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American College of Mortgage Attorneys — Partner with the Best®

Formed in 1974, the American College of Mortgage Attorneys (ACMA) is comprised of over 500 lawyers in North America who are experts in mortgage law.

Canada

Ontario

Although mortgages are the most common form of security used to charge lands in the Province of Ontario, it is also possible to use a debenture or a deed of trust provided all mandatory registration and formality requirements of the Land Registration Reform Act, R.S.O. 1990. Chap. L.4 (the “Land Registration Act”) are complied with.

SECURITY INSTRUMENTS USED

Most Ontario properties are subject to a land titles system which is Torrens based and governed by the Land Titles Act, R.S.O. 1990. Chap. L.5. Under this system, registration of a mortgage is required to establish and protect the priority of the mortgage against persons subsequently acquiring an interest in the mortgaged property and also to facilitate the conveyance of the mortgaged property by the lender on mortgage enforcement. The Land Registration Act requires the registration of a mortgage to be made by the electronic filing of a digitized copy of the mortgage (which is authorized, but not physically signed, by the mortgagor). Mortgages can be registered only by users who are authorized by Teranet (the operator of Ontario's land titles system) to make such registrations (mostly, but not exclusively, lawyers authorized to practice law in the Province).

RECORDING REQUIREMENTS

STATUTES TO BE WAIVED

Ontario mortgage lenders may file a set of standard mortgage terms and conditions (“standard charge terms”) to supplement the mortgage terms expressly set out in the mortgage. Standard charge terms are deemed to be included in any mortgage that specifically refers to their assigned filing number. Standard charge terms are used in most Ontario residential mortgages. However, the use of standard charge terms is optional, and where negotiation of mortgage terms is expected (i.e., larger commercial transactions), the mortgage lender will typically attach a full copy of the final negotiated mortgage terms instead of using standard charge terms. Even if the mortgage does incorporate a set of standard charge terms, any given provision may be deleted and/or replaced by including the applicable amendments in the mortgage document.

UNUSUAL TREATMENT OF STANDARD PROVISIONS

A registered mortgage will have priority for future advances over a subsequent registered mortgage provided that (i) the then-current outstanding principal balance (including the amount advanced) does not exceed the stated principal amount of the mortgage, and (ii) the prior mortgagee has no actual knowledge of the subsequent registered mortgage at the time of such advance. Actual notice of the subsequent mortgage by the prior mortgagee is required; “constructive notice” (i.e., notice arising solely from the registration of such subsequent mortgage) is not sufficient. There are exceptions for “mandatory advances” where the future advance under the prior mortgage is mandatory or obligatory (e.g. a prior mortgage securing an outstanding letter of credit). Intercreditor agreements are commonly used to establish mortgage priorities where there is more than one registered mortgage against the same mortgaged property, particularly where the prior mortgage secures a revolving credit line (revolving credit facilities are not generally considered mandatory advances). It is common for subsequent mortgagees to provide actual written notice to prior mortgagees to protect the priority of their subsequent mortgage against future advances under the prior mortgage. Construction liens also have special priorities over prior registered mortgages in certain circumstances (see “Construction Liens” below).

SECURING FUTURE ADVANCES

Pursuant to both common law and the express terms of most mortgages, a mortgage lender may recover “protective disbursements” (reasonable costs of property maintenance and repairs and other reasonable costs incurred for the protection of or preservation of the property), including taxes, utilities, insurance and certain other reasonable costs incurred in connection with mortgage enforcement, together with interest thereon at the mortgage rate. These costs are secured by the mortgage in the same priority as mortgage principal (even if the amounts advanced cause the total credit to exceed the stated principal amount of the mortgage). However, a mortgage lender is not entitled to recover costs incurred to pay for voluntary improvements to the property, even if the work increases the value of the mortgaged property and such cost is expressly authorized by the mortgage terms because borrowers cannot contract out of their common law right of redemption. Court-appointed receivers are generally not subject to this limitation on voluntary improvements because such work and related costs must be approved by the Court. Commercial lenders typically request a borrower-funded reserve for realty taxes, but do not request reserves for insurance.

