FARM CREDIT CANADA PLAINTIFF - v. -, 2023 SKKB 159

KING’S BENCH FOR SASKATCHEWAN Citation: 2023 SKKB 159 Date: 20 23 07 28 Docket: QBG-SC-00144-2021 Judicial Centre: Swift Current BETWEEN: FARM CREDIT CANADA PLAINTIFF - and - 101258391 SASKATCHEWAN LTD., MELANIE ANNE LAY, TESSA ANNE LAY, JAMES MANN and AGRACITY CROP & NUTRITION LTD. DEFENDANTS Counsel: Rick Van Beselaere, K.C. for the plaintiff Alan Berriault for Agracity Crop & Nutrition Ltd. Tobi Abisoie for James Mann Terry Lay for 101258391 Saskatchewan Ltd., Melanie Lay and Tessa Lay JUDGMENT KEENE J.

July 28, 202 3 I INTRODUCTION [ 1 ] The defendant, 101258391 Saskatchewan Ltd. [101], granted a mortgage dated January 16, 2019 in favour of the plaintiff, Farm Credit Canada [FCC] to secure payment and performance of all obligations owed to FCC in respect of a loan made to 101, Melanie Anne Lay [Melanie], and Tessa Anne Lay [Tessa] pursuant to a loan agreement dated January 2, 2019, collectively the [debtors]. The mortgage was registered in the land titles registry on January 31, 2019 as interest register #123309794 against lands owned by 101.

The debtors defaulted in payments required under the mortgage and loan. FCC commenced foreclosure proceedings and was granted an order on December 20, 2021 under The Saskatchewan Farm Security Act , SS 1988-89, c S-17.1 allowing FCC to issue a statement of claim to sue for judgment, foreclosure or sale of the mortgaged lands and costs. FCC issued this claim on February 14, 2022 naming 101, Melanie, Tessa, James Mann and Agracity Crop & Nutrition Ltd. [Agracity] as defendants. Mr.

Mann was named as a defendant because he registered a “Personal Property Security Interest” January 19, 2022 interest registration #124925520 [Mann Registration] and Agracity was named as a defendant because it registered a mortgage on February 15, 2022 interest registration #124961238. [ 2 ] FCC points out that the loan agreement, stipulates that it is a default for the mortgagor to grant a mortgage or other interest affecting the mortgaged lands without FCC’s approval. The plaintiff states that it did not provide its approval for any interest that Mr.

Mann claims nor did it provide its approval to register the Agracity second mortgage against the mortgaged lands (affidavit of Dale Berner sworn March 21, 2022 at para. 10). Mr. Mann claims (although disputed by the principals of 101) that in addition to the Mann Registration he has an interest as a purchaser under an unregistered agreement for sale of the mortgaged lands. This would also be a form of default under the terms of the mortgage. It is clear that FCC does not want to do business with Mr. Mann. I also understand that the principals of 101, Melanie and Tessa are at odds with Mr. Mann.

I only say this because regardless of whatever may be or may not be going on between the principals of 101, Melanie, Tessa and Mr. Mann – it bears no effect on this foreclosure action. It is undisputed that FCC has a valid registered first charge on the titles regarding the subject mortgaged lands and the subsequent encumbrances registered by Mr. Mann and Agracity are legally subservient. [ 3 ] The court granted an order nisi for sale on December 16, 2022 with a redemption period set to January 9, 2023. There was no mention of any other default – only the need to redeem by paying arrears.

As it turned out 101 was able to pay into

court the arrears by January 9, 2023. However, things did not stop there. FCC applied for an order to pay this money out of court and for a new order nisi for sale because 101 granted a mortgage to Agracity and its alleged granting to Mr. Mann the right to acquire the mortgaged lands. The plaintiff proposed that the redemption period be set to October 31, 2023. As it now turns out, the June 2023 mortgage payment is now in arrears.

II ISSUE [ 4 ] Can s. 10-11 of The King’s Bench Act , SS 2023, c 28 (formerly, s. 61 of The Queen’s Bench Act , 1998, SS 1998, c Q-1.01 (rep)) be used to remedy a default not related to payment, but where the mortgagor grants a second mortgage, charge, or encumbrance on their property? [ 5 ] I will pause here to state that any supposed issues brought forward by Mr. Mann are in my opinion without merit. He appears to want the whole foreclosure to start up again with the necessary serving of the federal and provincial notices of intention and presumably mediation followed by a report from the Farm Security Board.

