Kraft v. Leal, 2010 ABQB 745

Court of Queen ’ s Bench of Alberta Citation: Kraft v. Leal, 2010 ABQB 745 Date: 20101126 Docket: 0901 07575 Registry: Calgary Between: Nathan A. Kraft Plaintiff - and - Cheryl Leal Defendant _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice R.J. Hall _______________________________________________________ [ 1 ] This matter comes before me on appeal from the decision of Master Hanebury of June 2, 2010 rendered orally. The Standard of Review is the correctness standard. There are no material facts in issue between the parties. [ 2 ] The Plaintiff seeks

summary judgment against the Defendant for an amount which the Plaintiff has paid in partial retirement of a first mortgage registered against title to the subject property. [ 3 ] The Plaintiff sold the condominium property to the Defendant in 2007. The transfer price was $295,000.00, comprised of $11,000.00 cash, $270,000.00 by assumption of the Bank of Montreal first mortgage (the “BMO Mortgage”) already registered on title,

and a $14,000.00 vendor take back mortgage (the “Second Mortgage”), which Second Mortgage was registered concurrently with the transfer of land from the Plaintiff to the Defendant. [ 4 ] The Defendant made payments on the BMO Mortgage until sometime in 2008, when she apparently stopped making the payments, as the Bank of Montreal commenced foreclosure proceedings which were later discontinued.

The Defendant resumed making the payments on the BMO Mortgage for some time, but then stopped paying both the BMO Mortgage and the Second Mortgage after November, 2008. [ 5 ] In May, 2009 the Plaintiff was notified of another action having been commenced by the Bank of Montreal against him and the Defendant, who were both personally liable under the BMO Mortgage, which mortgage is CMHC insured. [ 6 ] In May of 2009 the Plaintiff paid monies to the Bank of Montreal to pay up the arrears in the BMO Mortgage, the condominium arrears, property management charges and legal costs required to obtain a discontinuance of the BMO Mortgage foreclosure action.

Thereafter, since June 1, 2009, the Plaintiff has paid monies to the Bank of Montreal each month for the principal interest and taxes payments on the BMO Mortgage. [ 7 ] The Plaintiff brought the within action and obtained an Order Nisi / Order for Sale on April 29, 2010, declaring the amount due under the Second Mortgage to be $15,383.19, which was the amount due under the $14,000.00 Second Mortgage, including interest and arrears from the time of default.

No part of the amount the Plaintiff paid to the Bank of Montreal was included in the amount of the Plaintiff’s mortgage claim in the Order Nisi / Order for Sale. [ 8 ] The Plaintiff now seeks

summary judgment for the amount he has paid on the BMO Mortgage.

Presumably, if he is granted such judgment, he will thereafter conclude the foreclosure proceedings on the Second Mortgage. [ 9 ] At issue is whether the Plaintiff is entitled to be indemnified for the amount of the monies he paid under the BMO Mortgage, by a judgment against the Defendant in the action; or is the Defendant entitled to have the amounts paid by the Plaintiff on the BMO Mortgage to be added to the Second Mortgage and only claimed by the Plaintiff in the foreclosure proceedings and not otherwise. [ 10 ] The Plaintiff submits that when the Defendant purchased the property from him in 2007 and received credit for the assumption value of the BMO Mortgage, she became subject to the implied covenants under

section 58 of the Land Titles Act with the Plaintiff and the Bank of Montreal, that she would pay the money owing under the BMO Mortgage, and would indemnify the Plaintiff against all the money secured by the BMO Mortgage and from any liability with respect to any of the covenants contained in that mortgage.

