Ksena J. Court and Francis N. J. Taman

Crystal Wealth Management System Limited v. JC Food Services Ltd.,[1] provides a cautionary tale about how an inadvertent error can result in a lack of recovery for a mortgagee.  JC Food Services Ltd. (“JCF”) granted a first mortgage, which was ultimately transferred to Crystal Wealth Management System Limited (“Crystal”).  As collateral security, the principals of JCF also granted guarantees for the first mortgage debt.  JCF also granted a second mortgage to a third party. 

In 2012, Crystal inadvertently discharged the first mortgage.  Crystal did not tell JCF or the guarantors about the discharge but did register a caveat against the title once it discovered its error.  The caveat was registered subsequent to the second mortgage, which was now in first position on the title.  Crystal did nothing more to correct the title.  JCF continued to make payments to Crystal until 2017, when it defaulted and Crystal proceeded to file foreclosure proceedings.

In the foreclosure proceedings, Crystal applied for an Order for Sale to the Plaintiff and a deficiency judgment against JCF.  Crystal acknowledged that the second mortgage, which was now in first position, took priority over its caveat.  JCF disputed that Crystal was entitled to a deficiency judgment on the personal covenant to pay in the mortgage.

The Court of Appeal reviewed the principals of a mortgagor’s equity of redemption.  The equity of redemption is the mortgagor’s right of relief from the forfeiture of their title to the mortgaged lands upon payment of the mortgage debt.  This equity of redemption is given recognition in s. 73 of the Law of Property Act,[2] which states that upon the mortgagor making payment of the debt due under a mortgage, instead of discharging the mortgage, the mortgagee is obligated to transfer the mortgage as the mortgagor directs.  By way of example, the Court of Appeal stated that if Crystal’s mortgage hadn’t been discharged, and payment of the mortgage had been made, then JCF could have had the mortgage transferred to the guarantors rather than discharged.  The guarantors could have then proceeded with foreclosure proceedings and had their guarantees extinguished. 

In this case, however, because the mortgage was discharged, JCF was deprived of the right to this transfer.  As such, the Court of Appeal found that Crystal was “deemed to have elected to forego the debt in exchange for unilaterally taking away the mortgagor’s equity of redemption.”[3]  Accordingly, Crystal could not obtain judgment for the deficiency under the covenant to pay in the mortgage.

Crystal also argued that it should be entitled to judgment on the basis of unjust enrichment.  The Court of Appeal did not accept this argument.  It held that while Crystal suffered a deprivation due to the loss of the registered mortgage, JCF did not receive a corresponding benefit as it was not provided with the benefit of a registered mortgage that could be transferred to a third party.

Three major lessons for lenders to keep in mind:

1. Take extra precaution when discharging.  Although it wasn’t clear from the written decision what events led to the discharge in this case, before submitting a discharge question and double check whether or not it is appropriate to be granting a discharge of the mortgage.  If the mortgage is collateral, are there any other debts that it secures?  If in doubt, seek legal advice.
2. If a mortgage is accidentally discharged, deal with getting the title rectified as soon as possible.  In this case, the Court of Appeal left open whether there were other remedies under the Land Titles Act that could have been used by Crystal.  There are sections in the Land Titles Act that permit a title to be rectified when mistakes are made.
3. Finally, where possible, lenders should take other security in addition to the mortgage.  In this case, although Crystal was not permitted to obtain judgment against JCF, the Court of Appeal chose not to make any comment on whether the guarantors remained liable under the terms of their guarantee.

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[1] 2020 ABCA 369 (Alta. C.A.)

[2] R.S.A. 2000, c. L-7, s. 73

[3] Supra note 1 at para. 3