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The Boundaries of the Interest Act

31 Tuesday May 2016

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Ksena J. Court and Francis N. J. Taman

In foreclosure proceedings, we are often asked by lenders why certain default fees, other charges or interest rate changes that are clearly chargeable based upon the terms of the mortgage are not collectable through the Court proceedings.  Our answer has been that in part it is because some Masters or Justices feel that such fees, charges or interest rate changes are a “penalty” under the Interest Act[1].  The Supreme Court of Canada recently released its decision confirming what fees and interest can and cannot be charged in mortgages.

In Krayzel Corp. v. Equitable Trust Co.,[2] which is commonly referred to by the Calgary Bar as the “Lougheed Block” case, Lougheed Block Inc. (“Lougheed”) granted a mortgage to Equitable Trust Company (“Equitable”) to secure a $27 million loan.  The initial interest rate in the mortgage was 2.875% per annum.  When the mortgage matured, Lougheed and Equitable agreed to a renewal for a 7 month term.  The interest rate in the renewal was prime plus 3.125% for the first 6 months and then 25% for the 7th month.  The term of the first renewal expired on March 1, 2009.

On April 28, 2009, the parties entered into a second renewal agreement which was made effective as of February 1, 2009 (a month before the expiration of the first renewal period).  Under the second renewal agreement, the interest rate was 25% per annum.  Lougheed was required to make monthly interest payments.  However, the monthly “pay rate” was not at the 25% rate of interest.  Rather, the “pay rate” was set at 7.5%, or prime plus 5.25%, whichever was greater.  The difference between the stated rate of 25% and the “pay rate” was to accrue to the loan, and if Lougheed did not default then the accrued interest would be forgiven.

As one might guess, since the matter was being litigated, Lougheed defaulted (in its first payment) under the second renewal agreement and Equitable sought payment at the 25% interest rate.  Lougheed claimed that the interest rate changes infringed the Interest Act.

Section 2 of the Interest Act states that a person can contract for any rate of interest that is agreed upon, except of course if it violates anything else stated in the Interest Act, or any other piece of legislation.  Section 8 of the Interest Act is one of those limiting sections.  It states:

No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property…that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

One of the purposes of s. 8 is to “protect landowners from charges ‘that would make it impossible for [them] to redeem, or to protect their equity’”.[3]  Essentially, if the borrower is already in default, the legislators felt that it was unfair for the mortgagee to be able to put the borrower further in the hole by charging a default fee or higher rate of interest on default.

The majority of the Court held that the substance of the clause will determine whether it violates the Interest Act, not the labels used.  It matters not whether the mortgage terms are described as a “bonus”, “penalty”, “discount”, or “benefit”.  “If its effect is to impose a higher rate on arrears than on money not in arrears, then s. 8 is offended”. [emphasis added][4]

The majority of the Court made it clear that an interest rate increase due solely to the passage of time, and not due to a default, does not offend the Interest Act.  As such, the terms of the first renewal agreement were fine.  However, the terms of the second renewal agreement were not.  The effect of the second renewal agreement was “to reserve a higher charge on arrears (25 percent) than that imposed on principal money not in arrears (7.5 percent, or the prime interest rate plus 5.25 percent).”[5]  Essentially, the higher interest rate only came into effect in the event there was a default and therefore imposed a penalty.  It mattered not that the terms described as a discount or that the higher interest rate would be “forgiven” if there was not default.  The Court allowed interest at the higher of 7.5% and prime plus 5.25%.

In light of this decision, lenders should review their mortgage paper and may wish to reconsider the effect that certain mortgage terms have and whether or not certain fees, charges or interest will be collectible.

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

[1] R.S.C. 1985, c. I-15, ss. 2 and 8.  Fees and charges are also disallowed by the Court as penalty under Section 10 of the Judicature Act, R.S.A. 2000, c. J-1, which allows relief from forfeiture for all “penalties and forfeitures”.

[2] 2016 SCC 18 (S.C.C.)

[3] Ibid. at paragraph 21

[4] Ibid. at paragraph 25

[5] Ibid. at paragraph 35

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Lending to Condo Owners – Risky Business?

28 Monday Sep 2015

Posted by in Condominium Fees, Foreclosure

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Ksena J. Court and Francis N.J. Taman

In our initial blog article, Not All Condo Fees Are Created Equally[1], we reviewed the decision of Master Prowse in King.[2]  In that decision, Master Prowse decided whether certain charges, such as legal costs incurred by the condominium corporation for enforcement of condominium fees, should be given priority over a mortgagee’s security interest in the condominium.  In the end, Master Prowse found that if the condominium bylaws stated that such charges constitute and form part of an “assessment” or “contribution” then they would be given priority over the mortgagee.

