Court File and Parties

COURT FILE NO.: CV-21-658911

DATE: 20210426

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

2544176 ONTARIO INC.

Applicant

– and –

2394762 ONTARIO INC., STEVEN GALLEN, DEBRA GALLEN and 2815608 ONTARIO INC.

Respondents

Counsel:

Mark A. Klaiman, for the Applicant

A. Paul Gribilas, for 2394762 Ontario Inc., Steven Gallen, and Debra Gallen

Jonathan Rosenstein for 2815608 Ontario Inc.

HEARD: April 16, 2021

BEFORE: FL Myers J.

REASONS FOR JUDGMENT

This Application

[1] The issue in this application is whether mortgagees conveyed good title when they sold mortgaged land by private power of sale without providing the mortgagor/owner a statement when requested and required by s. 22 of the Mortgages Act, RSO 1990, c M.40.

[2] I find the mortgagees purported to exercise a power of sale at a time when their rights to do so were suspended under the statute. As such, the sale is void.

The Uncontested Facts

[3] The timeline is not in dispute:

a. The applicant bought a gas station in October, 2017 for approximately $5.4 million;

b. The applicant financed the purchase with a mortgage of approximately $3.79 million;

c. On November 2, 2020, the lender made demand under its mortgage;

d. Shortly after, the lender assigned its mortgage to the respondents 2394762 Ontario Inc. and the Gallens. The principals of 2394762 Ontario Inc. were the principals of the original vendor that sold the property to the applicant in 2017;

e. On November 13, 2020, the applicant entered into a highly conditional agreement to sell the property for $8.7 million with a closing set for February 15, 2021. The applicant did not tell the mortgagees about this sale at the time;

f. On December 9, 2020 the mortgagees delivered a notice of sale to commence private power of sale proceedings under the mortgage;

g. The 35 day mandatory standstill required in power of sale proceedings expired January 13, 2021;

h. On January 14, 2021, counsel for the applicant told Mr. Jeffrey Frymer, counsel for the mortgagees, that the property had been sold by the applicant with a February 15, 2021 closing date.

i. At the same time, counsel for the applicant requested that the mortgagees provide a statement of the amount required to discharge the mortgage;

j. Mr. Frymer responded,

“I was speaking with my father about this (and I believe he already spoke to Jeff as well) -because the notice of sale period ended yesterday (January 13, 2021), your client's equity of redemption has now expired and is closed.”

k. Mr. Frymer also asked for a copy of the applicant’s agreement of purchase and sale so he could see if the applicant’s sale was “legitimate”;

l. Counsel of the applicant provided the agreement of purchase and sale to Mr. Frymer within minutes of his request;

m. The mortgagees did not provide a discharge statement to the applicant;

n. The next day, the mortgagees listed the mortgaged gas station property for sale;

o. On February 4, 2021, the applicant’s sale to its buyer went firm at a reduced price of $5.4 million. The closing date was deferred from February 15, 2021 to March 31, 2021. The applicant did not tell the mortgagees about this change to its transaction;

p. On February 10, 2021, the mortgagees entered into an agreement to sell the property to the respondent 2815608 Ontario Inc. for $4.9 million ($500,000 less than the mortgagor’s proposed sale).

q. Under its agreement to purchase the gas station property from the mortgagees, the buyer 2815608 Ontario Inc. agrees to “accept title to the property pursuant to The Mortgages Act”;

r. The agreement of purchase and sale also reserved to the mortgagees the right to terminate the agreement and abort the sale in the event that the applicant redeemed the mortgage or sold the property;

s. The mortgagees’ sale to 2815608 Ontario Inc. closed March 2, 2021;

t. As part of the closing, the mortgagees provided the statutory declarations and other evidence required for the safe harbour provisions of s. 35 of the Mortgages Act and s. 99 (1.1) of the Land Titles Act, RSO 1990, c L.5;

u. In connection with the closing, the buyer 2815608 Ontario Inc. granted a first mortgage to a third party lender for $4.3 million. It granted a second mortgage back to the mortgagees/vendors for $1 million. That is, the buyer seems to have financed $5.3 million in the aggregate on a purchase price of $4.9 million;

v. On learning that the mortgagees had sold the property, on March 4, 2021 the applicant’s buyer agreed to extend their closing to April 29, 2021. According to the applicant, its buyer is still interested and bound to pay $500,000 more than was paid by the mortgagees’ buyer 2815608 Ontario Inc.

[4] I have two preliminary comments on the timeline. First, there is nothing untoward about the mortgagees listing the property for sale under their power of sale while the owner is also trying to sell it and vice versa.

[5] If the mortgagees lawfully sell the property, the owner will lose its ability to redeem the mortgage. The owner therefore cannot interfere with the mortgagees’ right to sell the property.

[6] There is also no prejudice to the mortgagees in the owner trying to sell its interest in the property or successfully selling it while the mortgagees are trying to sell under power of sale. If the owner sells the property before the mortgagees sell it, then the owner will only be able to provide clear title to its purchaser by paying the mortgagees in full to obtain a discharge. If the owner cannot pay the mortgagees in full, the buyer will take its title subject to the undischarged mortgage or, more likely, it will not close.

