Jul 14, 2020

Keeping in place an "old mortgage" when paying out the mortgagee

Finley et al. v. Tines, 2012 MBCA 33 (CanLII)

Section 6 ("Section 6") of The Mortgage Act (Manitoba) (the "MMA") provides that where certain persons entitled to redeem a mortgage (hereinafter a or the "Redeemer") are prepared / willing / want to pay the secured debt to the mortgagee, there is a choice available to a Redeemer, other than simply getting a discharge of the mortgage and confirmation of satisfaction / payment in full of the secured debt obligation. In particular:

  1. A mortgagor can direct the mortgagee to assign the debt (and the mortgage) to a "third party", provided that the mortgagee being paid out is provided with certain information. The information is to include a current status of title for the mortgaged realty plus a statement showing the debt secured by each subsequent registrant (ie, each person having a subordinately ranking interest in the mortgaged realty) plus a statutory declaration describing the status (unpaid, in whole or in part) of each subsequent registrant's claim (hereinafter, the "Paid Out Mortgagee's Requirements").*
  2. Each subsequent registrant is similarly entitled to pay the (prior) mortgagee's secured debt claim and require that prior mortgagee to assign its debt claim and its mortgage to a third party.

However, such entitlement of a mortgagor or a subsequent registrant is available only in the following circumstances:

  1. Where more than one of the mortgagor and the subsequent registrants wishes to redeem a prior mortgagee's debt and security, the highest ranking of them has a first priority entitlement to redeem (and get an assignment to it). The priority "hierarchy" here starts with the highest ranking subsequent registrant (below) the mortgagee being redeemed. It then drops down level by level to the following subsequent registrants, with the mortgagor's entitlement to redeem being at the bottom of the hierarchy. The writer takes this to mean that where Whiteacre is owned by "O", and the property has been mortgaged by "O" to "A" (first mortgagee), then to "B" (second mortgagee), and then to "C" (third mortgagee), and all of "O", "B" and "C" wish to redeem "A"'s mortgage and direct an assignment of "A"'s debt claim and the mortgage itself, "B" has the first overriding entitlement to redeem, and if "B" passes on this right, "C" is next entitled to redeem, and, if both "B" and "C" choose not to redeem, only then is the owner / mortgagor "O" entitled to redeem. Although Section 6 doesn't specifically say so, it is the writer's understanding that if "C" wishes to redeem "A" in this situation, it would not be entitled to do so - at least without "B"'s consent - and "A" would not be entitled to accept redemption from "C" and thus not be entitled to assign its debt and mortgage security to "C" without "B"'s consent;
  2. The subsequent registrant redeeming must ensure that "A" is provided with the Paid Out Mortgagee's Requirements (aforementioned). This requirement is no doubt mandated to enable the first ranking mortgagee (being paid out) to be in a position to determine the aforementioned respective "redemption priority entitlements" of the other parties with lower ranking interests in the property, down to and including the mortgagor.

There are "real life commercial situations" in which it makes sense for a completely new party (an outside financier) to want to purchase an existing mortgagee's debt claim and the security therefor. Similarly, there are understandable commercial reasons for subordinately ranking registrants wanting to buy out a prior mortgagee's - or prior mortgagees' - mortgage(s) and the thereby secured debt claims. Consider the following:

  • Where one financial institution purchases another financial institution's portfolio of mortgage secured debt. Sometimes this happens directly and sometimes it happens as part of an amalgamation between two or more financial institutions.
  • Where a mortgagor / property owner arranges with a third party to buy out the mortgagor's existing mortgage, with the third party "stepping into the shoes" of the original mortgagee. This arrangement may be advantageous to the parties because the cost of having the existing mortgage assigned to the new lender may be less than the cost of creating an entirely new mortgage. Also, relying on the existing mortgage gives the new lender priority over the subsequent registrants without seeking postponements from them. The mortgagor and the new lender may keep the existing indebtedness in place but change one or more of the terms of payment / repayment thereof, (eg, the term of the debt, the interest rate, the frequency of compounding of interest, etc.). Or the mortgagor and the new lender may wish to keep the existing debt in place and have the new lender advance additional funds to the mortgagor. In either of these cases, the new lender and the mortgagor should enter into a mortgage amending agreement and the subsequent registrants would have to give their consents to the mortgage amendment.
  • Where a higher ranking mortgage goes into default and the mortgagee thereof commences mortgage realization proceedings, and a subsequently ranking registrant believes that there is - or that in the future there will be - sufficient equity in the property to cover both the subsequently ranking registrant's secured debt and that of the higher ranking mortgagee (who has commenced mortgage realization proceedings). The lower ranking registrant - to preserve its own security - redeems the higher ranking mortgage. If the lower ranking registrant failed to so redeem, the higher ranking mortgagee's mortgage sale purchaser (or the higher ranking mortgagee itself, consequent upon foreclosure) would thereby extinguish the lower ranking registrant's interest.

