Court of Appeal for Ontario

Date: 20220715 Docket: C69457

Gillese, Miller and Coroza JJ.A.

BETWEEN

2544176 Ontario Inc. Applicant (Respondent)

and

2394762 Ontario Inc., Steven Gallen, Debra Gallen and 2815608 Ontario Inc. Respondents (Appellant)

Counsel: Jonathan Rosenstein, for the appellant Mark A. Klaiman, for the respondent A. Paul Gribilas, for 2394762 Ontario Inc., Steven Gallen and Debra Gallen [1]

Heard: April 14, 2022

On appeal from the judgment of Justice Frederick L. Myers of the Superior Court of Justice, dated April 16, 2021, with reasons reported at 2021 ONSC 3067, 35 R.P.R. (6th) 114.

Gillese J.A.:

I. OVERVIEW

[1] This appeal concerns the sale of a parcel of commercial property located at 197 Bellamy Road North in Toronto (the “Property”). After the mortgage went into default, in reliance on their power of sale, the mortgagees sold the Property to a bona fide purchaser for value without notice (an “innocent purchaser”). However, at the time of the sale, the mortgagees were in breach of their obligation under s. 22 of the Mortgages Act, R.S.O. 1990, c. M.40 to provide the mortgagor with a requested default statement.

[2] The mortgagor applied to have the transfer of the Property to the purchaser set aside. Because the mortgagees were in breach of s. 22 at the time of the transfer, the application judge declared that the transfer was void as against the mortgagor and set aside the transfer.

[3] The purchaser appeals. I would allow the appeal because of the protections afforded to the purchaser by ss. 35 and 36 of the Mortgages Act and s. 99(1.1) of the Land Titles Act, R.S.O. 1990, c. L.5 (the “Safe Harbour Protections”). The Safe Harbour Protections provide an innocent purchaser taking property under the power of sale process, with good title, on registration under the Land Titles Act system, so long as the mortgagee makes certain declarations or professes compliance with the power of sale process, leaving any dispute over the power of sale process to be resolved between the mortgagor and the mortgagee.

II. BACKGROUND

[4] Before the events in this proceeding, 2544176 Ontario Inc. (the “Mortgagor”) owned the Property. The Property was encumbered by a mortgage in favour of 2394762 Ontario Inc., Steven Gallen and Debra Gallen (the “Mortgagees”).

[5] 2815608 Ontario Inc. (the “Purchaser”) bought the Property from the Mortgagees through the exercise of their power of sale. The application judge found that the Purchaser was a bona fide third party without notice of any defects in the power of sale process (i.e. an innocent purchaser).

[6] The key dates and events underlying the application were not in dispute. They are as follows.

• October 2017: The Mortgagor bought the Property for approximately $5.4 million and financed the purchase with a $3.79 million mortgage.
• November 2, 2020: The Mortgagees demanded repayment because the Mortgagor had defaulted on the mortgage.
• November 13, 2020: The Mortgagor entered into a conditional purchase and sale agreement to sell the Property for $8.7 million, with a closing date of February 15, 2021 (the “APS”). The Mortgagor did not inform the Mortgagees of the APS.
• December 9, 2020: The Mortgagees served a notice of sale on the Mortgagor to commence private power of sale proceedings.
• January 13, 2021: The mandatory 35-day standstill on the power of sale proceedings expired.
• January 14, 2021: The Mortgagor informed the Mortgagees that the Property had been sold with a February 15, 2021 closing date and requested a default statement. The Mortgagees did not believe there was a “legitimate” sale and asked for a copy of the APS, which the Mortgagor quickly produced.
• At no point did the Mortgagees provide the Mortgagor with the requested default statement.
• January 15, 2021: The Mortgagees listed the Property for sale.
• January 29, 2021: Because the Mortgagees failed to furnish the Mortgagor with a default statement, s. 22(3) of the Mortgages Act took effect and suspended the Mortgagees’ enforcement rights.
• February 4, 2021: The APS “went firm” at a reduced price of $5.4 million and with the closing date deferred to March 31, 2021. The Mortgagor did not inform the Mortgagees of these matters.
• February 10, 2021: The Mortgagees entered into an agreement of purchase and sale with the Purchaser for $4.9 million (the “Mortgagees’ APS”).
• March 1, 2021: The Mortgagees provided the Purchaser with a statutory declaration in which they represented that they had complied with the statutory formalities for a power of sale (the “Compliance Declaration”).
• March 2, 2021: The Mortgagees’ APS closed and title to the Property was transferred to the Purchaser (the “Transfer”). As part of the closing, the Mortgagees repeated that they had complied with all of the statutory formalities for a power of sale (the “Compliance Statements”). The Purchaser granted a first mortgage to a third-party lender for $4.3 million and a second mortgage to the Mortgagees for $1 million.

