May 2019

A lender ("Lender 1") makes a particular loan (the "Loan") to a debtor (the "Debtor") on the security of a real property mortgage (the "Mortgage"). The Loan is for five million ($5,000,000.00) dollars and the loan agreement between Lender 1 and the Debtor provides for amortization of twenty-five years and a term of five years. Nearing the end of the initial five-year term, the Debtor decides that it wishes to refinance the Loan with a different lender ("Lender 2"). The refinanced Loan with Lender 2 may continue on precisely the same payment/repayment terms as were stipulated in the loan agreement between the Debtor and Lender 1, or they may be substantially the same lending terms, but with a change in the interest rate and/or a change in the initial term of the financing with Lender 2. In either case, the Debtor wishes to end up in substantially the same position that it had with Lender 1, except the Loan would now be with Lender 2 with, depending on what is agreed upon between the Debtor and Lender 2, slightly revised payment/repayment terms.

Lender 2 can secure its position in one of two ways:

(i)    by acquiring an entirely new mortgage from the Debtor securing an entirely new loan (from Lender 2), the proceeds of that new loan being used to pay out the (original) Loan owed to Lender 1; or

(ii)   by getting Lender 1 to assign its rights under and with respect to the Loan to Lender 2, together with an assignment of Lender 1's rights and interests under the (originally granted Mortgage).

What if Lender 1 takes the position that while it is to receive payout in full of the Loan, it is not prepared to assign the Loan and the Mortgage to Lender 2?

Section 6(1) of the Manitoba Mortgage Act (the "MMA") provides that:

"Where a mortgagor is entitled to redeem he may require the mortgagee, instead of giving a certificate of payment or re-conveying, and on the terms on which he would be bound to be re-convey, to assign the mortgage debt and convey the mortgaged property to any third person, as the mortgagor directs, and the mortgagee is bound to assign and convey accordingly". Section 6(5) of the MMA additionally provides that "This section has the effect notwithstanding any stipulation to the contrary."

Clearly, Lender 1 must assign the Loan and the Mortgage to Lender 2 where the Debtor pays the balance owing under the Loan to Lender 1 and directs and requires Lender 1 to assign to Lender 2. And this is so even if Lender 1 had previously got the Debtor to agree that when paying off the Loan, the Debtor would then only be entitled to a discharge, not get an assignment to a third party.

Two of the main reasons why a mortgagor - and its new intended lender - might prefer to have the original mortgagee assign the debt and the mortgage to the new lender are:

(a)  in most cases, it will be less expensive for the new lender to take an assignment of the existing loan and mortgage than for an entirely new mortgage to be in place; and

(b)  by taking an assignment of the existing loan and the mortgage which already exists and is in place (and presumably duly registered, etc.), the new lender should be able to gain priority over other parties who have acquired interests in the mortgagor's realty between the time that the existing mortgage was registered and the time that the new lender acquires the mortgage by assignment.

Section 6(2) of the MMA provides that the mortgagor's right to require its mortgagee to assign the mortgage to a third party is a right which is also exercisable by each encumbrancer.  So a second mortgagee has the right to tender payment (in full) to a first mortgagee and require the first mortgagee to assign its mortgage to the second mortgagee.  The Section also provides that: (i) if both the mortgagor and a subsequent mortgagee directs the Transfer to the prior mortgagee, the subsequent mortgagee's requirement to assign prevails over that of the mortgagor.  Finally, the Section specifies that where there are, say, three mortgages, the requirements to assign by the second mortgagee prevails over the requirement to assign issued by the third mortgagee.  IN other words, the highest ranking mortgage out of two or more mortgagees, all of whom wish to redeem a mortgage holding priority over all of them, has the overriding right to redeem the higher ranking of the requesting mortgagees - here, the second mortgagee - prevails over that of the third mortgagee.

Where another existing mortgagee wishes to pay off a prior mortgagee and get an assignment of the debt and the mortgage, Section 6(4) of the MMA stipulates that the mortgagor's entitlement to so direct the new lender or the other existing mortgagee is contingent upon the prior mortgagee being provided with "sufficient official certificates or evidence showing the number and order and amounts of the encumbrances and the names of the encumbrancors and also proof by statutory declaration of the existence of each subsequent encumbrance, and that it is wholly or partly unsatisfied, as the case may be." Thus the mortgagor/its new lender/the other existing mortgagee must ensure that the prior mortgagee (ie, the mortgagee being paid out) receives such documentation and information before or concurrently with the direction to assign. The word "encumbrance" is defined in the MMA to include a mortgage as well as "a trust for securing money, and a lien by registration of a judgment or otherwise, and a charge of a portion, annuity, or other capital or annual sum".