The Mortgagor’s Equity of Redemption

A mortgage security represents various things to various people, depending on their economic circumstances and their particular wants and needs.  A mortgage may represent an opportunity for a young couple to enter the real estate market and purchase a home.  To a bank, it may mean the generation of profit from the lending of money secured by real property.  Regardless of wants or needs, a mortgage is, in substance, a contract to borrow money in exchange for the promise to repay with interest, coupled with the granting of a security interest in the borrower’s real property.

The first forms of mortgages were punitive towards and onerous on borrowers.

When mortgages were first conceived, wealth was scarce and a lender could dictate the rules that the borrower had to agree to in order to borrow.  It is not that much different today.  Borrowers still have to accept the lender’s terms, however, the mortgage has gone through significant evolution, the result of judicial decisions of the courts of equity, to as well as a competitive market.  The modern-day mortgage is, in form, considerably different. Again, regardless of its from, the substance of a mortgage transaction, the promise to repay and the granting of a security, remains the same.

Security Interests in Land

There are two essential types of security in land, the mortgage and the charge.  The mortgage is a creation of the common law which has been modified by the rules of equity and commercial necessity.  The charge is a creation of statute.  In Ontario the term “charge” is created by and defined in the Land Titles Act^[1].

The common law coined the term “mortgage” from the French for “dead pledge” or “mort-gage”^[2]. If the borrower did not repay the mortgage debt, title to their real property would be “dead” as it would vest with the lender.

As previously stated, the basic form and substance of the early common law mortgage contains two essential elements, the first being the sealed promise to repay the loan and the second the transfer of title to the lender, conditional upon the borrower’s right of redemption. This meant that, upon the borrower repaying the full amount of the debt to the lender, in accordance with the terms of the mortgage, the lender would have to give the borrower his title back.

The definition of the term “mortgage” was set out by Lord Lindley in the Stanley v. Wild case, which provides:

[A] mortgage is a conveyance of land or assignment of chattels as a security for the payment of a debt, or the discharge of some other obligation for which it is given….[A]nd the security is redeemable on the payment or discharge of such debt or obligation^[3].

Thus, in a mortgage transaction, the mortgagee would take title to the property, thereby becoming, in the case of a first mortgagee, the legal owner of title.  In the case of a second mortgage, the second mortgagee would be the owner of the equitable title.  The mortgagor who gave the mortgage became an owner in equity, with a right of redemption, compelling the mortgagee to reconvey title to the property back to the mortgagor upon the repayment of the loan in full.

From a logistical standpoint, the mortgagor would convey title to the mortgagee and the mortgagee would be the full owner of the land during the term of the mortgage and the mortgagor, provided he complied with the terms of the mortgage, would be permitted to remain in possession of the land with the consent of the mortgagee.  Essentially, he would be entitled to quiet possession.

The burden of the common law mortgage comes in the form of default.  In the event the mortgagor did not pay the mortgage in full on the due date specified in the mortgage, title would pass to the mortgagee and the mortgagor would forever lose his right to redeem, (the dead pledge).  This was a particularly harsh result; for if a borrower was even a day late or a dollar short, he would lose his property, notwithstanding that he paid all but a dollar of the mortgaged debt.  Given this inequity result, this consequence of default under the common law mortgage was abolished with the joining of the Courts of Chancery and the Courts of Equity, as will be discussed later.

In Ontario, much like in various other Canadian provinces, there is a statute dealing with mortgages or charges.  Under the Land Titles Act^[4] the owner who gives a security interest in land does not give a mortgage, but rather gives a charge.  This is an important distinction; unlike with common law mortgage, an owner does not actually convey title to the lender.  Title remains with the owner.

