Second Mortgagee

Other mortgage creditor

How soon can a second mortgage holder start selling a home in Ontario? Recent ruling by the Ontario Court of Appeal in Business Development Bank of Canada v. Pine Tree Resorts Inc. 20 highlights the magnitude of the risk that a second mortgagee may be exposed to if he tries to push through his second mortgag. At Pine Tree, the mortgagee is in arrears with a first hypothec in favor of the Business Development Bank of Canada ("BDC") and a second hypothec in favor of Romaspen Investment Corporation ("Romasspen") with reference to an apartment building in Honey Harbour, Ontario.

The Romspen debt was approximately $4.3 million. BDC was also in default of approximately $250,000 for HST, in excess of the amount due to BDC. HST's non-payment was a violation of a BDC collateral obligation. In order to secure enforcement of the settlement, BDC requested and received the establishment of a court-appointed administrator over the mortgage debtor's property as it was contractual justified by its collateral documentation.

On the contrary, Romaspen tried to start a sales procedure for the land, but the procedure was stopped by the nomination of a liquidator by BDC. Rome Spen then applied, together with the mortgage creditor, for authorisation to lodge an appeals against the order of the court ordering the bankruptcy to appoint the liquidator, on the ground that Rome Spen, as the next mortgage creditor, had the right to give BDC a good reputation in accordance with section 22 of the Mortgage Act21 and thus to take over the disposal of the real estate by restarting the sales procedure.

Article 22 of the Mortgages Act authorises a debtor who is in delay to fulfil this contract or to repay the amount owed under the mortgages to be released from the consequences of such delay. Rome suggested doing this by "putting the [first] mortgages in good order by settling all capital and interest debts as well as all BDC cost, expenditure and property tax overdue.

"However, 22 Romaspen did not suggest repaying the approximately $250,000 in HST remnants. Rome Spen and the mortgage creditor argued that it was not necessary for them to have to respect the HST contract in order to claim the right of their future mortgage creditor under Section 22, since the HST residue constituted a later charge and in no way endangered the safety of BDC.

"Rome Spen bases itself on the case law of this court, which states that a debtor on a real estate lien - and thus a succeeding mortgagee - is legally justified to be released from the consequences of delay if he submits the delay or performs the contract in time. Difficulties are that Romaspen did not offer to give the BDC mortgages a good reputation, but only in part.

She suggests not to let a contract for $250,000 be fulfilled - the settlement of HST backlogs. And as a consequence of the Pine Tree ruling, second mortgage lenders may face much higher cost before they can be able to assert their second place mortgages, and may be more hesitant to assert their collateral before a first hypothec.

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