[7] A corollary of this is that Mr. Frymer was patently incorrect when he asserted that the applicant was foreclosed from selling just because the 35 day notice period had run after service of the notice of sale. It was common ground at the hearing that the mortgagor’s equity of redemption is not foreclosed by the expiry of the 35 day notice period. Under s. 22 (1)(a) of the Mortgages Act, set out below, the owner/mortgagor retains the right to redeem until the mortgagees sell the property. For the purposes of this proceeding, the parties were content that this occurs when the mortgagees enter into an agreement of purchase and sale for the mortgaged property. See: 1173928 Ontario Inc. v. 1463096 Ontario Inc., 2018 ONCA 669 at paras. 42 and 43.[^1]

[8] In addition, it is hard to see what interest the mortgagees had to review the owner’s agreement of purchase and sale at least in conjunction with the owner’s request for a discharge statement. Under s. 43 of the Mortgages Act, if the owner pays the mortgagees in full before they have sold the property pursuant to their power of sale, the mortgagees must discharge the mortgage. Frankly, they should not care where the money comes from. They may have a practical interest in deferring effort and cost on their own sale if they think the owner has found a live purchaser. But that has nothing to do with the legal rights of either side.

[9] Mr. Frymer therefore got off on a wrong foot asserting that the mortgagor was too late and then inserting his or his clients’ view of the “legitimacy” of the owner’s sale into the question of whether the mortgagees were legally obliged to provide a discharge statement to the owner when asked to do so.

The Mortgagor’s Right to a Statement under [s. 22 (2)](https://www.canlii.org/en/on/laws/stat/rso-1990-c-m40/latest/rso-1990-c-m40.html) of the [Mortgages Act](https://www.canlii.org/en/on/laws/stat/rso-1990-c-m40/latest/rso-1990-c-m40.html)

[10] Subsections 22 (1) to (3) of the say:

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.

(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

(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). [Emphasis added.]

[11] Section 22 is found in Part I of the Mortgages Act. Part I deals with the rights and obligations of the parties to a mortgage.

[12] Section 22 deals with the right of a mortgagor - the owner and borrower - to cure defaults. It allows mortgagors to cure defaults that have led the mortgagee to accelerate the mortgage debt and declare it all due under the terms of the mortgage. Despite acceleration, the mortgagor/owner is entitled to pay the arrears, with interest and costs, to bring the mortgage back into good standing.The right to cure applies despite anything in the mortgage to the contrary. It does not matter if the default is monetary or non-monetary. It does not matter if the mortgage says the default is non-curable. See: 1173928 Ontario Inc. at para. 41.

[13] In Cranberry Cove Tower Inc. v. Monarch Trust Co., 2003 14548 (ON SC), aff’d 2005 2053 (ON CA), at para. 145, Cameron J. explained:

The purpose of s. 22(1) is to relieve the mortgagor from the harsh consequences of acceleration on a default. It gives the mortgagor a reasonable period to remedy the default by paying only the arrears, costs and expenses, as opposed to the outstanding balance secured by the mortgage: Double D Investments Ltd. v. Green (1979), 1979 2065 (ON SC), 24 O.R. (2d) 391 at p. 392; Marriott and Dunn, s. 24.2; Gord Harris Construction Ltd. v. Stern, [1992] O.J. No. 1389.

[14] Under s. 22 (1)(a), the owner’s right to cure a default ends when the mortgagee sells the mortgaged property. If the mortgagee has commenced litigation first, then under s. 23, the borrower can ask the court for the right to cure upon paying $100 for security for costs. The court can stay or dismiss the proceeding if the borrower cures its default.

[15] Section 22 does not deal expressly with power of sale proceedings. It does not matter if a power of sale process is under way. It does not matter if the lender has delivered a notice of sale under the statutory power of sale in Part II of the statute. It does not matter if the lender has delivered a notice of sale under Part III. A borrower is entitled to cure its default until the property is sold or upon obtaining an order in litigation if any exists.

[16] Section 22 protects the mortgagor’s “equity of redemption”. For centuries, mortgage law has been concerned with protecting the owner’s right to keep its property and whatever value or equity it may have built up over and above the mortgage debt. Courts of Equity ensured that the lender/mortgagee cannot clog the owner’s right to satisfy the terms of the mortgage even after it has defaulted. The idea of someone losing his or her land because of a default when he or she is actually able to keep the lender whole is abhorrent to our property law.

[17] There are numerous rules and provisions that protect the mortgagor’s right to redeem or to pay out the mortgage debt and keep the mortgaged land. Section 22 is among them.

[18] Subsection 22 (2) is part of the protections accorded to mortgagors in Ontario. Specifically, it is designed to support an owner’s exercise of its right to cure defaults provided in s. 22 (1). Under s. 22 (2) the borrower has a right to require the lender to deliver a statement of the amount of money in default including principal, interest, and costs necessarily incurred by the lender. Upon request, the mortgagee/lender must tell the mortgagor/owner the amount of money to be paid (or the substance of a non-monetary default to be performed) to allow the mortgagor/owner to exercise its remedy to cure its default under s. 22 (1).