[7] After the Transfer took place, the Mortgagor applied to have it set aside. Its position was based on the Mortgagees’ failure to provide it with a default statement contrary to s. 22 of the Mortgages Act. It submitted that the Mortgagees’ breach of s. 22 resulted in a suspension of their enforcement rights and, consequently, the Mortgagees’ purported exercise of their power of sale was void.

[8] The application judge agreed. By judgment dated April 16, 2021 (the “Judgment”), he ordered that the Transfer be set aside with costs to the Mortgagor fixed at $19,000.

III. THE RELEVANT LEGISLATIVE PROVISIONS

[9] For ease of reference, the relevant sections of the Mortgages Act and the Land Titles Act are set out below.

A. Mortgages Act

Relief before action

22(1) Despite any agreement to the contrary, where default has occurred in making any payment of principal or interest due under a mortgage or in the observance of any covenant in a mortgage and under the terms of the mortgage, by reason of such default, the whole principal and interest secured thereby has become due and payable,

(a) at any time before sale under the mortgage; or

(b) before the commencement of an action for the enforcement of the rights of the mortgagee or of any person claiming through or under the mortgagee,

the mortgagor may perform such covenant or pay the amount due under the mortgage, exclusive of the money not payable by reason merely of lapse of time, and pay any expenses necessarily incurred by the mortgagee, and thereupon the mortgagor is relieved from the consequences of such default.

Statement of arrears, expenses, etc.

22(2) The mortgagor may, by a notice in writing, require the mortgagee to furnish the mortgagor with a statement in writing,

(a) of the amount of the principal or interest with respect to which the mortgagor is in default; or

(b) of the nature of the default or the non-observance of the covenant,

and of the amount of any expenses necessarily incurred by the mortgagee.

Idem

22(3) The mortgagee shall answer a notice given under subsection (2) within fifteen days after receiving it, and, if without reasonable excuse the mortgagee fails so to do or if the answer is incomplete or incorrect, any rights that the mortgagee may have to enforce the mortgage shall be suspended until the mortgagee has complied with subsection (2).

Statutory declarations conclusive

35 Subject to the Land Titles Act and except where an order is made under section 39, a document that contains all of the following is conclusive evidence of compliance with this Part and, where applicable, with Part II, and is sufficient to give a good title to the purchaser:

1. A statutory declaration by the mortgagee or the mortgagee’s solicitor or agent as to default.
2. A statutory declaration proving service, including production of the original or a notarial copy of the post office receipt of registration, if any.
3. A statutory declaration by the mortgagee or the mortgagee’s solicitor that the sale complies with this Part and, where applicable, with Part II.

Impeachment of title

36 Where a notice has been given in professed compliance with this Part and, where applicable, with Part II, the title of the purchaser is not liable to be impeached on the ground that the provisions of this Part or, where applicable, Part II respecting default and the provisions of this Part respecting notice, have not been complied with, but any person damnified thereby has a remedy against the person exercising the power of sale.

B. Land Titles Act

Remedy of owner of charge with power of sale

99(1) Subject to the Mortgages Act the registered owner of a registered charge that contains a power of sale, upon registering the evidence specified by the Director of Titles, may sell and transfer the interest in the land or any part thereof that is the subject of the charge in accordance with the terms of the power in the same manner as if the registered owner of the registered charge were the registered owner of the land to the extent of such interest therein.

Compliance with Mortgages Act

99(1.1) The evidence specified by the Director of Titles under subsection (1) is conclusive evidence of compliance with Part III of the Mortgages Act and, where applicable, with Part II of that Act and, upon registration of a transfer under that subsection, is sufficient to give a good title to the purchaser.

IV. THE DECISION BELOW

[10] The application judge found that the Mortgagees had no objectively reasonable excuse for failing to provide the Mortgagor with the requested default statement under s. 22 of the Mortgages Act. As a result, the Mortgagees’ enforcement rights were suspended at the time they sold the Property to the Purchaser. Because the application judge found that the Purchaser was an innocent purchaser, the question for resolution on the application was whether the Purchaser received good title, having taken title when the Mortgagees’ enforcement rights were suspended.

