Power of Sale and the Right of Redemption

In a recent decision, an Ontario court reviewed a lender’s attempt to obtain an injunction to prevent a power of sale. We will be breaking down elements of this decision in separate blogs.

This week, we explore the right of redemption, and what the lender in question should have done in this situation. Next time, we will review injunctions in the context of a power of sale, using this same case as an analysis.

Request for Injunction

A property in Belleville, Ontario was scheduled to be sold under a power of sale on June 11, 2018. The power of sale was to be executed by the first mortgagee on the property, a credit union. The third mortgagee on the property, a corporation, brought an application for an injunction to:

  • allow the third mortgagee to redeem a mortgage made by the property owner;
  • prevent the credit union from selling the property.

The third mortgagee argued that the credit union had conducted itself in bad faith with respect to the sale of the property.

Chronology of Events

On February 3, 2018, the credit union accepted an offer of $4 million purchase the property in question, with a closing date of April 30, 2018. There was no evidence that the third mortgagee had given the credit union any notice of a desire to redeem the mortgage at any point prior to the credit union accepting this offer.

On February 13, 2018, the credit union informed the third mortgagee that it had accepted an offer to purchase the property and that the offer was conditional upon a five-day redemption period. If the third mortgagee chose to redeem the mortgage, the redemption funds would be required by 4pm on February 20, 2018.

On February 16, 2018, the third mortgagee notified the credit union that it wished to redeem the mortgage subject to the credit union receiving and approving the Agreement of Purchase and Sale and requested a copy of the Agreement as soon as possible.

Later that same day, the credit union sent a copy of the discharge statement to the third mortgagee and requested a bank draft in the amount of $4.3 million to be delivered no later than 4pm on February 20, 2018.

The third mortgagee responded and reiterated its request for a copy of the Agreement of Purchase and Sale, stating that its right of redemption could not be “meaningfully exercised” without first being able to review the Agreement. The third mortgage also noted, at this time, that it too had an offer to purchase the property.

The credit union responded by stating “if the third mortgagee wishes to redeem, please deliver the funds as indicated.”

On February 20, 2018, the third mortgagee informed the credit union that, despite the lack of production of the Agreement, it would be redeeming the mortgage.

Two days later (and after the deadline for redemption given by the credit union), the third mortgagee requested a detailed breakdown of one of the line items in the credit union’s payout statement. This request was repeated twice more. After the third request (at this point, made on February 26) the credit union responded by saying “it is too late to redeem.”

The third mortgagee responded by stating that, based on the anticipated inclusion in the Agreement of Purchase and Sale of the standard redemption clause, it was not too late to redeem. The credit union, however, maintained that it was, indeed, too late.

The conditional Agreement of Purchase and Sale eventually fell through, and the sale did not close. It was terminated on March 22, 2018. The credit union informed the third mortgagee that the first agreement of purchase and sale “has just been brought to an end.  The sale will not be proceeding, and [the] mortgage can, for the time being, be redeemed.” (via email send on 3:28 p.m.)

Another Agreement of Purchase and Sale was entered into on the same day with another buyer (Global). On March 23, 2018 (the next day), the credit union informed the third mortgagee that it had entered into an agreement of purchase and sale and “[the mortgage] can no longer be redeemed (via email sent at 2:22pm). Within fifteen minutes, the third mortgage informed the credit union that it had requisitioned funds and requested wiring particulars. The credit union did not respond.

On March 30, one week later, the third mortgagee re-confirmed that it was in possession of funds to pay the mortgage and emphasized that it had not done so as it had not received the wire particulars that had been requested.

The credit union responded on April 2 and informed the third mortgagee that “the mortgage cannot currently be redeemed” and stated that the wire particulars would not be provided.

The Positions of the Parties

The third mortgagee submitted that the notice of its desire to redeem the mortgage, which it gave to the credit union on February 16, was the first of a number of occasions on which it had notified the credit union of its desire to redeem. The third mortgagee argued that the credit union’s conduct after this notice was given ignored the third mortgagee’s intention to redeem and precluded the third mortgagee from being able to redeem.