[19] Subsection 22 (3) provides serious consequences to a mortgagee/lender who fails to provide the information requested under s. 22 (2). If the mortgagee fails to provide the information without reasonable excuse, then its rights to enforce the mortgage are suspended until the mortgagee/lender complies with its obligation and supplies the information.

[20] To exercise its right to put the mortgage back into good standing under s. 22. (1), the owner needs to know the precise amount of money it is required to pay at a given time. Subsections 22 (2) and (3) require the lender to provide this information. They prevent mortgagee/lenders from thwarting owners’ rights to put the mortgage back into good standing by hiding the precise amounts required to be paid including accrued interest and costs.

[21] These subsections are not aimed only at the mortgagees’ right to exercise a power of sale. The mortgagees’ rights to take possession, to attorn rents, to sue, and to exercise any other enforcement right whatsoever are all suspended if the mortgagees violate their obligation to deliver the requisite information.

[22] The market refers to the information requested under s. 22 (2) as an “arrears statement” or a “pay-up statement”. In virtually all real estate closings where there is an existing mortgage on title, the lawyer for the borrower/mortgagor/seller asks the mortgagee/lender to provide a “discharge statement” to provide certainty of the amount needed to obtain a discharge and deliver clear title. An arrears statement is even simpler. This is standard stuff.

[23] All parties accepted that s. 22 applies to the request for information made by the mortgagor/owner in this case although the request was phrased as a full discharge statement rather than a statement of arrears. They are not different in kind. When the owner seeks to pay out a mortgage in full in response to acceleration and enforcement by the mortgagee, asking for arrears alone would not assist either side. Accordingly, like the parties, I treat the request for a discharge statement as sufficient to invoke s. 22 in this case. Whether that is always the case is not before me.

The Mortgagees had no “Reasonable Excuse” to refuse to deliver a Discharge Statement

[24] The mortgagees chose to ignore the owner’s request for a discharge statement because they felt that the owner was stalling by saying it had its own sale in the works. The owner did not tell the mortgagees about the sale when it was agreed upon conditionally in November, 2020. It also did not do so while the 35 day notice period ran under the mortgagees’ notice of sale.

[25] The mortgagees decided that this meant that the borrower was stalling. I do not understand that. The sale was highly conditional. Among other things, it was subject to purchaser’s satisfaction with environmental conditions and it was also subject to a right of first refusal in favour of Esso. As the facts show, the price dropped nearly in half during negotiations to satisfy conditions. The initial price might never have been very real. The buyer might have been buying time to kick the tires to see what he might learn in due diligence investigations. None of this makes the deal “illegitimate” or affects the mortgagees’ rights.

[26] Under the Mortgages Act and the common law, the mortgagees are not allowed to incur any costs during the 35 day notice period after they deliver a notice of sale. This prevents the mortgagees from clogging the mortgagor’s equity of redemption by making it more expensive for the owner to redeem during the full 35 days.

[27] The mortgagor did not request a discharge at a time when the mortgagees could not incur any cost. I do not see how ill-motive can be inferred from that.

[28] When the owner’s lawyer did tell the mortgagees about their conditional sale, the mortgagees decided to ask for the agreement of purchase and sale. They received it and decided that the price was unrealistic. Had the mortgagees inquired, they would have learned that shortly afterward the parties decreased the price to about $500,000 more than the price ultimately obtained by the mortgagees under their power of sale.

[29] The mortgagees did not believe that the mortgagor’s proposed purchaser would close or could finance the sale. But they do not know the purchaser. They made no inquiries at all. The purchaser may not need financing. He would not be the first purchaser of property to have an idiosyncratic reason to value the property at more than the mortgagees or their appraisers believe it is worth.[^2]

[30] In reaching their view that the owner’s deal was a stall, the mortgagees apparently did not consider that the deal remained conditional and that further negotiations to reflect the outcome of the buyer’s due diligence exercise and environmental investigations would typically be expected.

[31] The principal of the mortgagees is a former owner of the gas station premises. He knew the property himself. He just decided that the owner’s sale was not a good faith transaction.

[32] Of greatest significance, I cannot understand why the mortgagees cared to make any assessment of the mortgagor’s proposed sale. The mortgagees were under their own power of sale. If they sold, then they would be paid as much as they could sell the property for. If the owner sold in the interim, the mortgagees would only give a discharge if they were paid in full or they agreed to give one because they could not find their own purchaser who would pay as much to buy the mortgaged property.

[33] The mortgagees offer no evidence of any reason why, in responding to the owner’s request for a discharge statement, they cared if the mortgagor’s proposed sale was unlikely to close or if the purchaser was allegedly promising to pay way more than the mortgagees thought the property was worth. If the mortgagor exercised its right to redeem any time before the mortgagees sold the property, the mortgagees win. They would be paid in full including receiving any costs of the power of sale process.

[34] The mortgagees also offer no evidence of how a request for a discharge statement in support of even a poor proposed transaction can be a “stall”. To provide the required information, all the mortgagees needed to do was to press “print”.

