32 Enforcement Of Personal Covenant

CROSS REFERENCES AND OTHER SOURCES OF INFORMATION

Foreclosure Procedure under Agreements for Sale

See s. 16 of the Law and Equity Act.

Secondary Sources

See the following for further information:

• Foreclosure Practice 2009 (CLEBC, 2009)
• Foreclosure Practice 2013 (CLEBC, 2013)
• Foreclosure Practice 2015 (CLEBC, 2015)
• Report on Mortgages: Judicial Sales and Deficiency Claims (Law Reform Commission of British Columbia, 1991)
• Di Castri, Registration of Title to Land, vol. 2, §13:26, §13:45, §13:53, §13:58, §13:59, §13:95, and §13:96

CASE LAW

Notes on Case Law: A considerable number of cases discuss the effect of foreclosure orders and mortgagor’s liability but do not specifically deal with or cite s. 32. The annotations included here are limited to those cases that specifically cite and interpret s. 32.

Orders Absolute

A mortgagee obtained an order of foreclosure that provided for a six-month redemption period. The order stated that the mortgagors would be absolutely barred if they did not pay the amount required to redeem, and also provided for personal judgment. The order was not an “order absolute” under s. 32 of the Act because it was conditional and qualified. A further order was required to determine the parties’ rights finally and absolutely (Bank of Montreal v. Brett, 1984 CanLII 859 (BC SC)).

After the hearing of its petition, a mortgagee entered a separate “order nisi” and an “order for sale”. The “order nisi” contained no redemption period, while the “order for sale” granted immediate sale. At issue was whether the first order was an order absolute under s. 32. The court had to approach the matter as if the “order nisi” included the provisions in the “order for sale”. In substance, neither the purpose nor the effect of the “order nisi” was that of an order absolute. The provision for sale was inconsistent with the mortgagee having obtained an order absolute (Federal Business Development Bank v. F.J.H. Construction Ltd., 1988 CanLII 3004 (BC CA)).

The plaintiff mortgagees obtained a Rice order from an Alberta court. Following the judicial sale, the mortgagees attempted to enforce their personal judgment in British Columbia, where the defendant lived at the time. The defendant argued that the Rice order was equivalent to an order absolute in British Columbia and that enforcement of the personal judgment in British Columbia would offend public policy as expressed in s. 32 of the Property Law Act. The court disagreed and held that the Rice order was not a final order of foreclosure. It was not therefore against the public policy contained in s. 32 to allow a mortgagee to enforce such a judgment in British Columbia. Judgment was granted to the mortgagees (Morguard Investments Ltd. v. De Savoye, 1987 CanLII 2445 (BC SC), appeal dismissed 1988 CanLII 2853 (BC CA), and 1990 CanLII 29 (SCC); followed in Standard Trust Company v. Stoelzle, 1990 CanLII 1091 (BC CA)). (A Rice order is an order for a judicial sale that enables a mortgagee to purchase the property and which grants personal judgment against the mortgagor for the deficiency.)

A first mortgagee loaned money to a mortgagor and took a first mortgage and personal covenants as security. A second mortgagee commenced foreclosure proceedings against the mortgagor and later the first mortgagee commenced its own proceedings. The second mortgagee obtained an order absolute and took title to the property subject to the first mortgage. The first mortgagee obtained an order nisi but did not apply for an order absolute. The first mortgagee subsequently purchased all the shares of the second mortgagee and later sold these shares to another party. After taking account of the profit of this transaction, the bank was still left with a deficiency and sought recovery from the covenantors who were liable. The purchase by the first mortgagee of the shares of the second mortgagee, and the sale of these shares, did not have the effect of an order of foreclosure extinguishing the first mortgagee’s mortgage by merger. The first mortgagee did not acquire title to the mortgaged property at a judicial sale or otherwise (Western & Pacific Bank of Canada v. Axiom Management Limited, 1989 CanLII 2720 (BC SC)).

Effect of Approval of Sale

A mortgagor sold mortgaged property to a purchaser who assumed the mortgage but defaulted in its payment. The mortgagee obtained an order nisi of foreclosure with a six-month redemption period and an order for sale. The mortgagor obtained conduct of sale but was not able to sell the property. The mortgagee then obtained the right to sell the property. The mortgagee found a purchaser who was prepared to buy by way of agreement for sale. The court approved the sale by order, a term of which was that title to the property vest in the mortgagee subject to the agreement for sale. This order did not amount to an order absolute under s. 32. Had it been the mortgagee’s intention to extinguish the liability under the mortgage, it would have applied for an order absolute, made a private sale, and not applied to court for approval of the sale. The sale was a judicial sale (Royal Trust Company v. Heelo Properties Ltd., 1986 CanLII 1094 (BC CA)).

