Most mortgagors repay their indebtedness to their mortgagees. Sometimes, however, a mortgagor is unable or unwilling to fulfill its obligations to its mortgagee and the mortgagee must consider enforcing or realizing its mortgage security. This usually involves a sale of the mortgaged realty by the mortgagee, and sometimes it involves the mortgagee becoming the owner of the mortgaged property (foreclosure), and occasionally it involves the mortgagee, either by itself or utilizing an agent or receiver, taking possession of the property (usually pending a sale or foreclosure) and collecting the rents or other income derived from possession and control of the mortgaged property.
When a mortgagee attempts to realize its mortgage security, there will sometimes be certain defences which the mortgagor can raise which, if accepted by a Court considering the matter, will block the mortgagee from proceeding further. Two of these defences were considered in the Prince Edward Island Court of Appeal case between Ella and Orville Lewis (the mortgagors) and Central Credit Union Limited (the mortgagee), judgment in this case having been issued May 31, 2012, (hereinafter the "Lewis Case"). The Court agreed with the mortgagors' defences which were:
(i) that at least one of the mortgagors (Ella), on the basis of the evidence presented to the Court, did not have a sufficient understanding of the mortgage and related financial transactions in order to have provided a valid consent to participating in the mortgage, and that she was in a particularly vulnerable position with her son (the other mortgagor, Orville), in effect, taking advantage of her willingness to join in the mortgage; and
(ii) that the mortgagor Orville did not receive consideration or value in exchange for mortgaging his interest to the mortgagee.
An interesting aspect of the first-mentioned defence is that lack of any consideration, value or indeed any benefit flowing to the mortgagor Ella was a substantial component of her defence of not having provided a sufficiently "informed" consent to the mortgaging transaction and that she was in a vulnerable position. In fact, the case law clearly reveals that lack of informed consent, vulnerability and giving up something of value without getting anything in return are factors that frequently appear together in cases like this. This can be particularly seen in the situation of a guarantor of the obligations of another person who, by virtue of the other person's relationship to the guarantor, gets something of value from the guaranteed transaction, whereas the guarantor gets nothing, with the guarantor often being susceptible to being "pressured" into participating in the guarantee transaction out of motivations such as love or fear.
It is informative for lenders to consider the Court's review and analysis of the mortgage transactions dealt with in the Lewis Case. Note in particular:
- The defence of absence of informed consent and vulnerability. This defence was successfully raised by Ella. To quote the Court in its recitation of the facts of this case: "Ella Lewis is the mother of Orville Lewis and is over 80 years of age. She had little formal education. She was not knowledgeable in business affairs. She stated that she had deep regard for her son and relied heavily on his advice and ability. She was never involved in the appellant's (her son's) business (a farming operation). She stated that she was aware the appellant was having financial difficulty but was not fully apprised of his debt situation". Mortgaging her interest in the property benefited her son (Orville) in his (financial) relationship with the mortgagee credit union. Ella received absolutely nothing of value for so mortgaging. The Court emphasized that the mortgagee credit union was fully aware of Ella's situation, including, in particular, her vulnerability (in relation to her son's wishes) and her lack of business/financial understanding. With such knowledge, the mortgagee became obligated to try and minimize the effect of such vulnerability and lack of business/financial understanding, which the court observed would have been most likely accomplished by insisting that Ella obtain independent legal advice before committing herself. This the mortgagee did not do. The mortgage was prepared by Orville's lawyer so that any legal advice obtained by Ella came from a source which was not independent of the interests of Orville (and the mortgagee credit union). In this particular case, there was an additional factor which weighed against the mortgagee; at a later date when another mortgage was granted to the mortgagee involving Ella, the credit union did take the trouble to ensure that Ella had truly independent legal advice. An interesting variation on this type of scenario is where a vulnerable guarantor receives legal advice and the Court concludes that, notwithstanding that the lawyer providing such advice was not independent (of one or both of the primary debtor and the creditor), the advice given wasadequate and sufficient in order to enable the guarantor to provide informed consent to the guarantee transaction.