[35] The mortgagees ignored the mortgagor request at their own risk. Even if they believed that the mortgagor was wasting their time pursuing a lost cause or putting forward a deal that would never close, so what? The mortgagor/borrower is entitled to know how much it has to pay to redeem or to put the mortgage back into good standing at any time up to the mortgagees’ sale.

[36] Section 22 (3) allows a mortgagee to refuse to provide a discharge statement if it has a reasonable excuse. I agree with my colleague Faieta J. who provided the following analysis of the “reasonable excuse” provision in 1414391 Ontario Ltd. v Graff, 2015 ONSC 7201:

[10] Graff submitted that the request for a discharge statement was made for the purposes of delaying the sale of the property. He submits that 141 did not provide evidence that he had financing or was otherwise in a position to pay the mortgage arrears on the Wilson property until October 27, 2015, when cheques for $2,595,000.00 and $590,000.00 were presented.

[11] What is meant by the phrase “reasonable excuse” is to be determined by reading those words “in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.”

[12] Subsections 22(2) and 22(3) were added to the Act in 1970. These amendments were made on the recommendation of the Ontario Law Reform Commission following a submission that the exercise of the right to tender arrears, under what is now subsection 22(1) of the Act, was causing “…difficulties for the mortgagor who wishes to pay up his arrears and is met with the refusal by the mortgagee to state the amount of the arrears and to accept any such payment. The Commission stated:

There is nothing to compel the mortgagee to give a statement of the arrears and the mere fact that the mortgagor holds a copy of the mortgage instrument does not necessarily mean he is capable of calculating the exact amount of the arrears.

Accordingly, the Commission recommends that section 20 be amended to enable the mortgagor to procure a statement of arrears from the mortgagee.…”

[13] The Commission did not address the purpose of the “reasonable excuse” provision that it recommended which is now found in s. 22(3) of the Act.

[14] The “reasonable excuse” provision should not be so broadly interpreted as to undermine the purpose of s. 22 which is to aid mortgagors who want to pay their mortgage arrears. Typically, the preparation of a mortgage statement is a relatively straightforward matter and thus there must be a compelling reason to refuse to provide a discharge statement. I accept Graff’s submission that a mortgag[ee] would have a reasonable excuse for refusing to respond to a request for a discharge statement under s. 22(2) of the Act when that request is not made in good faith, for instance when a mortgagor at the time of the request does not desire to make good its default under the mortgage.

[15] There is no evidence in this case that the mortgagor’s request was not made in good faith…

[Emphasis added. Notes omitted.]

[37] I agree with Faieta J. that the “reasonable excuse” provision should not be interpreted broadly as doing so could undermine its purpose. The phrase “reasonable excuse” brings with it an objective test of reasonableness. It is not enough for mortgagees or their lawyer to say they subjectively believe a mortgagor or owner is not acting in good faith. There must be objective grounds that could be sufficient to satisfy an ordinary person or at least to an ordinary person with familiarity in the real estate field.

[38] For example, in Cranberry Cove at para. 165, Cameron J. held that a mortgagee had a reasonable excuse to fail to provide a discharge statement when the letters requesting the discharge statement were never received and no follow-up demand was made by the owner. One can hardly be faulted for failing to respond to a request that is never received.

[39] Here, the mortgagees wrongly asserted that the owner had already been foreclosed from selling. They sought to satisfy themselves that the deal was “legitimate” by just looking at the initial price of a conditional deal. They conducted no investigations (let alone due diligence) and asked no questions. They did not know that a week before they agreed to sell the mortgaged property to 2815608 Ontario Inc. for $4.9 million, the owner’s purchaser had gone firm at $5.4 million. I deal below with whether the owner ought to have told the mortgagees this important piece of information. But the mortgagees offer nothing but their subjective reaction and an incorrect legal assertion to support their refusal to provide the information needed for the owner to protect its equity of redemption.

[40] I find that the mortgagees had no objectively reasonable excuse to fail to provide the requested discharge statement. There is no evidence that they could not comply simply. There is no evidence that the owner’s request for a discharge statement was not made in good faith. The mortgagees just chose to give the back of their hand to the mortgagor whom they wrongly believed was too late.

The Effect of a Breach of s. 22

[41] By failing to supply the discharge statement as required by the section, the mortgagees’ rights to enforce the mortgage were suspended. Therefore, I find that at the time that the mortgagees sold the property to 2815608 Ontario Inc. their right to enforce their mortgage was suspended.

[42] The applicant submits says that the sale by the mortgagees is therefore void and that it should be able to close its sale to its buyer.

[43] But on the evidence before the court, 2815608 Ontario Inc. is a bona fide third party without notice. There is no evidence or argument to the contrary although its financing of its purchase is suspicious.

[44] The vendor takeback mortgage given to the mortgagees seems to suggest that there may be more proceeds than the terms of the agreement of purchase and sale disclose. Might this be a method to avoid accounting to the owner for excess proceeds over the outstanding amount of the mortgage? I do not know. But whatever it means, on the evidence before me, it is not a basis to infer that the buyer 2815608 Ontario Inc. had knowledge of the mortgagees’ failure to comply with s. 22 of the Mortgages Act.

