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Guarantor Has Right to Know Mortgage Sale Details

A recent court case settles the issue of whether, in a mortgage sale by a privately-appointed receiver, the guarantor of the underlying debt is entitled to know the details of a sale agreement prior to closing.
 
Baysong Developments Inc. (“Baysong”) had borrowed more than $17.5 million from the Bank in exchange for a mortgage over a number of development lots it owned in Durham Region.   Nourmansouri (“N”) was the principal of Baysong and had personally guaranteed more than $12 million of that principal debt.  The mortgage was payable on demand, and included a provision that upon default the Bank was entitled to appoint a receiver to sell the property, and that Baysong would agree and consent to any such appointment.
  
When Baysong defaulted on the mortgage, the Bank demanded full payment.  The parties then signed a Forbearance Agreement, acknowledging the amount owing, and confirming the validity of the Bank’s security.
 
In keeping with the mortgage terms, the Bank appointed a private receiver.  However, Baysong refused to consent, despite the mortgage provisions. Baysong claimed that the mortgage and later agreement were all subject to the commercial reality that these were development lands subject to various ancillary agreements with builders, the municipality and other developers.  It promised to keep working at finding refinancing opportunities that would satisfy the Bank.
 
Nonetheless, the Bank brought an action for summary judgment.   It invited Baysong to redeem the mortgage if it wished, but required it to do so before the end of October 2010.  Meanwhile, the receiver took steps to market and sell the property, and in fact elicited an offer from a third party which culminated in a binding agreement of purchase and sale with a scheduled  closing dated in February of 2011.    
 
Baysong requested a copy of the purchase and sale documentation, but the Bank refused.   It felt it had no obligation to provide details of the agreement or account for the sale proceeds until after closing, and did not want to risk any potential interference with the pending sale. However – and despite the normal rule in a power of sale that the right to redeem ends once a binding agreement to sell the property is entered into – it gratuitously offered to allow Baysong to redeem the mortgage and pay the outstanding amount in full, prior to the scheduled closing date.  In that case the sale to the third party would be aborted.
 
Baysong brought a motion to force the Bank to produce copies of the sale agreement and supporting documents.  Without them, it claimed it would not be informed of the sale’s progress and could not even monitor its own obligations relating to the development of the land.
 
The court was asked to resolve the matter.   It began by confirming the current state of the law:   there indeed appeared to be no specific Rule of Civil Procedure to compel the Bank to produce the documents, nor was there any legal duty on a lender exercising its power of sale to consult with, advise, or seek approval from a borrower or guarantor. Nonetheless, the court was mainly concerned for N, the guarantor.   While the Bank had no legal duty to consult with Baysong, a guarantor such as N who had the express right to redeem anytime before closing should not be prevented from obtaining disclosure of the relevant documents.    Given that N was personally liable for more than $12 million, fairness dictated that he should allowed to be fully aware of the circumstances of the sale which would affect his liability.
 
But even aside from this concern for fairness, the court had to balance the effect on all the parties:  the potential prejudice to the Bank was outweighed by the prejudice to Baysong if the upcoming sale did not address its various other obligations and arrangements in connection with the land’s development.  These included subdivision and site plan agreements, letters of credit, construction lien and trust obligations, investments, etc.
 
In arriving at these conclusions, the court focused on the requirement of “proportionality” in resolving disputes, which was embodied in the newly-enhanced Rules of Civil Procedure.  
 
In the end, an Order was granted compelling the Bank to provide a copy of the agreement of purchase and sale, together with any relevant supporting documentation, with both the identity of the buyer and the purchase price and related financing terms fully revealed.  See Bank of Montréal v. Baysong Developments Inc., 2011 (ONSCJ).