DisputesInsights

The Perils of Private Mortgages in a Commercial Context

By January 16, 2025 No Comments

I took the one less traveled by,
And that has made all the difference.
― Robert Frost, The Road Not Taken

“Private mortgages”, as opposed to “institutional mortgages”, are mortgage arrangements by lenders who are not a bank listed in Schedule I or II to the Bank Act, a registered loan or trust company or credit union, or a licensed insurer or pension fund.1Marguerite E. Moore, Title Searching and Conveyancing in Ontario, 7th Ed., Ch 5. See also Kam Yiu Francis Ng and Priscilla Po v. Mario Eugenio, 2020 ONSC 2013 (CanLII), <https://canlii.ca/t/j6l4k>. Such loans can be attractive to borrowers who need alternative financing not available from the big banks for any number of reasons.

While the Ontario Mortgages Act R.S.O. 1990, c. M.40, does not distinguish between a bank mortgage and a private mortgage, reality may unfold differently. Not all private lenders are the same. As a result, there can be particular risks to entering such mortgages. This article will highlight a few and suggest possible ways to protect yourself or your business.

Improper Charges

When a mortgagor defaults under a mortgage, the Mortgages Act imposes certain notice periods on the mortgagee before it can sell the property to satisfy its debt. Essentially, the mortgagee must wait 15 days after the mortgagor’s default before issuing a Notice of Sale, and wait another 35 days after giving the Notice of Sale before it can take steps to sell the property.2These requirements apply to a contractual power of sale, i.e., the power of sale is stipulated in a contract. Different requirements apply for a statutory power of sale.

But an impatient lender failing to wait is not typically a concern. More often, problems can arise from efforts to hinder the mortgagor’s efforts to redeem the mortgage or, in layman’s terms, pay off the mortgage when it comes due.

It is mandatory at law for the mortgagee to give an accurate payout statement. Despite this, it is not uncommon to see an inaccurate payout statement for redemption. An unscrupulous lender might include extra or exaggerated charges that it says arose out of the mortgagor’s failure to pay off the mortgage when it came due for payment. While this may be formally offside the provisions of the Mortgages Act (or in some cases, the Interest Act), a borrower facing such tactics – who may already be cash constrained for other reasons – now faces either the risk of losing the property if funds are not paid or pursuing litigation.

What to Do

If you are a borrower in such circumstances, what do you do? If you choose not to pay the additional fees, or are unable to, the lender might proceed to sell your property. Another possibility is that the mortgagor/borrower pays all charges “under protest”: paying, but reserving rights to sue the mortgagee in future for the improper amounts insisted upon by the mortgagee. But even if you attempt to pay under protest, the lender might insist you sign a form of release, agreeing not to sue them despite your disagreement with the payout statement’s accuracy. All this effectively frustrates the mortgagor’s efforts to redeem the mortgage and is inconsistent with the Mortgages Act.

Again, it is the practical implications that matter. Whether it’s your rightful refusal to pay the improper charges or refusal to sign a coercive release, the lender might go ahead and sell your property forcing you to litigate. In that case you may still sue the mortgagee for damages, but you can find yourself embroiled in lengthy lawsuits for years, with title of the property having been transferred under power of sale by the mortgagee to a third-party purchaser.

If the mortgagee has violated the provisions of the Mortgages Act, you likely have a strong case against the lender. But that might not be enough to help you get title to your property back.

The legal test is different when it comes to recovering property from a third-party purchaser. As a starting point, if the purchaser meets the legal test of “a bona fide purchaser for value without notice”, you may not be able to recover the property. It goes beyond the scope of this article to address what makes a purchaser “bona fide” or to be determined to have purchased your property under power of sale from the lender “without notice”.

But it does raise a critical question worth thinking about: the steps you can consider taking to make sure anyone purchasing from the lender under power of sale is aware of your issue with the lender’s payout statement, the refusal to allow you to pay the actual amount owing to pay off or “redeem” the mortgage, and your intention to pay off the actual amount owing and challenge the lender’s misconduct in court as quickly as possible.

Concluding thoughts

The court has suggested that private lenders should not be treated less onerously than a bank.3Gedja Holdings Inc. v. Gondosch, [2000] O.J. No. 5170 at para 36. In practice, however, private mortgage arrangements can be prone to disputes, particularly regarding the amount of money required to redeem the mortgage, which may fall outside the borrower’s original contemplation. Whenever you encounter a situation where a lender seeks to thwart your attempt to redeem the mortgage, an urgent court application should be considered as soon as it becomes apparent the lender is insisting on being paid more than the amount to which it is entitled.

In particular, an application under s. 12(3) of the Mortgages Act allows the mortgagor to make payments into court, pending resolution of the dispute, where a proper discharge from the mortgagee “cannot be obtained, or cannot be obtained without undue delay”. In addition, an application could be made to obtain a Certificate of Pending Litigation (CPL) registered against the title of the property.

There are no guarantees, but both these steps help to guard your land while the dispute unfolds: the former prevents the mortgagee from selling the land without any legally required consent, and the latter gives notice to buyers in the world at large of your potential interest in the property. By preserving the status quo, these interim, procedural measures can put you in a better position to litigate or negotiate the payout of your private mortgage on fair rather than usurious terms, while protecting your land.

Disclaimer: This newsletter is for informational purposes only and should not be used as a substitute for competent legal advice from a licensed professional in your region.

 

 

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