SECURING ADDITIONAL ADVANCES TO PROTECT THE COLLATERAL, INCLUDING PAYMENT OF TAXES AND INSURANCE

A general assignment of rents is a “standalone” security instrument that is standard in Ontario commercial mortgage financings. Typically, a general assignment of rents will also include an assignment of the borrower's interest in the related leases. Because a rent receivable is personal property under Ontario law (a chose in action), security taken in rent receivables is subject to and governed by the Personal Property Security Act (Ontario) (the “PPSA”), &sect; 4(1)(e). For this reason, a financing statement should always be registered by the mortgage lender under the PPSA in respect of such assignment to protect its priority. However, where there is a dispute as to competing priorities to rents between a creditor asserting a real property claim (i.e., a claim under a general assignment of rents that includes an assignment of leases) and a creditor claim to rent receivables under a general security agreement), the rule is that an assignment of a lessor's interest in a lease that is registered in the property land registry office will prevail over the competing claim of a PPSA creditor under a general security agreement. As a result, a general assignment of rents (and leases) should always be registered against the mortgaged property in the proper land registry office to ensure full priority over any competing PPSA creditors.

ASSIGNMENT OF RENT

The Land Registration Act does not have a prescribed form for a deed of trust. Generally, they are used when bonds are to be issued to a number of investors either through a public offering or a private placement. Debentures are a more common form of land security instrument in larger commercial loan transactions because a single instrument can be used to grant security over multiple properties in multiple Canadian provinces and typically include both the real property and all related personal property as secured collateral (thus avoiding separate, potentially inconsistent, mortgage forms and additional personal property security instruments on a province by province basis). But even where a debenture is used, many Canadian lenders still require additional personal property security instruments (typically a general security agreement) out of an abundance of caution.

PRACTICE IN ONTARIO

The trustee may be corporate or individual, but where true deeds of trust are used, there are trust companies that perform such functions.