[45] The question before me is whether 2815608 Ontario Inc. received good title when the mortgagees sold the property to it while their rights to enforce the mortgage were suspended.

[46] 2815608 Ontario Inc. relies on sections 35 and 36 of the Mortgages Act and subsection 99 (1.1) of the Land Titles Act to argue that it received good title notwithstanding any defects in the power of sale process:

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:

36. A statutory declaration by the mortgagee or the mortgagee’s solicitor or agent as to default.

37. A statutory declaration proving service, including production of the original or a notarial copy of the post office receipt of registration, if any.

38. 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. [Emphasis added.]

[47] There is no doubt that these sections serve to protect the title of a purchaser under power of sale from defects in the power of sale process. Section 35 provides that the documents delivered by the mortgagees on closing in this case are “conclusive evidence of compliance with this Part”. Similarly, s. 36 protects the buyer from having its title impeached on the ground that “the provisions of this Part respecting notice, have not been complied with”.

[48] I agree with Mr. Rosenstein, that s. 35 was enacted to protect purchasers from the vagaries of the notice process in power of sale proceedings. If buyers are at risk of having their title impeached because a notice of sale was not properly mailed at the outset of the process, arguably, some buyers will shy away from buying or will offer to pay less for properties sold subject to this risk.

[49] The Legislature therefore decided to protect sales under power of sale from being later held void due to technical defects in the power of sale process.

[50] It is in everyone’s interest to maximize the value of security realization under mortgages. While the mortgagor/owner may not like having its property sold, it is still better off when the mortgagee obtains the highest price possible. So too is the mortgagee. Moreover, the public interests in protecting both lenders and borrowers are enhanced by terms that maximize sale value. By removing buyers’ risks of losing their title due to notice issues in power of sale proceedings, these provisions should ostensibly increase the willingness of buyers to compete and thereby maximize the value of land sold by power of sale.

[51] In addition, title to real property in Ontario has gradually been moved to the Land Titles Act which is a Torrens system. Certainty of the register is central to our system of land ownership. To parallel ss. 35 and 36 of the Mortgages Act and protect the title of buyers by power of sale, subsections 99 (1) and (1.1) Land Titles Act says:

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

(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.

[52] These sections ensure that a buyer who buys under power of sale can have its title registered and recognized despite a mortgagee’s lack of compliance with the power of sale provisions in Part III of the Mortgages Act. Currently, I understand that the evidence required by the Director of Titles is the same as the documents required under s. 35 of the Mortgages Act. This requirement can also be satisfied by counsel making a number of “statements in the Transfer under Power of Sale” as specified in an applicable ministry bulletin. As noted above, the requisite documents were provided by the mortgagees on closing.

[53] However, none of these sections, by their terms, assist the buyer 2815608 Ontario Inc. in this case.

[54] Section 35 provides “conclusive evidence of compliance with this Part”. Section 36 prevents impeachment of title on the grounds that “the provisions of this Part respecting notice, have not been complied with”. Section 99 (1.1) provides “conclusive evidence of compliance with Part III of the Mortgages Act”.

[55] None of these sections purport to protect the buyer from the consequences of a mortgagee’s breach of any section in Part I of the Mortgages Act.

[56] The applicant does not contend that the mortgagees failed to comply with the notice requirements of Part III of the Mortgages Act. The notice of sale was served on December 2, 2020. The applicant does not contest the propriety of the notice of sale or the amount of notice it received. Rather, it submits that the mortgagees’ rights to enforce the mortgage were suspended under s. 22 (3) of the Mortgages Act in Part I of the statute as of January 29, 2020. That was after the notice of sale was delivered and the 35 day notice period had elapsed.

[57] Subsection 99 (1.1) of the Land Titles Act is expressly subject to the Mortgages Act, not just Part III of the statute. That is not surprising. It is aimed at a specific issue – a curable failure to give proper notice of power of sale proceedings. It does not compel the recognition of title that is impaired due to other breaches of the Mortgages Act.

[58] Interestingly, s. 35 of the Mortgages Act says that it is subject to the Land Titles Act. Arguably, the incorporation of the whole of the Mortgages Act into s. 99 (1.1) may then make s. 35 subject to defects from elsewhere in the Mortgages Act too. I do not think I need to go that far as I find that s. 35 simply does not apply on its own terms.

[59] In 1173928 Ontario Inc. the Court of Appeal cautioned that ss. 22 (2) and (3) should not be abused by the owner:

[42] Section 22(2) works together with s. 22(3). Where the mortgagee fails to answer a request for a mortgage statement within 15 days without reasonable excuse or answers it incompletely or incorrectly, then the mortgagee’s rights to enforce the mortgage, including the exercise of a power of sale or commencement of a mortgage action, is suspended until the mortgagee provides an accurate and complete mortgage statement. But the provision is not to be used as a shelter by a mortgagor who does not desire to bring the mortgage into good standing. A mortgagor “is not entitled to suspend the mortgagee’s rights for an indefinite period of time, simply by questioning the [mortgage statement]”: Double D Developments Ltd. v. Green (1979), 1979 2065 (ON SC), 24 O.R. (2d) 391 (H.C.), at para. 9. Tendering or paying into court the amount of money that the mortgagor claims is owed could evince an intention to redeem the mortgage in the face of ongoing accounting disputes: Double D Developments Ltd., at para. 8.

