Ksena J. Court and Francis N.J. Taman

HELOCs[1], STEPs[2], EPMs[3]…these are just some of names for the new wave collateral mortgages that are being offered by the major lenders these days.  In fact, some lenders do not even offer a standard conventional mortgage any more (much to our dismay).  The collateral mortgage is marketed as an easy way for borrowers to access their home equity and other credit without having to go through the hassle of signing mortgage document after mortgage document every time they need more money from the bank.  But are the lenders in Alberta giving up too much by using this method of financing?

In our blog post “Line of Credit Mortgages – Once More into the Breach!”, we reported on the Bank of Nova Scotia v. Mawer[4] case which involved an application for a deficiency judgment on a Scotiabank STEP mortgage.  At that point in time, there were several Masters level decisions from the Alberta Court of Queen’s Bench, some of which (like Mawer) denied the bank’s application for a deficiency judgment, and others where judgment for the deficiency was allowed.[5]

The decision in Mawer was appealed.  It is this Justice level decision[6] that may have put a nail in the coffin for lenders wanting to obtain deficiency judgments on their collateral mortgages that secure various credit facilities.

The problem for lenders in Alberta is s. 40(1) of the Law of Property Act, which prohibits an action on the covenant to pay contained in a mortgage.  It is because of this section that lenders seeking to enforce their mortgage are generally limited to recovery of the mortgaged lands.  As Master Smart noted in Mawer, the concept of a mortgage that encompassed a variety of loan facilities was not “contemplated or even conceivable” when s. 40(1) was enacted.[7]

There are a few exceptions to this general rule.  A specific exception was created for high ratio insured mortgages in the Law of Property Act.  There is also case law which creates exceptions for collateral mortgages where there is evidence that in advancing credit the bank is relying solely on the borrower’s ability to pay and not the property, where the collateral mortgage is taken as part of a debt consolidation plan, or the collateral mortgage is taken where the loan was for business purposes.  In these instances, the bank isn’t seen as trying to “end run” s. 40(1).

In Mawer, the collateral mortgages initially involved debt incurred for the purchase of the properties.  Subsequently, the bank extended credit by way of Visa accounts.  Under the STEP financing, these Visa debts were also secured by the collateral mortgages.  In affirming the Master’s decision not to allow the bank a deficiency judgment against the borrowers, the Justice found that the mortgages were at the centre of the financing arrangements.  This was not a situation where financing arrangements were entered into and the mortgages were registered later to shore up the debt.  Essentially, where a lender is at all times looking to the mortgage as security for the indebtedness, it will be caught by s. 40(1) and the lender will be prohibited from claiming any deficiency judgment against the borrower.  One wonders in what circumstance a lender won’t be looking to its security!

This result is problematic for lenders in Alberta who choose to extend credit under various loan facilities that are secured by a collateral mortgage.  Unless the lender is able to clearly demonstrate to the Court that the loan falls within one of the limited exceptions, lenders who offer this type of mortgage facility will be at risk for taking a loss where the property value ends up being insufficient to cover the total debt.  By securing a Visa debt, for example, the lender may be prohibiting its ability to collect on that debt from other sources, such as the borrower’s wages through garnishment proceedings.  One may argue that if the borrower is in default, recovery of an unsecured debt is doubtful in any event.  However, judgments in Alberta are good for 10 years and can be renewed.  The borrower’s financial circumstances could certainly change over the course of time to make full recovery possible.

Exceptions to s. 40(1) have been made to the Law of Property Act in the past.  Lenders should seriously consider lobbying for another change.  Until then, it will be difficult for lenders to recover anything but the property when they are enforcing their collateral mortgages which secure various loan facilities that are traditionally unsecured debt.

Francis N.J. Taman and Ksena J. Court practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.

[1] “Home Equity Line of Credit” is the generic term for referring to a line of credit secured by a collateral mortgage.

[2] “Scotia Total Equity Plan” is the form of collateral mortgage offered by ScotiaBank.

[3] “Equity Power Mortgage” is the form of collateral mortgage offered by HSBC Bank Canada.

[4] 2013 ABQB 587 (Master).

[5] See for example Chinook Credit Union Ltd. v. Clarke, Alberta Court of Queen’s Bench action no. 1201-10614 (unreported) and HSBC Bank Canada v. Pleskie, Alberta Court of Queen’s Bench action no. 1108-00291 (unreported).

[6] 2014 ABQB 462 (Alta. Q.B.).

[7] Supra, note 4 at para. 15.