October 2019

You are in the business of making real property mortgage secured loans, and you are approached by a person requesting a loan to be secured by a mortgage of such person's title to particular land.  You make what are currently considered to be prudent "credit checking" investigations with respect to the contemplated loan - in particular, you order, obtain and review a search of the proposed borrower's title to the subject land (which confirms that the title is in the name of who the borrower claims to be) and you request and obtain and review at least two pieces of the borrower's identification, including one piece of "photo identification" (which also confirms that the person indicated in such identification is one and the same as the person the borrower purports to be).  You may also make enquiries of the borrower as to how the borrower came to acquire the property, and the borrower advises that he/she acquired it by a previous purchase or acquired it by inheritance.  Although you do not make further inquiries in order to verify the alleged facts behind such acquisition (most lenders would not do so unless they had some reason to be suspicious, and this doesn't appear to be the case here), you have no reason to doubt the accuracy of the borrower's explanation of its acquisition of the land.

You approve the loan, take and register a mortgage of the borrower's land and advance funds. 

Subsequently, you discover that the land was previously in the name of person "A" and that a fraudster (person "X") forged a transfer of title to "X"'s co-fraudster (person "Y"), "Y" being your borrower.  Your borrower has not misrepresented himself/herself to you as someone other than the real person "Y", namely the co-fraudster, but, as noted, you did not believe and had no reason to believe that "Y" was a fraudster and was involved in what amounted to the theft of the land from the original (and proper) owner "A".

Two questions arise here:

(i)               is "A" entitled to have "Y"'s title cancelled and title to the land restored in "A"'s name? and

(ii)              is your mortgage - obtained by you bona fide and for value - also to be cancelled or should your mortgage "follow" the title back from "Y"'s name to "A"'s name, with the result that "A" is now (clearly unfairly) saddled with your mortgage and the obligation to repay "Y"'s mortgage loan?

Two recent (March, 2009) British Columbia Court of Appeal cases (the "Gill Case" and the "Oehlerking Case") deal with these questions.  In both of these cases, the Court held that the innocently deprived landholder ("A") was entitled to a cancellation of the title held by the co-fraudster "Y" and to the restoration of title back in "A"'s name, but that the innocent mortgage lender was not entitled to have its mortgage "follow" title back into the hands of "A".

The Court's holding that the innocently deprived landholder was entitled to get its title back from someone involved in fraud is based on British Columbialand law which appears to be similar to that in other Canadian common law jurisdictions operating under Torrensland title systems.  The holding that the innocent mortgage lender who has advanced value loses its mortgage is based on the current state of British Columbialand law which may - or may not - be the same as the land laws of such other Canadian jurisdictions. 

Most Canadian jurisdictions (including British Columbia) will protect a bona fide and for value purchaser - as opposed to a bona fide and for value mortgage lender - who acquires title (ie. ownership, as opposed to a mortgage security) from a person who has been involved in fraud whereby the original owner is deprived of title, provided that such subsequent bona fide and for value purchaser acquires his/her title before the innocently deprived original owner learns of his/her loss and registers notice his or her claim to reinstatement against the title.  In other words, as long as a subsequent purchaser acquires from a fraudster bona fide and for value before the innocently deprived title holder can act, such purchaser will be able to acquire and keep his/her title to the exclusion of the innocently deprived owner.  But where the subsequently acquiring party acquires an interest bona fide and for value which is less than fee simple ownership, such as a mortgage, such subsequent bona fide and for value interest holder will lose its interest in favour of the innocently deprived owner.  That is the situation in British Columbia under its current legislative scheme and may be the situation in otherTorrens system based Canadian common law jurisdictions, depending on the provisions of such other jurisdictions' legislation.

A reading of the Gill Case and the Oehlerking Case (and related earlier jurisprudence) additionally raises or may suggest these questions:

(1)             what would be the position (inBritish Columbiaand in jurisdictions with legislation similar toBritish Columbia's) of a bona fide and for value purchaser (or mortgagee) who dealt with a fraudster who had arranged for the wrongful transfer of title from an innocently deprived previous owner into the name of a fictitious person (whom the fraudster then impersonates)?; and

(2)             what would be the position (in British Columbia and in jurisdictions with legislation similar to British Columbia's) of a person who has acquired an interest (whether ownership or some lesser interest such as a mortgage) bona fide and for value but who loses his/her interest by virtue of the operation of applicable land law legislation, where such subsequent bona fide and for value person makes a claim against his/her jurisdiction's government operated Assurance Fund?

The second question is complicated somewhat by the fact that whilst it should be relatively easy to remedy the loss sustained by a bona fide and for value mortgagee who loses its interest (ie. the amount of such party's compensation would simply be the balance of its outstanding loan), in the case of a bona fide and for value purchaser who loses his/her ownership interest, quantification of such person's loss may be hard to determine because of the difficulty in valuing the loss.  Where the subsequent bona fide and for value purchaser is entitled by applicable law to keep his/her title to the exclusion of the original innocently deprived owner, then the question becomes how to compensate the original owner.  Valuation of the original owner's loss may be even more difficult to determine.

In British Columbia and in jurisdictions whose legislation is similar to British Columbia's (or is held by the Courts to be of the same effect as British Columbia's), the law appears to place a fairly onerous burden on mortgage lenders.  Even if a lender conducts "due diligence" along the lines of what is described in the first paragraph of this paper, the lender may lose its security and thus fail to recoup, in whole or in part, its loan.  Of course, where a jurisdiction permits an innocently deprived mortgage lender to recoup itself out of an Assurance Fund, the lender's situation will be substantially alleviated.

InManitoba, the Real Property Act Sections 59(1), 62(1)(c) and 182(1) deal with these matters.  Using the above hypothetical example, is the writer's view that:

(i)               person "A" is clearly entitled to get title to "A"'s land back from person "Y";

(ii)              perhaps the bona fide and for value mortgagee's mortgage will follow the land back from "Y"'s name to "A"'s name in which case the Assurance Fund would be available to pay out the mortgage thereby having it discharged, but it may also be arguable that the mortgage was a nullity from the beginning, and thus is not capable of following title back into "A"'s name, and if the mortgage is considered to be a nullity, then Section 182(1) may not apply so as to enable the mortgagee to make a claim.

Some lenders, wishing to protect themselves from the risk of loss due to land fraud and/or wishing to minimize the necessity of having to make a formal claim for reimbursement against the Assurance Fund, may attempt to shift the burden of ensuring the absence of land fraud in a mortgage transaction to the lawyer providing the legal services in connection with the transaction.  This would be done by the lender's instructions to the lawyer specifying that it is the lawyer's responsibility to ensure that the person or persons purporting to be the mortgagor(s) are who they claim to be and/or that the mortgagor(s) have acquired the mortgaged real estate, in effect, honestly and for value.  A lawyer will be hard-pressed to fulfill this obligation where - as is the case in many if not most mortgage lending transactions - the lawyer does not know the borrower(s) until he or she meets with them for the first time in connection with the real estate transaction.  Where the lender's requirement of the lawyer is as aforementioned, no amount of due diligence on the part of the lawyer in identifying and/or verifying the identification of the borrower(s) will suffice, because what the lender is asking the lawyer to do, is, in effect, "guarantee" the identity of the borrower(s) and the validity of their underlying acquisition of the mortgaged realty.