When considering the desirability of paying out a mortgagee, the person intending to so pay out should consider not only the fact that he / she / it will, in most cases, have two options, ie, pay out and get a discharge or pay out and direct the paid out mortgagee to assign the mortgage and the mortgage secured debt, but should also consider what are - or will be - the likely consequences of making one choice or the other. Regardless of which choice is made, there have been cases where, having chosen to characterize a mortgage payout as a discharge transaction, the person paying out subsequently decides that it would be more advantageous to have characterized the payout as being made for an assignment of the mortgage, with the person having paid out then trying to retroactively re-characterize the payout as being one made for an assignment. In particular, consider the following cases:

  • Finley v. Tines, 2012 MBCA 33 (judgment issued April 24, 2012, hereinafter, the "Finley Case"). "Y" gave a mortgage on its property to "X" to secure certain indebtedness owed by "Y" to "X". "Z" (a principal of "Y") guaranteed / covenanted to "X" to pay the secured debt. Subsequently, "Y" sold the property to "P", and as part of its agreement with "P", undertook to cause "Y"'s mortgage to be paid off and discharged. Payment was made and was clearly accompanied by a request for a discharge. Subsequently, the principals of "Y" other than "Z" (hereinafter, the "Other "Y" Principals") realized that if, instead of getting the mortgage discharged, the Other "Y" Principals could have required "X" to assign the mortgage to them and the debt thereby secured, together with "Z"'s covenant to pay "Y", they would be in an advantageous position. In particular, they could then claim against "Z" as assignees of Z's guarantee. The Court held that the land sale required the discharge of the mortgage and the amount owing under the mortgage was paid to the mortgagee, a discharge produced and that discharge was registered at the Land Titles Office. Neither "Y" or the Other "Y" Principals could go back and change their minds and try and recast the tendering of payment as tender in exchange for an assignment. The Court emphasized that the (now registered) discharge not only terminated the existence of the security (ie, the mortgage), but also contained a statement to the effect that the mortgage secured debt was paid or satisfied in full.

Note that the Finley Case does not hold that it is not possible to redeem a mortgage and get an assignment of the mortgage, the debt thereby secured and any collateral security, such as a covenant / guarantee to repay from a third party. This clearly is possible, but for someone wishing to redeem and get an assignment, it is important that such person - and their lawyer - make it clear, from the outset, that it is an assignment, not a discharge, that is desired. It is also possible for a mortgagor and a mortgagee to agree that the security provided by the mortgagor is to be released without extinguishing the debt; in this situation, it is important for the mortgagee to ensure that the discharge clearly indicates that, although the security is discharged, the indebtedness is not discharged or released.

  • B & M Handelman Investments Limited v. Christine Drotos, 2018 ONSC 7124 (judgment issued November 27, 2018, hereinafter the "Handelman Case"). The Handelman Case is similar to the Manitoba Finley Case, in that money was tendered to a mortgagee, initially, for the express purpose of discharging the mortgage, but thereafter, it was argued that the purpose and objective of the tender was for the tenderer to obtain ownership of the mortgage and the indebtedness thereby secured. The tenderer's agent delivered a letter to the first mortgagee together with a certified cheque. The letter was addressed to the "Discharge Department" of the first mortgagee and it indicated that "you have advised that upon receipt of the funds, you would attend to the registration of the discharge of the mortgage". The Court held that when payment was made accompanied by what appeared to be an unequivocal statement on the part of the tenderer (ie, payment for the purpose of obtaining a discharge) and that payment was accepted for such purpose, it was not possible for interested parties to "later change their minds and try to recast the transaction as one of tender in exchange for assignment of the mortgage". In the Handelman Case, there were first, second and third ranking mortgages, although the total debt secured by all three mortgages was far in excess of the value of the property. Keeping the first mortgage alive (ie, having the mortgage assigned to the second or third mortgagee rather than having it discharged) may well have benefitted the second or third mortgagee, but as the Court observed, "A debt once discharged cannot be revived by the creditor and assigned to third parties. Other parties, including the second mortgagee, acquired rights in the interim. The transfer of (a mortgage) under the Land Titles system is always subject to the account between the parties and, in this case, that account stood at $0.00."

The common denominator lesson in the Finley Case and the Handelman Case is that if someone is contemplating redeeming a mortgage, they should carefully think through the consequences - or the possible consequences - of their proposed action. Having done so and having determined that they want an assignment of the mortgage rather than a discharge of same, they - and their lawyers' - actions and written communications should reflect the intention to require an assignment, not a discharge.

Note in particular the Court's statement (underlined above for the purposes of emphasis) referring to the second mortgagee "acquiring rights in the interim". The writer believes that this statement reflects his above-stated view that Section 6 of the MMA impliedly (at least) protects the rights of claimants ranking subsequent to the holder of the mortgage being redeemed by way of assignment by entitling the subsequently ranking registrants to insist that they give their consents to a redemption by way of assignment of a prior ranking mortgage. In the alternative, and this would be a condition of the giving of such consent, the lower ranking registrant(s) may require that they be paid out.

* In this context, a "subsequent registrant" is often referred to as a "subsequent" or "subordinate" encumbrancer.