall register the financing change statement or the certificate of discharge, or both, as the case may be. R.S.O. 1990, c. P.10, s. 56 (2); 2006, c. 34, Sched. E, s. 18 (2). Amendment (2.1) If a financing statement is registered under this Act and the collateral description or collateral classification in the financing statement includes personal property that is not collateral under the security agreement, the person named in the financing statement as the debtor may deliver a written notice to the person named as the secured party demanding registration of a financing change statement referred to in section 49 to provide an accurate collateral description, and the person named as the secured party shall register the financing change statement. 2006, c. 34, Sched. E, s. 18 (3). Removal of collateral classifications (2.2) If a financing statement is registered under this Act and the person named in the financing statement as the secured party has not acquired a security interest in any property within one or more of the collateral classifications indicated on the financing statement, the person named in the financing statement as the debtor may deliver a written notice to the person named as the secured party demanding registration of a financing change statement referred to in section 49 to correct the collateral

2 - 14

classifications by removing any collateral classification in which the person named as the secured party has not acquired a security interest, and the person named as the secured party shall register the financing change statement. 2010, c. 16, Sched. 5, s. 4 (4). Limiting collateral classification (2.3) If a financing statement is registered under this Act and the person named in the financing statement as the secured party has not included words limiting the scope of the collateral classification within the meaning of subsection 46 (2.1) and has acquired a security interest only in particular property within the classification, the person named in the financing statement as the debtor may deliver a written notice to the person named as the secured party demanding registration of a financing change statement referred to in section 49 to add words limiting the scope of the collateral classification, and the person named as the secured party shall register the financing change statement. 2010, c. 16, Sched. 5, s. 4 (4). (2.4) Repealed: 2006, c. 34, Sched. E, s. 18 (3).

Definition (3) For the purposes of subsections (4) and (5), “secured party” includes a person named in a financing statement or notice of security interest as the secured party to whom subsection (2) applies. R.S.O. 1990, c. P.10, s. 56 (3).

Failure to deliver (4) Where the secured party, without reasonable excuse, fails to register the financing change statement, or certificate of discharge or partial discharge, or all of them, as the case may be, required under subsection (1), (2), (2.1), (2.2) or (2.3) within 10 days after receiving a demand for it, the secured party shall pay $500 to the person making the demand and any damages resulting from the failure; the sum and damages are recoverable in any court of competent jurisdiction. 2006, c. 34, Sched. E, s. 18 (4); 2010, c. 16, Sched. 5, s. 4 (5). Security or payment into court (5) Upon application to the Superior Court of Justice, the court may, (a) allow security for or payment into court of the amount claimed by the secured party and such costs as the court may fix, and thereupon order the secured party to discharge or partially discharge, as the case may be, the registration of the financing statement or notice of security interest; or

(b) order upon any ground that the court considers proper that,

(i) the registrar amend the information recorded in the central file of the registration system to indicate that the registration of the financing statement has been discharged or partially discharged, as the case may be, or

2 - 15

(ii) the land registrar delete any entry in the books of the land registry office related to the notice of security interest or that the land registrar amend the books of the land registry office to indicate that the security interest has been discharged or partially discharged, as the case may be. R.S.O. 1990, c. P.10, s. 56 (5); 2000, c. 26, Sched. B, s. 16 (1).

Successors in interest (6) Where the person receiving a notice under clause (1) (a) did not have a security interest in the collateral immediately before all the obligations under the security agreement to which it relates were performed, the person shall, within fifteen days after receiving the notice, disclose the name and address of the latest successor in interest known to the person, and, if without reasonable excuse, the person fails to do so or the answer is incomplete or incorrect, the person shall pay $500 to the person making the demand and any damages resulting from the failure which sum and damages are recoverable in any court of competent jurisdiction. R.S.O. 1990, c. P.10, s. 56 (6).

No outstanding secured obligation (7) Where there is no outstanding secured obligation, and the secured party is not committed to make advances, incur obligations or otherwise give value, a secured party having control of investment property under clause 25 (1) (b) of the Securities Transfer Act, 2006 or subclause 1 (2) (d) (ii) of this Act shall, within 10 days after receipt of a written demand by the debtor, send to the securities intermediary or futures intermediary with which the security entitlement or futures contract is maintained a written record that releases the securities intermediary or futures intermediary from any further obligation to comply with entitlement orders or directions originated by the secured party. 2006, c. 8, s. 139.

2 - 16

Land Titles Act, R.S.O. 1990, c. L.5

Protection of unregistered estates 71. (1) Any person entitled to or interested in any unregistered estates, rights, interests or equities in registered land may protect the same from being impaired by any act of the registered owner by entering on the register such notices, cautions, inhibitions or other restrictions as are authorized by this Act or by the Director of Titles. R.S.O. 1990, c. L.5, s. 71 (1). Note: On a day to be named by proclamation of the Lieutenant Governor, subsection (1) is amended by striking out “of Titles”. See: 2012, c. 8, Sched. 28, ss. 45, 98.

Agreement of purchase and sale (1.1) An agreement of purchase and sale or an assignment of that agreement shall not be registered, but a person claiming an interest in registered land under that agreement may register a caution under this section on the terms specified by the Director of Titles. 1998, c. 18, Sched. E, s. 129. Note: On a day to be named by proclamation of the Lieutenant Governor, subsection (1.1) is amended by striking out “of Titles”. See: 2012, c. 8, Sched. 28, ss. 45, 98.

2 - 17

Effect of registration 99. (2) Where a notice, caution, inhibition or restriction is registered, every registered owner of the land and every person deriving title through the registered owner, excepting owners of encumbrances registered prior to the registration of such notice, caution, inhibition or restriction, shall be deemed to be affected with notice of any unregistered estate, right, interest or equity referred to therein. R.S.O. 1990, c. L.5, s. 71 (2). Note: A caution registered under section 71 or a predecessor of that section before June 16, 1999 ceases to have effect five years from June 16, 1999, if the date that the caution ceases to have effect is not specified in the caution or by subsection 128 (4) of this Act, as it read immediately before June 16, 1999, or if there is a date specified in the caution or by subsection 128 (4) of this Act, as it read immediately before June 16, 1999, the earlier of that date and five years from the date of registration of the caution. See: 1998, c. 18, Sched. E, s. 151 (2).

Effect of sale by chargee (2) Upon the registration of a transfer under subsection (1) and upon satisfactory evidence being produced, the land registrar may delete from the register the entry of an instrument or writ appearing to rank subsequent to the charge under which the land is sold, and thereupon the interest of every person claiming under such subsequent instrument or writ ceases to affect the land. R.S.O. 1990, c. L.5, s. 99 (2). Note: On a day to be named by proclamation of the Lieutenant Governor, subsection (2) is repealed and the following substituted:

Effect of sale by chargee (2) Upon the registration of a transfer under subsection (1) and upon evidence satisfactory to the Director being produced, the entry of an instrument or writ appearing to rank subsequent to the charge under which the land is sold may be deleted from the register and in that case the interest of every person claiming under the subsequent instrument or writ ceases to affect the land. 2012, c. 8, Sched. 28, s. 57 (2).

2 - 18

TAB 3

Collateral Mortgages

(including, but not limited to, mortgages

on collateral)

Simon Crawford Bennett Jones LLP

Nicholas Arrigo, Student-at-Law

Bennett Jones LLP

September 13, 2016

Practice Gems:

Mortgage Enforcement

ESSENTIALS 2016

Collateral Mortgages

(including, but not limited to, mortgages on collateral)

Simon Crawford, Partner, Bennett Jones LLP

Nicholas Arrigo, Student at Law, Bennett Jones LLP

I. What is a Collateral Mortgage?

Good question. There is the broad sense of the term and there is the technical sense of the term.

In common banking parlance, a collateral mortgage is one type of security document over so-

called collateral security, which The Court of Appeal in Royal Bank of Canada v Slack1 defined as

"any property which is assigned or pledged to secure the performance of an obligation and as

additional thereto, and which upon the performance of the obligation is to be surrendered or

discharged".

And, of course, this is where we want to make a distinction, because the use of the word

"collateral" is not, in our intended usage, referring to the asset (in the sense of the house charged

was collateral), but rather is referring to the security interest itself (in the sense that the charge

granted is collateral to something else).

Nor do we, in this paper, mean that a collateral mortgage means (only) an additional mortgage

given in support of a so-called "primary" mortgage, such as when one charges a second house as

additional credit support for the "primary" mortgage on one's main house. This is the usage

referred to in Falconbridge on Mortgages:

"Collateral security is a commercial rather than a legal term. It is a question of

construction in each case with particular reference to the course of dealings between the

parties, the type of transaction and the nature of the securities whether one mortgage is

to be resorted to first as the primary security or whether they are all to be considered as

parallel security."2

1 [1958] OR 262, 11 DLR (2d) 737. 2 Walter M. Traub, Falconbridge on Mortgages (Toronto: Thomson Reuters, April 2016), 1-11.

3 - 1

What we do mean, however, by the term "collateral mortgage", in the context of this discussion,

is any mortgage that is not a self-contained conventional mortgage. A self-contained

conventional mortgage is a mortgage that, within the four corners of the document, contains the

primary obligation to repay a debt, the terms of such repayment and the grant of the security

interest over the real estate as security therefor.

In contrast, therefore, in our usage, a collateral mortgage, is any mortgage which stands as

security for an obligation created outside of the mortgage, or for an obligation wherever or

howsoever created, that is a performance and not a payment obligation. So to get our heads in

the right space for this, a collateral mortgage may include but is not limited to:

(a) a mortgage delivered as security for the repayment of a grid promissory note;

(b) a mortgage delivered as security for the payment and performance of a

guarantee;

(c) a mortgage delivered as additional security for the primary debt borrowed under

another mortgage;

(d) a mortgage delivered as security for an indemnity; and

(e) a mortgage delivered to secure the performance of a transactional obligation,

such as an undertaking to perform environmental work or to hold the seller of a

property harmless under an assumed mortgage that it was not released under.

Stated simply, although there may be arguable exceptions, collateral mortgages are (generally

speaking), security documents only. Their purpose is to create a security interest in real estate to

support a primary obligation that (more often than not) is contained in another unregistered

instrument or contract. As a consequence, the obligations secured by a collateral mortgage can,

generally speaking, more easily be amended from time to time without affecting or amending

the mortgage itself.3

3 Daniel Kofman, "Collateral Mortgages and Revolving Loan Facilities: What Makes Collateral Mortgages Different?", Commercial Mortgage

Transactions 2013, p 2.

3 - 2

Although purists will no doubt balk at this, I am (again for the purposes of this discussion) also

going to lump in real property debentures in the collateral mortgage category, because they

satisfy my definition. While admittedly they secure both real and personal property, they are

invariably used (most often in the context of real estate bond issuances) only for the purposes of

creating a security interest in the property as security for obligations otherwise located.

When we think of mortgage enforcement or mortgage remedies, we don't generally think to

differentiate between conventional and collateral mortgages. More often, we think only of

ranking and priorities. But there are some concepts that we would do well to think of from time

to time as they are specific to collateral mortgages.

With that convoluted introduction behind us, let's consider our first collateral mortgage scenario

and issue.

II. Guarantees

A Co. borrows money from the bank and provides to the bank a conventional mortgage over its

office building. However, the bank is dissatisfied with the loan-to-value and so asks that A Co.'s

sister company, B Co. provide additional security over its manufacturing plant in support of the

loan. B Co. provides a mortgage over its manufacturing plant to the bank. You will note that I

have been intentionally cheeky and ambiguous about the nature of B Co.'s mortgage.

Questions that arise from this fact scenario are:

1. Is B Co.'s mortgage a collateral mortgage?

2. If it is a collateral mortgage, does B Co. have to provide a guarantee to the bank of A Co.'s

debt?

3. If it is not a collateral mortgage, does B Co. have to provide a guarantee to the bank of A

Co.’s debt?

4. Upon default, can the mortgagee enforce against the B Co.'s mortgage before enforcing

against A Co.'s mortgage?

3 - 3

(a) Is a guarantee necessary?

Our first question was, "is B Co.'s mortgage a collateral mortgage?", and the

answer to that very much depends on the drafting of both A Co.'s mortgage and

B Co.'s mortgage. Arguably, if B Co.'s mortgage states only that it is provided as

security for the debt incurred under A Co.'s mortgage, then it is quite clearly a

collateral mortgage. However, if B Co.'s mortgage is, on its face a conventional

mortgage that appears in all respects to be a "mirror" of the mortgage granted by

A Co., it may in fact be that what has been created is a "co-borrower" situation in

which both A Co. and B Co. have agreed to be primarily liable for the repayment

of the same debt and to satisfy that debt from the security of their respective

charged assets, if need be.

In the context of a co-borrower situation, there is little controversy over the

structure of the loan, as both mortgagors have not only created a charge, but have

promised to repay the primary debt as primary obligor. However, if B Co. has

created a collateral charge, then what is its relation to A Co., and what is the

nature of the debt secured?.

Obviously, the best answer would be if B Co. had delivered a written guarantee in

favour of the bank, guaranteeing the payment by A Co. of the debt created under

A Co.'s mortgage. But what if no such guarantee exists?

Steven Pearlstein has taken the position that a guarantee is not required.4 His

reasoning is that a collateral mortgage itself creates a surety relationship. To

support this, he points to a line of arguments found in the 1938 case Re Conley,5

in which Clauson LJ of the English Court of Appeal wrote that suretyship may be

based on a simple pledge deposited with a lender, and that a collateral mortgage,

viewed as a pledge of land deposited with the primary obligor's creditor, is

4 Steven I. Pearlstein, "Collateral Mortgages – Do you need a Guarantee?", 8th Annual Real Estate Law Summit 2011. 5 [1938] 2 All ER 127.

3 - 4

arguably analogous. Clauson LJ runs through the history of suretyship, tracing the

concept back to its inception as a pledge of property:

“… there is no reason to believe that in its inception the idea of suretyship

necessarily involved the idea of the surety making himself generally liable

in person and property for the satisfaction of the obligation he undertook.

His obligation in its inception seems to have been limited to the pledge

deposited or indicated. In the gradual development of suretyship, the

obligee, as one would expect, would call for a simpler and wider obligation

on the part of a surety – namely, the obligation to satisfy the principal debt

to the full by his person or property, without regard to the value of the

pledge or gage – and more and more the delivery or indication of a

particular piece of property as a pledge tended to become a form. If this

be a correct account of the development of the law of suretyship, it is quite

intelligible that the terms surety and guarantor should become associated

mainly with cases where the sanction for the obligation of the surety or

guarantor was not limited to the pledge, but consisted of the surety’s

liability to answer his obligation in person or in any property available for

execution.”

So we might reason that, if suretyship exists by virtue of delivery as a pledge of

property for the obligations of another, it includes a charge of property likewise

delivered.

But what if Steven is wrong (sorry Steven, I'm just saying "what if"…)? Generally

speaking, you have to have an obligation to a third party in order for that third

party to be able to enforce a security interest against you. So in the absence of the

surety "at law" argument, a guarantee is required in order for the collateral

mortgage to be enforceable…..a written guarantee. Guarantees are part of a

3 - 5

special class of deeds and contracts subject to the Statute of Frauds,6 which

provides as follows:

Writing required for certain contracts

4. No action shall be brought to charge any executor or administrator

upon any special promise to answer damages out of the executor's or

administrator's own estate, or to charge any person upon any special

promise to answer for the debt, default or miscarriage of any other person,

or to charge any person upon any contract or sale of lands, tenements or

hereditaments, or any interest in or concerning them, unless the

agreement upon which the action is brought, or some memorandum or

note thereof is in writing and signed by the party to be charged therewith

or some person thereunto lawfully authorized by the party.

While there is no common law requirement that a guarantee be evidenced in

writing, Section 4 of the Statute of Frauds imposes a formal requirement that

either a guarantee itself, or some memorandum or note thereof, be evidenced in

writing.7 The application of the Statute of Frauds turns on whether the agreement

(or such portion of the agreement at issue) gives rise to a primary obligation or

rather a "special" secondary or collateral obligation that constitutes a guarantee.

In short, every agreement which is a guarantee in substance must comply with the

Statute of Frauds in form and, while the Statute of Frauds does not require that

any particular form be adhered to, the essential elements of the agreement

generally must be in writing.8

As an aside, the law of guarantee does not require that consideration given by the

creditor benefit the guarantor directly. As Kevin McGuinness notes, "the

6 R.S.O. 1990, c. S. 19 (the "Statute of Frauds"). 7While there are a number of situations in which the requirement for written evidence may be dispensed with, the starting point of the analysis is

that such written evidence is required. 8 A. MacDonald & Co. v. Fletcher, [1915] 22 BCR 298.

3 - 6

consideration given by the creditor is to act in accordance with the request of the

guarantor in respect of the principal".9

That's all well and good, but in the context of collateral mortgages, it is not a bad

idea to always ensure that the consideration flowing to B Co (the second entity

providing the additional security by way of collateral mortgage) is sufficient. It is a

contract, after all.