[11] The application judge considered the Purchaser’s submission that, pursuant to ss. 35 and 36 of the Mortgages Act and s. 99(1.1) of the Land Titles Act, it received good title to the Property notwithstanding any defects in the power of sale process. He said that none of these sections purport to protect the buyer from the consequence of a mortgagee’s breach of any section in Part I of the Mortgages Act, and s. 22 is found in Part I, not Parts II or III. Therefore, the application judge viewed the legislature as having omitted Part I from the protections afforded by ss. 35 and 36.

[12] The application judge stated that he was bound by this court’s decision in 1173928 Ontario Inc. v. 1463096 Ontario Inc., 2018 ONCA 669, 142 O.R. (3d) 1, (“117Ont”). He recognized that 117Ont was distinguishable on its facts – because that case involved self-dealing – but viewed para. 57 as binding. At para. 57, this court stated that certain sales were “invalid because they were executed at a time when 117’s enforcement rights were statutorily suspended under s. 22(3) of the Mortgages Act.”

[13] The application judge acknowledged that Cameron J. commented at paras. 176-81 of Cranberry Cove Tower Inc. v. Monarch Trust Co., aff’d that, at least, s. 36 should apply in this circumstance, otherwise a mortgagee would struggle to sell any property pursuant to a power of sale since purchasers would doubt the quality of title that would be transferred because the property might be subject to a defaulting mortgagor who exercised their right of redemption. However, as Cameron J. found no breach of s. 22 in Cranberry Cove, the application judge viewed those comments as obiter.

[14] The application judge noted that the scheme and objects of the Mortgages Act and the Land Titles Act are many. The Mortgages Act protects the mortgagees’ ability to take and enforce security to support lending. But it also imposes limits to protect mortgagors from the “well-known history of abuses by mortgage lenders”, with s. 22 being added specifically to protect a mortgagor’s equity of redemption. The application judge also observed that ss. 35 and 36 of the Mortgages Act protect buyers from impeachment of their title due to improper notice or conduct of power of sale proceedings.

[15] The application judge then asked which policy trumped: protection of title or protection of the mortgagor’s equity of redemption by suspending creditors’ rights? He concluded it was the latter. He said that he could not read ss. 35 and 36 to apply to a breach of s. 22 because they do not expressly protect a sale made by mortgagees when their right to enforce the mortgage is suspended under s. 22. Moreover, s. 22 did not refer expressly to powers of sale.

[16] Accordingly, the application judge declared that the Mortgagees had violated s. 22 of the Mortgages Act, set aside the Transfer, and declared that the Transfer is null and void as against the Mortgagor.

V. THE ISSUE

[17] This appeal raises a single issue: did the application judge err in setting aside the Transfer?

VI. THE STANDARD OF REVIEW

[18] To decide the issue, this court must interpret various legislative provisions. It is well established that questions of statutory interpretation are questions of law and reviewed on a correctness standard: Harvey v. Talon International Inc., 2017 ONCA 267, 137 O.R. (3d) 184, at para. 32.

VII. THE PARTIES’ POSITIONS

[19] The Purchaser bought the Property from the Mortgagees, under their power of sale, without any notice of defects in the power of sale process. It submits that its rights take precedence over those of the Mortgagor who, at the time of the Transfer, had a claim against the Mortgagees for the improper exercise of the power of sale. The Purchaser says that the Safe Harbour Protections, on their face and as a matter of policy, must “trump”, otherwise no purchaser under power of sale – for value and without notice – could ever be assured of good title. Accordingly, the Purchaser submits, the application judge erred in setting aside the Transfer.

[20] The Mortgagor submits that the application judge correctly decided that its rights, pursuant to the provisions in s. 22 of the Mortgages Act, prevented the Mortgagees from selling the Property. Because the Mortgagees were in breach of s. 22 and their enforcement rights were suspended at the time they completed the Transfer, the Transfer was not valid as against the Mortgagor. The Mortgagor says that the application judge correctly decided the matter because otherwise a mortgagee could avoid the suspension provision in s. 22 simply by ignoring it and selling the subject property to an innocent third party.

VIII. ANALYSIS

[21] I accept the Purchaser’s submission. Although the Mortgagees’ enforcement rights were suspended at the time of the Transfer, pursuant to s. 22(3) of the Mortgages Act, in my view, the Safe Harbour Protections operate to protect the Purchaser, an innocent purchaser, who registered title to the Property under the Land Titles Act system after receiving both the Compliance Declaration and the Compliance Statements from the Mortgagees.