The unfortunate aspect of this decision is that it has, in some instances, given the condominium owner a “pot of money” to play with to the detriment of the mortgagee.  Consider the following actual fact scenario:

  • The lender holds a first mortgage against the condominium unit.
  • The security is a home equity type of collateral security, and as such it is questionable whether the lender will be able to obtain a deficiency judgment (for further discussion on this topic, refer to our blog post Are Lenders Giving Up Too Much?[3]).
  • The condominium corporation renders a special assessment for repairs to fix leaks in the condominium building envelope.
  • The condominium owner disputes the special assessment and there is extensive litigation between the condominium corporation and the condominium owner.
  • The lender is given information from the condominium owner that there is good cause to dispute the special assessment.
  • Years later the dispute between the condominium corporation and the condominium owner is resolved in favour of the condominium corporation.
  • The condominium bylaws state that the condominium corporation is entitled to solicitor and client legal costs, and the condominium corporation is awarded these costs.
  • The legal costs claimed by the condominium corporation are approximately $80,000.
  • The owner still doesn’t pay the special assessment and is therefore in breach of the mortgage.

In this instance, the amount of the special assessment essentially eats up any equity there is in the property.  If the legal costs also take priority over the mortgage, the lender is in a significant deficiency position.  But for the condominium owner’s actions of disputing the special assessment, the lender would not have been in such a deficiency position.

Since King, the Court of Queen’s Bench has approved its rationale of looking to the bylaws to determine priorities in two Justice level decisions, Rajakaruna[4] and Seehra[5].  Is this fair to the lender to be put into a deficiency position where it may have no ability to obtain a deficiency judgment against the condominium owner, or even if it could, collect on such deficiency judgment from the owner?  Is it fair that the condominium owner gets to use the property’s equity to fight a losing battle?

In the most recent decision, Bank of Montreal v. Bala[6], Master Schulz disagrees with the approach in King, Rajakaruna and Seehra.  Rather, Master Schulz finds that the Francis principle[7] of interpretation applies.

The Francis principle states that the condominium corporation does not have the same powers of a natural person.  Nor does it have the same powers as a corporation incorporated under the Business Corporations Act.  A condominium corporation is a creature of statute and as such only has the powers that it is given under the Condominium Property Act (the “CPA”).  If the CPA doesn’t state that an act can be done, the condominium corporation can’t give itself powers to do such an act in the bylaws.

Section 42(a) of the CPA states that a condominium corporation can collect solicitor and client costs from the condominium owner.  However, this is a collection remedy only against the condominium owner as a person, not against the condominium unit itself.  Section 42(b) of the CPA gives the condominium corporation the right to collect certain legal expenses against the condominium unit, but these are legal expenses incurred only for the preparation, registration, enforcement and discharge of a caveat for condominium arrears.  According to Master Schulz, this does not give the condominium corporation a blanket power to be able to collect all legal costs incurred by deeming them to be an “assessment” or “contribution” under the bylaws.

In the fact scenario above, if the condominium corporation had registered a caveat for the special assessment, arguably the legal costs incurred by the condominium corporation related to the enforcement of that caveat.  This would put the condominium corporation in a priority position over the lender for its legal costs.

Whether it be the Court interpreting the bylaws or applying the strict wording of the CPA, lenders should be aware that they face a significant risk in lending to condominium owners.  Lenders’ equity in the property can be eroded by the condominium owner entering into a dispute with the condominium corporation, with the lender essentially indirectly financing the dispute.  Lenders may wish to consider lobbying for changes to be made to the CPA in order to ensure that they have priority over legal costs incurred by the condominium corporation.

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

[1] https://albertaforeclosureblog.com/category/foreclosure/condominium-fees/

[2] Condominium Plan No. 8210034 v. King, 2012 ABQB 127 (Alta. Q.B.) (“King”).

[3] https://albertaforeclosureblog.com/2015/03/16/are-lenders-giving-up-too-much/

[4] Bank of Montreal v. Rajakaruna, 2014 ABQB 415 (Alta.Q.B.) (“Rajakaruna”).

[5] Condominium Plan No. 0526233 v. Seehra, 2014 ABQB 588 (Alta. Q.B.) (“Seehra”)

[6] 2015 ABQB 166 (Alta. Master).

