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Limitation periods and demand notes, Autumn 2007

Lenders Be Careful
A recent decision of the Ontario Court of Appeal has confirmed that unless an action on a demand note is commenced within two years from the later of the date the funds are advanced or the date of last payment made on the loan, the claim will be statute barred.

Before 2004, under the previous Limitations Act in Ontario, an action on a demand note had to be commenced within six years from the date the cause of action arose.

New Limitation Period – Two Years
In 2004, new limitations legislation went into force in Ontario in an attempt to streamline the multitude of limitation periods for various actions.

The new Limitations Act, 2002 established a “basic limitation period” of two years from the date a claim was discovered or discoverable. Did this change the date the limitation period would run from for demand notes to the date of demand rather than from the date of the advance?

Majority Decision
In the recent decision of Hare v. Hare, the majority of the Ontario Court of Appeal was not convinced that the change in the wording in the previous Limitations Act from the date the cause of action arose to the date a claim was discovered or discoverable changed anything.

In this case a lender made a demand for repayment on a demand promissory note and then commenced an action within two years following the date of the demand; however, more than two years had elapsed from the date of the issuance of the note. The defendant submitted that the lender could not collect on the note on the grounds that the action was statutebarred under the new Limitations Act.

Justice Gillese writing for the majority noted that “There is nothing to be discovered by the lender before he or she becomes aware of the claim.” The majority held that the lender who commenced an action more than two years from the date of issuance of the note was statute barred and lost its right to sue on the note. The majority was of the view that to change the law so that the trigger for the limitation period would be the demand for repayment could potentially lead to “a limitless liability”.

Dissenting Decision
The decision of the three-Justice panel of the Ontario Court of Appeal was not unanimous. Justice Juriansz wrote a strong dissenting judgment.

Justice Juriansz was of the view that the effect of the new legislation reducing the limitation period from six years to two years had to be that the new limitation period would run from the date on which the claim was discovered and not when the cause of action arose. Justice Juriansz did not agree that the claim was “discovered” when the loan is made but rather “a claim based on a demand loan cannot be discovered until a debtor defaults following a demand for repayment.” Lenders must now be careful that they do not lose their right to sue with this shortened limitation period of two years. If the demand loan is not “refreshed” by repayments during the years from the date the funds were advanced the lender may be statute barred from recovering its debt. Hare v. Hare 277 D.L.R. (4th) 238 (Ontario Court of Appeal)

Mortgage Enforcement Costs Must be Paid to Obtain Discharge, Autumn 2006
Typically in mortgage enforcement we will issue a claim against a mortgagor for the amount of the mortgage debt and possession of the mortgaged property. If the claim is not defended we will sign default judgment for the amount in our claim and costs and with applicable interest and file a writ of seizure and sale in the amount contained in our default judgment. There are, however, additional enforcement steps that we may take, for example, we may issue a notice of sale and attorn rents if the property is occupied by tenants. As well, a mortgagee may incur expenditures with respect to the mortgaged property after we have obtained default judgment, for example, property taxes and property management fees may have to be paid.

An issue can arise as to whether a mortgagee who has reduced his claim to a judgment for the amount owed under a mortgage can recover additional costs incurred after the date of the judgment.

This issue was recently litigated in the Ontario case of Violi v. McLeod [2006] O.J. No. 1924. The facts were straightforward. On November 2, 2005 McLeod the mortgagee signed default judgment against the mortgagor Violi for $19,000 and a writ of seizure and sale was filed in this amount. Subsequent to receiving judgment and filing its writ of seizure and sale the mortgagee incurred $5,000 in additional costs in enforcing its security. The mortgagor demanded a discharge statement from the mortgagee on December 13, 2005. The discharge statement produced by the mortgagee included the additional $5,000 in costs incurred by the mortgagee. The mortgagor refused to pay the additional $5,000 in costs and litigation ensued.

The mortgagor argued that once a mortgagee’s claim has been reduced to a judgment the mortgagee must withdraw its writ of seizure and sale and provide a discharge of its mortgage if the mortgagor tenders the amount of the judgment plus applicable interest. The mortgagee argued that its standard charge terms contained a clause that provided that “...all costs, charges, legal fees and expenses that may be incurred in taking recovering and keeping possession of the land... shall be, with interest at the rate provided for in the charge, a charge upon the land in favour of the chargee...” Accordingly, the mortgagee argued that the expenses incurred by the mortgagee after it received judgment should be recoverable.

The court ruled partially in favour of the mortgagor holding that once a mortgagee has reduced its claim to a judgment the mortgagor is entitled to have a writ of seizure and sale filed against it removed upon tendering payment of the amount of the judgment plus applicable interest. However, the court accepted the mortgagee’s argument based on its standard charge terms and ruled that the mortgagee did not have to provide a discharge of its mortgage until the mortgagor had also tendered the amount of the additional enforcement expenses incurred by the mortgagee after it received judgment.

The case underlines the importance of ensuring that a mortgagee’s standard charge terms contain provisions as outlined above. Without it the mortgagee may well have not been able to recover the additional costs it incurred.