Failing that, he seems to be requesting some sort of injunctive relief. If indeed any such applications are actually before the court – I dismiss them. The plaintiff’s request for a new order nisi is really only a logical off shoot of the first order nisi . Mr. Mann is not the land owner. In my opinion, he has no standing to claim relief under The Saskatchewan Farm Security Act . Any claim for injunctive relief is without merit. The foreclosure proceedings are paramount to any other claims ( i.e. any issues between Mr. Mann and 101) and should not interfere with the foreclosure procedure. Mr.

Mann is merely a defendant in these proceedings because of his subsequent encumbrance registration. That does not entitle him to any other relief. III ANALYSIS (

a) Background [ 6 ] I will briefly go through a bit of background regarding mortgages. A mortgage first began as a pledge of land. Typically, a debtor would transfer possession of his property to the “creditor to hold a security for payment of debt. While in possession, the creditor would receive income from the land …[i]f the income did reduce the debt, it was a mortgage ( i.e. , a dead pledge)” Robert Chambers, The Law of Property (Toronto: Irwin Law Inc., 2021) at 114 [ Chambers ].

A mortgage was composed of two main elements, the borrower’s promise to repay the loan and the lender’s promise to transfer title to the borrower upon payment of the debt. However, this agreement was conditional on the borrower’s right of redemption ( Chambers at 114-115).

This means that when the borrower discharged the debt, the lender would return the title to the buyer. [ 7 ] In Santley v Wilde , [1899] 2 Ch 474 at 474, Lord Lindley stated that “a mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given ... and the security is redeemable on the payment or discharge of such debt or obligation. …" [ 8 ] Under a common law mortgage, lenders could impose strident terms on borrowers.

When a mortgagor defaulted on their mortgage obligations, the law imposed harsh penalties ( Chambers at 115). For instance, when the mortgagor did not discharge their debt obligation in accordance with the mortgage agreement ( i.e. , missed one mortgage payment), the mortgagee could accelerate payments, retain title to the property, take possession, foreclose etc., and the mortgagor would lose his right of redemption ( i.e. the right to remedy the mortgage) ( Chambers at 115-116). (

i) The Equitable Right of Redemption [ 9 ] Because mortgage agreements were excessively harsh on mortgagors, the Court of Chancery intervened to "allow a mortgagor in default to redeem their right to recover the land if they could pay everything they owed to the mortgagee" ( Chambers at 115). This has come to be known as the equity of redemption. Fundamentally, the Court of Chancery expanded the mortgagor’s right to cure the default upon payment of the entire debt. This eventually transformed into “a right to relief from forfeiture in the event of default” ( Chambers at 116).

The Torrens land title registration system created a new type of mortgage "in which the debtor retains legal title to their land and grants a registered charge to the creditor" ( Chambers at 117). [ 10 ] Eventually, statutes were passed to create more protections for mortgagors seeking relief from forfeiture. As such, Canadian courts recognized a mortgagor's right to remedy a default by immediate payment of arrears, not the entire amount of the debt. This allowed mortgagors to put the mortgage back in good standing.

For example, s. 10 - 11 of The King's Bench Act provides: 10-11 If default is made in the payment of money due under a mortgage or in the observance of a covenant contained in a mortgage and, under the terms of the mortgage, the payment of other portions of the principal money is accelerated by reason of the default and those portions become due and payable: (

a) the mortgagor may, notwithstanding any provision of the mortgage to the contrary and at any time before sale or before the grant of a final order of foreclosure, perform the covenant or pay the arrears that are in default, with costs to be taxed; and (

b) on performing a covenant or paying arrears pursuant to clause (a), the mortgagor is relieved from immediate payment of the portion of the money secured by the mortgage that has not become payable by lapse of time. [ 11 ] Accordingly, a mortgagor may redeem the mortgage by performing the covenants or by payment of the arrears. There are some exceptions to a mortgagor’s ability to redeem a mortgage: (

a) A mortgagor loses the right to redeem the mortgage when the mortgage matures; (

b) A mortgagor loses the right to redeem the mortgage if the property is sold; and (

c) A mortgagor loses the right to redeem if a court has granted a final order of foreclosure or judicial sale.