[7] Taken from Francis v. Condominium Plan No. 8222909, 2003 ABCA 234 (Alta. C.A.) (“Francis”).

Are Lenders Giving Up Too Much?

16 Monday Mar 2015

Posted by in Foreclosure, Line of Credit

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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.

Mortgage Fraud with a New Twist

21 Wednesday May 2014

Posted by in Foreclosure, Mortgage Fraud

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Toronto-Dominion Bank v. Salekin (“Salekin”)[1] is “yet another case where rogues have taken advantage of a person who was willing to sign legal documents with little care for their meaning.”[2]  In the typical mortgage fraud, the “straw buyer” is induced by one or more individuals who are behind the mortgage fraud scheme (often referred to in the cases as “rogues”) to sign mortgage documents.  The inducement is often the payment of money accompanied with a promise that the straw buyer will only have to hold the property and mortgage in their name for a few months.  Salekin is a recent decision from the Alberta Court of Queen’s Bench that involved such a straw buyer.  However, in this instance, the straw buyer ended up with a mortgage in his name without having to sign any mortgage documents.

Mr. Salekin was approached by an individual (“Mr. D.”) who offered an investment opportunity or joint venture in a property.  Mr. D promised to pay Mr. Salekin a $5,000 “kickback” for participating.  In order to “expedite the process”, Mr. D asked Mr. Salekin to sign a Power of Attorney.  Mr. D promised that the Power of Attorney would only be used if the property came up for sale and Mr. Salekin was out of the province or not available.  The only document that Mr. Salekin signed was the Power of Attorney, but it was this document that allowed the fraud to be perpetrated and which left Mr. Salekin holding the bag at the end of the day.

A Power of Attorney is a document that authorizes another person, called the attorney, to step into your shoes and deal with your property as if it was their own.  A Power of Attorney document can be limited by giving the attorney authorization to deal with only certain property, or it can be very broad and give the attorney unlimited powers to deal with all of your property.  The Power of Attorney that Mr. Salekin signed was a general power of attorney that gave another individual (“Mr. L”) authorization to sign any documents with respect to the property that was being purchased.  It did not contain any statement that it would only be used if Mr. Salekin was unavailable as he alleged was promised by Mr. D.

Unbeknownst to Mr. Salekin, someone had already forged his signature on a purchase contract and a mortgage commitment for the property.  The Power of Attorney was then used to sign further documents respecting the purchase of the property, which included a transfer of the property into Mr. Salekin’s name and a high ratio mortgage in favour of the bank.  As is usually the case, the mortgage payments were not made and the mortgage went into default.  It was at that point in time that Mr. Salekin became aware that he was the registered owner of the property with a mortgage to the bank.

In the foreclosure proceedings, the property was sold to the bank.  Because the balance outstanding under the mortgage was higher than the fair market value of the property, the bank sought a judgment against Mr. Salekin for the difference.  At first instance, the Master denied the bank’s application.  The bank appealed to a Justice of the Court of Queen’s Bench.

The Court held that it was not necessary for the bank to have to prove that Mr. Salekin or someone authorized by him had signed the purchase contract or the mortgage commitment.  The bank had acknowledged that the signatures on these documents were forged.  This was not a sufficient defence for Mr. Salekin as he had signed the Power of Attorney which authorized Mr. L to sign any documents respecting the property for him.  The Court concluded that if the purchase contract and mortgage commitment had not already been signed, Mr. L still would have been able to sign those documents for Mr. Salekin by using the Power of Attorney and so the result would have been the same at the end of the day.

The Power of Attorney enabled the purchasing of the property and the placement of the mortgage against it.  While the Power of Attorney may have been used contrary to the conditions that were promised to Mr. Salekin, and Mr. Salekin may have a claim against Mr. L or Mr. D for breach of their promises, this was not a defence to the bank’s claim against him.  The bank had no notice of any conditions of use placed against the Power of Attorney.

