Foreclosure – Defence of Vendor/Mortgagor Against Deficiency Claim #72

By Gerry Neely
B.A. LL.B.

The Real Estate Council has recently advised licensees of the desirability of advising a vendor of the vendor's continuing liability to a mortgage lender under a mortgage granted by the vendor on property that is then sold to another person who agrees to assume the mortgage payments. The decrease in property values has given a number of vendors the unpleasant experience of being joined in a foreclosure action of property they may have sold two, three or four years earlier by a mortgage lender seeking to recover from the original vendor/mortgagor any deficiency that may result upon the sale of the mortgaged premises.

This experience has been made even more unpleasant by the discovery that the deficiency is substantially greater than it would otherwise have been because the rate of interest under the mortgage was increased at the time of the renewal of the mortgage by the purchaser. The main defence to this deficiency claim is that by renewing the mortgage, the mortgagee accepted the purchaser as the person primarily liable on the original debt and by doing so, released the vendor/mortgagor.

Although this argument has been unsuccessful in several cases reported over the past two years it was accepted by a Chambers judge in Vancouver recently. The decision offers a defence for at least a limited number of vendors/mortgagors whose circumstances are similar to those referred to in the case in question.

In 1981 the owner mortgaged his property to Royal Trust Corporation of Canada for $114,520.06 at 13 3/4%, to mature January 15th, 1982. Later in 1981 the property was sold to a purchaser who assumed the mortgage and then in January of 1982 renewed it for a further period of 4 years at 17% at increased monthly payments and a changed prepayment privilege. The renewal agreement stated that the original mortgage was deemed to be redated to January 15, 1982 and it contained the usual clause that all terms and conditions in the original mortgage remained in full force and effect except as amended by the renewal agreement.

Default having occurred, a foreclosure action was eventually started which for reasons not made clear from the Reasons for Judgment, took three years to reach the stage where the vendor/mortgagor was being asked to pay the deficiency of $44,819.00.

His defence depended upon the court deciding that the facts fell within the following criteria.

First, did the new debtor assume the complete liability? The court held that the combined effect of the original mortgage and the renewal agreement made the purchaser liable on the covenant.

Second, did the Royal Trust Corporation of Canada accept the purchaser as the principal debtor and not merely as an agent or guarantor? Although there was no specific release by the mortgagee of the vendor/mortgagor, the judge held that the renewal agreement created a new covenant to pay, that of the purchaser.

Third, did the mortgagee accept the new contract in full satisfaction and substitution for the old contract? Since all of the terms of payment were changed, the judge held that there was an implied acceptance of the purchaser's covenant to pay, in substitution for the covenant of the original vendor/mortgagor.

The consequence of these findings by the judge resulted in the discharge of the original vendor/mortgagor of any obligation to pay the deficiency.

1.

Royal Trust Corporation of Canada v. Chui et al,S.C.B.C. 1985 B.C.D. Civil 2768-13.

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