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Equitable mortgage principles affirmed after defaults of loans secured by property

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QUICK HITS

  • JKSD made two loans to Jaymor – $250,000 and $125,000. Security was personal guarantee of Jaymor’s principal or a fourth mortgage’s registration against property.
  • Jaymor defaulted on both loans. No fourth mortgage was registered on property, partly because Jaymor refused to execute authorization.
  • First, the judge decided appellants didn’t have equitable fourth mortgage and lender’s remedy was to sue.
  • Court of Appeal determined judge erred in finding terms of agreement uncertain as subsequent promissory note stated fourth mortgage would be registered on property in event of default.

 

In Greenspan v. Van Clieaf, the appellants, Greenspan and her lending company JKSD Management Inc. (JKSD), made two loans to Jaymor Securities Ltd., the first being for $250,000 secured by a third mortgage on a property in Richmond Hill, Ontario owned by Jaymor. Jaymor’s principal looked for another loan and provided an appraisal to show that the property could support a fourth mortgage.

 

Promissory note for second loan — default on both

 

On August 1, 2019, the parties executed a promissory note under which JKSD agreed to lend Jaymor a second loan of $125,000, which Jaymor was to repay within 30 days. Security for the loan was to be the personal guarantee of Jaymor’s principal, provided by a related company, and, if the loan was not paid in full on maturity and the default was not received afterward, then by a fourth mortgage’s registration against the Richmond Hill property.

Jaymor defaulted on both loans. No fourth mortgage was registered on the property, partly because Jaymor refused to execute an authorization for the mortgage registration.

Creditors obtained a judgment for $1,152,373.72 against Jaymor and registered a writ of seizure and execution against the property.

 

Property sold, equitable mortgage claimed

 

On March 12, 2021, the Richmond Hill property was sold for $1,560,000. After the payout of the first and second mortgages, tax arrears and the real estate commission, a balance of $548,437 remained that was subject to a dispute between the appellants and the respondents.

The appellants claimed an “equitable mortgage” over the property that took precedence over the respondents’ writ of execution. An equitable mortgage enforces “a common intention of the mortgagor and mortgagee to secure property for either a past debt or future advances, where that common intention is unenforceable under the strict demands of the common law.” It can be made in different ways, with the main element being the common intention of the borrower and lender to secure property for a past debt or future advances.

 

Lender to sue for breach of contract and/or negligent misrepresentation

 

At first, the Ontario Superior Court of Justice decided the appellants didn’t have an equitable fourth mortgage on the property. The application judge noted that Jaymor refused to execute the fourth mortgage and, at the time of maturity, had no intention of granting one — it wasn’t as though the parties didn’t intend to register a mortgage but formalities couldn’t be completed or a mistake was made.

The judge felt the right remedy for the lender was to sue for breach of contract and/or negligent misrepresentation rather than impose an equitable mortgage that interfered with the rights of execution creditors who had no other means to pursue and had taken all required steps (even during the COVID-19 pandemic) to solidify and register their interest.

 

Application judge made error of law

 

Once appealed, the Court of Appeal for Ontario held that the application judge erred in finding that JKSD did not have a valid equitable fourth mortgage. The decision focused on the written terms of the promissory note which indicated the parties intended that a fourth mortgage would be registered on the property if Jaymor defaulted on the loan. Nothing suggested that Jaymor had the discretion to decide whether or not the mortgage would be registered.

Based on the terms of the promissory note, the parties had a common intention when it was signed to grant a fourth mortgage to the appellants. That Jaymor refused to consent to the fourth mortgage’s registration and sought to retract from the agreement didn’t create ambiguity or uncertainty in the agreement to provide the fourth mortgage.

To consider the conduct of the parties after the formation of the promissory note without first determining whether the note was ambiguous was an error of law.

 

Accepting subsequent conduct gives undue power to create ambiguity

 

The Court of Appeal determined that the application judge made an error of law in finding that the terms of the agreement were uncertain because a subsequent promissory note also stated that a fourth mortgage would be registered on the property, in the event of default.

This involved subsequent conduct and there was never any conflict between enforcing the two promissory notes. Plus, the existence and terms of the subsequent promissory note could not create ambiguity with the earlier one if none existed when the parties entered into it.

The Court of Appeal’s view was that accepting the subsequent conduct created ambiguity and would give undue power to contracting parties to create ambiguity where none existed by refusing to follow through on their obligations in an agreement, or by acting in a self-serving manner after forming an agreement.

Finally, the Court of Appeal noted that considering the appellants had other means of enforcing their rights under the promissory note than by granting an equitable mortgage, or whether they had delayed taking steps to enforce their rights, was an error of law. The focus should instead stay on the terms of the promissory note when it was made. Based on the note, it was clear that the parties agreed that JKSD would have a mortgage on the property if Jaymor defaulted on the loan.

 

This decision affirms the fundamental principles involved in deciding whether an equitable mortgage may be enforced in circumstances where a charge or mortgage was not formally registered. The outcome may seem unfair to the execution creditors at first, but it doesn’t turn upon competing equitable claims between the parties.

The terms of the agreement between the appellants and Jaymor were not uncertain and later events or surrounding circumstances at the time of enforcement aren’t relevant in deciding whether there was an equitable mortgage to begin with.

 


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