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The Equity of Redeeming

October 18, 2021

Alberta

,

Canada

Issue

When can a borrower plead relief from forfeiture in defence of a mortgage foreclosure?

Conclusion

Sections 15 and 16 of the Judicature Act provide courts with the jurisdiction to grant equitable relief. In all matters in which there is any conflict or variance between the rules of equity and common law with reference to the same matter, the rules of equity prevail. The court is empowered to grant equitable relief if a plaintiff claims to be entitled to an equitable estate or right or to relief on an equitable ground. (Judicature Act)

Section 17 of the Judicature Act empowers the court to grant a stay of proceedings

(a) for the recovery of a debt or liquidated demand,

(b) for the enforcement of a security or charge on land,

(c) for the determination or specific performance of an agreement for the sale of land, or

(d) for the possession of land. (Judicature Act)

Historically, a mortgage at common law was by way of a conveyance by the mortgagor of title to the land to the mortgagee. When the debt was repaid, the land was reconveyed to the mortgagor. If the debt was not repaid at the required time, the mortgagee could treat the land as his own. In Alberta, where a mortgage was in the form of security registered against the land, rather than by way of a transfer of land as at common law, the equity of redemption continued to exist. In the case of a statutory mortgage pursuant to the Land Titles Act, under which the security of the mortgage is afforded by a charge on the land, the title remains in the name of the mortgagor. The equity of redemption is essentially a means of relief granted to the mortgagor from the forfeiture of his title to the mortgaged land which would occur upon an order for sale, or a foreclosure order, made in proceedings by the mortgagee for foreclosure. The mortgagor is given an opportunity to redeem his land from the charge of the mortgage, as distinct from redemption of the title conveyed to the mortgagee by a common law mortgage. Foreclosure itself is a counter-balancing means devised by the Court to bring to an end the equity of redemption in order that the mortgagee could realize upon the security without later being called to account by the mortgagor. (Crystal Wealth Management System Limited v JC Food Services Ltd)

It is not true, with respect to the redemption of mortgaged or pledged property, that where a debtor seeks relief from forfeiture, then the Court needs evidence to show that it would be unconscionable for the creditor to rely on the forfeiture. Since the reign of Charles II, no Chancellor has considered that redemption is a discretionary matter. The rules are fixed in this area. For a mortgagee or pledgee to attempt to have the money and get or keep the property at the very time the debtor is trying to pay and redeem, is the height of inequity. There is not authority for allowing a mortgagee or pledgee to keep the money and the security, and no authority suggesting that circumstances must be shown to favor the mortgagor or pledgor before he can redeem. (Brown v. Northey)

In the absence of statutory mandate the Court has jurisdiction in equity to open a foreclosure order, even a foreclosure absolute, under proper circumstances and in a proper exercise of its discretion. (Morguard Mortgage Investments Limited v. Faro Development Corporation Ltd.)

In Crystal Wealth Management System Limited v JC Food Services Ltd the appeal arose out of a mistaken unilateral discharge of a mortgage and involved consideration of the equity of redemption, which is the right of a mortgagor to reconveyance of the property upon payment of the debt. No steps were taken by the mortgagee to correct the title following the mistaken discharge. Instead, the mortgagee registered the mortgage by way of a caveat on the title, subsequent to the discharge of the mortgage, and later commenced foreclosure proceedings on the mortgage. While the discharge did not extinguish the underlying debt, the discharge deprived the mortgagor of the opportunity to obtain a transfer of the mortgage pursuant to s 73 of the Law of Property Act. The mortgagee was deemed to have elected to forego the debt in exchange for unilaterally taking away the mortgagor’s equity of redemption. As a result, the mortgagee could no longer sue the mortgagor on the personal covenant. The remedy of unjust enrichment was not available to the mortgagee. While the mortgagee suffered a deprivation of the loss of the registered mortgage, the mortgagor did not receive a corresponding benefit, as it was not provided with the benefit of a registered mortgage that could be transferred to a third party pursuant to s 73 of the Law of Property Act. The Court of Appeal concluded that following the discharge of the Crystal mortgage, the debt was not extinguished but Crystal was no longer able to sue JCF on the personal covenant contained in the mortgage.

In Canada Trustco Mortgage Co. v. Karpa the borrowing couple was in dispute with the bank where they had obtained the mortgage, regarding payments made by the bank to a third-party construction company. As the couple were not making the mortgage payments, the bank sought to foreclose. As the the couple had accepted all of the elements of the mortgage, including its registration and the fact that advances were made under it, the foreclosure was granted.

Law

Sections 15 and 16 of the Judicature Act, RSA 2000, c J-2 provide courts with the jurisdiction to grant equitable relief. Under section 17, the court may also grant a say of proceeding:

Equity prevails

15 In all matters in which there is any conflict or variance between the rules of equity and common law with reference to the same matter, the rules of equity prevail.

