A recent judgment highlights the risks to a buyer under power of sale despite delivery of evidence required for the safe harbour provisions of s.35 of the Mortgages Act and s.99(1) of the Land Titles Act.
In 2544176 Ontario Inc. v. 2394762 Ontario Inc. et al. 2021 ONSC 3067 (CanLii) the Court found that the mortgagees enforcing their power of sale rights failed to furnish a discharge statement upon request of the defaulting mortgagor contrary to s.22 of the Mortgages Act and that failure meant that the rights of the mortgagee to enforce the mortgage were suspended and its sale of the property to a good faith buyer without notice was not valid and must be set aside. The safe harbour provisions of s.35 of the Mortgages Act and s.99(1) of the Land Titles Act can convey good title to a buyer despite a failure to comply with Part II or Part III of the Mortgages Act. However, since s.22 is found in Part I of the Mortgages Act, the Judge found that those safe harbour provisions do not extend to a failure without reasonable excuse to furnish a discharge statement within 15 days of request.
Being faced with the competing interests of a good faith buyer without notice and policies supporting the protection of the equity of redemption of a defaulting mortgagor, the Judge found on the side of the mortgagor.
The Judge recognized that an effect of the decision is that power of sale transactions will be subject to greater risk on the part of buyers and that that may put downward pressure on the prices that a buyer may be willing to pay.
A summary of the facts:
- The subject property is a gas station.
- The mortgage was in default and demand was made.
- After receiving the demand, the mortgagor found a buyer and agreed to sell the property on a highly conditional basis for $8.7M with a closing scheduled for four months’ later on February 15, 2021.
- The mortgagees sent a notice of sale.
- On January 14, 2021, the day following the 35-day standstill period, the mortgagor’s lawyer requested a discharge statement. The mortgagor’s lawyer also advised the mortgagees’ lawyer of the mortgagor’s sale and provided a copy of the agreement.
- The next day the mortgagees listed the property for sale.
- On February 4, 2021, the mortgagor and its buyer firmed-up their agreement with the price reduced to $5.4M and a new closing date of March 31, 2021. The mortgagor did not advise the mortgagees of that fact.
- On February 10, 2021, the mortgagees agreed to sell the property under power of sale to another buyer for $4.9M. The agreement included a provision that the buyer agrees to “accept title subject to the Mortgages Act” and included a provision reserving to the mortgagees a right to terminate the agreement and abort the sale in the event the mortgagor redeems the mortgage or sold the property.
- On closing, the mortgagee’s buyer granted a $4.3M first mortgage to its lender and a $1.0M second vendor take-back mortgage for a total of $5.3M in mortgages on a $4.9M purchase.
- The mortgagees never provided a payout statement following the request on January 14, 2021.
The Judge found that, but for the suspension of enforcement resulting from a breach of s.22 of the Mortgages Act, the mortgagee’s buyer would have good title as a bona fide third party without notice and there is no evidence or argument to the contrary even if the financing of the purchase was suspicious.
In dealing with the competing interests of a bona fide third party without notice and a mortgagor’s equity of redemption, the Judge found that the mortgagees’ buyer had assumed a degree of risk because the buyer agreed to “accept title subject to the Mortgages Act”.
The Judge clearly understood the implications of the decision.
The Judge noted that immediately following his judgment, the mortgagees could deliver the requested, discharge statement, sign a new agreement with their buyer, and close immediately thereafter and before the mortgagor could sell to its buyer and redeem the mortgage. However, the Judge recognized that the mortgagees might not want to do that and possibly face an improvident sale claim given that it is now aware of the $500,000 spread in sale prices.
The Judge also noted that a good faith buyer could try to protect itself by obtaining an estoppel certificates from the mortgagor but recognised that is not realistic. A buyer could also insist that the mortgagee prove that it has provided a discharge statement.
What is yet to be decided:
- Are the mortgagees liable in damages to their disappointed buyer?
- Are the mortgagees liable in damages to the mortgagor?
- Was the mortgagees’ lawyer negligent?
- What can a buyer’s lawyer do to protect the buyer?
- What is the status of the buyer’s first mortgage? Does the doctrine of deferred indefeasibility apply to it as a third party?
- What are the obligations of a title insurer to the disappointed buyer and its lender?