28 Priority Of Charges Based On Priority Of Registration

PRACTICE

Modification of “First” Charge Where “First” Chargee Does Not Obtain Priority Agreement from “Second” Chargee

A question of priority may arise where a “first” mortgagee amends a “first” mortgage, for example, by increasing the principal or interest rate, or by extending the time for payment. It is up to the courts to determine the position between the “first” and “second” mortgagees. Sections 27 and 28 of the Act, in particular, determine priorities between charges (including, probably, a modification) by the date of application for registration. Consequently, the “second” mortgagee may not be bound by the modification of the “first” mortgage.

The Exceptions in Section 28

Charges take priority according to the date and time at which the registrar receives the applications for registration, except:

1. where a contrary intention appears in the instrument itself (a contrary intention may appear in a priority or postponement agreement, or in references in the document creating the charge); or
2. where someone lodges a caveat or registers a certificate of pending litigation against title to land, and a judgment, order or appropriate admission subsequently establishes the validity of the claim for which the caveat or certificate of pending litigation was filed. The interest so established will take priority from the time of the lodging of the caveat or registration of the certificate of pending litigation. See s. 31 of the Act.

Procedure for Registration of Charge “A” Which Gives Priority to Charge “B”, and Subsequent Registration of Charge “B”

The following procedure applies:

1. If charge “A” contains a clause giving priority to charge “B”, which has not been registered, the registrar accepts the charge “A” for registration but does not make note of the priority clause in it on the register.
2. When the applicant applies to register charge “B”, the registrar accepts it but makes no notation of priority on the register, even if the applicant points out the priority clause in charge “A”.
3. If the applicant for charge “B” requires a notation of the priority between charge “A” and charge “B”, the applicant should apply in Form 17, requesting that the priority be noted on title.

CROSS REFERENCES AND OTHER SOURCES OF INFORMATION

Regarding further advances by mortgagee, see s. 28 of the Property Law Act in chapter 56 (Property Law Act, R.S.B.C. 1996, c. 377).

Regarding the priority of unregistered Crown liens for taxes, see s. 23(2)(b) of the Act.

Regarding priorities during foreclosure or the exercise of a power of sale, see s. 30 of the Act.

See Di Castri, Registration of Title to Land, vol. 2, §14:85.

CASE LAW

Contract of Purchase and Sale

A contract of purchase and sale provided that the purchaser, now the respondent in foreclosure proceedings, arrange a first mortgage with a bank or lending company and that the vendor, now one of the petitioners in the foreclosure proceedings, carry a second mortgage. The mortgages were executed on the same date and tendered for registration at the same time. The vendor’s mortgage was time-stamped before the bank’s mortgage and neither mortgage contained a priority clause. In giving priority to the bank’s mortgage, the court found that the contract of purchase and sale qualified as one of the “instruments creating the charges” within the meaning of s. 28 of the Act. Under s. 1, an instrument is defined as a document “relating to the transfer, charging or otherwise dealing with or affecting land”. This definition is clearly wide enough to include the contract of purchase and sale, particularly, as in this case, when one of the mortgages contemplated in the agreement was a mortgage back to the vendor and it was implicit in the agreement that the vendor’s mortgage was subject to the first mortgage in favour of the bank (Griffiths v. Thomson, 2000 BCSC 39).

Priority Agreements

Extrinsic evidence is inadmissible under this section to establish a contrary intention as to priority of registered charges (Bronstein v. Harris, [1987] B.C.J. No. 1659 (QL) (C.A.)).

The petitioner vendor took a 12.5% mortgage from the purchaser. Under its mortgage agreement, the vendor was to give priority to a 12% mortgage for $16,500 that the purchaser was going to give to the respondent. The mortgage that the purchaser subsequently gave to the respondent was at 18% for $16,500. The vendor’s mortgage was registered before the respondent’s mortgage. If one mortgage is to have priority over another mortgage, justification for priority has to be found in the mortgage granting priority. The respondent’s mortgage did not fit the wording of the clause in the vendor’s mortgage allowing for priority. Therefore, the court refused to alter the priorities as they appeared on title (Ocean Park Securities Ltd. v. Foulkes, 1978 CanLII 314 (BC SC)).

