Want to Discharge a Mortgage? Pay It off First

Published on: July 2019 | What's Trending

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The Ontario Court of Appeal recently affirmed that a mortgage cannot be discharged until it is paid off.  Although this may sound obvious, complications can arise when the amount owing on the mortgage is in dispute.

In Sub-Prime Mortgage Corp. v. 1219076 Ontario Limited, two mortgagees held mortgages on two different properties.  1219076 Ontario Limited (“121”) was the first mortgagee and Sub-Prime Mortgage Corp. (“Sub-Prime”) was the second mortgagee.  A dispute arose as to the amount owing under the mortgages held by 121. Sub-Prime commenced two applications in Superior Court seeking to obtain an immediate discharge of the mortgages held by Sub-Prime on each property by paying money into court, pending the resolution of the dispute.

In bringing its applications, Sub-Prime relied on section 12(3) of the Mortgages Act (the “Act”).  This provision states that when a mortgagor wants to pay off a mortgage and the mortgagee cannot be found, the mortgage may be discharged by paying the amount owing into court.  Section 12(3) of the Act also applies when a mortgagor is not able to discharge a mortgage for other reasons, and its application is in the discretion of the court.

The applications judge held that section 12(3) of the Act did not apply because Sub-Prime was a second mortgagee and not a mortgagor, and it was not a situation where the mortgagee could not be found.  Section 12(3) is not triggered automatically when there is a dispute regarding the amount owing on a mortgage.   Even if this provision did apply, it was held that the court would not exercise its discretion to grant the relief sought, as there was no compelling reason to do so.

The applications judge also held that, rather than bringing applications to discharge the mortgages, Sub-Prime should have paid the mortgage balances under protest and then later should have brought a proceeding to determine the disputed amounts.

The Court of Appeal held that the applications judge erred in law in finding that section 12(3) of the Act was not available to Sub-Prime because it is a second mortgagee and not a mortgagor.  In section 1 of the Act, a mortgagor is defined to include “any person deriving title under the original mortgagor or entitled to redeem a mortgage…”  Sub-Prime therefore qualified as a “mortgagor” under the Act.

However, despite the error, the Court of Appeal noted that the application of section 12(3) is a matter of discretion to be applied to the facts of each case, and the applications judge was justified in refusing to exercise its discretion to grant the relief sought by Sub-Prime.  Accordingly, the Court of Appeal upheld the reasoning that section 12(3) cannot be used to discharge a mortgage when the amount owing is under dispute.

The court emphasized that if a mortgagor has legitimate concerns about the amount owing under a mortgage, a court application should be brought under Rule 14.05(3)(e) of the Rules of Civil Procedure, rather than section 12(3) of the Act.  This Rule enables an applications judge to determine the amount owing, and may make an interim order for the payment of monies into court. It was noted that “[w]hat is crucial in such an application is that the applicant seek a judicial determination of all of the disputed items and provide evidence in support of its position”.

Sub-Prime did not follow the proper procedure in its applications, nor did it legitimately support its claim.  In the applications, Sub-Prime requested that the disputed amounts be assessed at a later date and that the mortgages be discharged immediately without any payment to 121.  Additionally, Sub-Prime did not provide proper evidence to substantiate its position on the amount owing under the mortgages.  As such, the Court of Appeal confirmed that the applications judge was correct in refusing to make a finding on the validity of the amounts claimed by Sub-Prime, as that relief was not requested, nor was it supported by the evidence.

Sub-Prime’s appeal was ultimately dismissed and the parties were directed back to Superior Court to determine the disputed amounts owing under the mortgages pursuant to Rule 14.05(3)(e).

Sub-Prime establishes a useful precedent for mortgagees seeking to discharge mortgages and settle disputes regarding outstanding balances.  Although section 12(3) may apply broadly, its reach is also limited and it does not allow mortgagees to discharge a mortgage before it is paid off.  If the amount owing under the mortgage is at issue, parties should stick to Rule 14.05(3)(e) as a starting point before attempting to have the mortgage discharged.

Co-Author: Daniel Waldman, Lawyer