The consideration for a guarantee may take the form of a benefit flowing from

lender directly to the guarantor, and oftentimes guarantees (as well as other

contracts) will include a statement to the effect that some nominal payment has

been exchanged which, together with other "good and valuable consideration",

constitutes sufficient consideration. More often than not (or dare I say, nearly

always) the nominal consideration never actually changes hands and so, if the

nominal consideration is all you've got (or rather, purport to have), you may find

yourself a few peppercorns shy of an enforceable bargain. Furthermore, while

courts will generally not inquire as to the adequacy of consideration, some courts

have recognized a distinction between "nominal consideration" and "valuable

consideration" and have held that, notwithstanding the freedom of parties to

make bad bargains, nominal consideration which is not "real" consideration of

some value in the eyes of the law does not constitute sufficient consideration.10

In most instances the reference to nominal consideration is simply boilerplate

language that does not reflect the actual consideration changing hands, and the

presence of such boilerplate language certainly does not render a guarantee

unenforceable: the consideration for a guarantee need not be set out in writing,11

nor is it necessary that consideration flow to the guarantor,12 as the consideration

9 Kevin McGuinness, The Law of Guarantee, 3rd ed (Markham, ON: LexisNexis, 2013), p 161. 10 See, for example, Glenelg Homestead Ltd v Wile, 2003 NSSC 155 (CanLII) at para. 26. 11 Statute of Frauds, at s. 6. 12 Canada Mortgage and Housing Corp. v. Elbarbari, 1996 CanLII 6712 (SK QB) per MacLean, J.

3 - 7

may simply be the lender suffering some detriment or providing some benefit to

a third party, such as the granting of credit by the lender to the borrower.

However, a potential issue arises where a guarantee (and associated collateral

mortgage) are provided in circumstances where a borrower has defaulted or is on

the brink of default under an existing loan. The potential issue is that, while it is

generally sufficient that the lender has granted some specific type forbearance in

consideration for a guarantee and/or collateral mortgage, for example refraining

from commencing legal proceedings against the borrower or granting an

extension for repayment of the underling debt, mere voluntary inaction on the

part of the lender does not constitute sufficient consideration.13

So what's to be made of all of this? Although a collateral mortgage need not

explicitly describe the consideration for which it is granted, it is prudent to

consider whether, given the context of the transaction, valid consideration has in

fact moved from the lender. When in doubt, spell it out (particularly when acting

for the lender). Ensure that the collateral mortgage given in support for another's

debt, or the associated guarantee, contains an accurate (but sufficiently broad)14

description of the legally valuable consideration (for example making available

credit facilities or granting some specific forbearance to the borrower) for which

the guarantee is granted.

In summation…the enforcement of a collateral mortgage given by one person in

support of another's debt can be susceptible if the collateral mortgage has not

been structured in some manner (either as a primary obligation, as collateral for

a written guarantee, or (maybe) in a manner that creates a common law surety

13 Crears v. Hunter (1887), 19 QBD 341 at 346. 14 There is case law suggesting that, by describing the consideration in overly-specific terms, the scope of the guarantee may inadvertently be limited

because, while the description of consideration is not conclusive, it is relevant in construing the terms for the contract itself. See, for instance, ING Lease (UK) Limited v. Harwood [2007] EWHC 2292 (QB), in which the High Court of Justice (Queen's Bench Division) partially relied on the wording of a guarantee's consideration clause in finding that certain obligations of the borrower did not fall within the scope of the guarantee. See also Neil Levy & John Phillips, "Aspects of Guarantee Clauses and Their Drafting" (September 2009), online: Guildhall Chambers <http://www.guildhallchambers.co.uk/files/AspectsofguaranteeclausesFormattedNL.pdf>.

3 - 8

relationship) that allows the lender to enforce the obligation or liability against

the grantor.

(b) Can the mortgagee enforce against the collateral mortgagor before enforcing

against the primary mortgagor?

Turning now to the fourth question above, assuming we have a valid

surety/guarantee relationship in place, generally speaking a mortgagee can

enforce under a collateral mortgage granted by a surety before enforcing against

a so-called primary mortgage. The basic rule is that "the bringing of an action

against the principal is not a condition precedent to a claim by the creditor against

the surety".15

This rule is, however, subject to certain qualifications. First, it does not mean that

the lender can seek to enforce the collateral mortgage at any time. As a guarantee

and its collateral mortgage is contingent in nature, the principal must be in default

before the guarantor becomes liable. Second, it follows from the first qualification

that if the primary obligation is a demand obligation, such as a demand mortgage,

then the collateral mortgagor cannot be liable until the mortgagee has made a

formal demand and has given the primary debtor the opportunity to respond.16

(c) Nominees and Beneficial Owners

Another structural issue arises in the context of nominees and beneficial owners,

and the issue is raised here because too often lenders misunderstand how

collateral mortgages are to be structured in the context of a split between legal

and beneficial ownership, and much of the issue relates to the law of guarantees.

The following is a typical manner in which commercial real estate in Ontario is

owned. A Co owns the beneficial interest in a property. A Co. owns all of the issued

and outstanding shares of B Co. and has directed (under a nominee or bare trustee

15 McGuinness, p 888. 16 McGuinness, p 889.

3 - 9

agreement) that B Co. hold legal title to the property as nominee for A Co. As a

matter of law, B Co. hold the registered interest only and holds all rights and

benefits and all obligations and liabilities in respect of the property as nominee

and bare trustee for A Co. As a consequence it has financial statements that show

no assets or liabilities, notwithstanding that its name shows upon the title registry.

So then, as between A (the beneficial owner) and B (the nominee/registered

owner) how do you structure the loan documentation to create a valid charge over

the property and the obligation that such charge secures? Here is what we often

see:

Structure 1. The lender requires that the beneficial owner of the property act

as the borrower, and sets up the nominee title holder of the property as a

guarantor of the loan, who in turn grants a registered collateral mortgage as

security for its guarantee.

Structure 2. The lender requires that the legal title holder of the property act as

the primary borrower of the loan, signing the mortgage as evidence of its

mortgage debt, with a guarantee from the beneficial owner.

Now there is a third structure, but for the time being I am going to keep that one

for later.

Let's look at these two structures and ask ourselves whether they are effective

and immune from attack. And perhaps even more importantly, what problems

would they give counsel if counsel were required to give an enforceability opinion

with respect to the loan documents

In the first structure, the beneficial owner of the property is named as the

borrower and the nominee title holder is to sign a guarantee of its obligations

secured by a collateral mortgage.

3 - 10

The structural problem arises from the nature of the nominee relationship. If

properly established, a nominee has, as it relates to the property, no assets and

no liabilities of its own, it being merely a holder of title and obligations for another.

Which is to say that, even when it signs a guarantee, it incurs that obligation for

and on behalf the beneficial owner (incurring them for that principal)…and if that's

the case, the beneficial owner is, by virtue of the guarantee, guarantying its own

primary obligation as principal debtor/borrower.

So in this one example, we have flushed out the cardinal rule of the construction

of guarantees: Thou shalt not guarantee thy own debt.

To quote the (strikingly sexist) language of the court in an 1898 decision in Bowen

v. Needles National Bank17:

"Now…. men do not guaranty their own debts, nor do they employ that

word to designate an original undertaking. A guarantee is a promise to

answer for the debt, default or miscarriage of another person."

For clarity, women too do not guaranty their own debts.

So, in the law of guarantees, there must be at least "three to tango". A guarantee

is a trilateral relationship. There must be a primary obligor, a person to whom the

obligations is owed, and a distinct third person who guarantees that primary

obligation on its own account. Now this is not to say that there cannot be more

than three persons on the dancefloor, but there must be at least three, and any

attempt to guarantee one’s own obligations, directly or indirectly, runs the risk of

being a legal nullity (which, of course, may make the enforcement of the

supporting collateral mortgage suspect). Now, as a practical matter, a court

considering this structure will in all likelihood step back from the transaction and

impose on the legal imperfections a commercially reasonable interpretation,

having regard to the intentions of the parties, but I would venture that this is not

17 Bowen v. Needles National Bank (87 F 430 at 440)

3 - 11

the type of law you want to practice. The type where you intentionally or even

just consciously create or allow structures that are technically broken, relying on

the fact that ultimately a court may gloss over the imperfections in favour of

commercial intentions.

Why? Because you may not always get what you want. Consider for example, the

equitable defenses, based on longstanding principles of equity, that attach to a

guarantee that has been properly constituted. If, as counsel to the borrower, you

were to implement this structure is it your position that your nominee/guarantor

enjoys the benefits of these equitable defences? Is it your position, more

generally, that the guarantee given by the nominee is a valid guarantee? Would

you put those opinions in writing? If you do, you do so at your own peril.

Lender's counsel may care less, because ultimately the guarantee given by the

nominee title holder will likely still be acknowledged by a court as an admission by

the nominee of an obligation for the debt, whether as primary or secondary

debtor, and so it may matter less, so long as the lender can enforce the mortgage,

but again I would stress that it is precisely these imperfections in structure, and

taking these holidays from legal principles, that can lead to litigation. The point

being that, where your structure is broken technically, or you create ambiguity as

to what was intended, your structure can be misinterpreted. The same court

noted:

"In determining whether a promise is a guaranty or an original

undertaking, the language made use of, the situation and the surroundings

of the parties, and every other fact and circumstance bearing upon the

question, should be taken into consideration"

Hardly sounds like the scope of interpretive tools most lawyers want read into

their carefully prepared legal structure does it? Which is why your structure

should be precise. One note however: We have attacked this structure on the

factual assumption that we are dealing with a nominee who is nothing but a

3 - 12

nominee. If the facts are that the nominee owns additional assets besides the

assets it holds as nominee, and that the lender is looking for that additional

covenant, then a guarantee from that company, on its own account, may have

merit.

Let's look at the second structure we contemplated at the outset. In the second

proposed structure, the legal title holder/nominee is the primary borrower. It

grants the mortgage as security for its debt and the beneficial owner guarantees

the debt of the nominee.

Of course, this is the same problem. The nominee only ever incurs its debts for

and on behalf of the beneficial owner, which of course means that the guarantee

given by the beneficial owner is a guarantee of its own debts. Which of course

means that it is not a guarantee. And if any client or any party was under the

misapprehension that any of the rights, obligations, remedies or defenses that are

particular to guarantees would apply to this document, they may find themselves

rudely awakened…on account of trying to tango with only two dancers.

What then is the correct structure? Well, curiously, to observe and respect the

legal nature of the nominee relationship that has been created, the better view is

to do one of two things: One favoured approach is to have the registered owner

act as the borrower and to charge the property in favour of the lender. The lender,

having a copy of the nominee agreement, and knowing that the nominee

relationship exists, has the beneficial owner acknowledge contractually that all of

the covenants, agreements and security interests made by the nominee are made

on its behalf, has the beneficial owner specifically direct the nominee in writing to

enter into those loan documents on its behalf, has the beneficial owner agree

specifically in favour of the lender to perform, and to be bound by, those

covenants as principal obligor, and has the beneficial owner grant a beneficial

charge over those assets charged by the nominee.

3 - 13

It is similarly correct to have both nominee and beneficial owner act as co-

borrowers, recognizing that ultimately all obligations are incurred by the

beneficial owner, alone or in combination, with its nominee. The trick here, of

course, is to ensure always that careful thought is put into how to describe the

obligations that are secured by the collateral mortgage security package, as,

ultimately, the enforceability of the collateral mortgage may depend heavily of

the structure of the loan.

III. Marshalling and Subrogation

(a) Marshalling

The equitable doctrine of marshalling is a remedy that, by definition, requires that

one lender have security over more than one asset, and so it is particularly suited

to a situation where a debtor has provided mortgage security over multiple assets

to the same lender. The remedy is designed to lessen the chance that a junior

creditor may lose its security solely at the whim of a senior creditor's choice of

security to pursue.18 The doctrine requires that if a creditor has two funds of a

debtor (i.e. two properties) to which it can look to satisfy its claim, and a second

creditor has available only one of those funds (i.e. properties), then the first

creditor should order its recovery against the funds in a manner that reserves the

fund (property) available for the second creditor.19 In effect, this prevents a

creditor who can resort to two funds of a debtor from defeating another creditor

who can only resort to only one of them. For the doctrine to apply, five basic

criteria must generally be met:

(i) Two creditors;

(ii) One common debtor;

18 CIBC Mortgage Corporation v. Branch, 1999 CanLII 6394 (BC SC) at 6, citing Bruce MacDougall, "Marshalling and the Personal Property

Security Acts: Doing Unto Others…" (1994) 28:1 UBC L Rev 91,at 92. 19 Allison (Re), 1995 CanLII 7146 (ON SC).

3 - 14

(iii) Two funds of the debtor with the superior creditor having access to both

and the inferior creditor to only one;

(iv) No interference with the choice of remedy of the superior creditor; and

(v) No prejudice to third parties.20

As set out in (iv) and (v) above, the right to marshall assets is subject to two

qualifications: marshalling will not be permitted if it interferes with the paramount

right of the senior creditor to pursue its remedies against either of the two funds,

and marshalling will not be applied to the prejudice of third parties. Where the

senior creditor chooses to recover its debt from the fund available to both

debtors, courts may apply the doctrine to provide the junior creditor a right of

subrogation, which is discussed below.

Little in the way of case law or scholarly writing has been produced about the

intersection of collateral mortgages (in particular) and marshalling. One relatively

recent case which dealt with both is Balemba v R.21 After a complex series of

transactions, the end result was that the debtor owned two properties, both of

which were mortgaged to a single numbered corporation. One of these mortgages

was described in the agreement as being "collateral" to the other. The Crown also

had an interest in the property subject to the collateral mortgage, and argued

under the doctrine of marshalling that the numbered corporation should enforce

against the other property, as that mortgage was not "collateral". The court noted

that merely calling a mortgage "collateral" does not make it so, and that, in any

event, there is no requirement to enforce against a collateral mortgage first.

Moreover, on the facts, it was financially disadvantageous for the numbered

corporation to enforce against the property in which the Crown had no interest.

20 Green v. Bank of Montreal, 1999 CanLII 821 (ON CA) at 10. 21 [2009] 175 ACWS (3d) 429 (“Balemba”).

3 - 15

Thus the court did not apply the doctrine of marshalling to require enforcement

against the collateral mortgage.

This case reminds second mortgage holders that, on realization, they should

always have one eye as to whether the senior mortgage holder can be compelled,

by the doctrine of marshalling, to seek recourse against other secured assets.

(b) Subrogation

Subrogation is the equitable right of a party (a "subrogee") to be substituted in

place of some other party (a "subrogor") in relation to a third party who is

indebted or otherwise liable to the subrogor, so that the subrogee succeeds to the

rights of the subrogor in relation to the debt or claim.

Subrogation serves to prevent double-recovery by the subrogor, and to also

prevent unjust enrichment by entitling a subrogee to seek reimbursement from

the debtor for payments made by the subrogee in respect of the debtor's

obligations. 22 In common speak, subrogation allows one party to "step into the

shoes" of another party.

As we have discussed, many collateral mortgages are given in support of another's

primary debts, and are therefore supported by a guarantee. Although most

guarantees will provide that the guarantor (grantor of the collateral mortgage) is

prevented from claiming any amount from the debtor until the creditor is paid in

full. Such language is intended to prevent a guarantor, who has guaranteed only

part of a debt, from paying only the guaranteed amount (that is, less than the

entire debt of the primary obligor) and claiming rights in the lender's security.

22 Subrogation is not the only manner by which a guarantor can seek reimbursement, as a guarantor who pays a guaranteed debt is also entitled to

be indemnified by the principal debtor, and to obtain contribution from other guarantors. Although the right to be indemnified is quite similar to the right of subrogation, these are distinct rights. For example, the right of indemnity allows a guarantor to sue the debtor in the guarantor's own name, while a guarantor who is subrogated to the rights of creditor can be in no better position than the creditor. So, if the creditor's right of action against the debtor is barred, so too is the right of the subrogated guarantor. See, for example, Canada (A.G.) v. Becker, 1998 ABCA 283 (CanLII).

3 - 16

While the waiver of subrogation case law is most developed in the context of

insurance contracts, it is clear that courts will generally give effect to a clause

which waives the rights a party may otherwise hold as creditor. In Wimpey

(George) Canada Ltd. v. Northland Bank,23 a guarantor provided a limited

guarantee of the debts of another company. The debtor defaulted and the

guarantee was called by the lender. The guarantor paid the maximum amount that

the guarantor was obliged to pay under the guarantee, which was less than the

amount owing by the debtor to the lender, and demanded that the lender assign

to the guarantor a proportionate share of the mortgage granted by the debtor.