[60] Here the owner did not question the discharge statement to try to lengthen a suspension of the mortgagees’ rights. The mortgagees did it to themselves by refusing to supply the discharge statement altogether.

[61] At para. 57 of the 1173928 Ontario Inc. case, the Court of Appeal held that a mortgagee’s sale while its enforcement rights are suspended under a. 22 is invalid:

[57] Consequently, both the Second Sale and the Third Sale 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.

[62] The facts of 1173928 Ontario Inc. bear little resemblance to this case. They are infused with self-dealing by the mortgagee who tried to sell the mortgaged property to himself. However, the court did not suggest that the invalidity of the sale made when a mortgagee’s rights were suspended under s. 22 (3) was fact-based. The facts went to whether the mortgagee had a reasonable excuse to refuse to deliver a discharge. Once the mortgagee was held bound to deliver a discharge and it failed to do so, its enforcement rights were suspended, and its sale was therefore invalid.

[63] It follows that I do not accept that the determination in 1173928 Ontario Inc., is properly distinguishable on the facts. Rather, it is binding on me.

[64] Finally, the fact that ss. 35, 36, and 99 are required to protect a purchaser’s title when land is sold in breach of power of sale proceedings under the Mortgages Act, suggests to me that such sales are invalid otherwise. On that basis, a sale by a mortgagee when its right to enforce the mortgage is suspended altogether ought also to be invalid. There is no comparable legislation protecting a sale made at a time when the mortgagee’s rights are suspended. Nemo dat quod non habet. The common law does not recognize a sale by someone who does not have the right to sell. But this is all an aside in light of the holding in 1173928 Ontario Inc.

Statutory Interpretation

[65] Mr. Rosenstein asks me to interpret ss. 35, 36, and 99 as applying to protect his client’s title from impeachment despite the mortgagees’ breach of s. 22 (2) and the consequent suspension of its enforcement rights under s. 22 (3).

[66] In Cranberry Cove, Cameron J. suggested that at least s. 36 should apply in this circumstance:

[176] The principle behind s. 36 is to protect a bona fide purchasers for value and that principle should be extended to purchases under s. 22, at least those purchases completed before the mortgagor exercises its rights under s. 22. Put another way s. 22 gives the mortgagor the right to obtain information under ss. 22(3) and to remedy the default under ss. 22(1). The Act allows the mortgagor the right to remedy the default and delays the exercise by the mortgagee of its right to sell for 35 days following the Notice of Sale. This delay enables the mortgagor to remedy the default within a minimum of 50 days after the default. If following the 35 days but prior to a sale the mortgagor remedies the default, ss. 22(1)(a) permits the mortgagor to be relieved from the consequences of its default.

[178] Thus a mortgagor in default must act with reasonable diligence to protect its rights under s. 22. If it does not, it risks losing those rights.

[179] To decide otherwise would place in doubt every title acquired under Power of Sale pursuant to an acceleration clause in a mortgage. A purchaser in such circumstances would pay substantially less, if anything, for a property if the purchaser’s title was open to attack by a defaulting mortgagor. It would render virtually nugatory a mortgagee’s right to sell under an acceleration clause. The result would be to substantially increase the cost of mortgage financing or to diminish the availability of funds for mortgage financing. There must be certainty of title if a reasonable amount is to be realized on the sale of the security.

[180] 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.

[181] I make no decision as to whether this applies only after closing or on signing the agreement to sell. In this case Cranberry Cove made no attempt to remedy the default in payment on November 15, 1991 after that date and prior to the closing of the sale by National to 991 on November 23, 1992.

Practical Considerations

[67] How is a buyer in a power of sale to protect itself? It has no way to know if the mortgagees have breached s. 22 (2). Even if it were to have sought a representation and warranty from the mortgagees that they did not breach the section, one cannot actually know until a court decides whether any particular non-performance was reasonable.

[68] A buyer might be able to protect itself by obtaining a confirmation or a form of estoppel certificate from the mortgagor saying that it does not assert that the mortgagee is in breach of s. 22 (2) or that its rights are suspended under s., 22 (3). But that is not realistic.

[69] Alternatively, a buyer could insist that its mortgagee/vendor prove that it has provided a discharge statement to the mortgagor whenever asked. That would fulfill all of the related policies of the statutes. It is still not perfect however, as s. 22 allows contests over the adequacy of a discharge statement as referenced by the Court of Appeal in 1173928 Ontario Inc. But it would have solved the problem of the refusal made by the mortgagees and their counsel in this case.

[70] The purchaser submits that the mortgagor/owner was the best situated party to deal with the effects of ss. 22 (2) and (3). In this case, it waited to tell the mortgagees that it had a sale. Then, once the mortgagees were already in breach by failing to give the discharge statement, the mortgagor did nothing. It did not tell the mortgagees that it had amended the deal with the purchaser to bring the price much closer to the believed value of the land. It did not tell the mortgagees that its purchaser had waived all conditions and had extended the closing date. To use the vernacular, the buyer says it “sat in its rights” or it “lay in the weeds”.