The Court also noted that Mr. Salekin was not a completely innocent party in the transaction.  He was prepared to act as the straw buyer.  While Mr. Salekin did not receive the “kickback” he was promised, by signing the Power of Attorney, he put Mr. D or Mr. L in a position to perpetrate the fraud.  Mr. Salekin therefore did not come to the Court with “clean hands”.[3]

Mr. Salekin also attempted to argue that the bank was negligent in failing to review all of the documentation submitted to it when it granted the mortgage.  His argument was that the bank ought to have known that the Power of Attorney was not legitimate and that the mortgage was not authorized by Mr. Salekin.  This “failure of due diligence” argument was again clearly rejected by the Court as a defence.  The bank “was under no obligation to inquire into the validity of the Power of Attorney.  Further, the Bank’s diligence procedures were for its own protection, not the borrower’s, and it was entitled to follow or waive those procedures as it saw fit.”[4]

What is most interesting about Salekin is that it is a deviation from the standard straw buyer fraud scenario.  With the use of the Power of Attorney document, the straw buyer need only sign one document and does not have to attend a lawyer’s office in order to do so.  This innovation certainly reduces the risk to the “rogues” as the straw buyer no longer attends the lawyer’s office and may therefore not have the opportunity to obtain legal advice regarding the legality of the transaction or their liability under the mortgage.

While the bank was successful in obtaining judgment against the borrower in this case, and clearly does not have any obligation to inquire into whether the Power of Attorney that is presented to it is legitimate, it may be prudent during the underwriting and loan transaction process to do so in any event.  As the inventiveness of the “rogues” involved in mortgage fraud continues to evolve, the banks will clearly need to continually adapt their underwriting practices to reduce the risk of having to deal with these scenarios.

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] 2014 ABQB 168 (Alta. Q.B.).

[2] Justice Clark quoting from MCAP Service Corp. v. Halbersma, 2013 ABQB 185 (Alta. Q.B.) at para. 1.  Our blog post regarding this decision was posted May 22, 2013 (see https://albertaforeclosureblog.com/2013/05/22/if-it-sounds-too-good-to-be-true/).

[3] Salekin, at para.39.

[4] Salekin, at para 43.

Death changes everything – the interplay between death, bankruptcy and debt

21 Monday Oct 2013

Posted by in Bankruptcy, Foreclosure

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When underwriting loans, lenders should consider not only the assets that the borrower has available but also the assets that would be available in the event that the borrower dies.  Re Cameron Estate[1] is an example of how creditors may be out of luck in the event of the borrower’s death.

Cameron Estate involved the deaths of two doctors.  Both doctors had matrimonial homes which were jointly owned with their wives.  Doctor 1 obtained a $70,000 operating line of credit with the bank.  The security that the bank had against doctor 1 was a General Security Agreement.  Doctor 2 had a $75,000 demand overdraft facility with the bank.  The bank took security against doctor 2 in the form of a General Assignment of Book Debts.  When doctor 1 died, all his payments with the bank were current.  He owed approximately $56,000 to the bank.  Similarly, doctor 2 was also not in default with the bank when he died.  Doctor 2 owed approximately $70,000 to the bank.  In both cases there were insufficient assets in the doctors’ estates to pay the bank.  The main asset of each estate was the matrimonial home, which passed to the wives outside of the doctors’ estates due to the right of survivorship as a joint tenant.

The bank applied for and obtained orders for bankruptcy against each of the doctors’ estates.  Under s. 96 of the Bankruptcy and Insolvency Act,[2] a trustee in bankruptcy has the ability to apply to set aside transfers of property that have been made by the bankrupt before the bankruptcy for less than fair market value.  This section prohibits a bankrupt from making pre-bankruptcy attempts to defeat the claims of his creditors.  The Trustee in each case refused to take proceedings against the wives to have the transfer of the matrimonial home set aside on this basis.  The bank then obtained a court order allowing it to make the applications.

The bank argued that the transfers of the matrimonial homes to the wives in each case should be set aside because there was no payment by the wives for the transfer that occurred.  As such, the doctors’ half of the value of the matrimonial home should be declared an asset of their estates.  The bank also argued that court should order that the wives held the doctors’ half of the matrimonial home in trust for their estates.

Although these were very creative arguments advanced by the bank, the court rejected both.  In order for s. 96 of the BIA to apply, the bank must show that there was a “transfer” at undervalue that occurred within one year of the bankruptcy.  The court examined whether the wives’ becoming sole owners of the matrimonial homes due to survivorship constituted a “transfer” within the meaning of the BIA.  One of the fundamental features of joint tenancy is the right of survivorship – the surviving joint tenant automatically becomes the owner of the whole property upon the death of the other owner.

The court held that on the death of one joint tenant, the deceased does not “dispose” or “part with” his asset.  Rather, his interest in the jointly held asset is extinguished, which leaves nothing for the deceased to “transfer”.   The court noted that quite often parties intentionally hold assets jointly because they know that upon death the property will not form part of the deceased’s estate.  As the automatic vesting of the matrimonial homes to the wives by their right of survivorship was not a “transfer” under the BIA, the bank’s motion failed.