The lender refused, relying in part on the express terms of the guarantee to argue

that the guarantor was only entitled to claim against the lender's securities upon

payment in full of the amount owing to the lender. McFadyen J. agreed, holding

that

“…even assuming that by the applications of certain general principles of

law or equity the plaintiff would be entitled to a pro rata share of the

mortgage held by the bank, the plaintiff has expressly contracted out of

any such right.”24

The express terms in question dealt with an assignment by the guarantor of

indebtedness owed to it by the debtor, and a postponement by the guarantor of

its claims against the debtor. However, the crux of this line of reasoning in Wimpey

was that the guarantor had contracted out of rights the guarantor may otherwise

have had, as creditor of the debtor, prior to the repayment of the whole of the

debt owing to the lender.25

23 1985 CanLII 1223 (AB QB) ("Wimpey"). 24 Wimpey at para 13. 25 McFadyen J. also held at para. 22 that, even if the lender could not rely on the contracting out provisions, the guarantor's claim must fail on the

basis that, because the guarantee was a guarantee of the whole debt but with a limitation on the amount that the guarantor was liable to pay, the guarantor may only claim the right to an assignment of securities upon the payment of the whole of the debt. For further discussion of the distinction between a guarantee of the whole debt with a limit on liability, and a guarantee of only part of the debt, see QK Investments Inc. v. Crocus Investment Fund et al., 2008 MBCA 21 (CanLII).

3 - 17

Accordingly, we are left with the curious question of whether the

guarantor/grantor of a collateral mortgage can pay to the lender the maximum

amount of the guarantee/collateral mortgage and be entitled to a pro rata share

of the primary mortgage held by the bank. Wimpey suggests that it can.

IV. Limitation Periods

The question of when the limitation period for enforcement of a demand collateral mortgage

begins to run has received some judicial attention in the past decade. A full understanding of the

issue requires consideration of conventional demand mortgages as well. Three key cases made

the law of limitation periods what it is today, as it applies to mortgages: Hare v Hare,26 The

Mortgage Insurance Company of Canada v Grant Estate,27 and Bank of Nova Scotia v

Williamson.28

(a) Hare v Hare

The first case, Hare, does not concern collateral mortgages, but it sparked the

judicial interest in demand obligations more broadly. Hare dealt with the

transition from the old Limitations Act, RSO 1990, to the new Limitations Act,

2002. The plaintiff loaned money to the defendant in return for a demand

promissory note. When the defendant ceased to pay interest, the plaintiff waited

several years before making a demand. The question before the court was when

the limitation period began to run. A majority of the Court decided that, under

both the old Act and the new Act, the rule is the same: the period begins upon

delivery of the demand note, not on the making of a demand. As a result, the

plaintiff's action was barred.

Following Hare, new retroactive language was added in 2008 to the Limitations

Act, 2002. The new subsection 5(3) states that the limitation period for demand

obligations begins "once a demand for the performance is made". This language

26 [2006] 83 OR (3d) 766 (“Hare”) 27 2009 ONCA 655 (“Grant Estate”) 28 2009 ONCA 754 (“Williamson”)

3 - 18

applies to all demand obligations created after January 1, 2004. But neither Hare

nor this legislative change sheds any light on the limitation period for demand

mortgages under the Real Property Limitations Act RSO, 1990, which is the subject

of the second in our trilogy of cases, Grant Estate.

(b) The Mortgage Insurance Company of Canada v Grant Estate

In Grant Estate, TD Bank loaned Rebanta Holdings a sum of money, and Mortgage

Insurance Company of Canada (MICC) acted as surety. MICC then entered into an

Indemnity Agreement with multiple parties, one of which was the borrower

Rebanta itself. Rebanta and the other indemnitors provided demand collateral

mortgages to MICC as security for the Indemnity Agreement. Rebanta defaulted

on the original loan and MICC made a payment to TD, on account of the

suretyship. MICC then waited over ten years before commencing an action under

the Indemnity Agreement. The Court dealt with several issues, but the important

question for our purposes is when the limitation period of ten years on the

demand mortgages began to run.

The Court's answer turned on two key distinctions: first, whether the mortgage is

conventional or collateral and, second – if there is a collateral mortgage – whether

the collateral mortgagor is also the primary obligor. Based on these distinctions,

Grant Estate creates three possible scenarios:

(i) If the mortgage in question is a conventional mortgage, the limitation

period begins running immediately, at the creation of the obligation.

(ii) If the mortgage in question is a collateral mortgage, and the collateral

mortgagor is not the same person as the main mortgagor, the limitation

period begins running on the demand.

(iii) If the mortgage in question is a collateral mortgage, and the collateral

mortgagor is the same person as – or a principal of – the main mortgagor,

the limitation period begins running when the obligations under the main

3 - 19

mortgage are triggered. The reasoning here is that "there is no special

need for demand under the collateral security as the principal debtors

have full knowledge of, and control over, the status of their debt" (para

24). This was the scenario applicable in Grant Estate, as Rebanta was

both the main borrower and one of the indemnitors that provided a

collateral mortgage.

Since Grant Estate was decided under the Real Property Limitations Act, the

amendment to the Limitations Act, 2002 stating that all limitation periods begin

on demand did not factor into the ruling. That amendment was addressed in the

third case, Williamson.

(c) Bank of Nova Scotia v Williamson

The facts of Williamson are simple: a borrower defaulted on a loan from the bank,

and the bank sought to enforce against a guarantor. The guarantor argued that

the limitation period had elapsed. This case gave the Court of Appeal the

opportunity to confirm that the 2008 legislative amendments to the Limitations

Act, 2002 do indeed mean that the limitation period on all demand mortgages

subject to the Act begins to run on the making of a demand, whether the mortgage

is primary or collateral. It is worth pointing out, though, that the transactions at

issue in Williamson predate January 1, 2004. As a result, the legislative

amendments do not apply, and the Court's comments on the subject are

technically obiter dicta. Nonetheless, the Court notes that it is relying on the

amendments as an indication of legislative intent.

(d) Summary

We can distil this line of cases into a short summary of the state of the law. First,

after the legislative amendments and the persuasive obiter dicta in Williamson, it

seems clear that the limitation period on a primary or collateral demand obligation

subject to the Limitations Act, 2002 begins to run from the demand. This is not

3 - 20

helpful, however, in the case of demand mortgages, as they would likely be

subject to the Real Property Limitations Act. Instead, unless the legislature decides

to amend the RPLA in a manner consistent with the LA, it appears that Grant

Estate is still good law. Thus, to determine the relevant starting date for the

limitation period, we must always ascertain the type of mortgage (conventional

or collateral) and the identity of the mortgagor (principal or third party).

As a final point on limitation periods, there may be situations in which it is difficult

to tell which of the LA or the RPLA should apply. The ONCA offered some guidance

in Equitable Trust Co v 2062277 Ontario Inc, 2012 ONCA 235, noting:

"…it may not always be easy to determine whether a particular guarantee,

like the guarantee in Bank of Nova Scotia v. Williamson, is subject to the

Limitations Act, 2002 or, like the guarantee in the case at bar, is subject to

the Real Property Limitations Act. However, it does not follow that all

guarantees should be treated the same way. It has been the case

historically that guarantees associated with land transactions have

different limitation periods from guarantees associated with contract

claims. Moreover, as already noted, it is my view that the Legislature

intended that all limitation periods affecting land be governed by the Real

Property Limitations Act."

Thus, following Equitable Trust, a guarantee that is not itself a collateral mortgage,

but that guarantees a primary mortgage transaction, would have a sufficient

nexus to real property to fall within the jurisdiction of the RPLA, rendering it

subject to Grant Estate rather than Williamson.

V. Foreclosure

All of the issues discussed so far have been sensitive to whether the collateral mortgagor is the

same person as the primary mortgagor. The following topic – foreclosure – is not so sensitive.

3 - 21

In Price v Letros29, the defendant gave both a main and a collateral mortgage to the plaintiff. The

plaintiff foreclosed on the main property and sold it, then sold the second property under power

of sale, and finally sought to recover the deficiency that remained after both sales. The court held

that the plaintiff was not entitled to the deficiency, and that the plaintiff also had to account to

the defendant for the sale of the second property. The foreclosure and subsequent conveyance

of the first property fully satisfied the debt, such that the collateral mortgage was extinguished.

Some years later, the ONCA explained the law in more detail, in Bank of Nova Scotia v Dorval et

al.30 Here, the defendant husband gave two promissory notes to the plaintiff wife. The husband

gave the wife a mortgage, collateral to the notes. On the husband's default, the wife foreclosed

on the real property that was the subject of the mortgage, then sought to bring an action on the

promissory notes claiming the deficiency. The court ruled in favour of the husband; by foreclosing

on the property, even though it was collateral security, the wife settled the debt in full. The ONCA

helpfully summarized the principle as follows, citing Falconbridge:

"If a mortgagee holds collateral security for the payment of the mortgage debt, he should

realize the security before seeking to foreclose under the mortgage because, if he obtains

foreclosure first, 'he deprives himself of the benefit of the security in the sense that the

foreclosure will be reopened if he subsequently realizes the security".

Crucially, it is not any realization on the primary mortgage that extinguishes a collateral

mortgage. Rather, it is specifically the mortgagee's act of giving up its ability to reconvey the

mortgaged property. As the Court notes in Dorval, referring to some preceding cases:

"These cases do not … stand for the proposition that the holder of both primary and

collateral security must, as a matter of law, realize upon the collateral security first;

rather, they support the more general proposition that where security is pledged for a

debt and the lender has put it beyond his power to restore the pledge, he must be taken

to have elected to accept the amount realized in satisfaction of the debt and to have

29 (1974), 2 OR (2d) 292 (CA). 30 [1979] 25 OR (2d) 579 (“Dorval”)

3 - 22

foregone recourse to any other security for that same debt, whether that other security

be characterized as secondary, additional, primary or collateral".

Thus it would be perfectly acceptable to seek to enforce a collateral mortgage after enforcing a

main mortgage through power of sale or judicial sale, without prejudicing one's other security.

Note to self: do not foreclose under a collateral mortgage as I may extinguish my rights to claim

under any other security, including any other collateral mortgage.

VI. Venue

We now get to the hot topic of venue. A recent amendment to the Rules of Civil Procedure,

effective March 31, 2015, has introduced sub rule 13.1.01(3), which provides that mortgage

enforcement proceedings must be commenced "in the county that the regional senior judge of a

region in which the property is located, in whole or in part, designates within that region for such

claims". If claims fall into more than one designated centre, it has been suggested that the

plaintiff may choose the jurisdiction in which to sue, though the rule does not say how or on what

basis.31

The types of actions caught by the rule include those that contain a "claim relating to a

mortgage". The phrase "claim relating to a mortgage" is undefined, but clearly includes collateral

mortgages and an action to enforce a collateral mortgage that is supplemental to a main

mortgage would be caught by the rule. A more uncertain scenario, however, may arise if the

collateral mortgage is collateral to a non-mortgage debt obligation. At what point is the nexus to

the mortgage so tenuous that the claim no longer "relates" to a mortgage?

As discussed above, the Court in Equitable Trust held that the test for whether the Limitations

Act, 2002 or the Real Property Limitations Act applies is whether it is a limitation period "affecting

land". It may be the case that a similarly broad test will be applied to the new venue rule, with

the result that the mere presence of a mortgage within a series of transactions would trigger

subrule 13.1.01(3).

31 Doug Bourassa, “New Issue in Mortgage Enforcement – Changes in the Venue Rules: There’s No Place Like Home” (Aug 31, 2015).

3 - 23

VII. Further Advances and Tacking

(a) Further advances on a revolving line of credit

When a collateral mortgage secures a primary debt obligation that allows for

further advances by the lender to the primary debtor (for instance, a revolving line

of credit), the priority of these further advances may come into question. The

following discussion is based on a simple scenario. Suppose that Lender has given

a revolving line of credit to Debtor. This debt is secured by a collateral mortgage

by Mortgagor. Further suppose that Mortgagor gives a second mortgage on his

property to Second Mortgagee. The question is whether further advances made

on the line of credit from Lender to Debtor would be subordinated to the interest

of Second Mortgagee.

The basis for this subordination is the equitable doctrine of tacking. The doctrine

has two limbs. The first, not at issue here, is described in Falconbridge as follows:

"In a mortgage context, [tacking] arises where a third mortgage is taken

without notice of the second. If the third mortgagee gets in the legal estate

by purchasing the first mortgage, he or she is allowed to 'tack' the third

mortgage to the first mortgage, and obtains priority as to both over the

second mortgage".32

More significant in our situation is the second limb of the doctrine of tacking,

which deals with further advances. The common law rule was that a lender making

further advances enjoyed priority over subsequent encumbrancers so long as

notice of such intervening interests was not given to the lender.33 The common

law rule appears to date back to the 1861 House of Lords decision in Hopkinson v

Rolt,34 which was cited favourably in Ontario some thirty years later in Pierce v

Canada Permanent Loan and Savings Co.35 This rule has been codified in a number

32 Falconbridge, 9-11. 33 Law Reform Commission of British Columbia, "Report on Mortgages of Land: The Priority of Further Advances" (1986), pp 8-9. 34 (1861), 9 HL Cas 514, 11 ER 829. 35 (1894), 24 OR 671 (Ch Div), affd 23 OAR 516.

3 - 24

of provinces, the relevant provisions in Ontario being Subsection 93(4) of the Land

Titles Act and Section 73 of the Registry Act.

The underlying problem with this branch of tacking, of course, is that a second

mortgage lender can cause further advances under a senior mortgage (perhaps

securing a revolving line of credit) to be subordinated to its subsequent

encumbrancer upon notice. Curiously, notice is not deemed to be given simply by

virtue of the registration of the second mortgage, and so the first mortgagee

actually has to know of the second mortgage registration. One might argue that a

first mortgagee may simply take a position of "ignorance is bliss" and never

subsearch title before subsequent advances, but this would prove a precarious

practice given the statutory priority that certain liens are given over subsequent

advances.36

The protection for first mortgage lenders against tacking is imperfect. Firstly they

should contractually prohibit second mortgages; secondly they should provide

that the registration of any second mortgage is an immediate default giving rise

to the payment of makewhole amount; and thirdly, they should specifically

provide that, to the extent any second mortgages are permitted, they are

permitted only on the grounds that a satisfactory subordination and

postponement agreement is entered into.

The concern for first mortgage lenders is that they might unknowingly receive

actual notice of a subsequent mortgage, which would then take priority over

further advances on the first mortgage. The test for actual notice was articulated

in CIBC v Rockway Holdings37, in which Justice Salhany wrote:

36 See, for instance, Subsection 78(4) of the Construction Lien Act, which reads:

“Subject to subsection (2), a conveyance, mortgage or other agreement affecting the owner’s interest in the premises that was registered prior to the time when the first lien arose in respect of an improvement, has priority, in addition to the priority to which it is entitled

under subsection (3), over the liens arising from the improvement, to the extent of any advance made in respect of that conveyance,

mortgage or other agreement after the time when the first lien arose, unless, (a) at the time when the advance was made, there was a preserved or perfected lien against the premises; or

(b) prior to the time when the advance was made, the person making the advance had received written notice of a lien.” 37 (1996), 29 OR (3d) 350 (Ont Gen Div) (“Rockway”).

3 - 25

“[T]he term “actual notice” means actual notice (as opposed to

constructive notice) of the nature of the prior agreement and its legal

effect. There is no requirement that there be actual notice of the precise

terms of the agreement, such as the amount of the consideration passing

between the parties or the term of the agreement. The test, in my view, is

whether the registered instrument holder is in receipt of such information

as would cause a reasonable person to make inquiries as to the terms and

legal implications of the prior instrument”.

So if a second mortgage lender requests a statement of indebtedness from the

first mortgage lender, it would constitute actual notice on the Rockway analysis.38

A first mortgage lender should therefore protect itself contractually, as described

above, either by prohibiting subsequent mortgages outright, or by subordinating

them explicitly.

(b) Cap on advances

As discussed, collateral mortgages are often designed as such because they secure

debts created outside of the four corners of the document. Revolving credit

facilities and lines of credit are common examples. Therefore, because they so

often involve the extension of additional credit or the advance of additional funds,

they are more prone to being caught by the caps on advances concepts set out in

the legislation.

Subsection 93(4) of the Land Titles Act and Section 73 of the Registry Act provide

that the "money or money's worth" acts as a cap on the security realizable by the

lender.39 As explained in Falconbridge:

"A registered mortgage is only security for the money or money's worth

actually advanced under it up to the amount for which the mortgage is

38 Kofman, p 7. 39 Kofman, p 4.

3 - 26

expressed to be security and any advances over and above the registered

amount of the mortgage may not be secured and may lose priority to any

subsequently registered interests".40

Sounds simple enough. Your security cannot secure indebtedness above and

beyond the stated cap of the mortgage. Put another way, a lender only has

security to the extent of the funds advanced, and the funds may only be advanced

to the extent of the collateral mortgage's principal amount without risking the loss

of priority. As the line of credit is paid down, the repaid amount once again

becomes available for future advances.41 A contrary view, now seemingly defunct,

is what has been called the “ratchet advances” problem.42 The idea, historically,

was that the cap on further advances is reduced with every payment, up to the

principal amount of the loan. In other words, it was thought that a $500,000

payment, made on a $1 million loan and subsequently repaid, meant that only

another $500,000 could be advanced, regardless of the repayment. Intuitively,

this makes little practical sense, and the more palatable modern approach has

found favour with commentators. Kofman suggests that the “ratchet advances”

problem is not a risk, as “no one would sensibly claim that a mortgage lender

which advances $6 million, but then is subsequently repaid $6 million, continues

to have enforceable mortgage security for $6 million”.43 I tend to agree with Mr.