CORPORATE OR INDIVIDUAL

RESIDENCY REQUIRED

In Ontario, “foreclosure” has a very narrow legal meaning—a judicial action in which the mortgage lender seeks ownership of the mortgaged property free and clear of the mortgagor's right of redemption and claims of subsequent encumbrancers in full satisfaction of the mortgage debt. For reasons discussed below, foreclosures are extremely rare in Ontario. It is much more common for mortgage lenders to realize on Ontario mortgage security by the sale of the mortgaged property under either (1) power of sale (a private, non-judicial sale conducted by the lender in compliance with the requirements of the Mortgages Act, R.S.O. 1990, c. M.40 (the “Mortgages Act”)) or (2) judicial sale (a judicial sale supervised by the Court which is often coupled with a Court-appointed receiver). Properly conducted, each of these two remedies permits the sale of the mortgaged property free and clear of all claims of the mortgagor and any subsequent encumbrancers. In addition to these remedies, a mortgagor will generally be personally liable for payment of the mortgage debt, which obligation may be enforced by the mortgage lender through a judicial action (an “action on the covenant”) at any time (before or after a sale), unless the lender's recourse is expressly limited by the mortgage terms. An action on the covenant is not available if the lender seeks foreclosure. The vast majority of Ontario mortgages are full recourse to the mortgagor. Notice of Default and Demand for Payment. Regardless of which specific remedy is chosen by the lender following a mortgage default, the first enforcement step is to give a notice of default and demand for payment to the borrower and any other loan obligor. On commercial mortgage loans, the lender will also concurrently give the borrower a “BIA notice” (or “s. 244 notice”), which is a 10-day notice required to be given to certain insolvent debtors before enforcement under &sect;244 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (the “BIA”). If required by the terms of any applicable intercreditor agreement, these notices may also be required to be given to other secured creditors as well. Power of Sale. Power of sale is used in the overwhelming majority of Ontario residential mortgage realizations because it is faster (4-6 months) and less costly than judicial sale or foreclosure and preserves the lender's right to bring an action on the covenant to obtain judgement for the mortgage debt. However, power of sale is not an effective remedy without the ability to deliver possession of the mortgaged property, so a Court action for possession may be necessary if the property is occupied. But a mortgagee in possession of a mortgaged property is legally responsible under applicable law for various property-level liabilities (including environmental liabilities). For this reason, power of sale is usually limited to properties where the obligations and liabilities of a mortgagee in possession are known and can be performed without material risk/cost. There are strict timelines, notice protocols, and opportunities to cure associated with powers of sale under the Mortgages Act, which are mandatory and cannot be waived. A power of sale cannot be initiated until the mortgage is at least 15 days in payment arrears. The mortgagor then has 35 days to pay. During this “redemption period”, the lender cannot take any further enforcement or collection action proceedings of any kind. The borrower can redeem the mortgage by paying the amounts owing at any time prior to the mortgagee entering a binding agreement to sell the mortgaged property. If not redeemed by the borrower or a subsequent encumbrancer served with a copy of the notice of sale, the property can be sold by the mortgage lender, usually by private contract. In completing a power of sale, a lender has the duty to act in good faith and a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the time of the sale (failure to comply with these duties will expose the lender to claims of improvident sale). Although the Mortgages Act itself does not require a specific sale process, auctions are extremely rare. Generally, lenders are required to take reasonable and good faith efforts to ensure the property comes to the attention of the widest possible segment of the market for similar types of properties (by advertising, placing a sign on the property, listing it with a multiple listing service, obtaining appraisals, and ensuring the property is exposed to the market for a reasonable period of time). However, a lender is not required to wait for a market improvement in order to proceed with its sale remedy. Once the property is sold under power of sale, the lender must account for the sale proceeds and apply them in accordance with a “waterfall” specified in &sect; 27 of the Mortgages Act. Judicial Sale. Judicial sale is commenced by the lender commencing an action under the Rules of Civil Procedure (Ontario) seeking a Court-supervised sale of the mortgaged property and judgment for payment of its mortgage claim. Usually, it is coupled with a request for Court-appointed receiver under the Courts of Justice Act and/or for an order for possession. Judicial sale is slower and more expensive than power of sale, and is generally used only on larger commercial mortgage loans where the mortgage collateral is complex, where Court supervision is desirable due to borrower's expected level of resistance/lack of co-operation, where there are priority disputes between creditors, or if there are lender liability concerns (such as potential claims for improvident sale or environmental non-compliance). The borrower is entitled to file a request to redeem the property by paying the total amount due to the lender prior to the Court approving the sale. In judicial sale, the lender must obtain Court approval for the list price, marketing arrangements, the final purchase agreement, etc. Foreclosure. In foreclosure, the mortgage lender commences an action for foreclosure under the Rules of Civil Procedure (Ontario) seeking ownership of the mortgaged property free and clear of the mortgagor's right of redemption and claims of subsequent encumbrancers in full satisfaction of its mortgage debt. It is rarely used for several reasons. A borrower or subsequent encumbrancer generally has the right to “convert” the foreclosure action into a judicial sale action. The lender may ask the Court to “reconvert” the action back to foreclosure but only if it can demonstrate that the value of the property is unlikely to pay the mortgage debt (for this reason, foreclosure will rarely result in a windfall to the lender). Furthermore, a lender who successfully forecloses will assume responsibility for all existing environmental claims. A lender acquiring a mortgaged property by foreclosure is required to pay land transfer tax on the fair market value of the mortgaged property at a current rate of 2% (or 4% for properties in the City of Toronto). Finally, unlike power of sale or judicial sale, a lender seeking foreclosure cannot sue the borrower or any loan obligor on the mortgage debt without re-instating the borrower's right of redemption. Related Bankruptcy Matters. Most Canadian restructuring proceedings initiated by commercial mortgage borrowers occur under the Companies Creditors Arrangement Act (“CCAA”). Although these CCAA proceedings involve “stay risk” (mortgage payments are generally suspended during the initial 3-6 month period of the restructuring), “cram-down” risk between creditor classes is not a material lender concern due to the applicable rules governing class voting and approvals (all creditor classes must approve a proposed restructuring, with the approval of a majority of creditors in each class representing two thirds of the value of secured claims of each class). As a result, most mortgage lenders do not require the borrower to use an SPE or to deliver non-consolidation opinions in order to mitigate the potential impact of substantive consolidation (as in the U.S.). Residential mortgage borrowers who are natural persons cannot use the CCAA or the BIA to restructure their mortgage debts.