The petitioner holds a registered first mortgage over Lots A and B and a registered second mortgage over Lot A. One of the respondents holds a subsequent registered mortgage over Lots A and B. In this mortgage, it states that both of the petitioner’s mortgages are “prior encumbrances permitted by lender”. Following default and foreclosure proceedings, the petitioner applied for an order to distribute net sale proceeds. Section 28 of the Act establishes the priority of charges based on the priority of registration unless a contrary intention appears from the instruments creating the charges. The reference to “prior encumbrances permitted by lender” is not a “contrary intention” as that phrase is used in s. 28. The use of that phrase does not result in the petitioner’s second mortgage becoming a prior charge on Lot B as it could not now be registered against that property. The order of payment of the net proceeds is the order that the three mortgages were registered in the land title office. For Lot A, net sale proceeds are paid, first, to the petitioner as first mortgagee, second, to the petitioner as second mortgagee, and, third, to the respondent. For Lot B, net sale proceeds are paid, first, to the petitioner as the first mortgagee and, second, to the respondent (Richmond Savings Credit Union v. Zilbershats, 1997 CanLII 544 (BC SC)).

Priorities over Separate Properties with a Common Assignee

The petitioner was the assignee of the second mortgages of two properties, one in Vancouver and one in Port Alberni. One of the respondents, the first mortgagee on the Port Alberni property, granted the second mortgagee priority over its security in the amount of $50,000. Both properties were sold in foreclosure proceedings and partial distributions to creditors were made. The petitioner then applied to recover $50,000 that was paid into court following the sale of the Port Alberni property. The first mortgagee of the Port Alberni property argued that the petitioner should be paid entirely from the proceeds of the sale of the Vancouver property because the court order approving that sale occurred first. The court found that, because of the existence of more than one debtor, the doctrine of marshalling could not be applied in this case. However, as the first mortgagee of the Port Alberni property was, in effect, seeking an extension of the doctrine, the court considered the equitable principles underlying it; namely, that the doctrine cannot be applied to the prejudice of third parties.

In this case, the owner of the Vancouver property was not indebted to the first mortgagee of the Port Alberni property, and both the owner and the third mortgagee of the Vancouver property would be prejudiced if the second mortgagee of the Port Alberni property were paid in full from the proceeds of the sale of the Vancouver property. In granting the petitioner’s application for payment out of the $50,000 from the sale of the Port Alberni property, the court held that priorities with respect to each property must be determined separately and as set out under the provisions of the Land Title Act (627017 B.C. Ltd. v. Rainbow Hotels Ltd, 2002 BCSC 342).

Modification Agreements

On application for an order nisi of foreclosure, the mortgagee claimed priority not only for interest payable under the registered mortgage but also for the higher rate of interest payable under an unregistered modification agreement. The modification agreement was equivalent to an unregistered equitable mortgage and took priority over a later registered judgment (Fraser Valley Credit Union v. Carlson, 1984 CanLII 678 (BC SC)).

Two mortgages were registered before the defendant’s lease. Modifications of these mortgages were subsequently registered. Modification of certain terms changed the mortgages fundamentally and amounted to novation. Those terms of the mortgages unaffected by modification continued to have priority over the lease, but the lease took priority over the modified terms (Canada Trustco Mortgage Co. v. Park Plaza Country Club Holdings Inc., 1988 CanLII 2884 (BC SC)).

Solicitor’s Lien

At the time of a trial judgment in foreclosure proceedings, the defendant’s interest in his matrimonial home was subject to a number of registered charges. By court order, the property was sold and the proceeds were paid into court. The order approving the sale stated “any funds paid into Court shall stand in place of the Lands and be subject to the same registered and unregistered charges and priorities existing against title to the Lands as of the date of this Order”. At the conclusion of a subsequent family relations proceeding, the solicitors sought to assert the priority of their solicitors’ lien over the charges registered previously against the foreclosed property. The court held that the rights of a solicitor to funds in court stand no higher than the rights of the client. In dismissing the solicitors’ claim, the court held that, as the defendant’s interest in the matrimonial home at the time of the judgment in the foreclosure proceedings was encumbered by the registered charges, the priorities in relation to the funds held in court must be the same as the priorities in relation to the land which the foreclosure proceedings replaced (Marzara v. Marzara, 2011 BCSC 1142).