[22] It is important to begin by appreciating the principles that underlie the Land Titles Act. These principles were set out in Stanbarr Services Limited v. Metropolis Properties Inc., 2018 ONCA 244, 141 O.R. (3d) 102, at para. 13:

Before turning to the issues in this appeal, it is helpful to consider the principles that underlie the Land Titles Act and review how the legislation has been interpreted in the jurisprudence. Epstein J. (as she then was) described those principles in Durrani v. Augier (2000), 50 O.R. (3d) 353, at para. 42, referencing Marcia Neave’s article, “Indefeasibility of Title in the Canadian Context” (1976), 26 U.T.L.J. 173:

The philosophy of a land titles system embodies three principles, namely, the mirror principle, where the register is a perfect mirror of the state of title; the curtain principle, which holds that a purchaser need not investigate the history of past dealings with the land, or search behind the title as depicted on the register; and the insurance principle, where the state guarantees the accuracy of the register and compensates any person who suffers loss as the result of an inaccuracy. These principles form the doctrine of indefeasibility of title and [are] the essence of the land titles system[.]

[23] Fraud has always been recognized as an exception to the mirror principle: Stanbarr, at para. 14. That is of no moment in this case because the application judge found that the Purchaser had no notice of any defects in the power of sale process.

[24] However, the application judge effectively held that another exception exists to the mirror principle: namely, when a mortgagee is subject to a suspension of its enforcement rights under s. 22(3) of the Mortgages Act. Respectfully, that is an erroneous interpretation of the legislation.

[25] As the application judge found, the requirements of ss. 35 and 36 were met through the Compliance Declaration and the Compliance Statements. However, the application judge understood that the effect of ss. 35 and 36 of the Mortgages Act and s. 99(1.1) of the Land Titles Act was to provide “conclusive evidence of compliance” with the legislation. While it is correct that those provisions do afford the Purchaser that protection, they go further: they stipulate that, on registration under the Land Titles Act system, the transfer gave the (innocent) Purchaser “good title” to the Property.

[26] Moreover, the fact the Mortgagees were subject to a s. 22(3) enforcement suspension does not derogate from the Purchaser’s title.

[27] Section 22(3) does not give the Mortgagor substantive rights. Section 22(3) provides that, absent reasonable excuse, a mortgagee’s right to enforce the mortgage shall be “suspended” until the mortgagee complies and provides the mortgagor with a default statement. The mortgagee does not lose its substantive rights as a result of s. 22(3); rather, it loses its right to enforce them.

[28] In this case, it is not the mortgagee who seeks to enforce its rights; it is the Purchaser. The Mortgagor cannot rely on s. 22(3) to invalidate the Purchaser’s title: its recourse is against the Mortgagees for the improper exercise of the power of sale.

[29] Cameron J. reached this conclusion in Cranberry Cove, at para. 180, saying, “Once the sale of the property under the power of sale is closed, s. 22 is no longer applicable and the mortgagor is left to its remedy in damages against the mortgagee.” This court upheld the decision in Cranberry Cove in a two-paragraph endorsement that expressly referred with approval to the trial judge’s handling of the s. 22 and the s. 36 issues. See also Belende v. Patel, at para. 14, in which the Superior Court states that this court’s decision in Cranberry Cove “held that the s. 36 underlying principle of protecting bona fide purchasers for value should be extended to purchases under s. 22.”

[30] Further, this court’s decision in 117Ont did not compel the application judge to conclude that s. 22(3) rendered the Transfer to the Purchaser invalid. It is correct that in 117Ont the transactions were reversed, even after the transfer of the subject property had been registered. However, that is because 117Ont had conveyed the property to itself. 117Ont was the assignee of the mortgage. 117Ont was not an innocent purchaser as it had actual notice of the defects in the sale process. Therefore, it was not entitled to the Safe Harbour Protections. Moreover, s. 22(3) operated to preclude 117Ont, the mortgagee, from using the court to enforce its rights.

IX. DISPOSITION

[31] For these reasons, I would allow the appeal, set aside paras. 2, 3, and 4 of the Judgment, and order that the Application be dismissed with costs payable by the Mortgagor, below and on appeal, fixed at the agreed all-inclusive sums of $19,000 and $10,000, respectively.

Released: July 15, 2022 “E.E.G.” “E.E. Gillese J.A.” “I agree. B.W. Miller J.A.” “I agree. Coroza J.A.”

[1] Mr. Gribilas appeared on behalf of 2394762 Ontario Inc., Steven Gallen, and Debra Gallen but made no written or oral submissions.