In our newsletter’s Vol. 27, No. 3 (December 2021) we reported on an Ontario case called 2544176 Ontario Inc. v. 2394762 Ontario Inc. There, a mortgage lender’s intended exercise of its power of sale to a third party was set aside by the court, because it had failed to provide the borrower with a discharge statement as required under the Mortgages Act (“MA”). Now, that ruling has been overturned by the Ontario Court of Appeal – with the court’s reasons sharply focused on protecting the lender’s innocent purchaser.
The facts were rather unique: The borrower bought a gas station for $5.4 million with $3.79 million in mortgage financing. The mortgage went into default, the lender made a demand, and then it delivered a Notice of Sale a month later. Soon after, the lender commenced power of sale proceedings privately.
But unbeknownst to the lender, after receiving the demand, the borrower agreed to sell the property to a third party for $8.7 million, with an imminent closing date. The lender only found out a day after the 35-day standstill of its power of sale proceedings expired, when the borrower requested a discharge statement. The lender never provided one, however, having concluded (incorrectly) that the borrower’s redemption period had already expired, that its rights were lost and that the borrower’s intended sale was not legitimate. The lender listed the property for sale the next day and agreed to sell to a third party.
The borrower succeeded in having a judge declare the lender’s putative deal to be void. It was struck at a time when the lender’s enforcement rights were suspended under s. 22(2) and (3) of the MA, for its failure to deliver the discharge statement. This negated the intended sale, the judge said.
The Court of Appeal reversed this outcome. It did so based on the protections afforded to the innocent third-party purchaser through the combined operation of ss. 35 and 36 of the MA, together with what are known as the “Safe Harbour” provisions of the Ontario Land Titles Act (in s. 99(1.1)). In particular, those Safe Harbour provisions protect innocent buyers purchasing under the power of sale process, by declaring them to have taken good registerable title – provided the seller/lender makes certain declarations or otherwise professes to have complied with the power of sale process. This allows the buyer to walk away with good title even if the lender and borrower are still in dispute over aspects of the power of sale.
Section 35 of the MA is where those lender declarations are given legal force: It states that certain documents (including a Compliance Statement or Compliance Declaration) are considered “conclusive evidence of compliance” with parts of the MA and are “sufficient to give a good title to the purchaser”. Section 36 of the MA goes on to further protect the purchaser’s title even where specified notice requirements have not been strictly complied with.
With these two Acts working in combination, the lender’s third-party buyer received good and legal title to the property in this scenario, notwithstanding the defects in the power of sale process about which it had no knowledge. Admittedly, at the time of the sale, the lender’s enforcement rights were indeed suspended under s. 22(3) of the MA, but at that point the borrower simply had a claim against the lender for the improper exercise of the power of sale. The innocent purchaser had no part in that dispute; rather, its Safe Harbour rights “trumped” that conflict and left it capable of relying on the lender-provided compliance declarations when registering its title in the Land Titles office. Accordingly, the Appeal Court overturned the judge’s ruling, concluding it had been an error to set aside the lender’s sale to the third party. See 2544176 Ontario Inc. v. 2394762 Ontario Inc., 2022 ONCA 529 (CanLII); rev’g 2021 ONSC 3067 (CanLII).