RSA 1980 cJ‑1 s16

Equitable relief

16(1) If a plaintiff claims to be entitled

(a) to an equitable estate or right,

(b) to relief on an equitable ground

(i) against a deed, instrument or contract, or

(ii) against a right, title or claim whatsoever asserted by a defendant or respondent in the proceeding,

or

(c) to any relief founded on a legal right,

the Court shall give to the plaintiff the same relief that would be given by the High Court of Justice in England in a proceeding for the same or a like purpose.

(2) If a defendant claims to be entitled

(a) to an equitable estate or right, or

(b) to relief on an equitable ground

(i) against a deed, instrument or contract, or

(ii) against a right, title or claim asserted by a plaintiff in the proceeding,

the Court shall give to each equitable defence so alleged the same effect by way of defence against the claim of the plaintiff that the High Court of Justice in England would give if the same or like matters had been relied on by way of defence in a proceeding for the same or like purpose.

(3) The Court may grant to a defendant respecting an equitable estate or right or other matter of equity and also respecting a legal estate, right or title claimed or asserted by the defendant, all such relief against a plaintiff that the defendant has properly claimed by the defendant’s pleading.

(4) The Court shall recognize and take notice

(a) of all equitable estates, titles and rights, and

(b) of equitable duties and liabilities,

appearing incidentally in the course of a proceeding, in the same manner in which the High Court of Justice in England would recognize and take notice of them in a proceeding instituted in that Court.

Stay of proceedings

17(1) In a proceeding

(a) for the recovery of a debt or liquidated demand,

(b) for the enforcement of a security or charge on land,

(c) for the determination or specific performance of an agreement for the sale of land, or

(d) for the possession of land,

the Court in its discretion may at any stage of the proceeding grant a stay of proceedings on any terms that the Court may prescribe, and in like manner the Court in its discretion may with or without imposing terms, after final judgment in any proceeding whatsoever, grant a stay of execution of an order for sale or of other similar process, including a stay of an order for possession of land, and may by an order granting the stay extend the time for payment of a judgment debt or the time for doing any act or making any payment prescribed by a previous order of the Court.

(2) In a proceeding

(a) for the enforcement of a security or charge on farm land,

(b) for the determination or specific performance of an agreement for the sale of farm land, or

(c) for the possession of farm land,

the Court, notwithstanding the terms of an order or judgment previously made, shall grant a stay of proceedings when it appears that the default of the mortgagor, purchaser or other person is in whole or in part caused by the inability of the mortgagor, purchaser or other person to market grain by reason of lack of elevator space or by reason of the restrictions as to delivery of grain imposed under the Canadian Wheat Board Act (Canada) and the regulations under that Act.

(3) A stay granted under subsection (2) remains in force until set aside by the Court, but shall be set aside only on application after notice and on the Court being satisfied that the conditions existing at the time of the granting of the stay and by reason of which it was granted no longer exist.

(4) Nothing in this section limits the authority of the Court, at or after the time that a judgment is granted, to stay the enforcement of the judgment or to remove or extend any stay already granted in respect of the judgment.

In Crystal Wealth Management System Limited v JC Food Services Ltd, 2020 ABCA 369 (CanLII) the appeal arose out of a mistaken unilateral discharge of a mortgage and involved consideration of the equity of redemption, which is the right of a mortgagor to reconveyance of the property upon payment of the debt. No steps were taken by the mortgagee to correct the title following the mistaken discharge. Instead, the mortgagee registered the mortgage by way of a caveat on the title, subsequent to the discharge of the mortgage, and later commenced foreclosure proceedings on the mortgage. While the discharge did not extinguish the underlying debt, the discharge deprived the mortgagor of the opportunity to obtain a transfer of the mortgage pursuant to s 73 of the Law of Property Act. The mortgagee was deemed to have elected to forego the debt in exchange for unilaterally taking away the mortgagor’s equity of redemption. As a result, the mortgagee could no longer sue the mortgagor on the personal covenant. The remedy of unjust enrichment was not available to the mortgagee. While the mortgagee suffered a deprivation of the loss of the registered mortgage, the mortgagor did not receive a corresponding benefit, as it was not provided with the benefit of a registered mortgage that could be transferred to a third party pursuant to s 73 of the Law of Property Act. The Court of Appeal concluded that following the discharge of the Crystal mortgage, the debt was not extinguished but Crystal was no longer able to sue JCF on the personal covenant contained in the mortgage:

[1] This appeal arises out of a mistaken unilateral discharge of a mortgage and involves consideration of the equity of redemption, which is the right of a mortgagor to reconveyance of the property upon payment of the debt. No steps were taken by the mortgagee to correct the title following the mistaken discharge. Instead, the mortgagee registered the mortgage by way of a caveat on the title, subsequent to the discharge of the mortgage, and later commenced foreclosure proceedings on the mortgage.

