A purchaser of a home, or a homeowner, who borrows money from a lender to finance the property, is a mortgagor, and the lender is a mortgagee. If a mortgagor also has a second mortgage on a different property and does not have enough equity in that property to secure the mortgage, the borrower and lender on the second property may agree to create a cross- collateral mortgage. In this scenario, the lender on the second property gets a mortgage on the first property to secure the mortgage on the second property.
The Facts
In the recent Ontario Superior Court case Hinds et al. v Tasma 5 Rialty Ltd., which was civil litigation hearing in a real property dispute, the Applicants, Hinds et al. (the “Applicants” or the “Mortgagor”) had a mortgage with Home Trust (the “Home Trust Mortgage” or the “first mortgage”) on a property (the “Property”).
Under the terms of the first mortgage, Home Trust (“Home Trust” or the “first mortgagee”) chose to collect property taxes from the Applicants and give the proceeds to the City of Brampton (the “City”). However, if the Applicants were to default on payments, then any money that was collected for taxes had to go toward the amount owing on the first mortgage.
The Applicants defaulted on the first mortgage and, in response, Home Trust issued a Notice of Sale (the “Home Trust NOS”).
The Property was also subject to a cross-collateral mortgage (the “second mortgage”) with Walker Law’s client, the Respondents, Tasma 5 Rialty Ltd. (the “Respondents” or the “second mortgagee”). The second mortgage on the Property secured a third mortgage, on a different property, which the Applicants had with the Respondents. The second mortgage was second in priority to the Home Trust mortgage, which means that the Respondents would be paid only after the first mortgagee had been paid. The Applicants and the Respondents agreed that the second mortgage would take effect if the Applicants were to default on the first mortgage.
After the Home Trust NOS, the Respondents requested a discharge statement from Home Trust on the first mortgage, and the Respondents paid out the first mortgage and registered a Transfer of Charge on title. The Respondents then purchased the first mortgage from Home Trust.
Once the Applicants defaulted on the first mortgage, the second mortgage, which was with the Respondents, came into effect. The Respondents told the Applicants that, per the second mortgage contract, the new annual interest rate was 8% and the new monthly payment was $3,103.02, which they had to pay to the Respondents at the beginning of each month. However, the Applicants did not pay this amount. Instead, they paid the same amount that they had paid to Home Trust, namely, $2,723.07, which was based on the first mortgage’s rate of 2.89%, and which included the monthly property tax premium that Home Trust had been remitting to the City.
Once the second mortgage took effect, the Respondents did not remit the taxation portion of the payments to the City; as a result, the amount of property taxes owing on the property was $46,200.67, which is known as tax arrears.
Because the Applicants did not pay the monthly amount owing on the second mortgage and did not remit property taxes to the City, the Respondents concluded that the Applicants were in default on the second mortgage and issued a Notice of Sale (the “Respondents’ NOS”) on the Property. The Respondents’ NOS stated that the principal owing was $465,453.51, that the Applicants owed a 10% administrative fee of $46,545.35, and three months interest of $9,309.07.
The Court Hearing
A. The Issues
At the Court hearing, the issues were:
- Whether the Respondents were bound by Home Trust’s commitment to collect and pay property taxes to the City;
- Whether the interest rate in the second mortgage overrode the interest rate in the first mortgage; and
- Whether there was a legal basis for declaring the Respondents’ NOS null, void and/or
B. The Positions of the Parties
At the hearing, the Applicants argued that, because the Respondents purchased the first mortgage, the applicable interest rate remained the 2.89% of the first mortgage and they had to continue paying the property taxes to the City. They also argued that the 10% administrative fee was unlawful.
Meanwhile, the Respondents argued that they were not liable for the Applicants’ tax arrears, and that, according to the contract between the parties, the Respondents had the right to purchase the first mortgage and enforce the terms of the second mortgage in order to protect their interests.
Additionally, the Respondents argued that when it took on the first mortgage, funds were applied to the Applicants’ indebtedness; none of the $465,453.51 paid toward the first mortgage applied to the tax arrears. The terms required the Respondents to let the Applicants know if they were collecting and remitting taxes, which they did not do, because they were not collecting or remitting taxes. The terms of the second mortgage stated that the Applicants were responsible for paying taxes, and any taxes that the Respondents paid would have to be reimbursed by the Applicants.
C. The Court’s Decision
The Court noted that both parties were represented by lawyers in both this property dispute and received legal advice before entering into the mortgages.
The Court held that the Respondents were not required to remit property tax arrears to the City and the Respondents’ NOS was valid and enforceable. The first mortgage terms allowed Home Trust to collect and remit taxes, which Home Trust opted to do, but the Respondents did not need to do that.
If there had not been an agreement between the Applicants and the Respondents, then the Respondents would have to assume all obligations under the terms of the first mortgage. However, the second mortgage contract constitutes such an agreement between the parties. Based on the second mortgage contract, the annual interest rate changed to 8%, and there was a 10% administrative charge applicable if the Applicants were to default. The second mortgage applied to the entire principal owing on default, and it therefore did not apply to any tax arrears.
Under the terms of the second mortgage, the Respondents were not required to remit taxes to the City, the Applicants were required to pay an 8% annual interest rate, and the administrative fee was applicable because the Applicants were in default.
Thus, the Court held that the Respondents were owed the remainder, the Respondents’ NOS was valid and enforceable, and the Respondents were not responsible for paying the tax arrears of the Applicant. However, the Court held that, on consent, the Respondents had to delete the three months interest that they sought in the Respondents’ NOS.
Takeaway
In this case, when the second mortgage kicked in, the Applicant’s interest rate increased from 2.89% to 8%. Additionally, the arrangement that the Applicant had with Home Trust regarding the payment of property taxes no longer applied, and the Respondents, who was the second mortgagee, was under no obligation to remit taxes to the City or to pay the tax arrears of the Applicant.
The primary takeaway from this case is that mortgagors, i.e., borrowers, should make sure that they are aware of and understand the terms of their mortgages. When you get a second mortgage on your property with a different mortgagee, i.e., lender, and you default on your first mortgage, the second mortgage may change your obligations and the terms of your borrowing agreement.