Mortgage Defaults and a Guarantor’s Obligations to Repay the Lender

A recent Ontario decision outlines what happens to a guarantor of a mortgage in the event that there is a default. What options are available to the lender as against the guarantor, and what can the guarantor raise as a defence?

What Happened?

In February 2011, CIBC was the lender of a $202,200 mortgage on a property in cottage country. The property was owned by a woman and her husband became the guarantor. Under the terms of the guarantee the husband agreed to repay the amount of the mortgage to CIBC and perform all other obligations under the mortgage.

The last mortgage payment was made on November 11, 2016, with no further payments made beyond that date. The remaining loan amount (at that point, $171,467.49) became due and payable on December 23, 2016 (the mortgage maturity date). This constituted a default under the terms of the mortgage.

Per the terms of the agreement, CIBC had two options in the event of a default:

  • Suing the husband to collect the loan amount; or
  • Exercising a power of sale.

Suing Property Owner for Amounts Owing

CIBC decided, in this case, to sue for the amount owing prior to exercising a power of sale. On March 22, 2017 CIBC demanded payment from the property owner. The payment was not made.

Alleged Abandonment

CIBC claimed that, two days later, it discovered that the property had been left vacant and took subsequent measures to secure it and noted that it took no measures to deprive the owner of possession prior to that date. In CIBC’s view, the owner and the husband had abandoned the property with no notice to the bank.

Notice of Sale Under Mortgage

On April 6, 2017 CIBC issued a Notice of Sale Under Mortgage and sent a copy to the husband. The redemption period under the Notice of Appeal expired on May 13, 2017.

Aside from issuing the Notice of Sale, CIBC took no further steps to sell the property.

Suing Guarantor for Amounts Owing

On June 5, 2017 CIBC sued the husband, in his capacity as guarantor, for the outstanding amounts owing. The bank brought a motion for summary judgment against the husband (i.e. a judgment issued without a trial).

Guarantor Argues Against Summary Judgment

The husband took the position that the summary judgment motion ought to be dismissed on the basis that there were genuine issues that required a trial.

The husband claimed that he had vacated the property and ceased making mortgage payments in November 2016, at which time he had given the keys to the property owner via her agent, a financial advisor who was employed by CIBC (that advisor filed an affidavit denying that the husband had ever given him the keys).

The husband further claimed that CIBC had taken no steps to secure the property ahead of the 2016/2017 winter season, resulting in damage.

In addition, the husband claimed that CIBC was negligent in its delay in securing and selling the property, and that the bank should, therefore, not be able to obtain full repayment of the mortgage debt from him. He argued that there was sufficient equity in the property to fully pay off the mortgage if CIBC had acted within a reasonable time frame to secure the property and put it up for sale.

Lender Argues in Favour of Summary Judgment

CIBC disputed the husband’s position, arguing that the facts relevant to the husband’s liability under the terms of the mortgage were not in dispute, and that this was, therefore, and appropriate matter for summary judgment- there was no dispute that the property owner had defaulted on the mortgage, that the husband had guaranteed the loan, or that the terms of the mortgage obligated him to repay the loan amount.

CIBC further argued that the facts that were in dispute (such as when the bank took possession of the property) were not relevant to the legal issues to be decided. CIBC noted that the husband would be free to raise any arguments or evidence about the bank’s alleged delay in taking possession if CIBC exercised its right to sell the property and the husband subsequently brought an action for improvident sale. However, any such action would have to wait until the property was sold.

In the meantime, the husband was obligated to repay the outstanding loan amount, and there was no reason why the bank could not enforce the husband’s contractual obligation to pay the loan amount.

The Decision

The court noted that at the time of the hearing of the summary judgment motion, the property had not been sold and there was no claim by the husband against CIBC for either negligence or improvident sale.

The court noted:

Under the terms of the mortgage there is no obligation on the CIBC to sell the property before it seeks to enforce the guarantee. As a general proposition: “The mortgagee is entitled to exercise an accrued power of sale for his own purposes whenever he chooses to do so.” Bank of Montreal v. Zaffino, 2013 ONSC 3090 (CanLII), at para. 37; Oak Orchard Developments Ltd. v. Iseman[1987] O.J. No. 361 (Ont. H.C.J.), aff’d, [1989] O.J. No. 2394 (C.A.)Manufacturers Life Insurance Co. at paras. 68 and 69.

In addition, the court noted that the Ontario Court of Appeal has previously confirmed that mitigation of damages does not apply where there is an action for fixed debt, such as a mortgage:

[T]hat a mortgagee in an action for debt is under no duty to mitigate the mortgage debt by accepting a transfer of the mortgaged land… [D]octrines such as remoteness and mitigation, which place limits on the recovery of damages, do not apply to a debt… The principle of mitigation has no application to Manulife’s [the mortgagee’s] claim for repayment of its loans to Granada [the mortgagor].

In the court’s view, the date on which CIBC took possession of the property is not relevant to the bank’s right to enforce the husband’s contractual obligations to pay the loan amount, and the court, therefore did not have to resolve that particular factual dispute in order to come to a decision on the legal issue at play.

The court noted:

Pursuant to the terms of the loan agreement, CIBC was legally entitled to require the [husband] to pay the loan amount as soon as the payments required by the mortgage were in default. This legal right arose regardless of when (or whether) CIBC took possession of the property. While a [lender] is entitled to take possession of the mortgaged premises immediately upon default, it may exercise that right when it chooses; there is no “obligation on the [lender] to take possession of the mortgaged premises at the time of default, or at all”: Manufacturers Life Insurance Co., at paras. 56, 63; Royal Trust Corp. of Canada v. 880185 Ontario Ltd., 2005 CanLII 13910 (ON CA), at para. 33.

The court concluded by stating that the date of possession may become relevant if CIBC ever disposed of the property through power of sale, but the husband cannot, in the meantime, defeat a motion for summary judgment by raising an issue that may hypothetically “in the future” be a genuine issue for trial.

CIBC’s request for summary judgment against the husband for the outstanding loan amount owing ($173,639.78) was granted.

If you are involved in a mortgage dispute, would like to commence mortgage enforcement proceedings, or mortgage enforcement proceedings have been commenced against you contact the Toronto real estate lawyer Eli Karp at Financial Litigation immediately.

We rely on our in-depth knowledge in real estatebreach of contract, and collection actions to provide strategic advice and solutions. Our responsiveness is unparalleled, we are available seven days a week, and offer prompt, effective legal guidance and crisis management no matter when an issue may arise.

Respond to your mortgage crisis with Financial Litigation and let our unique experience guide you through your dispute. Schedule your consultation online, or by calling us at 416 769 4107 x1.