BRIEF DESCRIPTION OF PROCEDURE

Commercial leases which are unregistered (or registered after the registration of the subject mortgage) are generally subordinate to the mortgage, and at the option of the lender, may be terminated through the exercise of power of sale, judicial sale or foreclosure (unless a non-disturbance agreement (“NDA”) is in place between the tenant and the lender). Similarly, unless there is an NDA, the tenant under a subordinate lease may elect not to attorn to a prior mortgagee in possession or to a purchaser of the mortgaged property from a prior mortgagee and may instead elect to terminate its lease and vacate the property; although a tenant's right to terminate a subordinate lease can be avoided by a lender if the property is sold through a court-appointed receivership sale. Commercial leases registered prior to the mortgage must be recognized by both the tenant (i.e., tenant is obligated to attorn) and a mortgagee in possession/purchaser from the lender because of such tenant's prior interest in the mortgaged property. To eliminate any uncertainty arising from mortgage enforcement, NDAs with key tenants are common practice. Residential tenants are protected by special rules under the Mortgages Act and are not affected by mortgage enforcement.

EFFECT OF POWER OF SALE UPON LEASES

A mortgagee can take possession of the mortgaged property by physically (but peacefully) entering the mortgaged property for such purpose by obtaining a Court order for possession or by a Court appointment of a receiver. The choice is usually based on the borrower's expected level of resistance/non-co-operation, the nature of the mortgaged property and an assessment of the potential for any existing environmental non-compliance.

POSSESSION/RECEIVERSHIP

Under the Criminal Code, R.S.C. 1985, c. C-46, &sect;&nbsp;347 (Canadian Federal legislation), it is an offence for a lender to charge an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 60% per annum on the credit advanced under an agreement. This annual rate is calculated including all fees payable by the borrower (whether or not characterized in the loan documents as “interest”). Under the Interest Act, R.S.C. 1985, c.1-15, &sect; 8, lenders may not charge “default interest” on mortgage loans secured by real property in Canada (i.e., an interest rate that is higher following default than prior to default). This general restriction includes fines, lump-sum bonuses, penalties and other “disguised” interest rate hikes after default, as well as interest rates that are structured as discounts or incentives (i.e., lower rates payable so long as there is no default). “Default interest” will not include compound interest (interest on overdue interest at the same interest rate) or a “prepayment charge” (unless the prepayment charge is triggered by a loan default or lender realization). This prohibition on “default interest” has been considered many times by Canadian Courts at all levels, and these Courts have generally upheld this prohibition in the context of all types of avoidance schemes and structures. Courts have been willing to accept interest rate “step-ups” triggered by the expiration of time only (i.e., unrelated to default), provided that they are used only in freely negotiated commercial mortgage loans and are not structured in a manner that offends the clear intention of this statutory prohibition. Canadian Federal legislation (Interest Act, R.S.C. 1985, c. I-15 &sect;&nbsp;6) also requires that every mortgage of land that is payable by blended payments (typically, an amortizing mortgage loan) must contain a statement showing the equivalent interest rate calculated on a yearly or half-yearly basis, not in advance. If the mortgage does not contain this statement, no interest at all is payable. Interest only mortgages are not required to include this statement. Where the interest is calculated on any basis other than yearly or half-yearly, not in advance, a statement of the equivalent yearly or half yearly interest rate, or a concordance chart, will be included in the mortgage to comply with this disclosure requirement.