[71] Moreover, the buyer argues that the mortgagor no longer has the right to redeem. Once the buyer bought the property, the mortgagor’s equity of redemption was foreclosed. However, this is a circularity. The mortgagor’s rights were only foreclosed if the sale was valid. This argument cannot be the basis then of determining whether the mortgagees were able to convey good title.

[72] There are other practicalities. If I invalidate the sale, how does the buyer get its money back? Does its third party mortgage lender lose its security against the land that depends on the buyer’s title?

[73] Moreover, if I invalidate the sale, arguably all that needs to be done is for the mortgagees to deliver a discharge statement, sign a new agreement of purchase and sale, and then close right away. The notice of sale was validly given and the 35 day notice period expired long ago. The mortgagees’ rights were just suspended. If the mortgagees reinstate their enforcement rights, they can sell right away as long as their notice of sale has not become stale by the passage of time. Is there any point therefore in voiding the sale?

[74] However, there is also a question of whether the mortgagees will want to close in light of their knowledge that the owner’s sale has gone firm at a price within spitting distance of their price? Under their agreement of purchase and sale the mortgagees had the right to terminate if the mortgagor/owner sold. Moreover, the buyer expressly agreed that it took title “subject to the Mortgages Act”. Perhaps the mortgagees will not want to be sued for $500,000 for improvident realization and will choose to put the owner and its buyer to the test of closing on April 29, 2021. I cannot know.

The Modern Approach to Statutory Interpretation

[75] In Rizzo & Rizzo Shoes Ltd. (Re), 1998 837 (SCC), at para. 21, the Supreme Court of Canada adopted Prof. Driedger’s articulation of the test for statutory interpretation:

…the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

[76] The actual words of ss. 35 and 36 of the Mortgages Act and 99 (1.1) of the Land Titles Act, are quite specific. Nothing in the words used relate to or cure a breach of a mortgagee’s duty to provide a discharge statement or to protect title from impeachment when a mortgagee purports to sell when its enforcement rights are suspended under s. 22 of the Mortgages Act. If anything, the fact that s. 99 (1.1) is subject to the Mortgages Act and that s. 35 is then subject to the Land Titles Act, suggests the opposite.

[77] The scheme and objects of the statutes are many. The Mortgages Act protects the mortgagees’ ability to take and enforce security to support lending in the interests of the parties and the Ontario economy. But the statute also imposes limits to protect mortgagors from our well-known history of abuses by mortgage lenders. Section 22 was added to the statute specifically to protect a mortgagor’s equity of redemption.

[78] Sections 35 and 36 protect buyers from impeachment of their title due to improper notice or conduct of power of sale proceedings.

[79] So which policy trumps? The protection of title or the protection of mortgagors’ equity of redemption by suspending creditors’ rights?

[80] In my respectful view, and recognizing as well that this is a matter on which reasonable people may disagree, I cannot read ss. 35 and 36 to apply to a breach of s. 22:

a. The words of ss. 35 and 36 are too specific. The Legislature was narrow and careful about what was included. Had it wished to include a breach of s. 22 or any other section in part I of the statute within the reach of ss. 35 and 36, it could have readily done so;

b. Second, nothing in s. 22 refers expressly to powers of sale. It relates to mortgages in default that are accelerated. There is no basis in s. 22 to treat enforcement by power of sale differently than any other type of mortgage enforcement;

c. Part I of the Mortgages Act contains many different rights for mortgagors and mortgagees. Section 17 in Part I limits payment penalties to three months interest. Section 18 provides a right to redeem redeem non-corporate mortgages after five years. In my view, this is a statute in which the placement of the sections in their specific references to “parts” of the statute matter. Were I to include s. 22 within the ambit of ss. 35 and 36, what other rights of mortgagor/owners in Part I might be similarly trumped?

[81] What about the risks of impeachment of title referred to by Cameron J. What about the mortgage lender who lent money to the buyer 2815608 Ontario Inc.? Whether the doctrine of deferred infeasibility might be available to third parties is not before me. Whether the mortgagees or anyone else might be liable to the owner or to a third party lender if the third party lender’s title is held valid (or not) is also not before me. I note however that section 99 of the Land Titles Act is expressly subject to the Mortgages Act. It cannot be taken to have intended to trump breaches of Mortgages Act that prevent a mortgagee from conveying title.

[82] I agree with Cameron J. that a lack of certainty is not a good thing generally and in real estate deals especially. I also agree that mortgagors should not be allowed to sleep on their rights. On these bases, Cameron J. gave primacy to the mortgagor’s entitlement and obligation to pay within the notice period or at least before its equity of redemption was foreclosed.

[83] However, as Cameron J. found that the mortgagee had a reasonable excuse for not providing a discharge statement, in balancing the rights of the parties before him, he did not have to weigh the mortgagees’ breach of their obligations to provide a discharge statement that I have before me. He would have had the mortgagor pay within the available time. But he did not have to address a mortgagor who had asked “how much do I owe” and, without reasonable excuse, was not told the amount needed to redeem.