In Smith v. National Trust Co.^[5] the Supreme Court of Canada, in reviewing the nature of a statutory mortgage as created under the Manitoba Real Property Act^[6], which is not that dissimilar to that of Ontario, described the dominant characteristics of the charge as follows:

The mortgage contemplated and provided for by the Act is a real security which primarily derives its efficacy as security of that character from the statute itself…It is quite clear…that the registration of a mortgage under the Act is not intended to vest in the mortgagee any registered “interest” in the mortgagor’s land as that term is used in the Act….The Act does not, in a word, treat the mortgage authorized by it as an instrument immediately effecting any dismemberment of the mortgagor’s registered title.  The operation of the statute is rather this:  When a registered owner wishes to charge his registered title as security for a debt, he is to execute an instrument by which he declares that he “mortgages” his land and that instrument being registered, the mortgagee become invested with such rights in respect of the possession of the land and is profits and the registered title becomes (for the benefit of the mortgagee) subject to such powers of disposition as the statute expressly or by implication declares.  It is in these rights and powers that the virtue of the mortgage as a real security consists; and it is, consequently, to the statute that we must primarily resort to ascertain what are the rights and powers incidental to such a security^[7].

So, while a mortgagee does not possess the same rights under the common law, such as the granting of title upon default, the mortgagee does have remedies available in the event of default under the charge.  In Ontario, the remedies for default under a charge are set out in the Land Registration Reform Act^[8], which states:

6. (1) A charge does not operate as a transfer of the legal estate in the land to the chargee.

6. (3) Despite subsection (1), a charger and charge are entitled to all of the legal and equitable rights and remedies that would be available to them if the chargor had transferred the land to the charge by way of a mortgage, subject to a proviso for redemption.

Accordingly, the mortgagee under a charge has the same rights as if the charge was a common law mortgage such as the right, upon default, to take possession, commence an application for a Judicial Sale or Foreclosure, in addition to the right to the private remedy of Power of Sale proceedings.  The main distinction is that, instead of the mortgagee having had to do nothing upon the occurrence of default in the case of a common law mortgage where it is already the legal owner, under a charge it must take overt steps to enforce its security.

Equitable Right to Redeem

As discussed, under the common law, upon breach or default the mortgagor lost his title to the mortgagee forever, as the mortgagee was conveyed title at the time of the granting of the mortgage.  Given the rigid rules and harsh results of the common law, the Court of Chancery brought flexibility to the common law rules and expanded upon the mortgagor’s right to redemption.

The courts of equity recognized that a mortgagor’s right to redemption, specifically, the reconveyance of the property back upon payment of the debt, is a fundamental right and is to be jealously guarded by the courts^[9].  This equitable right is present in all mortgages and can neither be contracted out nor given away.  Moreover, this right will remain provided that the mortgagee does not take steps to enforce the mortgage when in arrears.

Given that the mortgagor’s right to redeem is acknowledged as a fundamental right that is to be jealously guarded, the issue then becomes: when can the equity of redemption be exercised and when is it extinguished?

Right to Redeem Prior to or on Maturity

The common law mortgage, as a general rule, does not grant the borrower the right to redeem prior to maturity^[10].  There are two exceptions to this general rule.  The first exception is when a mortgagee takes steps to enforce its mortgage and compels payment of the entire debt.  The second exception is created by statute, specifically, section 10 of the Interest Act^[11], which provides that, if the mortgage term is greater than 10 years, the mortgagor is entitled to redeem after the mortgage has run for five years:

Whenever any principal money or interest secured by mortgage on real property or hypothec on immovables is not, under the terms of the mortgage or hypothec, payable until a time more than five years after the date of the mortgage or hypothec, then, if at any time after the expiration of the five years, any person liable to pay, or entitled to pay in order to redeem the mortgage, or to extinguish the hypothec, tenders or pays, to the person entitled to receive the money, the amount due for principal money and interest to the time of payment, as calculated under sections 6 to 9, together with three months further interest in lieu of notice, no further interest shall be chargeable, payable or recoverable at any time after the payment on the principal money or interest due under the mortgage or hypothec^[12]. (emphasis added)

It should be noted that Section 10 of the Interest Act is only available to persons.  The exception does not extend to non-persons such as corporations, trusts or partnerships.

The leading case on the general rule that a mortgagor is not entitled to the right to redemption prior to maturity is Coplan v. Sparling^[13], where Master Dunn stated:

Since the establishment of the time for exercising the right of redemption depends on the terms of the mortgage contract or the subsequent acts of the mortgagee, I do not agree with the plaintiff’s position that there is a prima facie right in a mortgagor to redeem at any time.  If he claims that the time for payment of principal under the mortgage has gone past, let him say so, that the defendants may plead an extension agreement if they can.  If he claims that the defendants have gone into possession, let him say it, that the defendants may swear they have not.  To show that the time is ripe for redemption is as essential to the plaintiff’s case as it is essential for a mortgagee to show in an action for foreclosure that the mortgagor is in default^[12].