Kofman, but would add that this notion of a cap should remind lenders that

collateral mortgages are on their terms capped their stated principal amounts.

Too often, lenders amend or modify the terms of their loans in unregistered

instruments without revisiting their collateral mortgages to ensure that they are

securing the full amount of indebtedness.

40 Falconbridge, 8-28. 41 Kofman, p 10. 42 Bryan G. Clark and Jeffrey W. Lem, “Debenture Pledges: A Buggy Whip for your Porsche… Wound into the Crankshaft?”, Best Practices for

Commercial Mortgage Transactions, LSUC, March 26, 2003. 43 Kofman, p 10.

3 - 27

I will also pause here to go off topic (not the first time, I know) on the broader

issue of amending the unregistered instrument that creates the primary obligation

secured by the collateral mortgage. It is not unusual, for instance, for the collateral

mortgage to state that it secures all obligations and liabilities as set out in a

commitment letter, indemnity, undertaking, credit agreement or similar

instrument. Over time, the commercial terms of the unregistered instrument are

amended, modified, supplemented, added to, restated, replaced or otherwise

recast, without regard to the collateral mortgage on title. The concern is that the

collateral mortgage may need to be amended or reaffirmed to ensure that it

secures such new or modified obligations, and that such obscene things as

novation have not inadvertently happened.

(c) Reduction to zero

A third issue raised by attaching a collateral mortgage to a revolving debt

obligation is the possibility that, if the debt is paid down to zero, the mortgage

may be automatically redeemed. This rule is codified in Ontario in Subsection 6(2)

of the Land Registration Reform Act, which reads: "A charge ceases to operate

when the money and interest secured by the charge are paid, or the obligations

whose performance is secured by the charge are performed, in the manner

provided by the charge". The words “in the manner provided by the charge”

suggest that an easy workaround is to include in the charge language that keeps

the charge alive despite a reduction to zero.

While such a workaround would be necessary in Ontario, other provinces have

enacted rules to prevent the automatic redemption of collateral mortgages upon

the reduction to zero of the underlying revolving debt obligation. For instance,

Subsection 28(3) of the British Columbia Property Law Act provides a special rule

for running accounts like revolving lines of credit. It reads:

"If a mortgage is expressed to be made to secure a current or running account, it

is not deemed to have been redeemed merely because

3 - 28

(a) advances made under it are repaid, or

(b) the account of the mortgagor with the mortgagee ceases to be in debt,

and the mortgage remains effective as security for further advances and retains

the priority given by this section [i.e., further advances are subordinated to

subsequent mortgages with notice] until the mortgagee has delivered a

registrable discharge of the mortgage to the mortgagor but, if the mortgagor is

not indebted or in default under the mortgage, the mortgagee must, on the

mortgagor's request and at the mortgagor's expense, execute and deliver to the

mortgagor a registrable discharge of the mortgage".

But, to reiterate, in practice, an Ontario mortgagee wishing to prevent the

automatic redemption of a mortgage should simply include in the charge a clause

providing that the mortgage is not redeemed on the reduction to zero of the

underlying running account.

VIII. Securing a Performance Obligation

We now will touch on issues that arise when a collateral mortgage secures a

performance obligation that is not yet monetized – for instance, a promise to complete

a particular task, an undertaking, or an indemnity against a future loss. Should a

subsequent mortgagee wish to "pay off" the collateral mortgage and exercise a right of

subrogation, it is unclear what value the subsequent mortgagee should ascribe to the

mortgage when seeking to discharge it or if it can exercise a right of subrogation at all.

Legislation is silent on the interaction between collateral mortgages and performance

obligations, with the exception of Subsection 6(2) of Ontario's Land Registration Reform

Act, discussed above, which provides that "a charge ceases to operate when … the

obligations whose performance is secured by the charge are performed". Thus, as in the

"reduction to zero" problem for revolving debt obligations, a collateral mortgage

securing a performance obligation could be redeemed upon the completion of the

obligation.

3 - 29

The difficulty arises because, in a situation where the collateral mortgage secures an

unquantified amount, the subsequent mortgagee does not want to pay to the first

mortgagee the face value (or maximum secured amount) under the mortgage, nor can it

ask the senior mortgagee for a mortgage statement evidencing the amount then due (it

may in fact be zero at the time). So what to do?

Your author spent a good deal of time noodling on this one, and much to his dismay

(after trying to analogize to any manner of argument, including on whether one could

seek relief on the basis of it being a clog on the equity of redemption) has come to this

rather unsatisfactory conclusion. The best that a subsequent mortgagee could attempt

to do, is to make application to court for the cash or near cash (i.e. letter of credit)

collateralization of the senior mortgage in an amount equal to the maximum amount of

the senior mortgage.

IX. Conclusion

As noted at the outset, the term "collateral mortgage", though used by courts, does not

have a well-settled judicial definition. It is more a commercial term than a legal one. It is

therefore unsurprising that, when courts and lawyers comment on collateral mortgages,

they do so meaning different things at different times. That said, there is one

commonality, and that is that all collateral mortgages are posted as security for an

obligation that is not entirely contained within that mortgage. It is not a self-contained

loan and security document. Accordingly, any analysis or enforcement of a collateral

mortgage requires a complete view of the loan and security package, its construction,

and those particular remedies and defenses set out herein.

WSLEGAL\000850\00997\16039376v1

3 - 30

TAB 4

Mortgagees in Possession:

Drawbacks and Benefits

Jerry Udell, C.S., McTague Law Firm LLP

Omar Raza, Barrister and Solicitor

Adam Bulkiewicz, Student-at-Law

McTague Law Firm LLP

Samuel Atkin, Student-at-Law

McTague Law Firm LLP

September 13, 2016

Practice Gems:

Mortgage Enforcement

ESSENTIALS 2016

Mortgagees in Possession:

Drawbacks and Benefits

JERRY B. UDELL, B.A., LL.B. Certified as a Specialist in Real Estate Law

by the Law Society of Upper Canada judell@mctaguelaw.com Telephone: 519-255-4316

Omar Raza, LL.B., LL.M Barrister and Solicitor

With assistance from:

Adam Bulkiewicz, (H) B.A., J.D. Student-at-Law

abulkiewicz@mctaguelaw.com Telephone: 519-255-4340

Samuel Atkin, (H) B.A.

Summer Student satkin@mctaguelaw.com Telephone: 519-255-4310

Introduction

The Mortgages Act, RSO 1990, c M40 must be considered when taking possession of a mortgaged

property. For residential properties, unlike commercial properties where the common law applies, the

mortgagee’s rights and duties are prescribed in the Residential Tenancies Act, 2006, SO 2006, c 17. This

paper will highlight drawbacks and benefits when becoming a mortgagee-in-possession.

Who is a Mortgagee-in-Possession?

Upon the mortgagor’s default, the mortgagee is entitled to enter on and into the mortgaged property

and take possession. Taking possession of a mortgaged property is the right of the mortgagee and not

an obligation: Royal Trust Corp. of Canada v. Gupta, 1997 CarswellOnt 571. A mortgagee may only take

quiet possession of the property from the mortgagor with the sole condition that it is done peaceably, in

all other circumstances an action for possession is necessary: Lusk v Perrin (1920) 19 OWN 58 (HC). An

important fact to keep in mind is the nature of the property. For example, taking possession of a

commercial property, such as a rental unit will mean only taking possession of the management office.

A mortgagee is deemed to be in possession of a property when it assumes control and management of

the mortgaged property or when it deprives the mortgagor of control and management of the

mortgaged property: Green v National Trust (2003), 11 RPR (4th) 108 (Ont SCJ), aff’d [2005] OJ No. 272

(CA). It is important to note that the determination of whether a mortgagee is in possession is made

with reference to the circumstances of the particular case. The test is set out in Noyes v Pollock (1986),

32 Ch D 53 (Eng CA), wherein Cotton LJ stated:

In order to hold that a mortgagee not in actual possession is in receipt of the rents and profits,

in my opinion it ought to be shown not only that he gets the amount paid by the tenants, even

although he gets their cheques or their cash, but he receives it in such a way that it can be

properly said that he has taken upon himself to intercept the [power of the mortgagor to

4 - 1

manage his estate, and has himself so managed and received the rents as part of the

management of the estate.

There are several examples of actions that may deem a mortgagee to be in possession, such as:

employing a property manager: First Burton Developments Inc v Peel Condo Corp No 403 (1997),

8 RPR (3d) 127 (Gen Div);

making mortgage payments on a senior mortgage: Unican Development Corp v Settlers Savings

& Mortgage Corp (1984), 30 Atla LR (2d) 66 (QB);

paying utilities: Unican Developments Corp, supra;

entering into contracts for the supply of services to the property: Residential Tenancies Act,

2006, s. 21(1) and the Mortgages Act ss. 47(1), (3) and at (5) and s. 51(1);

attending to the tenant requirements as they arise: Unican Developments Corp, supra; or

performing minor repairs: Unican Developments Corp, supra.

It should be noted that if the mortgagee does not act within two years of the default, the mortgagee

may not be entitled to compensation for losses that could have been avoided or minimized should

action had been taken sooner. Failure to act within this period may expose the mortgagee to a defence

or a claim by the mortgagor that they failed to mitigate losses in a commercially reasonable manner:

165852 Canada Inc. v. Gestions Koliba Inc. (1994), 45 RPR (2d) 306 (Ont Gen Div).

4 - 2

Drawbacks of being a mortgagee-in-possession

In Schaeffer v Chambers (1847) 6 NJEQ 548 (Eng), the Chancellor stated that

“a mortgagee by taking possession assumes the duty of treating the property as a provident

owner would treat it, and using the same difference to make it productive that a provident

owner would use.”

The Court of Appeal in Capsule investments Ltd. v Heck (1993), 12 OR (3d) 225, reinforced that “the basic

rule is that a mortgagee-in-possession must act as a prudent owner and protect the equity of

redemption”. However, there is no liability to fund the maintenance and upkeep of the property in

possession beyond the income received from the property: Walter M. Traub, Falconbridge on

Mortgages, 4th ed. (Agincourt, Canada Law Book, 1977).

The equity of redemption includes the right to redeem but only upon payment of monies owing under

the mortgage. A mortgagee who mismanages the property may attract a liability to the mortgagor or

subsequent encumbrancer if they suffer loss due to the mortgagee actions or omissions: Homeplan

Realty Ltd. v Adair (1982), 13 ACWS (2d) 227 (Ont Co Ct).

Rental property management

Upon taking possession of a rental property, the mortgagee will be deemed a landlord but the

mortgagee will only be responsible for liabilities after it takes possession: 981673 Ontario Ltd. v Jessome,

1994 CarswellOnt 1812. Section 47 of the Mortgages Act, deems a mortgagee-in-possession as a

landlord and enshrines their rights and liabilities. A mortgagee-in-possession to mitigate liabilities as a

landlord, must address various rental property issues, which include the following:

hiring a qualified property manager;

ensuring the property manager attends to the property on a regular basis;

4 - 3

adequately and appropriately for the area and market condition, advertise on an ongoing basis

any vacancies within the mortgaged property;

manage the finances and accounts receivable; and

carry out any obligations as a person deemed to be a landlord who is subject to the tenancy

agreement and to the provisions of the Residential Tenancies Act, 2006 as it applies to

residential complexes: Marriott and Dunn: Practice in Mortgage Remedies in Ontario, 5th ed

(Toronto, Carswell, 1991)

Repairs, waste and vandalism

As stated above, the mortgagee, once in control and management of the property, is responsible for the

necessary and reasonable repairs as can be paid for out of the rents of the property after the mortgagee

has satisfied the mortgagee’s account. The mortgagee however is not required to increase the mortgage

debt by incurring expenses in excess of the rent of the property. Additionally, where the premise has

decayed in an ordinary manner and over time, the mortgagee-in-possession is not obligated to rebuild

the premise: Moore v Painter (1842) 6 Jur 903 (Eng).

In the circumstance where the building has become unfit for use, the mortgagee-in-possession may

demolish the building and rebuild it: Marshall v Cave (1824), 2 LJOS ch 57 (Eng).

The guiding principle is that the mortgagee-in-possession will be liable for gross or wilful negligence

resulting in damage to the mortgaged property and to persons other than the mortgagor for loss or

injury through nuisance, disrepair, etc. of the mortgaged property: Russel v Smithies (1792), 1 Anst 96

(Eng). Similarly, the mortgagee-in-possession is liable for any waste on the property: Hanson v Derby

(1700), 23 ER 852 (Eng).

4 - 4

It should be noted that a mortgagee’s liability towards a tenant of the mortgaged property is limited in

time to the period that the mortgagee-in-possession is the landlord: Prenor Trust Co. of Canada v Forest

(1993), 40 ACWS (3d) (Ont Gen Div), Mortgages Act, RSO 1990, s. 47 (5)

In becoming a mortgagee-in-possession, the mortgagee ought to do due diligence to ensure that the

mortgaged property’s use and condition complies with relevant statutes, regulations and by-laws. This

includes:

inquiring about work orders, notices of violation, control orders, stop orders and other non-

compliances;

compliance with the fire code requirements;

underground storage tanks;

property tax arrears;

public utility arrears; and

insurance coverages: Marriott and Dunn: Practice in Mortgage Remedies in Ontario, 5th ed

(Toronto, Carswell, 1991).

With regard to vandalism, the duty of the mortgagee is to take reasonable steps to protect the

mortgaged property. Failure to do so will result in the court reducing the mortgagee’s claim for payment

on the payment: Homeplan Realty Ltd. v Adair (1982), 13 ACWS (2d) 227 (Ont Co Ct)

Environmental Obligations

To be a “person responsible” for a source of contaminant under the Environmental Protection Act, RSO

1990, c E19, the person must be the owner, or the person in occupation or having the charge,

management or control of a source of contaminant. It follows that when the mortgagee assumes

control and management of the mortgaged property, they will be subject to the various obligations and

liabilities provided under the Act.

4 - 5

1) Owner

To be deemed an “owner” for the purposes of assuming responsibility for environmental contamination,

the person must be have possession or dominion over the facility or property: Wynne v Dalby (1913), 30

OLR 67, 16 DLR 710 (CA). In Canadian National Railway v Ontario (Director appointed under the

Environmental Protection Act), 1991 CarswellOnt 232, the Divisional Court held that “the fact that the

technical, legal ownership of the facility/property is in the mortgagee does not make it an owner within

the definition of a person responsible.

2) Person in Occupation

As stated above, possession (or occupation) of a source of contaminant will generally attract liability

under the Act. A mortgagee in possession of contaminated land would be deemed a “person in

occupation of a source of contaminant.” Accordingly, lenders who take possession of a property taken

as security would be liable under the Act for the cost and clean-up associated with contaminant.

3) Control

In Canadian National Railway v Ontario, supra, the Court opined that a mortgagee who enters a

mortgaged property upon default takes “control” of the property. If the property was a source of

contaminant at that time, the mortgagee could be a person responsible for the purposes of the Act.

Despite the mortgagor defaulting on a covenant requiring it to keep the property in a good state of

repair, the Court found that the mortgagee’s contractual right of re-entry to remedy the situation did

not mean the mortgagee was in “control” of a source of contaminant. For the mortgagee to be in

“control” of a source of contaminant, it would have to actually exercise its right of re-entry.

4 - 6

Benefits of being a mortgagee-in-possession

Upon taking possession of the property, the mortgagee-in-possession is entitled to the rents and profits

of the land: Puffer v Ireland 1905 Carswell 185. Additionally, the mortgagee is also entitled to rent

arrears that have accrued up to that day.

A mortgagee-in-possession is also entitled to an uninterrupted flow of public utilities notwithstanding

the state of accounts between the mortgagor and the public utility: Syncap Credit Corp v Consumer’ Gas

Co. (1978), 18 OR (2d) 633 (HC). The mortgagee-in-possession is entitled to an interlocutory injunction

restraining a public utility from terminating the supply of public utilities to the property: RoyNat Ltd. v

Consumers’ Gas Co (1980), 28 OR (2d) 97 (HC).

In McCarthy v Municipal Savings & Loans Corp. 1996 CarswellOnt 3538 (Gen Div), the court applied the

doctrine of abandonment and found that the mortgagee owed no obligation to the mortgagor with

respect to chattels found on the mortgaged property. However, in Paul v Scotia Mortgage Corp., 2004

CarswellOnt 5624, the court expressed the following:

“If ‘property’ in the context of the statement of principle means ‘land’, the question arises

whether the mortgagee-in-possession owes the same duty of care with respect to the

mortgagor’s chattels which the mortgagee finds on the premises. In principle there can be no

distinction between the mortgagor’s chattels and his/her lands. Accordingly, the Bank, being a

mortgagee-in-possession, owes a duty to take reasonable care of the mortgagor’s chattels.”