The court also went on to consider whether the automatic vesting was made at “undervalue”, which was the other element that the bank would have had to prove.  In the court’s opinion, the right of survivorship was acquired when the doctors and their wives acquired the property.  The doctors and their wives provided equal consideration for such right – each party had a risk of predeceasing the other and having nothing.  Marriage is considered an economic partnership and each of the wives acquired a right to the sole ownership of the property at the time the matrimonial homes were acquired with their equal, joint efforts.  The court concluded that the wives had already provided adequate consideration for the right of survivorship.

Finally, the court also refused to find that the wives held the doctors’ share of the matrimonial home in trust for the bank.  Because the court had found that there was adequate consideration provided by the wives and the widows owned the whole of the matrimonial homes prior to the bankruptcies, the estates were not deprived of anything.  The right of survivorship under joint tenancy also provided a juristic reason for a trust not to be implied in this instance.

The lesson to be learned is to ensure that the proper security is taken at the time the loan is granted.  The bank in Cameron Estate obtained security from each of the doctors for their loans, but as it turned out, it took the wrong type of security.  Mortgage security against the matrimonial homes would have protected the bank in this instance.  In Alberta, it is possible for a joint tenant to mortgage only his interest in real property.  Upon the death of the borrower, the surviving joint tenant would then take the property subject to the mortgage.  It is therefore important for lenders to carefully consider the assets that the borrower has, not only during the life of the borrower but also after his death.

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

Bankruptcy – it’s not the end!

21 Wednesday Aug 2013

Posted by in Bankruptcy, Foreclosure

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Under the Law of Property Act,[1] a mortgagee is limited to recovery of the property unless the mortgage is high ratio, insured by CMHC, or granted by a corporation.  If one of these latter circumstances exist, then the mortgagee is entitled to both recovery of the property and a judgment against the mortgagor for the deficiency in the event that the amount owed under the mortgage exceeds the value of the property.  The mortgagee can then take steps to collect on the deficiency judgment in order to make itself whole.

Unfortunately for mortgagees, the deficiency judgment is an unsecured debt, and if the mortgagor makes an assignment into bankruptcy, the mortgagee ends up lumped in with all of the other unsecured creditors ranking at the bottom of the distribution list of the bankrupt mortgagor’s estate.  If bankruptcy occurs, should the mortgagee give up?  Is bankruptcy the end of the mortgagee’s rights to collect?  As with most things, timing (in this case, the timing of the bankruptcy) is everything.

In CIBC Mortgage Corp. v. Stenerson,[2] the Donalds granted a mortgage to CIBC which was insured by CMHC.  Subsequently, the Donalds transferred the property to the Stenersons and by operation of the Land Titles Act, the Stenersons became liable for payment of the mortgage.  In March 1996, Cherie Stenerson assigned herself into bankruptcy.  For seven months after the assignment, she continued to make the mortgage payments.  In November 1996, the mortgage went into default, and in December 1996, Ms. Stenerson was discharged from bankruptcy.  Foreclosure proceedings were started by CIBC in February 1997.  Because the amount owed under the mortgage exceeded the value of the property, CIBC was granted a deficiency judgment against Mr. Stenerson.  The issue before the Court was whether CIBC was also entitled to a deficiency judgment against Ms. Stenerson given her bankruptcy.

The Court held that yes, CIBC was entitled to its deficiency judgment because Ms. Stenerson had affirmed the contractual relationship with CIBC by making the required mortgage payments during the bankruptcy.

The mortgagee’s right to a deficiency judgment is therefore dependent upon the timing of the date of bankruptcy and the date that payments are made.  If the default under the mortgage occurs before the date of bankruptcy and no further payments are made under the mortgage, then the mortgagee will be limited to recovery of the property and a declaration of the deficiency.  The mortgagee will then be able to register a proof of claim in the bankruptcy for the amount of the deficiency, but will rank alongside the other unsecured creditors.  However, if even one payment is made under the mortgage after the date of bankruptcy, the mortgage is affirmed and the mortgagee will be entitled to claim for both the property and any deficiency judgment against the bankrupt mortgagor.  Bankruptcy is not always the end to the rights of creditors!