(

b) The law on negative covenants [12] In Chambers, the learned author states that a negative covenant or "restrictive covenant" imposes a restriction onthe owner's use of land. Meanwhile, a positive covenant "creates an obligation to do something (e.g., to repair or pay rent)” (Chambers at157). [13] The distinction between positive and negative covenants is important. A positive covenant imposes “anobligation to perform

an act”, while a negative covenant restricts “the performance of

an act” (Paul M. Perell, “Covenants as Contractsand as Interests in Land”, (2005) 29 Advoc Q 476). (

c) Section 10-11 of The King’s Bench Act [14] FCC argues that the court in Marine Water Wells Ltd. v Dobson & Co. Refrigeration & Air Conditioning Ltd.(1982), 252 RPR 240 (WL) (Sask QB) [Dobson] in applying s. 44(8) of The Queen’s Bench Act, RSS 1978, c Q-1 (rep) (replaced by s.10-11 of The King’s Bench Act but for these purposes functionally the same) distinguished "between (

i) a covenant that has not beenperformed, but can still be performed and (ii) a covenant that has been breached where there is no ability to un-do what has been done"(see FCC's Brief of Law filed June 19, 2023 at para. 8). FCC relies on Dobson to claim the full amount of the mortgage is due andpayable because 101 breached negative covenants in the mortgage – most notably, 101 granted a second mortgage on the mortgagedlands. In my view this is the correct

interpretation of the application of s. 10-11 of The King’s Bench Act. [15] In Dobson, the court held that s. 44(8) did not allow a mortgagor to redeem a mortgage in respect of propertythat has been sold or disposed of. There, the mortgagor sold the property to another company [Lindsay] without seeking the mortgagee’sconsent. This was contrary to the mortgage agreement. The mortgagee refused to consent to Lindsay’s assumption of the mortgage andclaimed the balance owed. [16] The court in Dobson found that the acceleration clause was not invalid because the mortgagor should haveobtained the mortgagee's consent before selling the property. In interpreting the equivalent

section to s. 10-11, Scheibel J stated thefollowing in Dobson: 14 This

section provides relief to a mortgagor where there is a default in payment or the observance of a covenant related to payment. Itpermits the breach to be remedied and upon being remedied the mortgage is reinstated. The

section deals only with the breach of suchcovenants which can be performed. It has no application in this case as the property has been sold. The breach of covenant cannot beremedied. (see also: Morgan Trust Company v Stellar Development Ltd. (1983), (SK KB), 34 Sask R 91 (QB) and AssociateMortgage Corp. v Chau, 2001 SKQB 169, [2001] 8 WWR 388.) (

d) Does s. 10-11 of The King’s Bench Act allow 101 to remedy the breach of “negative covenants”? [17] I have not found any case law addressing the application of s. 10-11 (or its predecessors) to a situation where asecond mortgage, charge, lien or encumbrance has been registered on the mortgagor’s property, but the title remains in the hands of themortgagor. In my view, s. 10-11 allows for the remedy of such a breach of a negative covenant breach if the offending charge can bedischarged. This is because s. 10-11 does not state a mortgagor is unable to remedy a negative covenant. Rather the

section allows amortgagor to “perform the covenant or pay the arrears that are in default” (emphasis added). IV CONCLUSION [18] This has become a bit of a muddle at this stage. The mortgage is once again in arrears. It may be that themortgagor can discharge Agracity’s mortgage. It may be that the mortgagor can discharge the Mann Registration. If the arrears can bebrought current and the negative covenant defaults repaired – then in my opinion the mortgage could be reinstated. In any event, thecourt is prepared to grant FCC’s request for a new order nisi for sale to set things back in motion.

The drafting of the new order nisi mayprove to be tricky since possibly the order will be a blending of the arrears and default of covenants. I await argument on this. I willremain seized with this file to see this through. [19] I direct that the Local Registrar shall set a special hearing date so that I can receive representations from theparties as to the drafting of the order nisi for sale. I ask that FCC file a draft order nisi for sale before the scheduled hearing along with anupdated affidavit of default.

I will also order that the current adjourned chambers date of August 3, 2023 is vacated pending the newreturn date set by the Local Registrar. J. T.J. KEENE