It is for this reason that it is important that the mortgagee ensure that the existence and identity of all

chattels found on the mortgaged property be determined and catalogued on the first attendance at the

mortgaged property.

4 - 7

TAB 5

Things I May Have Forgotten but Really Need

to Know: Protecting Yourself in a Scary Market

James Butson Agueci & Calabretta

Joel Kadish

Kadish Law Professional Corporation

September 13, 2016

Practice Gems:

Mortgage Enforcement

ESSENTIALS 2016

Investment Authority

(Note to lawyer: This form is required in a private mortgage transaction whether or not the

mortgage was arranged by you. Please have your client complete every point on this form, with

"n/a" being noted if the point is not applicable. This form may be entered on a word processor.

For the definition of mortgage broker and other terms found in the clause of the Lawyers'

Professional Indemnity Company Policy found at the bottom of this form, please refer to the

policy.)

To: (Specify name of lawyer or law firm) Leslie Lawyer

I (or we) instruct you to act on my (or our) behalf, on my (or our) mortgage investment (or investments) of (specify amount) $40,000.00, the details, conditions and disclosures of which are set out below.

A. Details About The Investment:

1. Name and address of borrower (or borrowers): (specify) Terry Taylor, 123 Main St., Anytown, ON Z9Y 8X7

2. Name and address of guarantor (or guarantors) (if any): (specify) Kerry Taylor, 987 Townline Rd., Anytown, ON Z9Y 6W5

3. Legal description and municipal address of real property: (specify) Lot 10, Plan 20, Town of Anytown, County of Plenty

123 Main St., Anytown, ON, Z9Y 8X7

4. Type of property: (specify, e.g., residence, vacant land, etc.) Residence

5. (a) Principal amount of mortgage or charge: (specify) $40,000.00

(b) Amount of loan to be advanced by me (or us): (specify) $40,000.00

6. Rank of mortgage or charge is first (or specify other rank) 2nd (after payout and discharge

of existing second mortgage)

7. My (or our) investment of (specify amount) $40,000.00 represents (specify percentage) 100% of the total loan to the borrower (or borrowers).

8. (a) I am (or we are) satisfied that the approximate value of the property is (specify amount) $250,000.00

(b) I (or we) used the following means to determine the approximate value of the property: (specify) Arm’s length sale of property for $250,000 in February 2010

5 - 1

(c) Including my (or our) mortgage amount, the percentage of the value of the property that is mortgaged (or /encumbered) is (specify percentage) 66% (after payout of existing second

mortgage)

9. (a) The term of loan is (specify term of loan in months, years, etc.) 1 Year.

(b) The due date of loan is (specify date) September 1, 2011.

(c) The loan is amortized over (specify number of years) 15 Years.

10. The interest rate is (specify interest rate) 5.5% calculated semi annually, not in advance (or

specify how interest rate is calculated).

11. Particulars of amounts and due dates (monthly, quarterly, etc.) of payments of principal and interest: (specify) $370.80 on the first day of each month

12. Particulars and amounts of any bonus or holdback or any other special terms: (specify) N/A

13. (a) The mortgage is to be registered in the name (or names) of (specify name or names).

Kim Kirby

(b) After completion of the mortgage transaction, a collection or administration fee of (specify

amount) N/A per instalment is payable by the investor (or investors) (or borrower) (or borrowers) to (specify recipient of fee) N/A.

(c) If the mortgage is held in trust, the dates on which payments are to be made by the trustee (if applicable) to me (or us) are: (specify dates) N/A

14. Particulars of disbursements made for legal, brokerage or other fees or commissions in connection with the placement of the loan, including the names of recipients and amounts paid, are: (specify) Legal fees $400.00, Disbursements $70.00, HST $53.30, payable to Leslie

Lawyer

B. Conditions:

1. (Instructions: Clauses (a) and (b) below refer to information which each investor may require

from the lawyer. If you require the information referred to in a clause, initial the clause.)

The information which I (or we) require from you as my (or our) lawyer before you complete the transaction and make the advance is as follows:

(a) If my (or our) investment will be in a position other than a first mortgage or charge, details, including amounts, of all existing encumbrances outstanding. "KK"

5 - 2

(b) If the mortgage or charge is a syndicated mortgage, and a prospectus is necessary, a copy of the prospectus. We acknowledge and accept that you as my (or our) lawyer express no opinion as to the necessity for or validity of a prospectus.

2. (Instructions: Each investor to complete and initial clause (a) and, if clause (a) is answered

in the affirmative, to complete (if necessary) and initial clause (b) and to initial clause (c).)

(a) I (or we) instruct you to obtain a current and independent appraisal of the subject property and provide it to me (or us) before you complete this mortgage transaction. (Specify yes or no.) No "KK"

(b) The appraisal is to be paid by me (or us) or (specify name of person who is to pay for

appraisal). N/A

(c) I (or we) have been advised and accept that you as my (or our) lawyer do not express an opinion as to the validity of the appraisal. N/A

C. Disclosure:

1. I (or we) acknowledge being advised by you as my (or our) lawyer that you do not have any direct or indirect interest in the borrower (or borrowers). (Specify yes or no and indicate the date

on which the lawyer advised you that he or she has no direct or indirect interest in the borrower

or borrowers.) Yes, Aug 8, 2010

(If the lawyer has an interest in the borrower or borrowers, he or she is unable to act for you on

this loan (Rule 7, Rules of Professional Conduct).)

(Warning:

1. You are cautioned that the responsibility for assessing the financial merits of the mortgage

investment rests with the investor or investors at all times. The lawyer's responsibility is limited

to ensuring the mortgage is legally registered on title in accordance with the investor's or

investors’ instructions. The lawyer is not permitted to personally guarantee the obligations of the

borrower or borrowers nor the suitability of the property as security for the mortgage

investment.

2. Any loss you may suffer on this mortgage investment will not be insured under the lawyer’s

professional liability policy if the lawyer has acted as a mortgage broker or has helped to

arrange it.*)

I (or we) hereby acknowledge receipt of a copy of this form prior to the advance of funds to or on behalf of the borrower (or borrowers). I (or we) further acknowledge having read and understood the above warnings.

5 - 3

Investor (or Investors):

Kim Kirby

456 Avenue Rd., Anytown, ON Z9Y 4V3

(Specify full name of the investor (or full names of the investors) and specify the investor’s (or

each investor’s) address.)

(Signature of the investor (or of each investor)) Kim Kirby

(Date of signature) August 30, 2010

*(Pursuant to clause (g) of Part III of the Professional Liability Insurance Policy for Lawyers,

the policy does not apply "to any CLAIM directly or indirectly arising as a result of the

INSURED acting as a MORTGAGE BROKER or as an intermediary arranging any financial

transaction usual to mortgage lending; or to any CLAIM arising from circumstances where the

INSURED has provided PROFESSIONAL SERVICES in conjunction with the above.")

5 - 4

Form 9D

Investment Authority

(Note to lawyer: This form is required in a private mortgage transaction whether or not

the mortgage was arranged by you. Please have your client complete every point on this

form, with “n/a” being noted if the point is not applicable. This form may be entered on

a word processor. For the definition of mortgage broker and other terms found in the

clause of the Lawyers' Professional Indemnity Company Policy found at the bottom of

this form, please refer to the policy.) To: (Specify name of lawyer or law firm.) I (or we) instruct you to act on my (or our) behalf, on my (or our) mortgage investment (or investments) of (specify amount), the details, conditions and disclosures of which are set out below. A. Details about the investment: 1. Name and address of borrower (or borrowers): (specify) 2. Name and address of guarantor (or guarantors) (if any): (specify)

3. Legal description and municipal address of real property: (specify) 4. Type of property: (specfy, e.g., residence, vacant land, etc.) 5. (a) Principal amount of mortgage or charge: (specify) 5. (b) Amount of loan to be advanced by me (or us): (specify) 6. Rank of mortgage or charge is first (or specify other rank). 7. My (or our) investment of (specify amount) represents (specify percentage) of the total loan to the borrower (or borrowers). 8. (a) I am (or we are) satisfied that the approximate value of the property is (specify

amount). 8. (b) I (or we) used the following means to determine the approximate value of the property: (specify). 8. (c) Including my (or our) mortgage amount, the percentage of the value of the property that is mortgaged (or /encumbered) is (specify percentage).

5 - 5

9. (a) The term of loan is (specify term of loan in months, years, etc.). 9. (b) The due date of loan is (specify date). 9. (c) The loan is amortized over (specify number of years). 10. The interest rate is (specify interest rate) calculated semi annually, not in advance (or

specify how interest rate is calculated). 11. Particulars of amounts and due dates (monthly, quarterly, etc.) of payments of principal and interest: (specify) 12. Particulars and amounts of any bonus or holdback or any other special terms: (specify) 13. (a) The mortgage is to be registered in the name (or names) of (specify name or

names). 13. (b) After completion of the mortgage transaction, a collection or administration fee of (specify amount) per instalment is payable by the investor (or investors) (or borrower) (or borrowers) to (specify recipient of fee). 13. (c) If the mortgage is held in trust, the dates on which payments are to be made by the trustee (if applicable) to me (or us) are: (specify dates) 14. Particulars of disbursements made for legal, brokerage or other fees or commissions in connection with the placement of the loan, including the names of recipients and amounts paid, are: (specify) B. Conditions: 1. (Instructions: Clauses (a) and (b) below refer to information which each investor

may require from the lawyer. If you require the information referred to in a clause,

initial the clause.) The information which I (or we) require from you as my (or our) lawyer before you complete the transaction and make the advance is as follows: (a) If my (or our) investment will be in a position other than a first mortgage or charge, details, including amounts, of all existing encumbrances outstanding. (b) If the mortgage or charge is a syndicated mortgage, and a prospectus is necessary, a copy of the prospectus. We acknowledge and accept that you as my (or our) lawyer express no opinion as to the necessity for or validity of a prospectus.

5 - 6

2. (Instructions: Each investor to complete and initial clause (a) and, if clause (a) is

answered in the affirmative, to complete (if necessary) and initial clause (b) and to initial

clause (c).) (a) I (or we) instruct you to obtain a current and independent appraisal of the subject property and provide it to me (or us) before you complete this mortgage transaction. (Specify yes or no.) (b) The appraisal is to be paid by me (or us) or (specify name of person who is to pay

for appraisal). (c) I (or we) have been advised and accept that you as my (or our) lawyer do not express an opinion as to the validity of the appraisal. C. Disclosure: 1. I (or we) acknowledge being advised by you as my (or our) lawyer that you do not have any direct or indirect interest in the borrower (or borrowers). (Specify yes or no

and indicate the date on which the lawyer advised you that he or she has no direct or

indirect interest in the borrower or borrowers.)

(If the lawyer has an interest in the borrower or borrowers, he or she is unable to act for

you on this loan (Rule 2.06 of the Rules of Professional Conduct). (Warning:

1. You are cautioned that the responsibility for assessing the financial merits of the

mortgage investment rests with the investor or investors at all times. The lawyer's

responsibility is limited to ensuring the mortgage is legally registered on title in

accordance with the investor's or investors’ instructions. The lawyer is not permitted to

personally guarantee the obligations of the borrower or borrowers nor the suitability of

the property as security for the mortgage investment.

2. Any loss you may suffer on this mortgage investment will not be insured under the

lawyer’s professional liability policy if the lawyer has acted as a mortgage broker or has

helped to arrange it.*) I (or we) hereby acknowledge receipt of a copy of this form prior to the advance of funds to or on behalf of the borrower (or borrowers). I (or we) further acknowledge having read and understood the above warnings. Investor (or Investors): (Specify full name of the investor (or full names of the investors) and specify the

investor’s (or each investor’s) address.)

5 - 7

(Signature of the investor (or of each investor)) (Date of signature) *(Pursuant to clause (g) of Part III of the Professional Liability Insurance Policy for

Lawyers, the policy does not apply “to any CLAIM directly or indirectly arising as a

result of the INSURED acting as a MORTGAGE BROKER or as an intermediary

arranging any financial transaction usual to mortgage lending; or to any CLAIM arising

from circumstances where the INSURED has provided PROFESSIONAL SERVICES in

conjunction with the above”.)

5 - 8

Form 9E

Report On The Investment (Note to lawyer: In all private mortgage transactions, whether or not the mortgage was

arranged by you, you must complete this form, or, alternatively, you must complete a reporting

letter which includes responses to all numbered items in this form. If you complete this form,

you must complete every numbered item on this form, with “n/a” being entered if the numbered

item is not applicable. If you complete a reporting letter, you must respond to all numbered

items in this form in your reporting letter. If a numbered item is not applicable, you must include

it in your reporting letter and indicate that it is not applicable. After completion, an original of

this form, or the reporting letter, must be delivered forthwith to each lender. This form may be

entered on a word processor. For the definition of mortgage broker and other terms found in the

clause of the Lawyers' Professional Indemnity Company Policy found at the bottom of this form,

please refer to the policy.)

To: (Specify name and address of investor.) A. Details about the investment: 1. Name and address of borrower (or borrowers): (specify) 2. Name and address of guarantor (or guarantors) (if any): (specify) 3. Legal description and municipal address of real property: (specify) 4. Type of property: (specify, e.g., residence, vacant land, etc.) 5. (a) Principal amount of mortgage or charge: (specify) 5. (b) Amount of loan advanced by you: (specify) 6. Rank of mortgage or charge is first (or specify other rank). 7. Your investment of (specify amount) represents (specify percentage) of the total of this loan to the borrower (or borrowers). 8. Date principal advanced: (specify) 9. (a) The term of loan is (specify term of loan in months, years, etc.). 9. (b) The due date of the loan is (specify date). 9. (c) The loan is amortized over (specify number of years).

5 - 9

10. The interest rate is (specify interest rate) calculated semi annually, not in advance (or specify

how interest rate is calculated). 11. Particulars of amounts and due dates (monthly, quarterly, etc.) of payments of principal and interest: (specify) 12. Particulars and amounts of any bonus or holdback or any other special terms: (specify) 13. Details of any existing encumbrances, including rank on title, balances outstanding, mortgagee name and maturity dates: (specify) 14. In those instances in which the mortgage or charge is a collateral security, or if the mortgage or charge is collaterally secured, the details of other security are: (specify) 15. (a) Particulars of disbursements made for legal, brokerage or other fees or commissions in connection with the placement of the loan, including the names of recipients and amounts paid, are: (specify) 15. (b) Alternatively, I have advised I cannot confirm what independent commissions or fees are being charged to the borrower. 16. Registration number, date of registration and land registry office location: (specify) 17. Insurance particulars (where relevant): (specify) B. Conditions And Disclosure: In accordance with your Form 9D [Investment Authority] request for information and disclosures prior to the advance of your money, I advise that I have previously provided you with the requested information and disclosures as follows: 1. Particulars of existing encumbrances outstanding: (Specify yes or no, and if yes, specify date

on which particulars were provided.) 2. In the case of a syndicated mortgage where a prospectus was required, a copy of the prospectus: (Specify yes or no, and if yes, specify date on which prospectus was provided.) I advised and you acknowledged that I gave no opinion as to the necessity or validity of a prospectus. 3. Independent appraisal: (Specify yes or no, and if yes, specify date on which independent

appraisal was provided.)

5 - 10

I advised and you acknowledged that I gave no opinion as to the necessity or validity of an appraisal. 4. Any loss you may suffer on this mortgage investment will not be insured under the lawyers' professional liability policy if the lawyer has acted as a mortgage broker or has helped to arrange it.* I advised and you acknowledged having read and understood this warning. (Warning: You are cautioned that the responsibility for assessing the financial merits of the

mortgage investment rests with the investor at all times. The lawyer's responsibility is limited to

ensuring the mortgage is legally registered on title in accordance with the investor's instructions.

The lawyer is not permitted to personally guarantee the obligations of the borrower or

borrowers nor the suitability of the property as security for the mortgage investment.) (Name of lawyer or law firm) (Address of lawyer or law firm)

(Signature of lawyer) (Date of signature) *(Pursuant to clause (g) of Part III of the Professional Liability Insurance Policy for Lawyers,

the policy does not apply “to any CLAIM directly or indirectly arising as a result of the

INSURED acting as a MORTGAGE BROKER or as an intermediary arranging any financial

transaction usual to mortgage lending; or to any CLAIM arising from circumstances where the

INSURED has provided PROFESSIONAL SERVICES in conjunction with the above”.)

5 - 11

WHERE DID THIS ALL BEGIN

MORTGAGES AND RECOD KEEPING REQUIREMENTS – BY-LAW 9

Q: What is the purpose of Forms 9D and 9E?

A: The Forms were developed to ensure documented communication between lawyers and their clients. Written

instructions reduce allegations of miscommunication and failure to follow client instructions. The Law Society's goal is to ensure that the public is protected and to reduce claims and complaints by lender clients to the LawPRO® and the

Compensation Fund. Form 9D contains the written instructions from the lender. It crystallizes the transaction and is available for confirmation purposes in the event of a claim to the LawPRO®. Form 9E is a report on the investment for

the lender. The Forms must be completed for any mortgage transactions in which the lawyer acts for or receives

funds from a lender and the Forms are required by section 24(1) of By-Law 9. Section 24(2) of By-Law 9 outlines

circumstances under which the forms are not required.

