Lender Fails to Provide Discharge Statement: Power of Sale Nullified

A borrower owned a commercial property against which five collateral mortgages, in varying amounts totaling over $3 million, had been registered in favour of a lender.

The mortgages went into default, triggering the lender’s power of sale. To that end, the lender issued a Notice of Sale respecting each of the five mortgages, and negotiated a conditional agreement to sell the property to another party. That first deal fell through, however.

Shortly after, the borrower advised that it wanted to redeem the mortgage and had the funds to do so. The borrower asked the lender for a mortgage discharge statement, but lender – assuming it was a stalling tactic designed to delay the power of sale – never provided one. Instead, and having already given the required Notices, the lender simply continued to take steps under its power of sale, negotiating a second deal to sell the property to a third party.

The borrower then went to court in advance of the intended closing date, asking for a declaration that the lender’s agreement to sell the property was null and void and that the mortgages could be redeemed and discharged.

The court granted the borrower’s request. It held that on the date that the lender’s sale agreement with the third party was executed, the lender’s right to enforce its mortgage remedies had actually been suspended under certain provisions of the Mortgages Act. Those provisions are triggered when a lender “without reasonable excuse” fails to provide a mortgage discharge statement within 15 days of receiving the borrower’s request to do so; moreover, the state of suspension continues until the statement is supplied.

This was precisely what had happened here. The court observed that the preparation of a mortgage discharge statement is a relatively straightforward matter, and a lender must have a compelling reason to refuse to provide one if requested. This will mainly occur where the request is not made in good faith.

In the case at hand however, the lender had no “reasonable excuse” to withhold or fail to supply the mortgage discharge statement. Although the lender may have been skeptical that the borrower had sufficient financing to pay off the mortgage, it only asked for proof after the 15-day period specified in the Mortgages Act had already expired, and only after the borrower asked for a mortgage discharge statement a second time. In fact, the evidence tendered to the court confirmed that the borrower had sufficient funds at the time of the first request and had made the request in good faith.

The court surmised that the lender’s refusal to supply the mortgage discharge statement was actually driven more by its desire to sell the property pursuant to its power of sale than to allow the borrower to redeem the mortgage.

The court accordingly declared the sale agreement between the lender and the third party to be a nullity; it ordered the borrower to pay the $3,365,000 into court and directed that the mortgages were to be discharged pursuant to certain other provisions of the Mortgages Act. See: 1414391 Ontario Ltd. v. Graff, 2015 (ONSC).