21 Implied Covenant In A Mortgage Or Agreement For Sale

CROSS REFERENCES AND OTHER SOURCES OF INFORMATION

Secondary Sources

Novation

For a discussion of the law of novation in relation to foreclosure practice, see “Novation: Priorities, Unregistered Modification Agreements and Covenantors and Guarantors” in Foreclosure Update 1988 (Continuing Legal Education Society of British Columbia, 1988).

Implied Covenant

The following material is adapted from a discussion of the 1988 amendments to the Property Law Act by Konig in “Property Law Act, Sections 19.1 through 20.3: Liability of Original Covenantors and Other Current Owners” in Foreclosures and Fraudulent Transactions (Continuing Legal Education Society of British Columbia, 1990), at p. 2.1.03.

The pre-existing s. 20 [S.B.C. 1988, c. 42, s. 6] has been repealed; however, the new s. 20 [now, s. 21 under R.S.B.C. 1996] continues the implied covenant from a purchaser to a vendor on sale of a property to make payments under a mortgage left on title and to indemnify the vendor against liability on the charge. The section is not restricted in its application to residential mortgages.

Di Castri

See Di Castri, Registration of Title to Land, vol. 1, paras. 284 and 285, and vol. 2, paras. 531 and 532.

CASE LAW

Transferor’s Liabilities

Before enactment of the 1988 amendments to the Property Law Act (under the Law Reform Amendment Act, 1988, S.B.C. 1988, c. 42), the transfer by the mortgagor of their equity of redemption did not relieve them of personal liability to the mortgagee on the original covenant to pay the debt (Morguard Trust Co. v. Faulkner, [1984] B.C.J. No. 396 (QL) (S.C.) (Chambers)).

The granting of personal judgment against a transferor upon the default of the transferee does not automatically entitle the transferor to collect the moneys owing from the transferee to the mortgagee. Where the mortgagee has not and may never move on the covenant, the transferor is entitled to a declaration that the transferee is required to indemnify the transferor for any amount which the transferor is called upon to pay the mortgagee (Holmes v. Margolese (1983), 27 R.P.R. 158 (B.C.S.C.) (Chambers)).

The indemnity provided by s. 21 is only from those covenants which the original mortgagor contracts with the mortgagee to perform and nothing more. If a transferor of land wishes to extend their indemnity to a subsequent solicitor and client bill that they may subsequently incur beyond their liability to the mortgagee, the transferor must expressly so contract with the assignee of the mortgage obligations. The section merely provides a statutory assignment of the obligations to the mortgagee (Boomer v. Gallaher, [1986] B.C.J. No. 1857 (QL) (Co. Ct.)).

Terms Implied for Commercially Sensible Results

In dismissing the appeal in British Columbia (Technology, Innovation and Citizens’ Services) v. Columbus Real Estate Inc., , the court said s. 21 of the Property Law Act attempts to resolve issues that arise where a mortgage secured against a property is not discharged when the fee simple is transferred. The whole point is that there will be situations in which a mortgage remains on title after a transfer. Section 21 implies terms into transfer agreements in an attempt to impose commercially sensible results where the parties have not expressly addressed their respective rights to indemnity. Here, the notice of civil claim did not properly raise the issue of indemnity for payments on the mortgage. The court was not required to decide who bore ultimate responsibility for payments.