5 - 12

\

Q: When are Forms 9D and 9E required?

A: The Forms are required whenever a lawyer "acts for or receives money from a lender", as outlined in section 24(1)

of By-Law 9. A lender is defined in section 1(1) of By-Law 9 as "a person who is making a loan that is secured or to

be secured by a charge, including a charge to be held in trust directly or indirectly through a related person or

corporation."

However, section 24(2) sets out the transactions in which the Forms are not required. The exceptions are

the lender (note that all three conditions must apply)

is a bank listed in Schedule I or II to the Bank Act (Canada), a licensed insurer, a registered loan or trust corporation, a

subsidiary of any of them, a pension fund, or any other entity that lends money in the ordinary course of its business

has entered a loan agreement with the borrower and has signed a written commitment setting out the terms of the prospective charge, and

has given the lawyer a copy of the written commitment before the advance of money to or on behalf of the borrower

the lender and borrower are not at "arm's length", where "arm's length" and "related" persons are defined in section

1(1) of By-Law 9 as having the same meanings as contained in section 251 of as defined in the Income Tax

Act (Canada)

the borrower is an employee of the lender or of a corporate entity related to the lender

has executed the "Investor/Lender Disclosure Statement for Brokered Transactions", approved by the Superintendent

under subsection 54(1) of the Mortgage Brokerages, Lenders and Administrators Act, 2006, and has given the lawyer

written instructions, relating to the particular transaction, to accept the executed form as proof of the loan

the total amount advanced by the lender does not exceed $6,000, or

the lender is selling real property to the borrower and the charge represents part of the purchase price (i.e. a vendor

take back mortgage)

Depending on the circumstances, you may consider it advisable to use Forms 9D and 9E even if one of the

exceptions applies to a particular mortgage transaction.

5 - 13

5 - 14

1-. Law Society Tribunal Tribunal du Barreau

LAW SOCIETY TRIBUNAL HEARING DIVISION

Citation: Law Society of Upper Canada v. Tinianov, 2016 ONLSTH 91 Date: May 31, 2016 Tribunal File No.: LCN12/15

BETWEEN:

The Law Society of Upper Canada

-and-

Philip Charles Tinianov

Before: Frederika M. Rotter (chair) PauiM. Cooper Marilyn Thain

Heard: October 20, 2015 and April12, 2016, in Toronto, Ontario

Appearances: Tanus Rutherford, for the Applicant Respondent, self-represented

Applicant

Respondent

~

0>

i!: (JJ

-' z 0 to ~

0 N

5 - 15

Summary: TINIANO V- Professional misconduct- Penalty- The Lawyer provided independent legal advice to a colleague's clients in four real estate matters in circumstances where independent legal representation was required- The transactions were later determined to be fraudulent and the colleague's licence was revoked- The Lawyer was found to have assisted another lawyer to breach the two-lawyer subrules relating to real estate transactions under the former Rules of Professional Conduct- The panel rejected the Law Society's position that a one-month suspension was necessary, noting that it had accepted the Lawyer's testimony that he did not, at the time, appreciate the difference between independent legal advice and independent legal representation, but found misconduct on the basis that he ought to have known - Further, the Lawyer was remorseful, accepted responsibility, had no discipline record and the misconduct was "minor"- A reprimand was imposed, along with an order for continuing education and costs in the amount of $3,000.

REASONS FOR DECISION ON PENALTY

[1] Frederika Rotter (for the panel):- After a contested hearing, this panel found that the Respondent, Philip Charles Tinianov ("the Lawyer"), engaged in professional misconduct in contravention of s. 33 of the Law Society Act: see 2016 ONLSTH 3. He assisted another lawyer Golnaz Vakili {whose licence has since been revoked), to breach the two-lawyer subrules relating to real estate transactions under the former Rules of Professional Conduct ("the Rules").

[2] We found that the Lawyer acted in circumstances where he ought to have known that he was assisting Golnaz Vakili to breach Subrule 2.04(11) of the former Rules by acting for both the lenders and the borrower in connection with two charges in September 2012. He also ought to have known that he assisted her to breach former Subrule2.04.1 (1) in connection with two transfers ,registered-in-September and October of 2012.

[3] Ms. Vakili acted for both the Charger and the Chargee on each charge, and for both Transferor and Transferee on each transfer. The Lawyer provided independent legal advice ("I LA") to the Chargers and the Transferees, in circumstances where the former Rules required each party to a mortgage or transfer transaction to have independent legal representation ("ILR").

[4] These reasons address the appropriate penalty. The Law Society submitted that the appropriate penalty was a one-month suspension and substantial fine. The Lawyer requested a reprimand.

THE FACTS

[5] The Lawyer was called to the bar in 1978 and at all material times practised primarily real estate law. Ms. Vakili had an office in the same shared office facility.

[6] At the hearing on the merits, the Lawyer testified that in the law chambers where

2

~

OJ

~ __, z 0 r.o ~

0 N

5 - 16

[7]

[8]

he worked the lawyers practised collegially, giving each other advice and assistance. Ms. Vakili was a young lawyer who used to consult the more senior lawyers, including the Lawyer, for advice or assistance.

We accepted the Lawyer's testimony regarding his good intentions in providing I LA, as a favour to Ms. Vakili in situations where she acted for clients on both sides of a real estate or mortgage transaction.

The Lawyer testified that when providing the ILA in these four transactions, he met

with the clients, verified their identities, and carefully reviewed all the documents produced to him. They all seemed correct and legitimate, and none seemed questionable. He noted no "red flags" of fraud. He stated that he provided the ILA for no payment, to assist his then colleague.

[9] The Lawyer testified candidly that the distinction between I LA and I LR was not clear to him at the time of the transactions. In his evidence concerning the transactions, the Lawyer explicitly confirmed that he was providing ILA and not ILR to Ms. Vakili's clients. He knew that the parties he was purportedly advising were not his clients but Ms. Vakili's clients. Therefore, he did not provide the same legal services which he would normally provide to a paying client whom he independently represented, such as performing corporate searches, requesting further information on shareholders, and the like. He said he believed that by providing ILA he was assisting Ms. Vakili to comply with the Law Society's two­lawyer subrules.

[1 0] We found that the Lawyer did not knowingly assist Ms. Vakili to violate the two­lawyer subrules. He failed to appreciate the import and significance of the subrules,

- -and-he-failed to appreciate the difference, and the importance-of-the-difference;­between ILA and ILR. We found that the Lawyer had engaged in professional misconduct in this regard, as he had acted in circumstances where he ought to have known that he was assisting Ms. Vakili to contravene the former subrules.

THE POSITIONS OF THE PARTIES

[11] In submissions on penalty, counsel for the Law Society noted that as a result of the fraudulent transactions in which the Lawyer had unwittingly assisted, at least one person lost her home and was required to bring legal proceedings. She also submitted that the two-lawyer rule for transfers, and the complementary amendment to 0 .Reg. 19/99 under the Land Registration Reform Act (requiring, among other things, a statement by each of the solicitor for the transferor and the transferee that those solicitors were not one and the same) had been widely publicized at the time they were enacted in 2007/2008.

[12] Counsel for the Society submitted that in assessing the appropriate penalty in this case, the panel should have regard to three primary objectives, namely specific

3

~

Ol

~ --' z 0

"' ~ 0 N

5 - 17

deterrence, general deterrence and maintaining public confidence in the legal profession. Counsel conceded that in the present case, specific deterrence is not at issue. However, general deterrence and public confidence in the legal profession are over-arching concerns.

[13] Counsel stressed the seriousness of the Lawyer's misconduct which, she submitted, assisted in the fraud which resulted in the loss of a person's home. She submitted that a one-month suspension, to be accompanied by a substantial fine, would be appropriate in this case and that such a penalty was required to maintain public confidence and to send a message of deterrence to members of the legal profession.

[14] The Lawyer submitted that his conduct had been neither dishonest nor fraudulent. He felt embarrassed about having been manipulated by Ms. Vakili. He considers himself her victim, but acknowledges that he ought to have been more familiar with the two-lawyer subrules. He acknowledges that he misunderstood and misinterpreted those subrules, and by so doing, assisted in Ms. Vakili's violation of them. He now understands and is fully aware of the import of the subrules.

[15] The Lawyer stressed that he was extremely sorry for the misconduct. He re­iterated that he thought he was helping a colleague by providing I LA to her clients without charging for his services. He thought he was acting honourably and benevolently. He also pointed out that in that specific situation, even ILR might not have prevented Ms. Vakili's clients from signing the transfer documents, and that the fraud and damage resulted from her actions- not his own.

[16] The Lawyer testified that he was called to the Bar in 1978, had no discipline history and a very good -reputation in the legal community. As a -sole practitioner he would be greatly affected by a suspension. He has four children, two of whom are still dependent on him for support.

[17] The Lawyer testified that he is very involved in synagogue and community activities. He sings in the synagogue choir and participates in performances in community venues such as retirement homes. He is a Big Brother. He taught law clerks at Seneca College, did tutoring for the Bar Admission Course, and has also mentored younger lawyers.

[18] He spoke to the physical, psychological and emotional toll which this proceeding has taken on him. He suffered from depression and anxiety on account of the proceedings. He stressed that he now understands the difference between ILA and ILR, and that his continuing to practise law would not pose a danger to anyone. He submitted that an appropriate penalty would be a reprimand accompanied by an order to take continuing professional education courses.

4

~

"' ~ ...J z 0 (jJ ~

0 N

5 - 18

ANALYSIS

[19] The case of Law Society of Upper Canada v. Aguirre, 2007 ONLSHP 46 at para. 12 sets out in detail the factors to be considered in imposing a penalty for misconduct. Aguirre holds:

The following factors - and no doubt others - inform the appropriate penalty to be fixed:

a. the existence or absence of a prior disciplinary record;

b. the existence or absence of remorse, acceptance of responsibility or an understanding ofthe effect of the misconduct on others;

c. whether the member has since complied with his/her obligations by responding to or otherwise co-operating with the Society;

d. the extent and duration of the misconduct;

e. the potential impact of the member's misconduct upon others. In this regard, consideration may be given not to the merits of the complaints that prompted the Society's intervention (unless proven at the hearing), but to how the member's unresponsiveness did or might reasonably be expected to affect the client's interests;

f. whether the member has admitted misconduct, and obviated the necessity of its proof;

g. whether there are extenuating circumstances (medical, family-related or others) that might explain, in whole or in part, the misconduct;

h. whether the misconduct is out-of-character or, conversely, likely to recur.

[20] In considering the enumerated factors, we agree with counsel for the Society that the most salient ones are the nature of the misconduct (including its extent and duration), the Lawyer's discipline history, and any mitigating factors such as remorse, the acceptance of responsibility, and other extenuating circumstances.

[21] We have considered counsel's submissions on the nature and seriousness of the misconduct. We agree that the Lawyer's conduct unwillingly facilitated a breach of the two-lawyer subrules and assisted his erstwhile colleague in her fraudulent activities. However, in our view this case is different from and less serious than the authorities to which counsel for the Law Society referred us.

5

~

m

fl: (/) ..J z 0 <0 ~

0 N

5 - 19

[22] In the real estate fraud cases to which counsel referred, the respondent lawyer was to some degree a contributing participant in the fraud, in that he or she independently represented one or both of the parties in the transaction.

[23] In Law Society of Upper Canada v. Cunningham, 2012 ONLSAP 31 the Respondent lawyer failed to be aware of and familiarize herself with her professional responsibilities to her clients and participated in 16 fraudulent transactions. She abdicated her professional responsibilities by leaving everything to her staff in some transactions. The number and duration of the transactions, as well as her failure to recognize the nature of the transactions in the face of known "red flags," showed a severe departure from the minimal standards of a competent practitioner. In that case the respondent was suspended for 15 months.

[24] Law Society of Upper Canada v. Kelly, 2012 ONLSHP 68 deals with a practitioner who acted for and failed to be on guard against unscrupulous clients in four real estate transactions. The panel found that the respondent had been a dupe, and had failed to make reasonable inquiries about transactions which should have raised red flags. The panel also found the lawyer had clearly abdicated his responsibilities to the point of extreme carelessness if not gross negligence. Moreover, the lawyer was an experienced practitioner who had taught professional responsibility. In those circumstances, and where mitigating factors were considered, the panel imposed a four-month penalty.

[25] In Law Society of Upper Canada v. De Francesca, 2015 ONLSTH 26 the lawyer had admitted to professional misconduct. He had extensively abdicated his professional responsibilities when acting in four real estate transactions, including failing to meet with clients, failing to prepare standard closing documents, obtain instructions, disburse funds on closing, report to the clients, and make enquiries about the unusual features of the transactions. He had allowed the lawyer for the purchasers to do all the work on behalf of the vendors, whom he supposedly represented, and billed for his services. Each transaction had one or more unusual features which should have caused the lawyer to make further inquiries, but he did not do so. The panel found that the lawyer had been misled by another lawyer he trusted, and did not knowingly participate in fraud. The panel determined that a reprimand accompanied by a fine, was the appropriate penalty in the circumstances.

[26] In Law Society of Upper Canada v. Zandi, 2016 ONLSTH 37 the lawyer committed professional misconduct by not performing legal services to the standard of a competent lawyer in respect of five property transactions in which a son impersonated the owner or estate trustee who was actually his father, of the same name.

[27] In that case, the lawyer failed to obtain a will and take sufficient steps to verify that he had the correct estate trustee, thereby committing professional misconduct by

6

~

"' ~ ...J z 0 c.o ~

0 N

5 - 20

failing to meet the standard of a competent lawyer. He did not have sufficient knowledge and understanding of estates law to recognize that he was required to verify whether a will existed and to verify the information from the client. The lawyer also improperly prepared or supervised the preparation of transmission applications to transfer three properties to the purported estate trustee.

[28] He also failed to disclose material facts to his lender client and failed to make reasonable inquiries regarding the unusual features of a real estate transaction, in a situation where he acted to transfer a property to a third person as trustee. Finally, he allowed a non-lawyer conveyancer to use his lawyer access on the conveyancer's Teranet account to register documents. He did not understand at the time that there was any restriction on so doing.

[29] In Zandithe panel accepted the parties' joint submission for a reprimand, a fine of $10,000 and a requirement to complete five hours of professional development in real estate in each of the following three years. A costs order of $15,000 was also imposed, with five years to pay both the fine and costs award.

[30] The panel in Zandi found that the misconduct in De Francesca was more serious than in Zandi. It found, at para. 26, that "[a] reprimand plus the fine signifies that this case is more serious than one that would justify a reprimand alone, although less serious than one that would require a suspension." The panel went on to conclude that:

The Lawyer's errors, while they may have contributed to significant consequences, were at the minor end of the spectrum of fault, in particular given that the Lawyer was shown false identification and made no mistake in accepting it. He paid attention to his vJork, and did not abdicate his responsibilities, with the exception of allowing his conveyancer to register a transaction he knew about using his access. Including a requirement that the Lawyer engage in professional development aims at further protecting the public through maintaining and enhancing the Lawyer's real estate skills.

[31] We find that the Lawyer's single error in the present case was less serious than the misconduct in both De Francesca and Zandi.

[32] In De Francesca there was extensive abdication of the lawyer's duties in circumstances where he was purportedly representing vendor clients and accepting a fee, rather than acting on a limited retainer. There was no such abdication in the present case. The Lawyer acted conscientiously: he met with the clients, reviewed their documents, made appropriate enquiries, and was alert for the presence of red flags. He provided his services as a favour, and received absolutely no financial benefit- not even a modest fee. He believed he was acting benevolently by helping a colleague meet her obligations under the Rules.

7

5 - 21

[33] In Zandithe lawyer made a series of errors because of his lack of understanding of both estates law, and real estate law. He lacked the requisite skills and knowledge in both areas of law where he was providing legal services.

[34] In the present case the Lawyer's only error, which led to our finding of misconduct, was his confusion about the difference between ILA and ILR; this led to his failure to realize that ILR, and not I LA, was required.

[35] In the circumstances, given the nature of the Lawyer's misconduct here, which we find is far less serious than that described in either De Francesca or Zandi, we do not agree that a penalty more severe than a reprimand is warranted. Our view is reinforced by the Lawyer's otherwise spotless discipline history and excellent reputation in the legal and social community. The Lawyer is a senior practitioner. He is remorseful and has admitted responsibility for his actions. We agree, as conceded by counsel for the Society, that specific deterrence is not an issue in this case.

[36] We find, as was held in De Francesca at para. 64, that in these circumstances, "a reprimand is a serious penalty, not a mere slap on the wrist, and one which will support the objectives of general deterrence and maintaining the integrity of the profession and the public's confidence."

