Purchaser's Knowledge of When Approval of Financing Given; Criminal Rate of Interest; Is an Application to Discharge a Mortgage Sufficient Evidence of Clear Title? #194

By Gerry Neely
B.A. LL.B

What are the legal consequences for a purchaser whose Contract of Purchase and Sale was subject to raising a mortgage by October 19, 1990, when the purchasers were not made aware that the mortgage had been approved by that date. The purchasers contracted to use their best efforts and it was agreed that they had done so when they promptly applied through the local bank for a first mortgage, which had to be approved in Vancouver.

At the close of banking on October 19, 1990, the purchasers were told by the local bank that the branch had not been notified by Vancouver of any decision regarding the purchasers' application for mortgage financing. The purchasers passed this information on to the vendors and then advised them that they would not be proceeding with their purchase. On the following Monday the local branch received from Vancouver the approval given October 19.

The vendor sued for damages for the purchasers' failure to complete, and the purchasers counterclaimed for the return of their deposit. The decision of the Judge was that the contract would only be effective if the purchasers knew or had the ability to find out that mortgage approval had been given by October 19, 1990. Since the purchasers could not assure the vendor on that date that the money would be available to complete the purchase, there was no agreement after October 19 and the deposit was ordered to be returned to the purchasers.¹

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Cases involving Section 347 of the Criminal Code, which provides that an effective annual rate of interest which exceeds sixty percent (60%) is a criminal rate, continue to appear before the courts. In the most recent case, a high-rolling developer arranged a mortgage loan of $375,000 to complete the purchase of land for slightly more than $2,200,000 which he thought he would be able to flip for a price in excess of $5,400,000. He suggested to the money lender, an individual, that they jointly purchase the property and split the profit 50/50. The money lender was not interested because of the hassle involved, but agreed to advance the funds if the developer agreed to pay to the lender fifty percent (50%) of the estimated profit and the actual amount of cash advanced.

The estimated profit came to $1,300,000 and a mortgage was drawn securing repayment of $1,675,000. When problems arose, the money lender sued for that amount but was met by the defense that repayment of $1,300,000 on $375,000 three months after the loan was made, resulted in an effective annual rate of 1,406%. The money lender's argument was that this figure was a collateral advantage which was not interest, but predetermined profit. Since this argument contracted the money lender's own evidence, the Ontario Court of Appeal agreed with the defense that the $1,300,000 was uncollectible because it was interest which exceeded the lawful rate.

The moral - take a profit when it is offered.²

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The Norfolk v. Aikens decision raised a few questions which it left unanswered for another court to decide. One of those questions was whether a vendor could satisfy his obligation to clear his title of a mortgage merely by applying in the Land Titles Office to register the discharge.

The process of registration of a discharge or mortgage involves two steps. The first step is taken when the application is made to register the discharge, and the second when the Registrar of Land Titles has endorsed the register with a notice of cancellation. A period of anywhere from a few days to a few weeks may elapse before that notation is endorsed on the title.

The opportunity to decide this question, at least at the Supreme Court of British Columbia level, came when a purchaser who was unable to pay the purchase price on the date for closing, defended an action by the vendor for damages by arguing that the vendor had failed to clear title. In this case, the vendor's lawyer had protected his client's legal position by arranging to apply to register a discharge of mortgage on the afternoon of the date of closing.

The purchaser's argument was that clear title occurred only when the notice of cancellation had been endorsed on the title. The court disagreed, deciding that if the mortgage had been paid in full, the vendor had discharged his obligation to clear title when the application was made to register the discharge. Damages of $81,500 were awarded the vendor.³

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