Accordingly, unless and until the mortgagee demands payment of all sums secured pursuant to the mortgage acceleration clause, takes possession of the mortgage property, takes other steps to recover payment or claims payment upon breach of a mortgage condition or proviso, the mortgagee is said to have resorted to the security and will be forced to permit the mortgagor to redeem.  Moreover, if the mortgagee exercises its Power of Sale rights or commences an action for foreclosure, the borrower’s equity of redemption is activated.  This is true even if the mortgagee only seeks to recover the arrears and not the entire sum due and owing under the mortgage^[15].

To be clear, if a mortgagee does not commence an action for foreclosures or issues a Notice of Power of Sale, but instead seeks possession of the property while only claiming the arrears and not the entire amount due and owing pursuant to an acceleration clause, the equity of redemption will not be triggered.  This was set out in Shankman v. Mutual Life Assurance Co of Canada^[16]. In that case, the mortgage was for a fixed term and did not provide for early redemption.  The mortgage fell into default and the mortgagee commenced an action for the payment of arrears and for possession.  The mortgagee did not seek the entire amount due under the mortgage.  Upon the commencement of the action, the mortgagor tendered funds for the entire amount and requested a discharge of the mortgage.  The mortgagor took the position that the mortgagee resorted to the security and, as such, the mortgagor was entitled to redemption.

The mortgagor failed at the trial court level and appealed. Cory J.A. of the Ontario Court of Appeal, in upholding the lower court’s decision, concluded that:

There can be no difference between a mortgagee who is seeking no more than the payment of arrears through the appointment of a receiver and a mortgagee seeking the same relief by taking possession personally. It should not and cannot make any difference in the result whether the mortgagee acts directly and personally to take possession to collect the arrears or does so by or through his agent, the receiver. So long as the claim of the mortgagee is limited to the arrears owing on the mortgage, then taking possession of the mortgaged property for that limited purpose amounts to no more than protecting the security. It does not constitute a resort to that security^[12].

Accordingly, if the mortgagee simply takes possession of the property to protect its security and not to compel payment, then the mortgagee will not be deemed to have resorted to the security and the equitable right of redemption will not be triggered.  This can be rather troublesome in the case where a mortgagor owns a commercial income producing property and falls into arrears and the mortgagee goes into possession. The mortgagor would be excluded from the property, thus unable to earn income to pay the arrears and, moreover, be unable to exercise his equity of redemption.

In the case where there is an acceleration clause contained in the mortgage, and the mortgagee does not rely upon same, but rather only seeks repayment of the arrears, there is no compulsion on the part of the mortgagee to use or rely on the acceleration clause.  In Eusanio v. Laci^[18] the court determined that an acceleration clause is independent from the other terms of the mortgage and as such, the mortgagee is entitled to exercise same at his will and is not obligated to use it.  Furthermore, the mortgagor cannot rely upon this provision as it is not for his benefit.  From a practical perspective, should a mortgagee only wish to claim the arrears and take possession and prevent the mortgagor from exercising his equity of redemption, he, the mortgagee, must ensure that he is laying claim for arrears only, that this is clearly set out in his demand notice and, further, that he is not relying upon the acceleration clause^[19].

While the general rule may appear to be punitive to borrowers, there is a very real commercial purpose for this rule.  The market for mortgage loans is vast and buyers of mortgage loans purchase them on the basis of receiving a particular yield.  When mortgages are redeemed prior to maturity, the corresponding yield is reduced, resulting in the buyer of the mortgage having overpaid for his investment.  In the absence of the general rule preventing early redemption, the market for mortgage loans would be uncertain.

In the event redemption is permitted by the mortgagee prior to maturity, either on consent or on account of the mortgagee resorting to the security, what amount may be claimed on account of same?