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

Not all condo fees are created equally

13 Wednesday Feb 2013

Posted by in Condominium Fees, Foreclosure

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Ksena J. Court and Francis N.J. Taman

Condominium fees are often comprised of more than just the regular monthly assessments or special assessments.  Where there has been a default by the owner in payment, condominium corporations will usually charge the owner fees for NSF charges, writing a demand letter, as well as for the legal and other costs for taking collection steps or registering a caveat against the condominium title.  Typically lenders presumed that the condominium corporation has priority over their registered mortgage for these expenses due to the provisions of the Condominium Property Act.[1]  If the owner was not paying, lenders would often simply make payment of the amount requested by the condominium corporation and add the amount as a claimable expense under the registered mortgage.  A recent decision issued from the Court of Queen’s Bench has made it clear that not all fees or charges rendered by a condominium corporation will be secured against the title to the condominium nor will they take priority over a registered mortgage.

In Condominium Plan No. 0210034 v. King,[2] Master Prowse examined five cases in which the condominium corporation levied charges for items such as collection expenses, unpaid parking fees, and NSF fees, in addition to the regular monthly and special assessments and interest on those overdue assessments.  Generally, there is nothing prohibiting a condominium corporation from enacting bylaws that allow for it to charge these types of expenses and to have those expenses assessed against a particular defaulting owner or the owner’s unit.  After all, the condominium corporation is there to administer the common property and part of this administration is taking steps to collect on those unpaid expenses.  However, whether those expenses have priority over a registered mortgage or whether the condominium corporation is even entitled to a security interest against the condominium unit is a whole other issue.

The Condominium Property Act clearly creates a statutory charge in favour of the condominium corporation for unpaid “assessments”. [3]   It also creates a statutory charge for interest on overdue “assessments”, which has a priority over other registrations on title.[4]  The key is to determine whether those other charges are included in the definition of an “assessment” or deemed to be an “assessment” under the condominium bylaws.

By way of example, below is a portion of two very similar bylaws that were considered by Master Prowse:

Example 1:  “Any infraction or violation of or default under these By-laws on the part of an owner, his servants, agents, licensees, invitees or tenants that has not been corrected, remedied or cured within ten (10) days of having received written notification from the Corporation to do so, may be corrected, remedied or cured by the Corporation and any costs or expenses incurred or expended by the Corporation including costs as between a solicitor and his own client, in correcting, remedying or curing such infraction, violation or default shall be charged to such owner and shall be added to and become part of the assessment of such owner for the month next following the date when such costs or expenses are expended or incurred (but not necessarily paid) by the Corporation and shall become due and payable on the date of payment of such monthly assessment and shall bear interest both before and after judgment at the Interest Rate until paid.”

Example 2:  “The Corporation shall and does have a lien and charge upon and against the estate or interest of the Owner for any unpaid assessment, installment or payment (including interest on arrears) due to the Corporation in respect to his Unit, which lien shall be a first paramount lien against such estate or interest, subject only to the rights of any municipal or local authority in respect of unpaid realty taxes, assessments or levies of any kind against the Unit title or interest of such Owner, but subject also to the provisions of the Act and the Land Titles Act of Alberta…The lien or charge shall be deemed to be an equitable mortgage, payable on demand, and can be enforced either as a debt, or in the same manner as a legal mortgage registered against the Unit.  The Corporation shall be entitled to be paid by the defaulting Owner the costs (including without limitation legal costs on a solicitor and his own client basis) incurred in preparing and registering the caveat and realizing upon and enforcing the charge caveated, recovering the arrears and in discharging the caveat; and shall not be obliged to discharge any caveat until all arrears of the Owner (including interest and all such costs) are fully paid.” 

With respect to the first example, Master Prowse found that the collection costs were included as an “assessment” and therefore took priority over the registered mortgage.  In the second example, Master Prowse came to the opposite conclusion.  The distinguishing factor is what we lawyers like to call “magic words”, namely “shall be added to and become part of the assessment of such owner”.

Expenses that don’t have the magic words attached to them in the bylaws, may still be subject to a contractual security interest agreed to in the bylaws.  This security interest would entitle the condominium corporation to register a caveat against the condominium unit for those charges, but the condominium corporation would rank below any prior registrations against the title.  Absent this security interest, the condominium corporation may still charge the expenses, but it will only be collectable against the owner as an unsecured debt.

The moral of the story is that in instances where the condominium corporation is claiming a charge for anything other than a regular monthly assessment, a special assessment, or interest, the bylaws should be carefully reviewed by lenders to ensure that they are not overpaying the condominium corporation.  We suspect, however, that many condominium corporations will be reviewing their bylaws and amending them so that these other charges are included as an “assessment” and their super priority maintained.

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

[2] 2012 ABQB 127 (Alta. Master).

[3] Supra note 1 at s. 39(8).

[4] Supra note 1 at s. 41.