[37] We agree with the comments in De Francesca at para. 60, in discussing Law Society of Alberta v. King, 2010 ABLS 9, that "a reprimand [may be seen] as a public expression of the profession's denunciation of the lawyer's conduct intended to deter further misconduct by the lawyer and within the profession as a whole".

[38] We consider that in the present case a further penalty, in the form of a fine, is not necessary for the purposes of either specific or general deterrence. We find that the Lawyer's misconduct is on the very minor end of the spectrum of fault, and less serious than the misconduct in Zandi. We are satisfied that the reprimand which has been administered constitutes sufficient deterrence. In these circumstances, we find that a further punitive measure, in the form of a fine, is not necessary.

[39] We also ordered, as part of the penalty, that the Lawyer shall within one year attend a course or courses on real estate law which covers conflict and the difference between ILA and ILR, for a total of a minimum of 16 hours (two days) as accredited by the Law Society of Upper Canada.

COSTS

[40] The Law Society submitted a Bill of Costs in the amount of $26,991.83 and submitted that reduced costs in the amount of $13,500 should be awarded.

[41] The Lawyer submitted that these costs were excessively high and that he would have some difficulty paying such an amount.

8

~

(J)

~ ....J z 0 (JJ ~

0 N

5 - 22

[42] The starting principle for an award of costs, as established in Law Society of Upper Canada v. Baker, 2006 ONLSHP 21, at para. 12 is that "[t]he financial burden for the prosecution of a member should not rest on the profession generally." Accordingly, we find the Lawyer should pay costs in this proceeding.

[43] The Tribunal has a general discretion to award costs, taking into account the particular facts of each case and the factors discussed in Boldt v. Law Society of Upper Canada, 2012 ONLSAP 24 and Law Society of Upper Canada v. Winton, 2008 ONLSHP 36. Those factors are:

a) Length and complexity of the proceeding: The hearing lasted one day, with another short day for penalty submissions.

b) Importance of the issues: The issue decided was important for both parties. The Society must effectively discharge its regulatory role to ensure that the public is served by lawyers who exhibit the highest degree of competence and professionalism.

c) Conduct: We found no improper or vexatious conduct on either side, such as would prolong the hearing to any extent.

d) Ability to pay: The Lawyer made comments about his ability to pay but provided no evidence of hardship.

[44] In considering costs, we found that the Society's costs were somewhat high given that the hearing proceeded smoothly and efficiently. The investigation concerning the real estate transactions had already been completed in connection with the proceedings against Ms. Vakili. The Lawyer did not contest the underlying facts. No expert evidence was led and neithe; was an expert ;eport tendered. The single issue in play was whether the Lawyer's misconduct in this case was knowing.

[45] We also considered that a significant award of costs would have the same punitive impact as a fine.

[46] Taking the above factors into consideration, we found that costs in the amount of $3,000 payable to the Society were reasonable in this case. The costs shall be payable on or before April 12, 2017 failing which interest shall accrue at the rate of 2% per year.

[47] We thank both parties for their helpful submissions.

9

~

"' ~ ...J z 0 <0 ~

0 N

5 - 23

' -II Law Society Tribunal Tribunal du Barreau

LAW SOCIETY TRIBUNAL HEARING DIVISION

Citation: Law Society of Upper Canada v. Tinianov, 2016 ONLSTH 3 Date: January 7, 2016 Tribunal File No.: LCN12/15

BETWEEN:

Before:

The Law Society of Upper Canada

-and-

Philip Charles Tinianov

Frederika M. Rotter (chair) Paul M. Cooper Marilyn Thain

Heard: October 20, 2015, in Toronto, Ontario

Appearances: Tanus Rutherford, for the Applicant Respondent, assisted by Duty Counsel, Cynthia Spry

Applicant

Respondent

~

:::::; c: \1l

~

"' I t; ...J z 0 <D ~

0 N

5 - 24

Summary: TINIANOV- Conflict of Interests- Independent Legal Representation (ILR) vs. Independent Legal Advice (/LA) - The Lawyer believed that he l-1BS assisting a colleague by providing /LA to some of the other lawyer's clients, lllhere that lawyer !-1BS acting for multiple clients in individual real estate transactions- The Lawyer should have provided fuiiiLR to those clients - Some of those transactions turned out to be fraudulent - The other lawyer l-1BS breaching the Rules of Professional Conduct- The Lawyer assisted her in doing so by failing to appreciate the distinction berneen ILR and /LA - The Lawyer engaged in professional misconduct by acting in circumstances lllhere he ought to have knolMJ that he assisted the other lawyer to breach the Rules- HoiJ\ever, the allegations that he knol!'.ing/y assisted the other lawyer to breach the Rules IJ\ere dismissed- A date

for the penalty hearing oos to be set.

REASONS FOR DECISION ON FINDINGS

INTRODUCTION

[1] Frederika M. Rotter (for the panel):- The Law Society of Upper Canada alleges that Philip Charles Tinianov ("the Lawyer") engaged in professional misconduct

thereby contravening s. 33 of the Law Society Act. The Society alleges:

(a) that the Lawyer knowingly assisted another licensee, Golnaz Vakili, to breach subrule 2.04(11) under the former Rules of Professional Conduct (the "two-lawyer subrule") by acting for both the lenders and the borrower in connection with two Charges registered on September 19, 2012 against 129

Homewood Avenue, Toronto; or alternatively acted in circumstances where he ought to have known that he was assisting Golnaz Vakili-to breach subrule 2.04(11).

(b) that the Lawyer knowingly assisted Golnaz Vakili to breach subrule 2.04.1 (1) (the "two-lawyer subrule") under the former Rules of Professional Conduct by acting for both the transferor and the transferee in connection with:

A transfer registered on September 28, 2012 for 7 High Point Road,

Toronto, and

A transfer registered on October 5, 2012 for 25 Heron Hollow, Richmond

Hill;

or alternatively acted in circumstances where he ought to have known that he was assisting Golnaz Vakili to breach subrule 2.04.1 (1 ).

[2] The four transactions are two charges and two transfers that closed in September

2

::J c

"' £ "' ~ en ...J z 0 <0 ~

0 N

5 - 25

[3]

[4]

[5]

and October of 2012. Golnaz Vakili acted for both the Charger and the Chargee on each charge, and for both Transferor and the Transferee, on each transfer. The Lawyer provided independent legal advice to the Charger and the Transferees.

The Law Society is alleging that by providing independent legal advice in these

transactions, the Lawyer knew he was assisting Golnaz Vakili to breach the former Rules of Professional Conduct, which required each party to a mortgage or transfer transaction to have independent legal representation.

The Society's alternative allegation is that the Lawyer ought to have known that acting in such circumstances amounts to professional misconduct that brings the legal profession into disrepute.

The substance of the Society's allegations are that the Rules require the Lawyer to have refused to provide independent legal advice because independent legal representation was required in these circumstances.

THE FACTS

[6] The Lawyer was called to the bar in 1978 and at all material times practised primarily real estate law. Golnaz Vakili had an office in the same shared office facility as the Lawyer.

[7] The Lawyer testified that in the year 2012, he worked in legal chambers where he rented premises from a management company. The lawyers who practised there all worked more or less collegially, gave each other advice, and helped each other out, although they had no formal partnership or business association. In 2012 Ms. Vakili wasa young lawyer who had been licensed for less than one year. Sheused to consult the more senior lawyers in the premises, including the Lawyer, for advice or assistance.

[8] Ms. Vakili is Iranian and had niany clients from that community. She asked the Lawyer to provide "independent legal advice" in situations where she acted for clients on both sides of a real estate or mortgage transaction. The Lawyer agreed to provide such independent legal advice because, he said, he felt that by doing so hew as doing Ms. Vakili a favour and assisting her to comply with the Law Society's two-lawyer subrules.

[9] The Lawyer said that all the parties in the questionable transactions were Ms. Vakili's clients. He did not charge any fees for providing independent legal advice, did not open a file as he would normally have done for his own clients whom he was representing, did not receive or disburse any funds, and did not prepare or deliver any written reports.

[1 0] In March 2013, the Superior Court of Justice appointed the Law Society trustee of Ms. Vakili's law practice. In May 2013, a Law Society hearing panel ordered an

3

5 - 26

interlocutory suspension of her licence to practise law. ~was learned that at least one of the transactions in which the lawyer had been involved was a fraudulent transaction.

The Transactions

[11] Transactions #1 and #2 were two Charges registered against 129 Homewood Avenue, in Toronto, on September 19, 2012.

[12] Golnaz Vakili acted for both the Charger and Chargee in each transaction, and asked the Lawyer to provide independent legal advice to the Charger although rvls. Vakili signed the Charge electronically as the person acting for the Charger. The

Charger was a corporate entity, represented by an individual who purported to be its sole director, as well the president, secretary and treasurer of the corporation. The Chargees were two different corporate entities.

[13] The Lawyer testified that rvls. Vakili told him that her client, the Charger, owned the property and was borrowing money from two other of her clients, the Chargees. rvls. Vakili wished to make sure her lender clients agreed with the terms of the transactions, and that there was no undue influence. All three parties were members of the Iranian community and knew each other.

[14] The Lawyer reviewed a number of legal documents in connection with these transactions, including a Consent to Act re Conflict for each Charge, which stated that both the Charger and the Chargee in each case acknowledged being advised by Golnaz Vakili that she was acting for both parties and consented to her acting in that capacity. Each Consent was signed on behalf of the Charger but was not signed on behalf of the Chargee. The Lawyer was provided an unsigned Certificate of Independent Legal Representation, which both he and the iridil/idl.lal representing the Charger signed on September 19, 2012.

[15] The Lawyer felt that it was prudent for the Charger to obtain independent legal advice. He testified that he requested identification from the person representing the corporate Charger, as well as other documents, including the parcel register and some of the corporate documents. He reviewed all the documents provided, and none of them seemed fraudulent or even questionable. He noted no "red flags" of fraud. The Lawyer stated that he thought, at the time, that he did everything he was supposed to do to ensure that the transactions were legitimate.

[16] The Lawyer acknowledged that that he did not review all the corporate documents in detail. He had no knowledge of the corporate shareholders of the company involved in this transaction.

[17] Although he looked at the Charge documents, he did not prepare them himself (as he would have done for his own clients) nor did he receive or disburse the loan funds, as he would have done for his own clients. Similarly, he did not prepare a

4

5 - 27

reporting letter, which he would do for his own clients.

[18] The Law Society did not suggest that these documents, or the transaction itself, were fraudulent.

[19] Transaction #3 was a transfer of a property, 7 High Point Road, Toronto, from a trustee, AY, to a beneficial owner, an Ontario numbered company, for the consideration of $2, registered on September 28, 2012. Ms. Vakili told the Lawyer that she acted for both the Transferor and the Transferee, and asked the Lawyer to provide independent legal advice to the Transferee, the numbered company. In connection with the transfer, she provided documents including a Trust Declaration

between the Transferor and the Transferee, as well as a parcel register for the property.

[20] The Lawyer was aware that this was not an arms-length transaction, and testified that he understood that the transfer involved just a nominal change in title, with no change in beneficial ownership. (The Lawyer indicated that he was not relying any exceptions in this regard}. He testified that he reviewed the title search for the property to ensure that the individual was the owner, and he also reviewed the Trust Declaration, showing that the property was held in trust. All the documents

looked correct. He felt he was helping his colleague to discharge her professional obligations by providing independent legal advice.

[21] The Lawyer acknowledged that he did not provide independent legal representation to the Transferee (the company) and did not have its representative sign a Certificate of Independent Legal Advice or any other document setting out

the scope of the retainer. He did not obtain a corporate search or other corporate doc~ments_ for the_ company, and has no information as to its share~old~~rs.

[22] The Lawyer did not attempt to verify the validity of the Trust Declaration, and he did

not prepare and deliver a final written report, as he would have done for his own clients. He did not ask why the property was held in trust, nor pursue any other issues with the Trust Declaration. In his mind, he was simply providing independent legal advice, and not representation. He testified that he would have asked for more documents and information had he been representing the company.

[23] The Lawyer testified that he learned two years later that this was a fraudulent transaction, and it was eventually reversed for that reason. In May 2013, he

testified at a hearing held under the Land Titles Actto determine whether the transfer was fraudulent. He stated that he had had nothing to do with the fraud and at the time all the documents looked legitimate. He did not notice any "red flags" of fraud. He felt that it was reasonable to rely on parcel registry and corporate documents issued by the Ontario government.

[24] Transaction #4 was another non arms-length transfer from an individual to a

5

5 - 28

corporate entity, the transfer of 24 Heron Hollow, Richmond Hill, registered on October 5, 2012. The transfer documents indicated that the consideration was $2 and that the transfer was from the trustee to the beneficial owner. The Lawyer indicated that he was not relying on any exceptions in this regard.

[25] Again, Ms. Vakili told the Lawyer that she acted for both the Transferor and the Transferee. She asked the Lawyer to provide independent legal advice to the Transferor, and asked that he electronically sign the Transfer and insert the following statement "I am the solicitor for the transferor(s) and I am not one and the same as the solicitor for the transferee(s)." In connection with the transfer, Ms. Vakili provided a Trust Declaration between the Transferor and the Transferee, a certificate of incorporation for the corporate Transferee, and a parcel register for the property.

[26] The Lawyer signed the Transfer on behalf of the Transferor and inserted the statement as requested, although he knew that both parties were Ms. Vakili's

clients, and that he was not, in fact, the solicitor for the transferor. He did not attempt to verify the validity of the Trust Declaration, nor inquire as to the date it was signed, nor did he deliver any written reports, as he would have done for his own clients.

[27] The Lawyer stated that, similar to the previous transactions, all the documents for this transfer looked legitimate. He understood that this was a change in title with no change in beneficial ownership, and that the parties were related. He only learned years later that this was also allegedly a fraudulent transaction. For his part, he had no knowledge of any fraud. He did not note any "red flags" in connection with this transfer. He felt that he was assisting his colleague in not breaching the Rules of Professional Conduct. He said thai, ai the time, he feii he was acting with aU due diligence in providing independent legal advice.

[28] The Lawyer also indicated that at that time in question, the distinction between

independent legal advice and independent legal representation was not entirely clear to him, as a real estate lawyer. He felt that he had been acting ethically and appropriately in assisting a colleague to avoid a conflict, but stated that he would not now do the same thing again.

ANALYSIS

[29] The Law Society alleges that the Lawyer knowingly assisted Ms. Vakili to breach the two-lawyer subrules in the four transactions described above. In the alternative, the Society pleads that the Lawyer ought to have known that he was assisting Ms. Vakili to breach those rules.

[30] We must first decide whether Ms. Vakili breached the two-lawyer subrules. If she did, we can then determine whether the Lawyer knowingly assisted Ms. Vakili to

6

5 - 29

[31]

violate the two-lawyer subrules, as alleged or whether, in the alternative, the Lawyer acted in circumstances where he ought to have known that he was

assisting l\lls. Vakili to breach the relevant subrules.

The (pre-2014) Rules of Professional Conduct distinguished between "independent

legal advice" (ILA) and "independent legal representation" ("ILR"). Rule 1.02 defines ILA as follows:

"independent legal advice" means a retainer where

(a) the retained lawyer, who may be a lawyer employed as in-house

counsel for the client, has no conflicting interest with respect to the client's transaction,

(b) the client's transaction involves doing business with

(i) another lawyer,

(ii) a corporation or other entity in which the other lawyer has an interest other than a corporation or other entity whose

securities are publicly traded, or

(iii) a client of the other lawyer,

(c) the retained lawyer has advised the client that the client has the right

to independent legal representation,

(d) the client has expressly waived the right to independent legal

representation and has elected to receive no legal representation or legal representation from the other lawyer,

(e) the retained lawyer has explained the legal aspects of the transaction to the client, who appeared to understand the advice

given, and

(f) the retained lawyer informed the client of the availability of qualified advisers in other fields who would be in a position to give an opinion to the client as to the desirability or otherwise of the proposed

investment from a business point of view.

[32] In contrast, ILR is defined as follows:

"independent legal representation" means a retainer where

7

5 - 30

(a) the retained lawyer, who may be a lawyer employed as in-house counsel for the client, has no conflicting interest with respect to the client's transaction, and

(b) the retained lawyer will act as the client's lawyer in relation to the matter;

(emphasis added)

[33] ~ is clear from the two definitions that someone who is providing ILR is fully acting as the client's lawyer in relation to a matter, while someone who is providing ILA is doing something less than providing full representation -that is, providing advice, in circumstances where the retainer is limited.

[34] Moreover, someone who is providing ILA has a duty to advise the client that the client has a right to ILR. In a real estate transaction, someone providing ILA has a duty to explain that ILA is not tantamount to ILR for the purposes of the subrules. Pursuant to paragraph (e) of the subrule, a lawyer providing ILA also has the duty to explain to the client "the legal aspects of the transaction". That is, in such a

situation, the legal practitioner has the duty and obligation to clearly explain the two-lawyer subrule, and to satisfy himself or herself that the client understands it. This means that the other lawyer should explain to the client that the referring lawyer cannot act or continue to act on both sides of the transaction, and that one or both clients should seek independent legal representation.