In the case of early redemption by consent, provided that a bonus is paid, the matter was decided in Rivard v. Canada Permanent Trust Co^[20]. In Rivard, the maturity date for the mortgage was January 31, 1985.  In November 1983 the mortgagor sought early redemption and the mortgagee consented provided that the mortgagor paid a bonus equal to three months’ interest.  The mortgagor disputed the claim for bonus and the matter proceeded to court.  The court held that, since the mortgage term was less than five years, the mortgagor had to pay the bonus required by the mortgagee.

On the other hand, in the case where there is a breach prior to maturity and the mortgagee demands payment for the entire amount due under the mortgage and resorts to the security, there is no right of the mortgagee to demand all interest which would have been due under the mortgage.  In Bank of Montreal v. Sam Richman Investments (London) Ltd.^[21] Justice Pennell ruled:

[A] mortgagee who has taken steps to recover payment by taking possession, or otherwise, is bound to accept in satisfaction of his security his principal costs with interest up to the time of payment^[22].

There is no further right to claim any other interest or charges.  This makes sense for, if the mortgagee does not wish to claim the entire yield under the mortgage, he can, as stated above, claim only the arrears and take possession of the property for security of the arrears.  In proceeding in this fashion, he will not be deemed to have resorted to the security and will succeed in precluding the mortgagor from exercising the equity of redemption prior to the maturity date.

The non-entitlement to bonus interest does not apply in the case where the mortgagee commences an action for foreclosure under the Rules of Civil Procedure (Ontario)^[23]. When a mortgagee commences a foreclosure action against a mortgagor, the mortgagor is entitled to file a Request to Redeem.  When filed, pursuant to the Rules, the mortgagor will be entitled to 60 days, after taking of the account of the amount due and owing to the mortgagee, to redeem the mortgage.  In the event the mortgagor wishes to redeem the mortgage prior to the 60 day redemption period set by the court, the mortgagor must pay the entire interest which would be due up to the redemption date set by the court.

This was the case in Soloway v. Sheahan^[24].  In Soloway, the mortgagee commenced foreclosure proceedings and obtained an interlocutory judgment which set the date of redemption six months hence.  The mortgagor requested additional time for redemption and was granted same by the court.  Prior to the extended redemption date, the mortgagor procured the necessary funds to redeem the mortgage and sought redemption prior to the redemption date set by the court.  At first instance the mortgagor succeeded, only to be overturned on appeal.

On appeal, Grant J. ruled that a mortgagee has a preferential right as to the payment of interest and may require that interest be paid up to the date set for redemption, notwithstanding that payment is made prior to the redemption date.  The decision was based on the double object of the Rules of Civil Procedure which, on the one hand, granted the mortgagor a reasonable period of time to procure funds, either by finding a new lender or selling the subject premises and, on the other hand, permitting the mortgagee a reasonable time to reinvest his funds without suffering a loss in the interim. Accordingly, unlike a Power of Sale proceeding whereby a mortgagee will be denied any interest over and above the amount due up to the date of redemption, a mortgagee who commences a foreclosure action will be permitted to charge interest up to the date of redemption set by the court.

VI. Right to Redeem after Maturity and During Enforcement

As previously stated, the common law mortgage, prior to the intervention of the Court of Chancery, provided that, when a mortgagor failed to pay all amounts due and payable under the mortgage, she would lose her mortgaged deed forever.  Again, this was due to the redemption right being conditional upon repayment in full.  To add insult to injury, due to the mortgage debt being executed under seal, the mortgagor could be sued for the debt owing in addition to losing her property, as the security was separate and distinct from the promise to repay.  Thus, the common law mortgage was onerous and burdensome.

The protection afforded by the equity of redemption was extended, by the Court of Chancery to those instances where the mortgage debt has matured.  The courts of equity stated that a mortgage was first and foremost a security agreement.  In Campbell v. Holyland^[25] it was said:

The principal in a Court of Equity has always been that, though a mortgage is in form an absolute conveyance when the condition is broken, in Equity it is always security…^[26]

The Courts of Equity focused on the objective of the transaction and, by doing so, exercised a certain flexibility that was otherwise unavailable to the courts of common law given the relative rigidity of their rules.  This presented a major, if not fatal, obstacle to mortgagees for the marketability of a property is severely diminished when the property to be sold on the open market is subject to an absolute right of redemption by a mortgagor.