Section 58 of the Land Titles Act provides as follows: Implied Covenants in Transfer 58(1) In every instrument transferring land for which a certificate of title has been granted, subject to mortgage or encumbrance, there shall be implied the following covenant by the transferee both with the transferor and the mortgagee: that the transferee will pay the principal money, interest, annuity or rent charge secured by the mortgage or encumbrance, after the rate and at the time specified in the instrument creating it, and will indemnify and keep harmless the transferor from and against the principal sum or other money secured by the instrument and from and against the liability in respect of any of the covenants contained in the instrument or under this Act implied on the part of the transferor. [ 11 ] From that, it follows that there is an implied covenant by the Defendant to reimburse the Plaintiff for any amounts which the Plaintiff pays on the BMO Mortgage. [ 12 ] The Second Mortgage between the parties provides, in paragraph 2 as follows:

2(

a) The Mortgagor further covenants that should this mortgage be registered subsequent to another encumbrance (the “Prior Encumbrance”) the Mortgagor shall not allow any default to occur pursuant to the terms of the Prior Encumbrance and further covenants and agrees that should the Mortgagor allow a default to occur pursuant to the terms of the Prior Encumbrance, same shall be considered to be a default pursuant to the terms of this mortgage and will allow the Mortgagee herein to exercise all of its rights and remedies herein contained. (

b) If the Mortgagor makes default in the performance of the covenants or conditions contained in any Prior Encumbrance(

s) secured upon the said lands, then the entire unpaid balance hereby secured together with interest and all other charges, shall, at the option of the Mortgagee, become forthwith due and payable without notice or demand. The Mortgagee shall be at liberty in case of such default to pay any arrears or other sums payable under the said Prior Encumbrance(

s) or pay off all or any portion of the principal, interest and any other charges thereby secured whether said Prior Encumbrance(

s) are the subject of foreclosure or enforcement proceedings or not. Any amount so paid by the Mortgagee shall: (

i) be added to the amount hereby secured; (ii) bear interest at the stipulated rate herein or amended from time to time until repaid; (iii) be a charge upon the said land; and (iv) unless repaid to the Mortgagee upon demand shall be recoverable from the Mortgagor in the same manner as if such sum had been originally secured hereby. [ 13 ] There are 2 agreements made between the Plaintiff and the Defendant; the transfer agreement and the Second Mortgage. Each agreement deals with the circumstance where the Plaintiff makes payment under the BMO Mortgage (Prior Encumbrance).

The 2 agreements provide inconsistent remedies. [ 14 ] By virtue of the transfer agreement and the instrument of transfer, the Plaintiff is entitled to be indemnified by the Defendant for the amount so paid. However, by virtue of

section 2 of the Second Mortgage, the amount so paid shall be added to the amount secured by the Second Mortgage, bear interest at the rate of the Second Mortgage, be a charge upon the land, and be recoverable in the same manner as if such sum had originally been secured by the Second Mortgage. [ 15 ]

Section 40 of the Law of Property Act provides that, in an action brought on a mortgage of land, the right of the Mortgagee is restricted to the land to which the mortgage or agreement relates and to foreclosure of the mortgage and no action lies on a covenant for payment contained in the mortgage.

Section 44 of the Law of Property Act provides that no action shall be brought against any individual who is a transferee of land that is subject to a mortgage on the basis of the covenant for payment or any obligation that exists at law in equity or by agreement that is in substance the same as the covenant for payment. However, section 44(4) provides that the

section does not apply in respect of a mortgage given to secure a loan under the National Housing Act (Canada) , which type of mortgage is a CMHC insured mortgage. [ 16 ] In the result, BMO under its CMHC insured mortgage can bring foreclosure proceedings and can sue either the Plaintiff or the Defendant or both for any deficiency in payment of the debt after the foreclosure proceedings have concluded. [ 17 ] However, the Second Mortgage is not a CMHC insured mortgage pursuant to the National Housing Act (Canada) ; accordingly, the Plaintiff, as second Mortgagee, has no right to obtain judgment for any deficiency beyond the security of the property itself. [ 18 ] In this case, the Plaintiff presumes that because of a falling housing market, foreclosure and sale of the subject property will leave a deficiency if the monies paid by the Plaintiff under the BMO Mortgage are added to the amount of the Second Mortgage. [ 19 ] The Plaintiff argues that each contract provides him a remedy, and he can choose his remedy.

The Defendant argues that the 2 contracts must be seen as a whole; that the Second Mortgage amends or alters the covenant which is implied by

section 58 of the Land Titles Act in the transfer agreement.

