Mortgage Sale and Foreclosure Proceedings in Manitoba – Unregistered Amending Agreements
By Dan Ransom on 2017/02/28
The mortgage sale and foreclosure process in Manitoba is becoming more complex all the time. One recent development that has contributed to the complexity is the strict enforcement by the District Registrars of Manitoba of the rules relating to mortgage amending agreements and, more specifically, mortgage amending agreements that have not been registered against title. This is a change from past practice of the District Registrars.
A Latent Problem
It is fairly common to find a registered mortgage in Manitoba that is affected by an unregistered mortgage amending agreement. In the case of diligent borrowers (i.e. mortgagors) who make their payments and maintain their mortgage in good standing throughout the life of the mortgage, the problems associated with an unregistered amending agreement may never manifest themselves. When a borrower defaults on such a mortgage, however, and the lender (i.e. mortgagee) commences mortgage sale and foreclosure proceedings by filing a Notice of Exercising Power of Sale (the “NEPS”), significant problems can arise.
The reasons for which a lender may not register an amending agreement vary. Some reasons include: oversight; trying to minimize costs for the borrower; not understanding the risks involved in failing to register an amending agreement; or not realizing that extending the term of the mortgage upon even minor revised terms can be interpreted as an amendment of the mortgage. Whatever the reason, the unregistered mortgage amending agreement is something lenders would be well advised to avoid – now more than ever.
By the time a lender has exhausted its patience with a borrower and called in the lawyers to commence mortgage sale and foreclosure proceedings, there are often subsequent encumbrances registered against title (e.g. in favour of judgment creditors such as credit card companies, Canada Revenue Agency, etc.). This is when the latent problems associated with an unregistered mortgage amending agreement surface, and cause potentially significant issues for the foreclosing lender.
Recent Developments at The Property Registry
(formerly known as the Land Titles Office)
Recently, the District Registrars in Manitoba have begun to take a firm position on unregistered amending agreements in mortgage sale and foreclosure proceedings. Where there are encumbrances on title subsequent to a mortgage, and the terms of that mortgage have been amended without having registered the amending agreement in the Land Titles Office (Property Registry), the District Registrars will not issue an Order for Sale without one of the following:
- consents from all subsequent encumbrancers, acknowledging the amendments and that such may have affected their security;
- a postponement, postponing the subject mortgage to the subsequent encumbrance; or
- a court order authorizing the lender to continue.
None of these options are desirable for the lender, particularly in circumstances where there is little or no equity in the subject property and the subsequent encumbrances are for significant dollar amounts (which can be an all too common occurrence). Let’s consider the options a little more closely.
Option 1: Obtain Consents from Subsequent Encumbrancers
It may be worth a phone call to see whether a subsequent encumbrancer might provide its consent. In the vast majority of cases, however, such consent will not likely be given. If there is enough equity in the subject property to pay out all encumbrances, a subsequent encumbrancer may consent so as to allow the property to be sold and its encumbrance paid out. On the other hand, the subsequent encumbrancer might say, “if there is equity, then why don’t you, first mortgagee, postpone to our encumbrance?” Or they may just say “no”.
Option 2: Postpone the First Mortgage to the Subsequent Encumbrances
Having to postpone the entire mortgage to a subsequent encumbrance will in many cases create harsh and unfair results for the foreclosing lender. That would certainly be the case when the “amendment” of the mortgage is something as minor as extending the term of the mortgage, or even lowering the interest rate. After all, the reasonable expectation of the subsequent encumbrancer at the time it registered its encumbrance was that the mortgage would have priority.
When the unregistered amendment to the mortgage is more significant, such as increasing the amount of the mortgage and advancing more money, it may be unfair to the subsequent encumbrancer to give priority to a re-advance by the lender. A partial postponement may be a fair solution in those circumstances, but that does not appear to be an option at this point in time (unless perhaps by court order). The District Registrars require a full postponement of the mortgage.
In many cases, there will be little or no equity in the property, so postponement may result in a significant loss by the lender. In cases where there is clearly enough equity in the property to pay out all encumbrances on title, then the path of least resistance for the lender may be to postpone its mortgage and get paid last from the mortgage sale proceeds. That said, even when there appears to be enough equity, the decision to postpone requires careful consideration.
Option 3. Obtain a Court Order Authorizing the Mortgage to Continue Proceedings
As the District Registrars’ refusal to issue Orders for Sale is a recent development, there is not yet any guidance from the courts as to what circumstances will allow the court to authorize the lender to proceed. We will update this article as cases make their way through the courts.
There are many circumstances in which an “unregistered amending agreement” may impact on mortgage sale and foreclosure proceedings. Each situation is unique, and will have to be given careful consideration in order to determine the course of action that will allow the lender its best opportunity to collect the debt owed to it.
Given the complexities involved and the potential costs to lenders, it would be prudent lending practice to register a mortgage amending agreement in the Land Titles Office (Property Registry) for every mortgage amendment, however small. For mortgages that are currently affected by an unregistered amending agreement, but which are in good standing and not affected by subsequent encumbrances, it would be prudent to register an amending agreement at the earliest opportunity. This will mean a little extra cost to every borrower who extends or amends their mortgage. The lender who is not prepared to do that will continue to face significant exposure when “unregistered amending agreements” surface in the context of mortgage sale and foreclosure proceedings.
If you are a lender and need guidance with this or other complex issues relating to mortgage sale and foreclosure proceedings, we would be happy to assist you.
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