February 7, 2022 | Christianah
Mortgages are a necessity in today’s world. With property prices increasing daily, many individuals find it financially challenging to purchase houses without getting a mortgage. For investors, having the appropriate debt leverage is critical to returns.
A mortgage can be defined as a loan given by a mortgagee (usually a bank) to a mortgagor (borrower) used to purchase a house or other properties. Mortgagees’ interests are subject to certain important priority rules. When there’s a foreclosure, lenders are reimbursed based on the order in which mortgage registration occurred over the property. While this is usually clear, the water gets muddy when two lenders legitimately believe they each respectively have first priority interest over the property. In today’s blog post, we will examine the case of CIBC Mortgage Inc v Computershare Trust Co. of Canada 2016 ONSC 7094 and the mortgage priority rules that apply in the occurrence of a fraudulent discharge.
In this case, the borrowers secured a loan from Computershare over their property. Subsequently, they registered a discharge over the mortgage given by Computershare without Computershare’s knowledge. The borrowers then obtained another mortgage from CIBC without disclosing their indebtedness to Computershare. The CIBC charge was registered over the property on the confidence that it had the first charge. The borrowers obtained another loan from Secure Capital, representing only one mortgage registered against the property (CIBC mortgage). As you may have guessed, the borrowers defaulted on their payment obligations, and Computershare discovered that its mortgage had been fraudulently discharged. The property got sold according to a court order, and the court had to decide who had priority over the proceeds.
Decision at the Ontario Superior Court
The trial court held that although Computershare and CIBC were innocent mortgagees, Computershare should be given priority, as its mortgage had been fraudulently discharged by a fraudulent instrument within the meaning of the Land Titles Act R.S.O. 1990, c. L.5. By relying on the case of Lawrence v. Wright 2007 ONCA 74 and the “deferred indefeasibility” theory, the court held that the registration of the void discharge does not give subsequent mortgagees (in this case CIBC) good title. It was the view that CIBC had the opportunity to investigate further and evade the fraud. Computershare had already closed its mortgage transaction and could not be reasonably expected to investigate or suspect the fraudulent discharge.
Decision at the Divisional Court
The decision at the Ontario Superior Court amassed a lot of criticism from those who thought it sabotaged the purpose of the land registration system. The register is a “mirror” and “curtain” of all rights concerning a property. It doesn’t require a mortgagee or purchaser to search behind the title. Therefore, the Divisional Court reversed the decision of the trial judge and held that CIBC had priority over Computershare. The court held that although the borrowers’ behaviour was indeed fraudulent, there was no fraud in the CIBC mortgage, thus creating a valid mortgage.
In conclusion, although mortgages are instrumental in today’s market, they are not without risks, both for the mortgagor and the mortgagee. Parties should therefore consider obtaining title insurance to protect their interest.
At Northview Law, we would love to discuss any real estate concerns you may have. You can book a free consultation with Northview Law by following this link or contact us at 416-639-7639. We look forward to hearing from you soon.