The credit union argued that the mortgagee was, throughout the relevant period, made aware of the status of the first Agreement of Purchase and Sale and was fully aware as to when its right to redeem the mortgage would lapse, and it failed to exercise that right before it was lost.

The Law on the Right of Redemption

Rights of redemption are granted to a mortgagor (and subsequent mortgagees) under s. 22 of the Mortgages Act (the Act). These rights, however, are time-limited and may be exercised “at any time before sale under the mortgage”.

This has been interpreted to mean at any time before the acceptance by the mortgagee of an odder to purchase. Even if the offer accepted by the mortgagee is conditional, the right to redeem is lost.

In addition, a mortgagor (or subsequent mortgagee) may only redeem the mortgage if that individual has tendered the amount due under the mortgage and paid any expenses necessarily incurred by the mortgagee, per s. 22(1) of the Act.

The Decision

The court found that the third mortgagee was, at all times, aware of the requirement to tender as a pre-condition of redemption.

The court found that at no time after giving notice of its desire or intention to redeem, as early as February 2018, did the third mortgagee tender (even after the credit union had provided instruction as to the method by which to complete the tender). The third mortgagee provided no evidence, no statutory authority, and no case authority to support a conclusion that the credit union was not within its rights to direct the method of tender.

The court further went on to note:

As the circumstances with respect to the agreements of purchase and sale in this matter demonstrate, things can move quickly in the context of commercial real estate transactions.  I find that the [third mortgagee] was not in any way taken by surprise by the speed with which the first transaction came to an end and Global’s offer was accepted.

The uncontradicted evidence is that at 3:28 p.m. on March 22, 2018, [the credit union] informs [the third mortgagee] that the agreement of purchase and sale it had accepted in February “has just been brought to an end; the sale will not be proceeding, and [the credit union’s] mortgage can, for the time being, be redeemed.”  Shortly after 1:00 p.m. on March 23, 2018, [the credit union] accepts Global’s offer … At 2:22 p.m. on March 23—1 hour and 22 minutes after Global’s offer is accepted—[the credit union] informs [the third mortgagee] of the acceptance of that offer.

From March 22 to 23, 2018, there were 23 hours during which [the mortgagee] had an opportunity to exercise its right to redeem.  [The credit union] was not under any obligation to give [the mortgagee] a greater amount of time within which to tender and exercise its right to redeem.  It is clear from the evidence that [the credit union] had exercised patience with the mortgagor for a number of years, to no avail.  [The credit union] had decided that it was going to sell the Property and it was entitled to do so (Canada Trustco Mortgage v. Gutstadt (1997), 38 O.T.C. 150 (Gen. Div.), at para. 10, aff’d 1998 CanLII 17697 (ON CA), 108 O.A.C. 315 (C.A.)).

The court also noted that it is well-established that tendering is a pre-condition to redemption of a mortgage, and that only tendering or payment into court would satisfy this requirement. As such, the court questioned:

Why, if the [third mortgagee] was intent on redeeming the Mortgage, did the [third mortgagee] not arrange in February, when it gave notice of its desire and/or intention to redeem, for funds to be immediately available so that it could exercise its right of redemption when that right existed?  More importantly, why did the [third mortgagee] not tender during the 23-hour period from March 22 to 23, 2018, during which the opportunity to redeem existed?

The court concluded that, in accordance with established caselaw, once the credit union accepted Global’s offer to purchase the property, the third mortgagee’s right to redeem the mortgage under s. 22 of the Mortgages Act was extinguished. By failing to tender when it had the chance to do so, the third mortagee lost the right to redeem the mortgage.

There was no exceptional or extreme circumstances giving rise to the equitable jurisdiction of the court to intervene in the power of sale proceeding.

How Can We Help?

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.