Once a mortgagor provides a request to the mortgagee to produce a discharge statement, the mortgagee must answer the request unless it has a reasonable excuse for its failure to do so. This is a requirement under the Mortgages Act. In a recent case, 2544176 Ontario Inc. v. 2394762 Ontario Inc, 2021 ONSC 3067, a court tenaciously quarreled with a situation where the mortgagee failed to produce a discharge statement without a reasonable excuse. The court ultimately with a lot of zig zagging around the issues finally concluded that the sale by that the mortgagee’s subsequent sale to a bona fide third party was invalid.
The court raised the practical issues in voiding the sale. Mortgages have been signed. Monies have been transferred. How can the transaction be properly reversed? The court asked a lot of questions but gave very little answers.
What we can take away from this decision is that a court will invalidate a sale where the mortgagee does not produce a discharge statement to a requesting mortgagor. If there is a failure, the mortgagee must have an objectively verifiable excuse for the failure.
This judicial approach is line with the long-standing principle in the law of mortgages that mortgagor’s rights are to be jealously protected.
Background.
It appears the mortgagee and the mortgagor were racing to sell the property in the face of the mortgagor’s default. Both the mortgagee and mortgage had buyers in place to purportedly close. The mortgagee had already issued a notice of sale. 35 days had passed. The mortgagor requested from the mortgagee’s real estate counsel to provide it with the discharge statement. The mortgagee’s real estate counsel asked for a copy of the mortgagor’s executed agreement of purchase and sale to prove the legitimacy of the mortgagor having a purchase lined up. In response, the mortgagor sent the APS.
But – the mortgagee did not provide a discharge statement.
The mortgagee’s sale closed but in the APS there was a condition that reserved the right for the mortgagee to terminate the agreement if the mortgage redeemed the mortgage.
The mortgagor brought an application to reverse the sale.
Court.
The court made its first of a few determinations that a mortgagor of course has the right to redeem its mortgage right up to when the mortgagee sales the property. After the sale occurs, the mortgagor’s right to redeem is extinguished.
The court then went to consider whether under s 22 of the Act, did the mortgagee have a reasonable excuse for not delivering the discharge the statement. The court held that the “reasonable excuse” should be interpreted broadly and brings with it an objective test of reasonableness.
The court ultimately held that mortgagee failed to have a reasonable excuse as it did not much of have an excuse at all. The court found that the consequence of not delivering the discharge statement was that the mortgagee’s rights are suspended. The court found the mortgagees’ power of sale rights were suspended.
So - what now?
The court went on to analyze of what the legal impact of s 22 would be on the mortgagee’s sale of the property which actually closed.
Buyer’s Position.
The crux of the third-party buyer’s position was that sections 35 and 36 of the Mortgages Act and subsection 99(1.1) of the Land Titles Act protect third-party buyers from situations such as the one that occurred here. These sections cure defects in the title. Therefore, the buyer received good title that the mortgagor cannot attack.
Court’s Position.
The court performed some statutory analysis and found:
Section 35
is subject to the Land Titles Act
declarations under it relate to the compliance with Part II and Part III of the Mortgage Act but not to the compliance of Part I;
Section 36
Again, relates to Part I and II of the Mortgages Act and not Part I;
Section 22 is contained Part I and therefore, as the court viewed, are out of the each of section 35 and 36. As the court held, the legislature could have referred to Part I in section 35 and 36 but failed to do so.
Further, section 99 of the Land Titles Act proves this theory further. Section 99(1) holds that subject to the Mortgages Act, a party that has a registered charge that contains a power of sale, upon registering the evidence specified by the Director of Titles, may sell the interest in land. Subsection 99(1.1) makes the provision congruent with section 35 and 36 and it holds that such evidence is evidence of compliance of Part II and III of the Mortgages Act.
In other words, by complying with the prescribed evidence, which are statements by the mortgagee on TeraView, generally called: “statements in the Transfer under Power of Sale”, are sufficient for a third-party buyer to accept that the mortgagee has complied with Part II and Part III of the Mortgages Act.
However, these sections do not is cure defects that arise from Part I. This is the Part where section 22 falls in.
The court ultimately concluded that sale should be voided. But the court raised several practical issues on voiding the sale.
Court Opining on Practical Result of Voiding Sale.
The court looked at what the practical effect would be if it voided the sale. The court was concerned how would third-party buyers protect themselves from such a defect in the title. Interestingly, the court gave no real answer on this. It posited that there are significant reasons why a void of the sale should not be granted as the purchaser’s offer was greater than the mortgagor’s buyer. Another issue was how would the buyer get its money back. And further, does its third-party mortgage lender lose its security against the land that depends on the buyer’s title.
Lots of questions but not too many answers.
Conclusion.
The court ruled that the transfer be voided but did not grant the applicants, the mortgagor’s purchasers, the right to complete its APS. The court held that the applicant has “whatever rights it has. I cannot prejudge what that might be as there are steps that have been taken and steps that my yet be taken that may affect that outcome.”
We can take away from this case that it is critically important for the mortgagees be in total compliance with Part I of the Mortgages Act, specifically, as outlined in this case, section 22 of the Act. Or else, your sale will be void.
UPDATE: Decision Reversed!
Recently the Court of Appeal set aside the decision discussed above. The highest Court in Ontario held the innocent purchaser was entitled to good title given the "Safe Harbour Protection". I will be writing about this in another blog. Thusly, the sale is no longer void. The recourse for the mortgagor lies against the mortgagee, not the 'innocent purchaser'.