A mortgagee obtained an order nisi of foreclosure, personal judgment, and an order for sale with conduct of sale. The bank sought approval of a sale for market value to Canada Mortgage and Housing Corporation (CMHC), which had insured the mortgage. CMHC planned to pay the balance of money owing under the mortgage, and take an assignment of the foreclosure and the personal judgments. Consequently CMHC would hold both the property and the personal judgments. The chambers judge dismissed the application as it was the practice to refuse to approve sales to mortgagees because of perceived unfairness to mortgagors. The chambers judge regarded CMHC as in essentially the same position as the mortgagee. The Court of Appeal allowed the appeal and remitted the matter to the court below. While CMHC stood in the place of the mortgagee, there was no legal impediment to a mortgagee, who has conduct of sale, obtaining an order approving purchase of the property by him or her. If a court makes such an order, the court should contemplate that the mortgagee has the right to claim for any deficiency (Bank of Montreal v. Butler, 1990 CanLII 471 (BC CA)).

In January 1983, the petitioner obtained an order for specific performance of the parties’ agreement for sale. The order granted a three-month redemption period, fixed the redemption amount at $153,975, and granted personal judgment against the respondent. Three weeks later the petitioner obtained an order for sale under s. 15 of the Law and Equity Act with the proceeds to be applied against the personal judgment. One month later, the petitioner obtained an order approving sale for $117,000. In asking for an order for sale during the redemption period, the petitioner did not make an election within the meaning of s. 32 of the Property Law Act. Clearly, the petitioner indicated that it was relying on a deficiency judgment and was not electing to rely on its security (K.C. Johnson Construction Ltd. v. Wilson, 1990 CanLII 1094 (BC SC)).

The mortgagors sought to stay execution of an order nisi of their land obtained by the mortgagee in November 1982 and an order for sale of the mortgagors’ land obtained by the mortgagee in July 1983. The court-ordered sale was to J for $140,000, with the sale to complete on July 15, 1983. J did not register the order for sale in the land title office until April 30, 1984. On the same day, he transferred title to the mortgagee. J and the mortgagee entered and concluded this transaction working in concert, money did not change hands, and, consequently, there was no judicial sale within the proper meaning to be given the term. This case was distinguishable in its facts and circumstances from Bank of Montreal v. Butler and Royal Trust Company v. Heelo Properties Ltd. (both annotated under this section) in which the courts held that judicial sales did take place. The mortgagee followed the course it did as a means of avoiding an order absolute of foreclosure which would have afforded the protection of s. 32 for the mortgagors’ interest. The court ordered a stay of both orders (Parklane Enterprises Ltd. v. Bennett, 1990 CanLII 679 (BC SC)).

Claims Advanced after Order Absolute

On the same day that a mortgagee obtained an order nisi of foreclosure, it obtained an order appointing a receiver of certain property. After obtaining an order absolute of foreclosure, the mortgagee applied for summary approval of the receiver’s accounts and an order directing payment to it of the balance of funds held by the receiver which was received before the granting of the order absolute. If a mortgagee presents a claim for funds before, or contemporaneously with, an application for an order absolute, they do so as mortgagee, and a court determines their entitlement on that basis. If the mortgagee advances the claim after an order absolute, the mortgagee is then in the position of owner. To claim funds received before that change in status, the mortgagee must agree to the setting aside or reopening of the order absolute, with all necessary consequences, to put them back in the position of mortgagee (Canada Mortgage and Housing Corporation v. McGregor (1980), 37 C.B.R. (N.S.) 46 (B.C.S.C.)).

A vendor obtained an order cancelling an agreement for sale. The order was silent as to costs. The vendor then applied for an order for costs pursuant to the covenant to pay costs in the agreement for sale. Section 32 barred the vendor from obtaining such an order. The fact that s. 32 refers only to the personal covenant to pay and not to other covenants does not necessarily mean that a vendor can then sue a purchaser on other covenants in an agreement. It is not only the covenant to pay that taking an order absolute extinguishes, it is the entire agreement. The vendor’s contention that the court could treat costs as a separate debt also failed (Wyman v. McKay, [1983] B.C.J. No. 1031 (QL) (S.C.)).