To offset the inequity to mortgagees by the expansion of the right of redemption to mortgagors after maturity, the courts of equity created the foreclosure rules, whereby the courts would fix a date of redemption and, in the event that the mortgagor did not exercise the right of redemption during that time, the right of redemption would forever be lost.

In the case of the self-help remedy of Power of Sale proceedings, where a mortgagee follows the terms of the mortgage and the provisions of the Mortgages Act (Ontario)^[27], the loss of the right to redeem is in principal, lost and irrevocable at the time of the sale.  In Standard Realty Co. v. Nicholson^[28] the court was called upon to review and intervene after a valid exercise of the Power of Sale.  The court concluded that it was not competent to re-establish the right to redeem after the Power of Sale.  In setting out its conclusion, the court drew a distinction between an action for foreclosure and the exercise of a Power of Sale.  In an action for foreclosure, a purchaser is presumed to have knowledge of the discretionary power of the court to re-establish the right to redeem.  It must be remembered that, in an action for foreclosure, the mortgagor loses his property and there is a chance for a mortgagee to make a gain without having to account to the mortgagor.  Under a Power of Sale, the mortgagee cannot gain a windfall.  The mortgagee must account to the mortgagor and any surplus of funds from the sale will be to the credit of the mortgagor.  Much the same, if there is a shortfall, the mortgagee can continue the action against the mortgagor for the difference.  It must be remembered that the substance of a mortgage transaction is the granting of the security interest and the covenant to repay.

It must also be remembered that, whereas courts are limited in what they can and cannot do when it comes to the rights of parties which arise in contract, as in the case of Power of Sales, they retain broad discretion where the rights to be exercised arise from the Rules of Court.

It should be noted that, under a Power of Sale, the right of redemption expires upon a sale, which is defined as the entering into an agreement of purchase and sale and not the actual closing of the transaction.  Under the doctrine of equitable conversion, once an agreement of purchase and sale is consummated, the purchaser becomes the equitable owner of title and the vendor (mortgagee) holds legal title only as security for payment of the balance of the purchase price.

Further Right to Redeem Following Sale – Foreclosure and Power of Sale

In the case where there has been a final order for foreclosure and the property is sold to a bona fide purchaser for value, the mortgagor will, absent extraordinary circumstances, not be able to redeem the mortgage and claim title back from a good faith purchaser.  This is provided for in Section 60 of the Conveyancing and Law of Property Act^[29], which states:

Section 60. An order of the court under any statutory or other jurisdiction shall not, as against a purchaser, whether with or without notice, be invalidated on the ground of want of jurisdiction or of want of any concurrence, consent, notice or service^[30].

Accordingly, it is presumed that under an order for foreclosure, the appropriate steps have been taken before the issuance of the court’s order.  Notwithstanding, the courts will have discretion to reopen a final order of foreclosure at any time on equitable grounds.  This issue was decided in the case of Babbie v. Petryczka^[31].  In Babbie, the date for redemption fixed by the court was set for April 15, 1974.  On April 16, 1987 the mortgagee assigned the interlocutory judgment to a third party, who, as assignee, proceeded to obtain a final order for foreclosure and then conveyed the property to a third party.  The mortgagor brought an application to set aside the final order on the basis that the assignee did not obtain the order to proceed prior to having obtained the final order of foreclosure.  The court held that the mortgagor would not be entitled to have a final order of foreclosure set aside on the basis of an irregularity and, further, that “the court will not lightly disturb the title of a bona fide purchaser and will want to be satisfied that the interests of such purchaser will not be unduly prejudiced.”^[12]

There is an argument that the courts may intercede to vary its own judgments, especially in those cases where the purchaser has knowledge of the foreclosure, accepts the risks associated with a foreclosure and the courts deem it just to interfere^[33].  In Gram v. Geddes^[34], Justice Gale commented:

they [purchasers] were entitled to rely on that judgment [foreclosure], and chaos would be the undoubted result if honourable persons were not free to rely at all time, in circumstances such as appear in this case, upon a judgment of this Court.^[35]

In short, even in the face of an irregularity, the courts are loathe to interfere, absent undue prejudice to the mortgagor.  This is not the case with Power of Sale proceedings.  In Power of Sale proceedings, the courts are unable to interfere with the sale, for three reasons.  First, in the case of a foreclosure, the relationship between the mortgagor and mortgagee is one of debtor/creditor and the court is not precluded from protecting the debtor’s interest^[36].  Second, in the case of a foreclosure, the mortgagor loses his property in such a manner that the mortgagee does not have to account to the mortgagor and may realize a windfall.  In Power of Sale proceedings, the mortgagee must account to the mortgagor and any surplus of money over the amount owed belongs to the mortgagor. Third, the courts can always interfere with its own orders.  It is less able to do so where a private contract is entered into as between two parties^[26].