USURY CEILING

USURY EXEMPTIONS

Unless prepayment is expressly permitted by the mortgage terms, Canadian mortgages are fully closed to prepayment at any time prior to maturity. Where prepayment is permitted by the mortgage terms, prepayment charges which protect yield maintenance over the remaining term to maturity will be enforceable provided that the prepayment is voluntary. However, a prepayment charge will not be enforceable upon lender acceleration or upon a lender “resorting to its security” (i.e., enforcing a mortgage remedy of sale or foreclosure). Under Canadian Federal legislation, a mortgagor who is an individual has the statutory right to prepay any closed mortgage loan (residential or commercial) with a term exceeding 5 years at any time after the first 5 years of the term upon payment of a penalty equal to 3 months' interest only. (Interest Act, R.S.C. 1985, c. I-15 &sect;&nbsp;10(1)). Mortgagors cannot contract out of this prepayment provision. Corporations, joint-stock companies, partnerships, trusts settled for business or commercial purposes, unlimited liability corporations and other entities are not entitled to this statutory prepayment right (Interest Act, &sect; 10(2)), and must negotiate with lenders for a right to prepay (generally with a prepayment charge) or for a right to defease.

PREPAYMENT PREMIUMS AND SIMILAR AMOUNTS

There are no unusual formalities to be observed by guarantors. However, it is highly recommended that independent legal advice be obtained in circumstances where a guarantee is provided by any person who is either unrepresented, unsophisticated or whose interests otherwise appear to be materially different from those of the borrower (i.e., a non-owning spouse).

GUARANTY

GENERAL

STATUTE OF LIMITATIONS: Generally the limitation period for bringing an action under a mortgage is 10 years from when the action first arose (including an action for possession or recovery of land, an action on the covenant to pay, or routine enforcement of mortgage remedies) (Real Property Limitations Act, R.S.O. 1990, c. L15). Actions on guarantees are subject to a 2-year limitation period.

STATUTE OF LIMITATIONS

The statutory form of discharge will release the mortgage and other registered collateral security from title.

REQUIREMENTS FOR RELEASE OF LIEN

There are no homestead issues applicable in the Province of Ontario.

HOMESTEAD ISSUES

In the case of a matrimonial home owned by one spouse, the other spouse's consent is required to grant a mortgage. The non-owning consenting spouse should get independent legal advice.

COMMUNITY PROPERTY

There are only nominal registration fees payable on registration of a mortgage and related security.

MORTGAGE TAX

While a choice of law provision in a credit agreement involving assets in Ontario is enforceable, mortgages of Ontario real property will be enforced in accordance with the laws of Ontario regardless of any purported choice of law provision.

CHOICE OF LAW

Domestic Canadian mortgage lenders are generally regulated either federally (such as a bank or a federally incorporated insurance company or trust company) or provincially (such as a provincially incorporated insurance company or trust company, or any private lender including mortgage brokerages). While there is no statutory “safe harbor”, non-resident mortgage lenders may be able to avoid federal or provincial licensing and regulation for individual, “one-off” mortgage loan transactions by following certain protocols generally intended to avoid establishing any physical presence or carrying on business by the lender in Ontario, but transaction-specific legal advice is recommended.

LENDER QUALIFICATION

A mortgagee taking possession or control of an Ontario mortgaged property can be held liable for clean-up of hazardous materials and related third party claims due to broad liability provisions under the Environmental Protection Act, R.S.O. 1990, Chap. E 19. For this reason, most mortgage lenders (i) require a clean environmental assessment of the mortgaged property prior to the initial loan advance, and (ii) where possible, an updated environmental assessment prior to taking possession of a mortgaged property in order to facilitate the lender's sale of the property at the best possible price and to avoid lender exposure to unexpected environmental claims.

ENVIRONMENTAL LIEN LAW ISSUES

The Mortgage Brokerages, Lenders and Administrators Act, 2006 S.O., Chap 29, licenses and regulates mortgage lenders carrying on the business of making loans secured or to be secured by a charge on real property situated in Ontario. These requirements do not apply to “financial institutions” (generally, all banks and provincially regulated insurance and trust companies). The Act does not regulate the amount of fees which can be charged, but requires cost of borrowing disclosure on mortgage loans made to natural persons (excluding loans for business purposes). Payment of fees in advance is not permitted on loans of $400,000 or less.