[2] While the discharge did not extinguish the underlying debt, the discharge deprived the mortgagor of the opportunity to obtain a transfer of the mortgage pursuant to s 73 of the Law of Property Act. In the circumstances of this case, the mortgagee is deemed to have elected to forego the debt in exchange for unilaterally taking away the mortgagor’s equity of redemption. As a result, the mortgagee can no longer sue the mortgagor on the personal covenant.

[3] The remedy of unjust enrichment is not available to the mortgagee. While the mortgagee suffered a deprivation of the loss of the registered mortgage, the mortgagor did not receive a corresponding benefit, as it was not provided with the benefit of a registered mortgage that could be transferred to a third party pursuant to s 73 of the Law of Property Act.

[...]

[16] Historically, a mortgage at common law was by way of a conveyance by the mortgagor of title to the land to the mortgagee. When the debt was repaid, the land was reconveyed to the mortgagor. If the debt was not repaid at the required time, the mortgagee could treat the land as his own. “However, as a principle of equity, the debt could be repaid and a reconveyance obtained at any time. This right came to be known as the equity of redemption. A mortgagee had to commence an action in the courts of equity to quiet the right to redeem that existed after the expiration of the (time) to pay at common law. If appropriate, the courts of equity could grant a foreclosure decree that would end the equitable right to redeem unless the debt was repaid.”: Francis C.R. Price and Marguerite Trussler, Mortgage Actions in Alberta: the law and practice in actions upon mortgages and collateral security and agreements for sale of land (Calgary: Carswell, 1985) at p 1.

[17] In Alberta, where a mortgage was in the form of security registered against the land, rather than by way of a transfer of land as at common law, the equity of redemption continued to exist. This was described in Morguard Mortgage Investment Corp v Faro Development Corp (1974), 1974 CanLII 1182 (AB CA), 50 DLR 426 at 433 – 434, [1975] 1 WWR 737 (ASCAD):

We are concerned here with a statutory mortgage pursuant to the Land Titles Act, under which the security of the mortgage its afforded by a charge on the land, the title remaining in the name of the mortgagor. In this respect it differs from a common law mortgage in which the security is effected by a transfer of title from the mortgagor to the mortgagee; but the equitable jurisdiction of the Court of Chancery in England over mortgages generally, and the principles upon which it acted, are vested in this Court by virtue of ss. 15 and 16 of the Judicature Act, R.S.A. 1970, c. 193, and are exercisable in respect of a statutory mortgage. Technical mortgage terms are to be adapted accordingly….Applying this approach to a statutory mortgage, the equity of redemption is essentially a means of relief granted to the mortgagor from the forfeiture of his title to the mortgaged land which would occur upon an order for sale, or a foreclosure order, made in proceedings by the mortgagee for foreclosure. The mortgagor is given an opportunity to redeem his land from the charge of the mortgage, as distinct from redemption of the title conveyed to the mortgagee by a common law mortgage. Foreclosure itself is a counter-balancing means devised by the Court to bring to an end the equity of redemption in order that the mortgagee could realize upon the security without later being called to account by the mortgagor. (emphasis added)

[...]

[24] In our view, it was an error to grant a remedy founded on unjust enrichment in this case. Restitution is often available to a party that has made a causative mistake resulting in a non-contractual transfer: Mitchell McInnes, The Canadian Law of Unjust Enrichment and Restitution, (Markham, ON: LexisNexis, 2014) at 38-50. The deprived party must show an enrichment, a corresponding deprivation, and absence of a juristic reason for the enrichment: Garland v Consumer Gas Co, 2004 SCC 25 at para 30. While Crystal suffered a deprivation of the loss of the registered mortgage, JCF did not receive a corresponding benefit as it was not provided with the benefit of a registered mortgage that could be transferred to a third party pursuant to s 73 of the Law of Property Act.

[...]

[31] The appeal is allowed. Following the discharge of the Crystal mortgage, the debt is not extinguished but Crystal is no longer able to sue JCF on the personal covenant contained in the mortgage.

In Canada Trustco Mortgage Co. v. Karpa, 2000 ABQB 841 (CanLII) the borrowing couple was in dispute with the bank where they had obtained the mortgage, regarding payments made by the bank to a third-party construction company. As the couple were not making the mortgage payments, the bank sought to foreclose. Since the couple had accepted all of the elements of the mortgage, including its registration and the fact that advances were made under it, the foreclosure was granted:

[1] Michael and Sophie Karpas mortgaged land to the Canada Trustco Mortgage Company (“Canada Trust”) in November, 1990. The Karpas were to use the mortgage monies to build a house on the mortgaged land. Canada Trust states that the mortgage is in default and as a result the whole principal has become payable. Canada Trust claims a declaration as to the amount owing under the mortgage and, in default of payment, sale or foreclosure and possession of the lands.