[84] As Cameron J. found no breach of s. 22, his discussion of the curative breadth of s. 36 when a breach of s. 22 is proven was obiter dicta.

[85] The buyer says that the mortgagees could fairly have expected to hear back for the owner as the original closing date of its deal neared on February 15, 2020. If the deal was bona fide, the mortgagees would have expected the owner to be frantically trying to get a discharge statement to close its deal. Of course, they did not know that on February 4, 202 the owner and its buyer went firm and extended closing.

[86] Regardless, in this case, it was the mortgagees who held the key to unlock the problem and to ensure certainty. Had they sent the discharge statement, as required, whether they felt that the owner’s sale was “legit” or not, the owner would have been put to the test of redeeming prior to the sale by the mortgagees under their power of sale. If the mortgagees’ sale closed before the mortgagor had told them that its sale had gone firm at a higher price, the owner’s loss of its equity of redemption would have lain at the owner’s own feet.

[87] Rather than surmising, assuming, and ignoring the owner’s rights based on their own subjective determinations, the mortgagees could have easily delivered the discharge statement and, ultimately, cancelled its deal if it learned that the owner had a better deal that they thought would close.

[88] The buyer 2815608 Ontario Inc. says it is the more innocent party. If someone has to be left suing the mortgagees, it says it should be the owner who failed to pay its mortgage debt. In my view however, the buyer’s express agreement to take title subject to the Mortgages Act was an allocation and acceptance of the risk the breach that occurred in this case.

[89] Moreover, as noted above, the owner made its request for a discharge statement. It did nothing to artificially increase the suspension period or violate the policy of s. 22. If the owner could not pay on time, its equity of redemption would have been foreclosed. It is the mortgagees who created uncertainty as to whether that could happen by clogging the mortgagor’s equity of redemption.

[90] In all, I do not see a basis to interpret ss. 35, 36, or 99 as applying to protect a sale made by mortgagees when their right to enforce the mortgage was suspended under s. 22. Doing so subordinates the important policy purpose of s. 22. As discussed above, all of the sections could have readily been satisfied by the push of a button by the mortgagees. This would have protected and enhanced all the interests of all of the parties and all of the relevant statutory purposes.

Remedy

[91] I cannot tell how the chips will fall when all is said and done. But I am satisfied that the mortgagees’ sale to the buyer 2815608 Ontario Inc. at a time when their rights to enforce their mortgage were suspended is invalid.

[92] I grant the relief sought in paras. 36 (a) to (c) of the applicant’s factum dated April 14, 2021 as follows:

a) setting aside the Transfer, dated March 2, 2021 between 2394762 Ontario Inc., Steven Gallen and Debra Gallen, as Vendors and 2815608 Ontario Inc., as Purchaser for the lands and premises municipally known as 197 Bellamy Road, in the City of Toronto;

b) a Declaration that 2394762 Ontario Inc., Steven Gallen and Debra Gallen, have violated the provisions of the Mortgages Act;

c) a Declaration that the Transfer is null and void as against the Applicant;

[93] I do not grant the order sought authorizing the applicant to complete its agreement of purchase and sale. It has whatever rights it has. I cannot prejudge what that might be as there are steps that have been taken and steps that may yet be taken that may affect that outcome.

[94] In light of this outcome, I make no reference for a determination of damages as was discussed at the hearing. I do not know if any damages will be incurred by the applicant or anyone else. I cannot tell if any losses should be dealt with in this or other litigation. If anyone wishes to take further steps in this litigation, assuming any remain to be taken, I may be spoken to.

[95] Any party claiming costs may deliver cost submissions no later than May 3, 2021. Anyone against whom costs are sought may deliver cost submissions no later than May 10, 2021. Anyone who files submissions shall file their own Costs Outline too. In addition, the parties may deliver copies of any offers to settle on which they rely. Submissions shall be no longer than three pages.

[96] All costs material is to be filed through the Civil Submissions Online portal and uploaded to Caselines although counsel will not have received confirmation of the acceptance of their filings from the registrar.

[97] No case law or statutory material is to be submitted. References to case law and statutory material, if any, shall be embedded in the parties’ submissions as hyperlinks.

FL Myers J

Released: April 26, 2021

COURT FILE NO.: CV-21-658911

DATE: 20210426

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

2544176 ONTARIO INC.

Applicant

– and –

2394762 ONTARIO INC ., STEVEN GALLEN, DEBRA GALLEN and 2815608 ONTARIO INC.

Respondents

REASONS FOR JUDGMENT

FL Myers J

Released: April 26, 2021

[^1]: See subsection 22 (1)(a) of the Mortgages Act is set out below. I note that the subsection refers simply to a “sale”. On the facts of this case, nothing turns on whether a sale is effective to foreclose the mortgagor’s equity of redemption on the signing of the agreement or at closing. Both happened here.

[^2]: I note that the mortgagees’ acceptance of a $1 million vendor takeback mortgage on top of the third party financing of $4.3 million, would suggest that the mortgagees value the property at $5.3 million or more rather than their agreed upon sale price of $4.9 million.