It ought to be noted that there is case law where the court did interfere with a sale to a bona fide purchaser under a Power of Sale.  Such as case is Camp-Wee-Gee-Ma v. Clark^[38]. In Camp-Wee-Gee-Ma, the mortgagee commenced Power of Sale proceedings under the terms of the mortgage and set the date of redemption for June 17, 1971.  The mortgagee entered into an agreement of Purchase and Sale on May 3, 1971, conditional upon the mortgagor not redeeming the mortgage on or before the redemption date.  On June 20, 1971 the mortgagor attempted to redeem the mortgage only to discover that the property was sold on June 17, 1971. In the mortgagor’s application to the court, it was held that equity must intervene in this kind of case and the mortgagor’s equity of redemption was protected.  The difficulty with this case is that it is devoid of any authority in support of the decision.

The Clogging of The Equity of Redemption

Some lenders attempt to get around the borrower’s equity of redemption by structuring the transaction as a straightforward transfer of deed or a sale with an option to repurchase the property for a definite amount within a definite period.  As a general rule, a sale will be presumed unless the parties intended the transaction to be, in reality, a security of loan.  In such cases, even if the transaction is disguised as a sale, the courts will protect the mortgagor’s right to redeem.

Some of the factors that the courts will consider in determining whether a transaction was an outright sale or a loan transaction are:

1. Did the grantor remain in possession of the property after the sale?
2. Did the grantor make improvements to the property after the sale?
3. Were the taxes paid by the grantor?
4. Was the consideration less than the true value of the land? and
5. Was the grantor in financial need, where there was pressure and inequity in the bargaining positions of the parties?^[39]

There are two primary methods to clog the equity of redemption; an absolute deed and a deed with an option to purchase.

In situations where the borrower executes a deed absolute, the courts will review all of the facts and circumstances of the transaction, taking into account the factors set out above. Where the evidence indicates that the true object of the transaction was a mortgage and not a sale, the courts will protect the seller/mortgagor’s equity of redemption^[40].  This also holds true when there is an option to repurchase by the seller.  Where the seller conveys title with an option to repurchase, the court will look at the underlying transaction in order to determine if the conveyance was intended to be a sale or security for a debt.  In summary, courts will not interfere with the transaction unless the evidence so clearly demonstrates that one of the parties exerted undue influence on the other party and mandated that the loan transaction be structured in such a manner as to clog the equity of redemption^[41].

Conclusion

A mortgagor’s entitlement to redeem his mortgage in order to obtain title back has evolved from being exercisable within a minuscule window of time into a fundamental right, even existing in the face of a final court order for foreclosure.  Essential to this evolution were the courts of equity, who recognized that the underlying transaction is at, its heart, the granting of security for the performance of a debt obligation and not a conditional conveyance upon non-repayment of the debt.  By expanding the single right of redemption, the mortgagor’s right to redeem is now available prior to, on and subsequent to the “redemption” date as well as following a final order for foreclosure.

By contract, the modern day mortgagor enjoys more rights then ever before, and this is as a result of commercial competitiveness.  There are more lenders today seeking borrowers and it is not uncommon for mortgages to contain prepayment privileges, assignability and assumption clauses in favour of borrowers.  Yet in the background of the transaction is the ever-present common law and statutory provisions governing lending transactions which serve to protect the lender’s security and entitle a mortgagee to seize and sell the property in satisfaction of the debt while still retaining the right to continue as against the mortgagor on account of any deficiencies arising from the sale.  The question becomes: at what point does the mortgagor’s equity of redemption infringe upon the mortgagee’s right to recover its investment?  With a few more decisions along the lines of Camp-Wee-Gee-Ma, one never knows.

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