March 2012

In recent years, the use of "all obligations" mortgages has become increasingly popular with both lenders and borrowers.  An "all obligations" mortgage - sometimes called an "all purpose mortgage" or a "collateral mortgage" - is designed to secure the borrower/mortgagor's present and future obligations of all kinds (direct borrowings, guarantees, etc.) in favour of the creditor/mortgagee, up to, at any one time, and from time to time, the maximum principal or face amount specified in the mortgage.  By their very nature, all obligations mortgages are designed to secure yet to exist and yet even to be imagined (let alone agreed upon) credit facilities.  This and a few other elements of all obligations mortgages discussed below can present certain difficulties for the creditor/mortgagee.

Consider the following:

1. Acceleration and realization of security where not all of the debts secured are in default.  It would not be unusual for an all obligations mortgage to secure, at any particular time, say, two term loans, both repayable by way of installments of principal with interest.  Because there is only one mortgage involved as security for both loans, it is essential for the mortgagee that if one loan goes into default, the mortgagee must be able to treat the other loan as also being in default - whether or not it actually is in default.  This allows the mortgagee to realize its security primarily to recoup the debt which is in default.  Clearly, it would not be possible for the mortgagee to realize its security (typically, sell the mortgaged realty) to recoup the debt in default and still somehow preserve the mortgage as ongoing security for the loan which is not in default.  The mortgage security must be utilized to try to recoup both loans at the same time.  Thus for a single mortgage to stand as security for multiple obligations, it is necessary that the debtor agrees that default under any one or more of the secured debts is deemed to be default under all of them, with the result that the mortgagee can accelerate and demand repayment of all of them, and then realize its security to get back all of its money.  However, enabling the mortgagee to take this course of action seems to fly in the face of several rules which, in effect, permit a borrower/mortgagor to reinstate a loan which is in default.  Section 39 of the Manitoba Queen's Bench Act and Section 14 of the Manitoba Mortgage Act both, in effect, permit a mortgagor in default to cure the default and reinstate the term of a mortgage secured loan.  Assume that a mortgage secures two loans, each for $100,000.00 and each repayable by way of periodic payments of principal and interest over time; assume further that one of the two loans is in default and the mortgagee wishes to accelerate and realize its security to get back the defaulted loan; if the mortgagee takes this course of action, it will no longer have any mortgage security to secure payment of the other (not yet in default) loan, which is obviously not an acceptable situation for the mortgagee; thus it becomes necessary for the mortgagee to treat both loans as being in default, accelerate repayment in full of both of the loans and then realize its security to recoup what is owed to it with respect to both of the loans.  If the mortgagor exercises its aforementioned reinstatement rights, it is clear that it would have to pay the monies in default, typically, the installments of principal and interest actually in arrears (with costs) with respect to the loan which was in default.  But how does the mortgagor reinstate the other loan which itself was never in default?  The answer appears to be that the mortgagor must pay off in full the loan which was not actually in default.  Arguably, this is not fair to the mortgagor.
2. Difficulty in complying with the disclosure requirements of Section 6 of the Canada Interest Act where one or more of the loans to be secured by the mortgage haven't yet even been considered or finalized.  Section 6 of the Canada Interest Act provides that where a real estate secured loan is repayable by way of blended installments of principal and interest, then unless the mortgage specifies the principal amount of the loan and the rate of interest applicable to it, calculated yearly or half-yearly, not in advance, the mortgagee is not legally entitled to collect interest.  Alternatively, if the mortgage contains a Section 6 type statement of principal and interest which is inconsistent with other provisions in the mortgage as to the repayment of principal and interest, then the mortgagee is only entitled to collect interest at the lower of the rates specified.  The problem with an all obligations mortgage is that it is intended to secure loans and credit facilities which may or may not exist in the future, and whose terms have not yet even been considered by the mortgagor and the mortgagee at the time when the all obligations mortgage is executed and registered.  Thus it is impossible for a mortgagee to comply with respect to Section 6 - at least for those future loans to which Section 6 would apply.  However, consider the following:

(a)          based on the case law to date, very few mortgages which secure loans repayable with equal periodic payments of principal and interest are really "blended" payment mortgages subject to Section 6;

(b)          the opening words of Section 6 are "whenever any principal money or interest secured by mortgage on real estate or hypothec on immoveables, is, by the mortgage or hypothec made payable on…any plan under which the payments of principal and interest are blended…" (the underlining is the writer's for emphasis purposes).  Arguably, the terms of payment/repayment of any particular loan secured by an all obligations mortgage are not contained within the four corners of the mortgage document itself.  Usually, the terms of payment/repayment are found in one or more documents separate from the mortgage document (ie, in loan agreements, promissory notes and the like).  On that basis, one could argue that the repayment terms are not "made payable…by the (terms of the) mortgage".  On the other hand, because most all obligations mortgages directly or indirectly incorporate all of the from time to time existing promissory notes, loan agreements, etc. between the parties, it may be difficult to successfully propound this position;

(c)           the primary purpose of Section 6 is to mandate disclosure of the cost of borrowing (interest) to borrowers/mortgagors.  Surely this can be effected by incorporating into each all obligations mortgage, a readily available "chart" of equivalent interest rates.

1. High title insurance policy premiums for all obligations mortgages.  This problem arises because all obligations mortgages are designed to secure - currently and in the future - multiple loans, and because (at least in Manitoba) the Land Titles system charges relatively nominal fees for registering mortgages no matter how high the maximum principal or face amount of the mortgage.  It is typical for borrowers and lenders to create all obligations mortgages with very high maximum principal or face amounts.  A borrower's all obligations mortgage may have a face amount of, say, $1,000,000.00, but at any given point in time, it is unlikely that the aggregate debt secured by the mortgage will be anywhere near to $1,000,000.00.  For example, at a particular point in time, the borrower's aggregate debt may be, say $200,000.00, with the maximum principal or face amount of the mortgage being, $1,000,000.00.  However, title insurance companies usually charge premiums based on the maximum principal or face amount of the mortgage.  This results in exceedingly high title insurance premiums for mortgage secured debt where such debt is considerably less than the amount on which the title insurer has calculated its premium.  I say "usually" here, because it is my understanding that at least one title insurance company doing business in Canada is considering altering its practice so that the premium paid will be based on the currently contemplated debt to be secured by the mortgage.  In this situation, where future obligations increase the actual amount of the secured debt, then, (presumably), upon the borrower (or the lender) reporting the increased debt, the insurer will increase the policy limit and charge an additional premium.