23 Extinguishment Of Liability Under The Personal Covenant

CROSS REFERENCES AND OTHER SOURCES OF INFORMATION

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 (CLEBC, 1990), at p. 2.1.04. For convenience, the section references have been updated to reflect the section numbers used in R.S.B.C. 1996.

Sections 23 and 24 provide that as to a residential mortgage a mortgagor is released from liability under a mortgage within a defined period of time after the transfer of a property. There are three methods by which a mortgagor can be released.

• 1. Section 23(1) provides that a mortgagor is released at the expiry of the existing term of a mortgage, unless the mortgagee, within three months of the end of the term, makes written demand for payment to the original mortgagor. This provision applies notwithstanding a provision in the mortgage making it due at the expiry of the term without demand. Written demand in the mortgage document itself is not sufficient. Paraphrasing, this section provides that a mortgagor is only liable on the mortgage for the term for which he or she, in fact, signed. Any renewals or extensions do not bind the mortgagor.
• 2. Section 23(3) deals with mortgages due on demand. A mortgagor is released from liability under a demand mortgage if the mortgagee fails to demand payment in writing within three months of written notice “from the person” who transfers an estate in fee simple subject to a residential mortgage, or a purchaser’s interest under a residential agreement for sale. While the courts will not likely be very particular as to what they require by way of a written notice, it is critical to note that this notice must come from the person desiring to be released, that is, the original mortgagor. For example, if the mortgagee receives cheques for the mortgage payments from the purchasers of the property and comes to know from the purchasers of the transfer, the provisions of the legislation have not been met. While the mortgage cheques may arguably be written notice, they have not come from the right party. The test under this section is not one of actual notice. The provisions of s. 23(1) and (3) can be waived but only after transfer of a property. A purported waiver in a mortgage itself of the rights contained within it is not effective. A waiver can only be given after a mortgagor’s right to be released has arisen.
• 3. Section 24 provides a means by which an original covenantor can be released from liability prior to the expiration of the term of a mortgage. Again this section is restricted to residential mortgages and provides that where a mortgagee gives written approval to a purchaser, the original mortgagor is released. The original mortgagor can force the mortgagee’s hand in this regard by requesting such approval within three months of a transfer. The mortgagee is entitled to require a purchaser to provide financial information and a reasonable fee. Once a mortgagee has received this information, he or she cannot unreasonably refuse to approve a purchaser. This section also provides for a court application where a mortgagee has allegedly unreasonably refused approval.