Subsequent Advances

A first or prior mortgagee may claim priority, up to the face amount of the mortgage, for money advanced under the first or prior mortgage subsequent to the registration and advancement of funds under a second or subsequent mortgage, provided that the first or prior mortgagee does not have actual notice of the second or subsequent mortgage when making the subsequent advances. In any case, the second mortgage here contained a general postponement clause granting priority to building advances made under the first mortgage. A second mortgagee who expects to receive funds from advancements made by the first mortgagee in partial payment of the second mortgage and who wishes to be protected should take an assignment of sums payable under the first mortgage and give notice of that assignment to the first mortgagee (Capital City Holdings Ltd. v. C & A Mortgage Corp., 1979 CanLII 490 (BC CA); see also the annotation of this decision under s. 27 of the Act). Regarding further advances by the mortagee, see s. 28 of the Property Law Act in chapter 56 (Property Law Act, R.S.B.C. 1996, c. 377).

Unjust Enrichment

The petitioner approved a mortgage loan to the respondents, S and L. At the time, there was a first mortgage against the property of S and L in favour of a third party and a second mortgage in favour of the respondent, Household Realty Corporation. By a letter to Household, the petitioner indicated its intention to pay out the first mortgage and enter into an agreement with Household, giving the petitioner priority as holder of the first charge. The letter and its receipt were acknowledged by one of Household’s branch managers. A priority agreement was never executed and its terms were not specified until after the petitioner had registered its mortgage as a third charge and discharged the first mortgage. The court found that the petitioner could not rely on s. 28 of the Act because this section does not contemplate unregistered agreements regarding the reordering of priorities. However, the court found no reason in principle why the doctrine of unjust enrichment should not apply where the benefit in question was an enhanced priority position. In this case, the petitioner’s demotion from first to second position in priority was an economic detriment, and Household’s promotion to first place a windfall benefit. Neither the petitioner’s action in registering its mortgage without a proper priority agreement nor the priority rules under s. 28 of the Act provided the juristic reason for Household’s enrichment. By replying to the petitioner’s letter, Household created an expectation that it would execute a priority agreement. In good commercial conscience, it would have honoured that letter; its enrichment through promotion of its priority from second to first was therefore unjust. Accordingly, the petitioner was entitled to have its mortgage registered in priority over the mortgage of Household (Fraser Valley Credit Union v. Siba, 2001 BCSC 744).

Encumbrances in Favour of the Crown

A certificate regarding a grant provided by the Crown under the Home Purchase Assistance Act, R.S.B.C. 1996, c. 195 (now repealed) was registered against a home owner’s title subsequent to the registration of a mortgage. Registration of the certificate did not give the Crown priority over the mortgage. The certificate was an encumbrance and therefore a “charge” within the meaning of s. 28 of the Land Title Act. Absent some provision to the contrary in the Home Purchase Assistance Act or its regulations, priority between the mortgage and certificate was established in accordance with their respective dates of registration. Therefore, after the mortgagee was granted an order absolute in foreclosure proceedings, the mortgagee was entitled to registration of a transfer without production of a cancellation of the Home Purchase Assistance Act certificate (First City Trust Co. v. Thomas, 1979 CanLII 660 (BC SC)).

Application of Creditor Assistance Act

Following a court-approved sale in a foreclosure proceeding, priorities among judgment creditors are determined by the order in which they are registered. Section 46 of the Creditor Assistance Act, R.S.B.C. 1996, c. 83 (formerly, s. 3 of the Creditors’ Relief Act, R.S.B.C. 1960, c. 85), which provides that there shall be no priority among creditors by execution, has no application because the bare registration of a judgment is not a proceeding by way of execution such as to turn the judgment creditors into creditors by execution (Roadburg v. R., 1980 CanLII 407 (BC CA), supplemental reasons 1981 CanLII 509 (BC CA); followed in Canadian Imperial Bank of Commerce v. 1679 Investments Ltd., 1982 CanLII 660 (BC SC)). See also the annotation of Roadburg v. R. under s. 22 of the Act regarding the priorities of Crown liens.

Where a fund results from the sale of land under the Court Order Enforcement Act, the specific provisions of that Act and the Creditor Assistance Act override the general provisions of the Land Title Act, and the fund must be distributed ratably among all judgment creditors (Hongkong Bank of Canada v. R., 1989 CanLII 2736 (BC CA)).