BC Court of Appeal Reviews Limitation Periods on Secured Loans
The British Columbia Court of Appeal recently overturned a lower court decision related to enforcement of security on a loan. The Court of Appeal found that where there is a secured loan, the two year limitation period to enforce the security will start from the day the security becomes enforceable, even if a demand has not been made. Where the terms of the loan provide that security is enforceable upon default, the timing on right to enforce may begin to run even if the lender does not take action.
This was the first decision that considered the amended Limitations Act in that province.
In May 2013, a married couple (the Leathermans) loaned Kootenay Lake Estates Ltd. (KLE) $1,500,000 and were given a mortgage. KLE subsequently sold its interest in the land to a numbered company (the borrower) who assumed KLE’s obligations under the mortgage.
The Mortgage Terms
The terms of the mortgage stipulated that the date of payment would be on demand. Until the demand was made, the borrower was obligated to pay accrued interest. The mortgage also included Schedule B – The Prescribed Standard Mortgage Terms (under the Land Titles Act), which states:
8(1) If a default occurs, all the mortgage money [ie principal and interest] then owing to the lender will, if the lender chooses, at once become due and payable,
(2) if a default occurs the lender may, in any order that the lender chooses, do any one or more of the following:
(a) demand payment of all the mortgage money;
(b) sue the borrower for the amount of money due;
. . .
(f) apply to the court for an order that the land be sold on terms approved by the court;
(g) apply to the court to foreclose the borrower’s interest in the land so that when the court makes its final order of foreclosure the borrower’s interest in the land will be absolutely vested in and belong to the lender;
KLE and the borrower gave the Leathermans a General Security Agreement (GSA) over the proceeds of the sale of lots that were potentially going to be subdivided from the mortgaged land. The GSA provided that if the borrower was in breach of the mortgage, the Leathermans were free to realize on the GSA.
Failure to Make Required Interest Payments
The borrower missed the first required interest payment in October 2013. Initially, no action was taken by the Leathermans in response to this failure.
In November 2015, the Leathermans and the borrower sent correspondence about the loan and the repayment schedule, but no action was taken by either party.
Another interest payment was missed in October 2016. In November 2016, the Leathermans’ issued a demand for payment of the whole amount of the principal and the interest due on the debt (seeking only the lowest amount of interest contemplated by the mortgage). In December 2016, the Leathermans filed a petition seeking repayment and foreclosure.
The borrowers responded arguing that the Leathermans’ petition was statute barred due to the limitation period that had commenced on November 1, 2013 when the mortgators had first failed to make a required payment (since more than two years had passed since that date, the Leathermans could not now act). The borrowers further argued that their failure to make payment on October 31, 2013 had been a breach of the promise contained in the agreement, and an act of default pursuant to Clause 7, which had, at that time, triggered the Leathermans’ right to accelerate payment under Clause 8 Schedule B – The Prescribed Standard Mortgage Terms.
The Leathermans’ argued that the failure of the borrowers to comply with the demand that the Leathermans had made for payment in November 2016 had been the actual triggering event for limitation period purposes, and that there was therefore no merit to the limitation period argument made by the mortgagors.
The Law on Limitation Periods
An updated Limitations Act came into force in B.C. in 2013 and outlined special exemptions to the general rule of discoverability, particularly in the context of demand obligations and security. The relevant part of the Act (sections 14 and 15) states as follows:
14 A claim for a demand obligation is discovered on the first day that there is a failure to perform the obligation after a demand for the performance has been made.
15 A claim to realize or redeem security is discovered on the first day that the right to enforce the security arises.
The Original Decision
The original trial judge noted that s. 14 of the Limitation Act provides that a pure demand loan will be treated like a delayed-demand loan in which the lender can demand payment at any time, but which stipulates that payment can happen at some future date. The effect of s. 14 is that the limitation period for pure demand loans starts when a demand is made and the borrower fails to comply not on the date the loan is made.
The judge went on to say that the borrower’s argument confused the legal right to sue with the start of a limitation period. Section 14 does not modify when the lender may make a demand for payment on a demand loan, only when the limitation period commences once the lender has made that demand.
The judge was unpersuaded by the argument that the fact that the parties had a GSA indicated their intention not to create a simply demand loan.
The court, therefore, concluded that the Leathermans had the right to demand repayment of the loan at any time once the agreement was made. The limitation period to seek foreclosure was triggered by their November 2016 request for repayment.
An order was entered permitting the Leathermans to continue with foreclosure while granting a six month redemption period on more than $1,900,000 due with 6% annual interest.
The Court of Appeal Decision
The Court of Appeal made a number of observations:
Section 14 Limitations Act
The Court of Appeal noted that section 14 was included in the amended Limitation Act in order to address the difficulties arising from the application of the limitation period to pure demand obligations. Lenders who enter into such obligations can range from unsophisticated parties lending money to friends, to large experienced lending institutions such as banks or credit unions.
Before the addition of section 14, the limited timeframe in which a lender could legally enforce payment could be problematic for certain parties, such as those who had informal lending arrangements.
The introduction of section 14 brought the limitation period for demand obligations in line with the delayed-demand obligations. Now, under section 14, a claim for repayment of a demand obligation is discovered on the first day that there is a failure to make repayment once a demand is made, and the two-year limitation period begins to run then.
Section 15 of the Limitations Act
Section 15 of the new Limitation Act modified the limitation period for secured parties seeking to redeem their security or seeking to bring a claim.
Under section 3(4) of the former Limitation Act, there was no limitation on the period in which a secured party could bring an action to realize on collateral that they already possessed. If the collateral was not in the secured party’s possession, a six-year limitation period would apply.
The effect of section 15 of the new Limitation Act is that the general two-year limitation period applies where someone is seeking to redeem a security and the time starts running from the first day the right to enforce the security arises.
If a security is redeemable upon default, the limitation period then commences when the default (or the right to enforce the security) occurs. If the security is enforceable on demand, then it follows that the limitation period will start once the demand has been made and there has been a default.
The Positions of the Borrower
The borrowers argued that the mortgage is not a pure “demand obligation” and that the limitation period began immediately upon their default. They further argued that the mortgage in this was a “contingent loan with a demand element” and the term that required payment on demand did not make the mortgage a demand obligation.
Conclusion on Limitation Periods
The Court agreed that the mere insertion of the term “payable on demand” (as there was in this case) does not make a mortgage a “demand obligation”. In the court’s view, the agreement between the parties here reflected a reasonable arrangement in a high-risk lending environment where there was little prospect for repayment on strict terms or on a specified due date. The agreement, therefore, included both a demand obligation and a contingent obligation.
In terms of the demand obligation to pay the principal amount owing, section 14 applied and the limitation period began to run on the failure to pay following the demand (as of November 2016). However, the demand to pay interest was not a demand obligation because it was payable without demand at the end of October of each year, and the mortgage terms provided that the property being mortgaged was security for the debt. Section 15 applied to that aspect of the debt, and the right to realize the security arose upon discoverability of that right upon default (which occurred when an interest payment was not made- i.e. as of October 2013).
The court, therefore, concluded that absent any postponement, the Leathermans’ limitation period had expired with respect to their ability to realize on the security and some of the interest (since more than two years had passed since October 2013).
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