ANY PROHIBITION OR SPECIAL RULES REGARDING LOAN APPLICATION, LOAN FEES OR COMMITMENT FEES

Residential mortgage transactions typically require a relatively simple form of report as to title and registration in the lender's standard form which (usually) does not require a formal legal opinion as to enforceability of the mortgage. Commercial mortgage loans usually require a formal legal opinion as to existence of each loan obligor, due authorization, execution and delivery, and enforceability of the mortgage documents. There is no standard form for these legal opinions, but they generally share similar assumptions and many common qualifications.

OPINIONS

Under the Construction Act, R.S.O. 1990, Chap. 30, a mortgage taken with the intention of financing an improvement (a “building mortgage”) will lose priority to all construction liens against the mortgaged property (whenever registered) to the extent of any shortfall in the statutory holdback required to be maintained by the property owner (generally 10% of the cost of all completed work and materials, although the holdback requirement will be increased by unpaid claims for such work and materials of which the owner has actual notice of the requested lien claims). To protect against this potential loss of priority, construction lenders typically deduct the applicable statutory holdback amount from their mortgage loan advances, and advance the holdback amount only when the lender is satisfied that all lien claims have expired. In addition to priority based on a holdback deficiency, lien claimants will also have full priority over any mortgage advances which are made after the time that any lien claim has been registered against the mortgaged property (whether or not the prior mortgagee has actual notice of such lien claims). This priority will benefit all future lien claimants as well (even those not registered at the time of the advance). For this reason, a mortgage lender should always subsearch title to the mortgaged property prior to making any loan advance in order to ensure there are no construction liens registered against the mortgaged property at the time of advance and should also verify that it has not received notice of a construction lien. Lien claimants cannot contract out of their lien claims or priorities (that is, lien waivers are not effective and are never obtained).

CONSTRUCTION LIENS

Title insurance is usually required for Ontario commercial mortgage loans and for many residential mortgage loans as well. Several U.S. title insurers operate in Ontario through Canadian subsidiaries in a very similar manner to their U.S. counterparts. The full range of endorsements, tailored to Ontario law, is available. There is no Ontario legislation specifying a minimum premium amount. It is worth noting that new/updated property surveys are typically not required by Canadian title companies, yet standard survey endorsements are still provided in lender policies.

TITLE INSURANCE

FOR FILING: “Desktop” filings of PPSA financing statements can be made to the Personal Property Registry, an electronic registry that serves the entire Province and allows both individuals and organizations to record security interests in personal property. Personal property includes goods, a document of title, chattel paper, investment property, an instrument, money, or an intangible.

LOCATIONS

A security interest in a fixture may be registered by a PPSA creditor against a mortgaged property in the land titles system by a PPSA creditor under &sect; 54 of the PPSA (a “Notice of Security Interest” or “fixture filing”). A security interest in goods that attaches before the time that the goods become fixtures has priority over the interests of the current owner of the mortgaged property and all existing mortgages (for advances already made). However, if the land is sold or remortgaged (or if there are new advances under any existing mortgage), the PPSA creditor will lose its priority to new interests acquired in the mortgaged property without knowledge of the security interest unless a fixture filing is registered by the PPSA creditor against the mortgaged property in the proper form. (PPSA &sect; 34). The sole remedy of a PPSA creditor with a prior claim to a fixture is to cause its collateral to be removed/repossessed (subject to giving certain notices to the land owner or its solicitor) but it will be responsible for any physical damage in doing so. &nbsp;

Ontario

Mortgage Law Summary

Continue reading the
Mortgage Law Summary for Ontario

Ontario

Mortgage Law Summary

Continue reading theMortgage Law Summary for Ontario

Continue reading the
Mortgage Law Summary for Ontario