- The defence of absence of consideration or value. This defence was successfully raised by the mortgagor, Orville. The need for consideration is applicable to real property mortgages and to contracts generally, excepting possibly for covenants given under seal. In the Lewis Case, Orville borrowed $220,000.00 from the mortgagee credit union in November of 2003. The mortgagor did not then require that it be provided with any security. In July of 2004, the mortgagee, by then not feeling comfortable with its (lack of) security position, asked Orville to mortgage his interest in some land. The Court acknowledged that the mortgage was given in exchange for the mortgagee "continuing to allow the loan to exist without taking any collection action". However, the Court observed that "there (was) no evidence of default or of enforcement or forbearance from enforcement (by the mortgagee)". The mortgage was stated to be payable on demand, but (again) there was "no evidence (before the Court) that (the mortgagee) had demanded or was going to demand repayment at this…time". Of critical importance to lenders in this situation is the need to go through the "formality" of either making a formal written demand, or making a demand with the proviso that such demand will be withdrawn (or no demand will be made in the immediate future) in exchange for the debtor providing security. Forbearance from enforcing security has long been recognized as valid consideration in this type of a situation. "Reading between the lines", one suspects that the credit union did make it clear to the mortgagor that it would not maintain the loan, and at least, by implication, that it would require repayment of the loan, unless security was then provided, however, officers of the credit union simply omitted to document what they had communicated to Orville.
The judgment in the Lewis Case is also of interest to mortgage lenders by reason of these additional matters:
(a) In an action by the mortgagee credit union under another related mortgage granted by Orville, Orville argued that his commitment should be vitiated by reason of the fact that he was under " financial duress" when he provided the mortgage. The Court quickly disposed of this, pointing out that while Orville was, no doubt, under considerable stress because of his financial situation, that stress was "of his own doing". If that kind of defence was accepted by the Courts, then very few mortgages given in "workout" situations would be valid.
(b) Orville also defended on the basis that the amount of the debt secured and the interest rate applicable thereto did not appear in the mortgage document. This defence was not pursued with any vigour, and the Court did not comment on it further. Hopefully, such a defence will never be accepted, otherwise utilization of "all obligations" mortgages will have to cease. If it becomes legally necessary to include in the mortgage document the precise amount loaned and the interest rate applicable thereto, in other words, if the terms of any loan to be secured by a mortgage have to be included in the mortgage, then this type of mortgage can only be used to secure presently existing loans where the precise terms thereof have been fully worked out. The flexibility available to both creditors and debtors in utilizing "all obligations" mortgages would be lost.
(c) In considering the defence of vulnerability and lack of informed consent, the Court distinguished between these situations:
(i) where a creditor loans to one person and takes a guarantee (typically secured) from another person, the guarantor being often, although not necessarily, the spouse of the primary borrower; and
(ii) where a creditor structures a loan so that it is made to both the person who would otherwise be the primary borrower plus another person (again, typically, but not necessarily, a spouse) who is vulnerable, with security being taken from the vulnerable person alone, or from each of the vulnerable person and the other borrower.
The Court pointed out that lenders must be vigilant to assure themselves that the guarantor referred to in the first of the above-described situations receives - if necessary - independent legal advice. It is this writer's view that lenders should also be vigilant in situations similar to the second of the above-described scenarios, that is, where both parties are named as joint borrowers. This is because some lenders and their (primary) borrowers will seek to minimize a subsequent attack on the guarantor's promise (and the security provided by the guarantor for such promise) by making it appear that the guarantor is not merely a surety, but rather a co-borrower obtaining the benefit of the loan, along with the other obligant. In fact, in this scenario, it is frequently the case that the nominal borrower (who in substance is really a guarantor) receives absolutely no benefit from the loan.