[35] In his evidence concerning the four transactions, the Lawyer was very clear that he was providing ILA and not ILR to Ms. Vakili's clients. He knew that the parties he was purportedly advising were Ms. Vakili's ciienis. She was representing both sets of clients, and would continue to do so

[36] He confirmed that he did not provide the kind of services he would normally provide to his own clients in real estate transactions. He reviewed certain documents and satisfied himself that they appeared correct and legitimate. He was conscious of the need to be alert to "red flags". However, he says he was not representing or

acting as the lawyer for the parties to whom he provided advice.

Did Ms. Vakili Violate the Two-Lawyer Subrules?

[37] Subrule 2.04(11) of the Rules of Professional Conduct specifies that lawyers may not act for both sides of a loan or transfer transaction in real estate matters. ~ provides:

Subject to subrule (12), a lawyer or two or more lawyers practising in partnership or association shall not act for or otherwise represent both

lender and borrower in a mortgage or loan transaction.

8

~ <::

"' S:!-

"' I 1-­(f)

--' z 0 ([) ~

0 N

5 - 31

Subrule 2.04.1 (1) provides:

Subject to subrule (3), an individual lawyer shall not act for or otherwise represent both. the transferor and the transferee in a transfer of title to real property.

(em ph as is added)

[38] In brief, the subrules provide that, in real estate matters, the same lawyer cannot act for or otherwise represent both borrower and lender, or both transferor and transferee. Certain exceptions to the two-lawyer subrules are set out for both situations, but the Lawyer is not relying on these exceptions. He acknowledges that the two-lawyer subrules were in effect at the relevant time.

[39] The Lawyer also acknowledges that he did not act for or otherwise represent any of the parties in these transactions. He provided ILA without charge, as a favour to assist a colleague. He did not provide the level and degree of legal services that he

would normally provide to a paying client whom he represented. He acknowledges that the parties to whom he provided advice previously were, and afterwards remained, Ms. Vakili's clients.

[40] Accordingly, we conclude that Ms. Vakili breached subrule 2.04(11) by acting for or otherwise representing both the borrower and the lenders in transactions #1 and

#2, the Homewood Road charges registered on September 19, 2012.

[41] Similarly, we find that Ms. Vakili breached subrule 2.04.1 (1) by acting for or otherwise representing both the transferors and transferees in transactions #3 and #4, which were transfers registered in late September and early October2012.

Did the Lawyer Knowingly Assist Ms. Vakili to Breach the Subrules?

[42] The Lawyer testified truthfully and sincerely, and we accept his evidence. He stated candidly that, as a real estate lawyer, the distinction between ILA and ILR was not always clear to him. However, he was adamant that he had never intended to

assist anyone to violate the Rules of Professional Conduct. On the contrary, he thought that by providing ILA, he was assisting his colleague to comply with the Rules.

[43] The Lawyer is now aware that this was not the case, and that the clients should have been provided with full and independent legal representation (ILR) in order to ensure compliance with the two-lawyer subrules.

[44] The Lawyer did not recognize that by providing ILA he was assisting Ms. Vakili to breach the subrules. Those subrules provide that "a lawyer or two or more lawyers

practising in partnership or association shall not act for or otherwise represent" both parties in real estate transactions. In the circumstances, it is clear that if a

9

5 - 32

lawyer knows that another lawyer is acting for both parties in a transaction as prohibited by the subrules, any independent legal advice provided by the lawyer is tantamount to assisting the other lawyer to otherwise represent both parties, in breach of the subrules.

[45] Also, it is clear that the Lawyer assisted l\lls. Vakili in breaching the relevant subrule when he electronically signed the Transfer in transaction #4 on behalf of the Transferor, and inserted a statement that he was the solicitor for the transferor,

although this was not the case. The Lawyer knew that both parties were still, and would continue to be, lllls. Vakili's clients for the purpose of concluding and finalizing the transaction. By signing the transfer, he was in fact certifying compliance with the two-lawyer subrule, although that subrule had not been complied with.

[46] We find that the Lawyer did not knowingly assist l\lls. Vakili to violate the two-lawyer subrules. He failed to appreciate the import and significance of the two-lawyer subrules, and he failed to appreciate the difference, and the importance of the difference between ILA and ILR. He failed to understand that simply providing ILA does not satisfy the subrules, which clearly require full independent legal representation.

[47] The two-lawyer subrules were developed and added to the Rules of Professional Conduct in 2001 and 2008, specifically to deal with conflicts in real estate matters. The Lawyer is an experienced real estate practitioner. We conclude that, under the circumstances, the Lawyer ought to have been aware of the Rules.

[48] Accordingly, the Lawyer ought to have explained, to both l\lls. Vakili and the clients, that -to comply 'v•Jith the Rules, he could not provide ILA. He should have explained that, if the client did not wish or accept independent legal representation, he would have to refuse the retainer.

[49] Lawyers are expected to be fully aware of and compliant with the Rules of Professional Conduct. They are expected to keep current and familiarize themselves with law and practice issues as they arise and develop, particularly within their own area of law and expertise.

[50] Rule 1.03(1) of the pre-2014 Rules explicitly provided that "rules of professional conduct cannot address every situation, and a lawyer should observe the rules in the spirit as well as in the letter." In considering the spirit of the Rules, we must find that even unwitting misconduct is misconduct, where there is a professional obligation to be knowledgeable.

[51] We also note that Rule 2.01(2) requires that all lawyers perform any legal services undertaken to the standard of a competent lawyer. A failure to perform to the standard of a competent lawyer can amount to misconduct.

10

5 - 33

[52] We rely on the reasons of the appeal panel in Law Society of Upper Canada v. Dmel/o, 2013 ONLSAP 5, in which the appeal panel commented, at para. 79:

[79] In our view, the Rules of Professional Conduct are to be interpreted in a broad and purposive way in the public interest. Nonetheless, there may be behaviour that is appropriately prosecuted as professional misconduct although it is not covered by the Rules, even when interpreted broadly. The reasons for that conclusion follow.

[80] First, "professional misconduct" is conduct including the categories that follow. The term "including" usually implies that what follows is not necessarily a complete list. [81] Second, Rule 1.03(1)(f) confirms that the Society is not confined to the precise language contained in Rules 2 to 6. As already noted, it recognizes that the Rules do not cover every factual situation, so that

lawyers must comply with both the spirit and the letter of the Rules.

[82] Third, under Rule 2.01, a lawyer may be disciplined for incompetence. The Rule also says that a competent lawyer complies with both the letter and spirit of the Rules. This Rule, like 1.03(1)(f) recognizes

that a lawyer has an affirmative obligation to comply with the spirit, not just the letter of the existing Rules and that failure to meet that obligation may constitute misconduct.

[53] We also rely on the reasons in Law Society of Upper Canada v. McSJAeen, 2012 ONLSAP 3, quoted in Dmello at para. 71. In McSJAeen it had been argued that the Law Society's failure to argue a particular rule alleged to have been violated was fatal to the Law Society's position. The McSv.een appeal panel said (at para .. 37 of that decision):

This appeal panel has repeatedly held that particulars are not to be treated as counts in a criminal indictment ... This means, among other things, that the failure to plead the most applicable rule will not preclude a finding of professional misconduct, as long as the licensee has had a fair opportunity to respond to the substance of the allegations being made.

[54] We find the Lawyer accepted a retainer to provide independent legal advice when he should have refused to do so. This amounts to professional misconduct and brings the legal profession into disrepute.

[55] The Omelia appeal panel (at para. 71) cited para. 40 of the McSJAeen decision, in a passage that observes:

A competent lawyer is expected, inter alia, to comply with the spirit and letter of the Rules: see Rule 2.01 (1 )(g). Surely, a competent lawyer must, at

11

5 - 34

a minimum, conduct himself or herself in a way so as to guard against becoming the tool or dupe of unscrupulous parties.

[56] The appeal panel in Omelia stressed that the public depends on lawyers to be alert to situations that may bring harm to clients. Therefore, when a lawyer's conduct does not meet this expectation it should be seen as misconduct.

[57] In the present case, it unfortunately did not occur to the Lawyer that he might have been used as a "tool or dupe" of his unscrupulous colleague. The Lawyer himself said that it "is a sad commentary" when he learned that his purported acts of friendship and assistance in reality served to facilitate a breach of the Rules, and ultimately, fraud. He stated unequivocally that he would not do the same thing again.

CONCLUSION

[58] We find that the Lawyer has engaged in professional misconduct, as the Law Society has alleged in its alternative allegations, in that he acted in circumstances where he ought to have known that he assisted Ms. Vakili to breach the two-lawyer subrules. The allegations of knowingly assisting Ms. Vakili to breach the two-lawyer subrules are dismissed.

[59] The Tribunal Office is requested to set a date for a penalty hearing.

12

https://www.lsuc.on.ca/For-Lawyers/Manage-Your-Practice/Practice-Area/Lawyer-Practice-Area-

Resources/

Real Estate Law

Real Estate Practice Guide (français) Residential Real Estate Transactions Practice Guidelines Fighting Real Estate Fraud Lutter contre la fraude immobilière FRANÇAIS Guidelines on Powers of Attorney in Real Estate Transactions Due Diligence Process for Mortgage and Loan Transactions for Lenders and Lawyers Electronic Registration of Title Documents Information Regarding Payment of the Real Estate Transaction Levy How to Prepare Closing Documents in a Commercial Real Estate Transaction How to Prepare Closing Documents in a Residential Real Estate Transaction How to Prepare Closing Documents in a Residential Mortgage Transaction How to Prepare Closing Documents in a Residential Condominium Transaction

The real estate practice guide is 327 pages long – enjoy!!

Tribunal decisions of note:

http://www.canlii.org/en/on/onlst/doc/2016/2016onlsth3/2016onlsth3.html

http://www.canlii.org/en/on/onlst/doc/2016/2016onlsth91/2016onlsth91.html

5 - 35

TAB 6

Procedure for Assessing of Accounts,

Fees and Expenses

Robert Macdonald Fogler, Rubinoff LLP

September 13, 2016

Practice Gems:

Mortgage Enforcement

ESSENTIALS 2016

Procedure for Assessing of Accounts, Fees and Expenses

Robert Macdonald, Fogler Rubinoff LLP

In Ontario, the general rule is that a mortgagee will not be restrained in realizing upon its

security through the power of sale, absent circumstances of fraud or bad faith conduct.1 The

mortgagee's power to sell the mortgaged property and recover their loan without the involvement

of the court is extraordinary.

The Mortgages Act seeks to regulate the extraordinary power that mortgagees hold by

providing certain mechanisms to allow mortgagors to challenge the amounts charged by a

mortgagee through a mortgage, thus ensuring that only proper amounts are recovered through

power of sale proceedings.

Mortgagors may take the view that charges included by the mortgagee are excessive or

otherwise unacceptable. This paper outlines two of the procedures that a mortgagor can rely on if

it objects to the amounts charged by a mortgagee:

i. the procedure in Royal Trust v. E.R. Kwinch Investments Ltd.; and,

ii. the assessment process under section 43 of the Mortgages Act.

This paper also seeks to offer practical considerations for counsel advising mortgagors who

object to the amount charged in a discharge statement. This paper does not seek to offer a

comprehensive review of the tools available to mortgagors in power of sale proceedings, but rather

1 This principal is referred to as the “Rule in Arnold v. Bronstein”. See: [1971] O.R. 467 (Ont. H.C.).

6 - 1

seeks to highlight two of the procedures most commonly used by mortgagors that counsel are most

likely to encounter.

i. The Procedure in Royal Trust v. E.R. Kwinch Investments Ltd.2:

In Kwinch, Master Sandler considered the proper procedure for a mortgagor who contested

a mortgagee’s lawyer’s legal costs, and whether payment of those costs is required prior to an

assessment of those costs.

The mortgagor contested the legal costs charged by the mortgagee’s lawyer, and objected

to making any payment toward the legal costs charged before the costs were assessed by the Court.

Kwinch established that a mortgagor can tender the amount owing under the mortgage,

exclusive of costs, and require the mortgagee to have its costs assessed. Under the Kwinch

procedure, the mortgagor does not have to tender any amount for costs until after those costs have

been assessed. However, it must be noted that mortgagors are not relieved of the consequences of

their default until the mortgagee’s legal costs have been paid.

The mortgage will not be discharged until after the legal costs have been assessed and paid

by the mortgagor. Accordingly, the Kwinch procedure will be of no assistance to mortgagors who

require an immediate discharge of the mortgage, for the purposes of a refinancing. Significant time

may pass before the costs are assessed and the mortgagor is able to obtain a discharge of the

mortgage.

2 44 O.R. (2d) 593 (“Kwinch”)

6 - 2

ii. Section 43 Assessments:

Most (if not all) mortgage contracts contemplate that the mortgagee's legal fees will be paid

by the mortgagor, typically on a solicitor and client scale. Mortgagors must be made aware at the

outset that they will be responsible for paying the mortgagee’s legal costs in the event that

enforcement proceedings are initiated.

The Mortgages Act recognizes this unusual arrangement. Given the mortgagee's

extraordinary right to exercise self-help remedies, the Mortgages Act provides a mechanism

through which the mortgagor can assess the costs incurred by the mortgagee in a power of sale

proceeding, thus regulating the mortgagee's ability to recover costs from the equity in the property.

Section 43(4) of the Mortgages Act provides that:

Costs, taxation

(4)A mortgagee’s costs of and incidental to the exercise of a power of sale, whether under

this Part or otherwise, may, without an order, be assessed by an assessment officer at the

instance of any person interested.

Section 43(4) allows a mortgagee's costs of and incidental to the mortgagee's exercising

power of sale to be assessed at the request of any interested party without a court order. Such costs

may be assessed by an assessment officer having jurisdiction in the county or district in which the

mortgage property is located.3

An assessment under subsection 43(4) includes, amongst other things:

i. Legal costs;

ii. Property inspection fees;

3 Vacations Inn Inc. v. Income Trust Co. (1991), 6 O.R. (3d) 573.

6 - 3

iii. Appraisal fees;

iv. Discharge fees;

v. Property taxes; and,

vi. Penalty interest

Historically, a mortgagee has been entitled to charge any costs it has incurred through the

mortgage, so long as those costs relate to the mortgage and were "reasonably incurred".4

However, the Court has held that the standard charge terms that provide the mortgagee

with the ability to recover its costs from the mortgagor do not grant the mortgagee or its counsel

a "carte blanche" on the fees to be incurred and charged. At the very minimum, there has to be an

air of reasonableness to the fees claimed.5

iii. The Assessment Process:

Mortgagors seeking to assess a mortgagee's costs charged through a mortgage may attend

at the assessment office of the Superior Court of Justice and obtain a Notice of Appointment for

Assessment, which will formally start the assessment process.

No evidence, in the formal sense, is adduced on an assessment of costs under a

mortgage.6 The accepted practice in Ontario is to conduct the assessment on the basis of unsworn

evidence.7

4 Manufacturers Life Insurance Co. v. 1008522 Ontario Inc., 2006 CarswellOnt 1160 (S.C.J.) 5 Chong v. Kaur, 2013 ONSC 6252 at para. 43. See also: 3072453 Nova Scotia Company v. 1623242 Ontario Inc., 2015 ONSC 2105. 6 Such assessments are referred to as assessments of "party-and-party costs". 7 Coutts v. Canadian Imperial Bank of Commerce (1983), 22 A.C.W.S. (2d) 41 (Ont. Assessment Officer); Arthur v.

Signum Communications Ltd. (1992), 16 C.P.C. (3d) 38 (Ont. Ct. (Gen. Div.), affd 42 A.C.W.S. (3d) 332 (Ont. Div. Ct.); Dical Investments Ltd. v. Morrison (1993), 13 C.P.C. (3d) 305 (Ont. Ct. (Gen. Div.)) at p. 311.

6 - 4

Typically, the mortgagee's counsel will deliver a bill of costs to opposing counsel, and

file it with the court at the assessment. The bill of costs should set out a detailed description of

the costs that the mortgagee seeks to charge through the mortgage, including a detailed

description of any legal fees included in that amount.

The mortgagee's counsel will make unsworn submissions on the bill of costs to the

assessment officer, including referencing any relevant documents that the mortgagee wants to

rely on, and any law supporting the mortgagee's position. Opposing counsel will then have the

opportunity to respond to those submissions.

Mortgagors who wish to assess a mortgagee’s costs must analyze the potential benefit of

commencing an assessment against the time and cost involved in conducting the assessment. It

may not be cost effective to commence an assessment where the challenged portion of the

mortgagee’s costs is relatively small.

Summary:

While mortgagees have an almost unfettered ability to sell a mortgaged property through

the self-help remedies provided by the Mortgages Act, mortgagors are able to challenge amounts

charged by mortgagees to ensure that only proper amounts are collected through power of sale

proceedings through the assessment process.

Mortgagors must be made aware of the mortgagees ability to recover its costs through the

mortgage, and the time and expense involved in seeking to assess a mortgagee's costs before

initiating the assessment process.

6 - 5