As security for a loan a mortgagee took land mortgages, guarantees, and hypothecation of certain securities. After the mortgagee called the loan, it converted the securities to cash and held the cash in a “cash collateral account”. The mortgagee subsequently obtained an order absolute of foreclosure on the land mortgages. Following granting of the order absolute, there was no liability left to which the mortgagee could appropriate the remaining proceeds of the sale of the securities (Johl v. Toronto-Dominion Bank (1987), 17 B.C.L.R. (2d) 63 (Co. Ct.)).

Vacation of Order Absolute

The words “by process of law” in s. 32(b) do not give an applicant a right to have an order absolute vacated, except in those circumstances that normally apply to the vacating of court orders. The court has an inherent jurisdiction to set aside a judgment or order which has been obtained by fraud, collusion, or perjury; which constitutes an abuse of process; on the ground that fresh evidence has been discovered; or which was obtained by consent on a ground which would invalidate a compromise contained in a judgment or order. A mortgagor may redeem a final order in appropriate circumstances. None of these conditions existed in this case, nor was there specific statutory authority for vacating the order (Bank of Montreal v. McAloney, 1983 CanLII 519 (BC SC)).

Cancellation of Agreement for Sale

The remedies of specific performance of an agreement for sale and personal judgment against a purchaser are not inconsistent with an order giving liberty to apply for cancellation in the event that the amount is not paid within the redemption period. In this case, the court made the order conditional on the following grounds: the order for cancellation was not to be sought until the time allowed for specific performance had elapsed, and, if the vendor executed on the judgment debt and then sought cancellation, the vendor had to account to the purchaser for the proceeds of the execution proceedings (Century Manufacturing Co. Ltd. v. O’Neill, 1982 CanLII 723 (BC SC)).

Enforcement of Judgment

A mortgagee that registers its order nisi of foreclosure against other properties of the mortgagor does not elect its remedy against the mortgagor. The mortgagee can enforce its judgment by execution so long as it is in a position to return the mortgaged property upon payment by the mortgagor. However, a court will consider that a mortgagee has made an election if it disposes of the property or registers an order absolute (Martens v. First National Mortgage Co., 1982 CanLII 582 (BC SC)).

Guarantors

The word “mortgagee” in s. 32 includes assignees of a mortgagee and any other person using the name of the mortgagee in litigation. Consequently, where a mortgagee obtains an order absolute of foreclosure, it deprives a guarantor of pursuing its rights under s. 34 of the Law and Equity Act to pay the money owing on a mortgage, standing in place of the mortgagee, and obtaining indemnification from the mortgagor (Walter E. Heller Financial Corp. v. Timber Rock Enterprises Ltd., 1982 CanLII 747 (BC SC)).

Two guarantors under a mortgage paid monies in partial satisfaction of their obligation prior to the order absolute which rendered unenforceable the balance of the obligation. They then sought contribution for the payments made from a third co-guarantor, who claimed that his obligation had been extinguished by the order absolute. The court held that the right of one surety to sue the other for contribution is founded not originally on contract, nor on foreclosure proceedings, but upon a principle of equity. The order absolute only operated to limit the guarantors’ liability to that which had already been paid by the first two guarantors. That being so, the equity to receive a contribution arose in those two guarantors, as did the right to sue the third guarantor for contribution to the extent of his pro rata share of that amount (Schnurch v. Ploeger, 1991 CanLII 140 (BC CA)).

Collateral Security

Notes on Case Law: The decisions cited below were made before the enactment of the Personal Property Security Act, which may affect the application of s. 32 as it concerns collateral security.

A mortgagee took a mortgage of land and a chattel mortgage to secure the same debt. In foreclosure proceedings under the land mortgage, the mortgagee obtained personal judgment. It thus lost the right to seize or execute against the chattels (Harbour Way Motel Ltd. v. Westcoast Savings Credit Union, 1986 CanLII 1067 (BC CA), distinguishing Household Finance Corporation of Canada v. Mogck, 1984 CanLII 875 (BC SC) (Chambers)).

If a security instrument exists which does not contain a personal covenant of the mortgagor and which is a collateral or separate security for a mortgage debt, realization of such security does not offend s. 32 of the Property Law Act. Accordingly, insurance proceeds derived from a loss to a mortgagor’s real property, albeit not forming part of the land mortgage security, are available to a mortgagee who is named loss payee under the insurance policy notwithstanding a final order of foreclosure pursuant to the mortgage (Canim Lake Farms (1969) Ltd. v. Toronto-Dominion Bank (1987), 47 R.P.R. 78 (B.C.S.C.)).