January 1997

The case which this comment deals with (the Bills Investments Case, decided by the Saskatchewan Court of Appeal on July 5, 1990, hereafter the “Bills Case”) is not a recent court decision. Nevertheless the ruling must be kept in mind by persons giving or taking what are commonly known as “blanket” or “wrap-around” mortgages.

What is blanket mortgage? By its nature, it must be at least a second mortgage, although in some cases, it could end up being a third, fourth or even a fifth mortgage. The core of what it’s about is that the mortgagor agrees with the mortgagee that the face amount of the blanket mortgage will include not only the “new” advances being made by the mortgagee to the mortgagor, but also the balance or balances outstanding on one or more pre-existing mortgage or mortgages held by third parties. The mortgagor will make loan payments to the mortgagee which include not only the amount required to service the debt arising out of the new advances made by the mortgagee, but also the amounts required to service the debt(s) under the prior mortgage(s). Provided all of those payments are made, the mortgagee agrees that he will make timely payments on the prior loan or loans thus keeping them in good standing. In other words, the mortgagee’s mortgage “blankets” or “wraps around” one or more pre-existing prior mortgages.

Why would a lender want to take a blanket mortgage, and why would a borrower want to give one. Consider the following:

(i)            For whatever reason, the prior mortgages are not to be paid off, and the blanket mortgagee wishes to take control of the loan repayment process for the prior mortgages. Perhaps the blanket mortgagee does not entirely trust the mortgagor to properly service the prior mortgage debt. One can see an analogy here to the situation where a mortgagee collects monies from the mortgagor (over and above repayment of the debt with interest) to ensure that the property taxes and/or the condominium common element expenses are properly paid. Failure to pay such amounts - or failure to pay the debt service on the prior blanketed mortgage(s) - would clearly put the blanket mortgagee’s position in jeopardy.

(ii)           The rate of interest stated in the blanket mortgage applies not only to the new advances being made by the blanket mortgagee, but also to the balance(s) outstanding under the prior blanketed mortgage loan(s), and, the interest rate(s) applicable to those other loan(s) are lower than the rate under the blanket mortgage. Thus the blanket mortgagee obtains an additional benefit (ie. in addition to the interest he collects on the new advances he has made) which is the interest differential between the blanket mortgage interest rate and the mortgage rate(s) on the prior blanketed mortgages. Incidentally, if getting the benefit of this interest differential is the mortgagee’s sole motivation to take a blanket mortgage, he can probably accomplish the same thing - without running some of the risks dealt with in the Bills Case by taking an “ordinary” (i.e., not a blanket) mortgage (which would be a second, third, fourth, or as the case may be, mortgage) with a higher interest rate.

(iii)          The property owner is selling his property subject to one or more existing mortgages which have what then appear to be very attractive (i.e., low) interest rates with relatively long terms. This will only work if the existing mortgages are assumable, but assume they are assumable. Also assume that the purchaser needs more money to pay the purchase price to the vendor (i.e., something over and above the amount covered by the purchaser’s assumption of the existing mortgages). That additional credit can come either from a new lender or from the vendor acquiring a take-back mortgage from the purchaser. In either case, the person extending the additional credit may find that a mortgage blanketing the prior mortgages is attractive because of the opportunity of getting the interest differential, plus the right to take control of servicing the debt on the prior mortgages. These advantages compensate for the relatively greater risk undertaken by holding a second, third, fourth, or as the case may be, other subsequent mortgage. Where the new credit is being provided on a relatively short term basis and the blanketed mortgages (with their longer terms and low interest rates) will continue after the blanket mortgage is paid off, the arrangement can be seen to be quite advantageous from the purchaser’s/mortgagor’s point of view.

In the Bills Case, after providing the mortgagee with a blanket mortgage covering one prior mortgage, the mortgagor argued that, in spite of the wording of the mortgage contract, the mortgagor should not have to pay interest on the amount owed under the prior blanketed mortgage loan. Its position was that it should only have to pay interest on the monies actually advanced to it by the blanket mortgagee. This of course would deprive the blanket mortgagee of the benefit of the interest differential. The mortgagor agreed that if the blanket mortgagee had made payments on account of the blanketed mortgage debt (no doubt to protect itself from a default by the mortgagor), then the blanket mortgagee would have been entitled to receive interest on any such “new” advances made by the blanket mortgagee. In other words, the mortgagor took the position that even if it had contractually promised to pay the blanket mortgagee interest on the prior mortgagee’s debt, since that debt was not incurred by reason of advances made by the blanket mortgagee, the mortgagor was not lawfully obliged to pay such interest and should be relieved of its promise.

The Court held that there were two principles involved. The first was the general rule that a mortgagee could only charge interest from the time when it advanced credit. This principle supported the mortgagor’s argument. However, the second principle was that, notwithstanding the first principle, if the parties have clearly agreed that the mortgagee is entitled to interest on credit not actually advanced by the mortgagee, then such an agreement will be enforced against the mortgagor. Obviously, this principle supported the position of the blanket mortgagee. The question then became, did the transaction evidence a clear intention by the parties that the mortgagor would pay the blanket mortgagee interest on the prior blanketed mortgage loan even though none of that loan had been advanced by the blanket mortgagee?

The Court decided that although there wasn’t a “black and white” statement in the mortgage that the mortgagor was to pay interest on the prior loan, the rest of the terms of the loan and the surrounding circumstances offered sufficient evidence that that indeed was the parties’ intent.

The Bills Case may suggest that in drawing a blanket mortgage, it would be helpful for the blanket mortgagee’s lawyer to include an unequivocal “black and white” promise by the mortgagor that the mortgagor will pay the mortgagee interest on the full (i.e., face) amount of the blanket mortgage including that portion which represents the prior blanketed mortgage loan or loans, notwithstanding that the blanket mortgagee may never make any payments out of its own monies on account of such prior loans.