[2] The Karpas have counterclaimed against Canada Trust. The Karpas state that Canada Trust advanced funds to the Builder, Hankewich Homes Ltd./High Light Homes Ltd., after it was instructed not to make payments to the Builder without the Karpas’ express approval and consent. The Karpas state that the Builder was paid money it was not entitled to receive. The Builder ceased construction on the home and its work was defective. Further, the Karpas state that the inspector, employed by Canada Trust, improperly inspected the house and did not notice deficiencies in the construction. As a result of the overpayments to the Builder, the Karpas state that they had to pay a higher cost to complete the construction and will have to recover the improperly paid funds at a great expense.

[3] Canada Trust states that it was authorized to distribute mortgage funds pursuant to an Order & Direction to Pay which was signed by the Karpas. There was an agreement that the Builder would be advanced funds as work progressed. Canada Trust holds that payments made were authorized by the Karpas and were made pursuant to their agreement with the Builder. The inspection undertaken by Canada Trust was only to determine the progress of the work in place and was not done a building code or quality control inspection. In response to the counterclaim, Canada Trust has added the Karpas’ lawyer, Wayne Lovatt, as a third-party. Canada Trust states that if Lovatt had been advised by the Karpas of any deficiencies in the construction he had a duty to stop making advances to the Builder. Lovatt knew that Canada Trust would be relying on him to advance funds in accordance with the instructions of the Karpas.

[...]

[63] I conclude on the balance of probabilities that there were never any instructions given to Ralph Morgan not to advance to Mr. Lovatt’s office without the Karpas’ consent. Further, the only concern that the Karpas had was in relation to the release of funds to the Builder. That is a matter between the Karpas and their solicitor, and not subject of anything within the control of Canada Trust. Canada Trust had to Third Party Wayne Lovatt into the action as a result of the allegations raised in the Counterclaim. However, Michael and Sophia Karpa did not sue Mr. Lovatt. If those instructions were breached (and again there is evidence from Mr. Lovatt that no such instructions were provided to his office) that raises only the issue of liability as between the Karpas and Mr. Lovatt. It does not provide a defence to the claim brought by Canada Trust.

[64] All of the elements of the mortgage, including its registration and the fact that advances were made under it, were accepted by the Karpas in the Agreed Statement of Facts. It is clear that Michael and Sophie Karpa received funds advanced under a validly registered mortgage and have not repaid those funds in whole or in part or even the interest in the last nine and a half years. It is clear that the Karpas received the entire benefit of the mortgage funds, and there is no evidence to the contrary. In light of these facts, the foreclosure is granted and that the judgment declare as due and owing under the mortgage the principal sum of $63,100.00, plus interest calculated in accordance with the mortgage, and that the amount be realized by sale of the mortgaged lands.

In Brown v. Northey, 1991 ABCA 75 (CanLII) the Court of Appeal held, with respect to the redemption of mortgaged or pledged property:

[10] The Respondent Plaintiff here suggests that where a debtor seeks relief from forfeiture, then the Court needs evidence to show that it would be unconscionable for the creditor to rely on the forfeiture. With respect, that is not true of the particular well-developed type of relief from forfeiture in question here, the redemption of mortgaged or pledged property. Since the reign of Charles II, no Chancellor has considered that redemption is a discretionary matter. The rules are fixed in this area. That is not surprising; for a mortgagee or pledgee to attempt to have the money and get or keep the property at the very time the debtor is trying to pay and redeem, is the height of inequity. The Respondent Plaintiff cited no authority allowing a mortgagee or pledgee to keep the money and the security, and no authority suggesting that circumstances must be shown to favor the mortgagor or pledgor before he can redeem. Nor do the authorities cited above hint at a need for such evidence, or at such discretion.

In Morguard Mortgage Investments Limited v. Faro Development Corporation Ltd., 1974 CanLII 1182 (AB CA) the Court of Appeal held that in the absence of statutory mandate the court has jurisdiction in equity to open a foreclosure order, even a foreclosure absolute, under proper circumstances and in a proper exercise of its discretion:

Foreclosure in the sense of a final order to that effect is not in issue here, but it is clear that in the absence of statutory mandate the Court has jurisdiction in equity to open a foreclosure order, even a foreclosure absolute, under proper circumstances and in a proper exercise of its discretion: Campbell v. Holyland (1877), 7 Ch. D. 166. It is this jurisdiction that is preserved by s. 109 (5) of the Land Titles Act, infra, and it may be that the jurisdiction survives even the issue of a certificate of title to the mortgagee if subsequent rights have not intervened: Mackie v. Standard Trusts Co. (1922), 67 D.L.R. 201, [1922] 1 W.W.R. 566, 17 Alta. L.R. 236; Fink v. Robert-son, supra, at pp. 886-7.

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