[ 20 ]

Section 59 of the Land Titles Act provides that every covenant and power declared to be implied in any instrument by virtue of this Act may be negatived or modified by express declaration in the instrument . [ 21 ] I take the words “in the instrument” to mean the registered transfer document. The implied covenant has not been negatived in that document. [ 22 ] However, the Land Titles Act does not preclude the parties from amending or negativing the implied contract in some other fashion, by agreement. [ 23 ] I am satisfied that

section 2 of the Second Mortgage has the effect of modifying the implied covenant. The parties have expressly agreed, in the Second Mortgage, what the Plaintiff’s remedy shall be in the event that he makes payments under a Prior Encumbrance. The Plaintiff gets the benefit of applying to those payments the interest rate set out in the Second Mortgage, and gets the benefit that he may add those amounts to the Second Mortgage and recover those amounts by foreclosure. [ 24 ] The wording in

section 2 of the Second Mortgage is mandatory; the Plaintiff shall take the steps described. To my mind, the mandatory wording takes away from the Plaintiff the option to proceed either under the implied covenant contained in

section 58 of the Land Titles Act , or pursuant to clause 2 of the Second Mortgage. The Plaintiff has agreed to proceed in accordance with the terms of the Second Mortgage. [ 25 ] The Plaintiff argues that this obligation is modified by the provisions in paragraphs 18(

a) and (

e) of the Second Mortgage. Those provisions are set out below: 18. The Mortgagor further covenants and agrees with the Mortgagee that: (

a) it is agreed that this mortgage, the taking, foreclosure or cancellation thereof or any other dealing with or proceeding under the same shall not operate by way of merger of any indebtedness of the Mortgagor to the Mortgagee or any contract or instrument by which the same now or at any time hereafter be represented or evidenced, nor shall it operate to suspend payment of any such indebtedness or affect or prejudice in any way the rights, remedies and powers of the Mortgagee in respect thereof or any securities held by the Mortgagee for the payment thereof; and that no judgment recovered by the Mortgagee and no other dealing with any other security for the moneys advanced hereunder or secured hereby shall operate by way of merger of this mortgage or in any way affect the security hereby created or the Mortgagee’s right to interest as aforesaid; (

e) in the event of the mortgage moneys advanced hereunder, or any part thereof, being applied to the payment of any charge or encumbrance, the Mortgagee shall be subrogated to al the rights of and stand in the position to and be entitled to all the equities of the party so paid off whether such charge or encumbrance has or has not been discharged; and the decision of the Mortgagee as to the validity or amount of any advance or disbursement made under this mortgage or of any claim so paid off, shall be final and binding on the Mortgagor; [ 26 ] While merger is not in issue here,

section 18(a), paraphrased for the purpose of the issue under consideration says in part, that the Mortgagor has agreed that the mortgage shall not operate to suspend payment of any indebtedness of the Mortgagor to the Mortgagee or affect or prejudice in any way the rights, remedies and powers of the Mortgagee in respect thereof. [ 27 ] This paragraph of the Second Mortgage applies to any debt not addressed in the Second Mortgage. Here, the debt incurred by the Mortgagee paying down a prior encumbrance is specifically dealt with in paragraph 2 of the mortgage. The specific treatment of that very debt in paragraph 2 trumps the general reference in paragraph 18(

a) which paragraph deals with debts not dealt with within the Second Mortgage. Paragraph 18(

a) of the Second Mortgage does not affect the analysis. [ 28 ] Paragraph 18(

e) does not apply in these circumstances, but rather to circumstances where the moneys advanced under the mortgage are used to pay down or pay off another debt, in which case the Mortgagee would become subrogated to the rights of that

creditor against the Mortgagor. Such circumstances have not occurred here. [ 29 ] For the reasons above, the appeal is dismissed. The Defendant shall have costs of this application and the application before the Master in Column 1 of

Schedule C of the Rules of Court . Heard on the 21 st day of October, 2010. Dated at the City of Calgary, Alberta this 26 th day of November, 2010. R.J. Hall J.C.Q.B.A. Appearances: Martin J. Arkell Arkell Damen Hoffman for the Plaintiff Brian N. Clark Clark & Associates for the Defendant