Mortgages in British Columbia: unregisterable equitable mortgages do count

A mortgage is a form of security given by a person who owns land but wants to borrow money, or already owes a debt or some other obligation. As security for repayment of the debt, the mortgagor (the borrower, or debtor) gives the mortgagee (the lender, or creditor) the right to recover against the land if the mortgagor defaults in repaying the debt.

 

This article outlines the law of statutory and equitable mortgages in the context of the land title registration system in British Columbia, and considers the nature of unregisterable equitable mortgages.

 

The Torrens system of title was formulated by Sir Robert Torrens, a colonial Premier of South Australia. The system was designed to solve the uncertainty, complexity, and cost problems associated with historical systems of “registration” (which are still used as an alternative to the Torrens system in many jurisdictions).

 

Under registration systems, right to title depends on the owner being able to prove an unbroken chain of title back to a good root of title. Under such systems, transactions involving land are generally registered in a government registry, but purchasers cannot rely on the register as proof of good title. Under registration systems it is possible that after the purchaser has paid for land thinking he or she was taking clear title, someone may show up and claim an interest in the land the purchaser thought he or she owed outright. Under a recording system, registration has no legal effect, but is just a resource for dealings in land.

 

The essence of the Torrens system is that title is determined by the register, and previous dealings with the land are irrelevant. The Torrens system was implemented in the colony of Vancouver Island in 1861. Under the Torrens system in British Columbia, each piece of land is identified by a certificate of title in the land title office. The title certificate is, in a pure Torrens system (which is not what is in place in British Columbia), conclusive of all of the interests held by all persons in that particular piece of land.

 

Under Torrens systems, the act of registration has legal effect, and once it has occurred and the certificate is registered in the new owner’s name, the government guarantees it to be accurate and ensures indefeasible title to those included in the register.

 

Under the British Columbia title system, there is also an assurance fund to compensate persons who rely on the register but suffer loss at the hands of fraudsters. This right to compensation is given by the government in exchange for purchasers giving up their equitable rights of recovery which the Torrens system removed.

 

Variations on the Torrens system are used in many Canadian provinces. 

 

Few jurisdictions operate a strict Torrens system. In most Torrens jurisdictions, including British Columbia, there are exceptions to the principle that interests in land are not valid until registration occurs and the certificate of title is updated. For example, under s. 20 of the British Columbia Land Title Act, R.S.B.C. 1996, c. 250 (the “Land Title Act”) unregistered interests are valid against the person executing the transfer even before registration:

 

20(1) Except as against the person making it, an instrument purporting to transfer, charge, deal with or affect land or an estate or interest in land does not operate to pass an estate or interest, either at law or in equity, in the land unless the instrument is registered in compliance with this Act.

 

Therefore, under s. 20, if person A transfers an interest in land to person B, person A is “the person making it” and that transfer is valid against A even before the interest is registered in the land title office. Even if B delays registration for a long time, A cannot rely on the land title certificate as proof that B does not have an interest. However, B will normally register his interest promptly to establish priority over people other than A. In other words, the general rule is that B’s interest is not valid until registered, but there is an exception as against A.

 

Section 23(2) of the Land Title Act lists a number of further exceptions to the Torrens rule that all interests are shown on the certificate of title, and that the interests shown on title are absolutely conclusive. Included in the list of exceptions under s. 23 are the Crown’s right to expropriate, to file tax liens, and to recover minerals. In other words, certain interests are deemed to be incorporated into the register even though they are not shown on the face of the individual certificates of title. (See also s. 26(1) regarding charges). Section 23 also provides other exceptions, such as the right of those defrauded by purchasers to recover against the land underlying the fraudulent transaction.

 

Section 29 of the Land Title Act deals with the effect of notice of unregistered interests, and the way it has been interpreted by the courts is that if a purchaser has actual notice of an unregistered interest he will be bound by it, and it will not suffice for the purchaser to say that the interest was not shown on the title certificate. This again demonstrates that British Columbia does not have a strict and pure Torrens system.

 

The way equitable mortgages are dealt with under the British Columbia title registration system is a further area in which the system deviates from what would be a pure Torrens systems. As is discussed below, equitable mortgages are interests in land which are considered valid, but which are not registerable even though the register is, conceptually at least, designed to describe all of the interests in the piece of land named in the certificate.

 

Mortgages occur between debtors and creditors. The debtor (who owns the land on which the mortgage is given) gives the mortgage to the creditor as security for the debt. The creditor is the mortgagee because he receives the mortgage given by the mortgagor.

 

In Bank of Montreal v. Orr (1986), 4 B.C.L.R. (2d) 1 at 7 (C.A.), Carrothers J.A. provided the following description of mortgages:

 

A mortgage consists of two things: (a) a contract on the part of the mortgagor for the payment of a debt to the mortgagee; and (b) a disposition … of an estate or interest of the mortgagor to the mortgagee as security for the repayment of the debt. Every mortgage implies a debt (quantified or ascertainable) and an obligation on the part of the mortgagor to pay it. A repayable mortgage debt is a vital element of a mortgage.

 

Because mortgages are contracts, they must, like all contracts, be supported by valuable consideration. The last line of the above quote confirms this i.e. the creditor must have given something of value by advancing funds, in which case there would be a debt owing. In Mohabir v. Dvorak (1999), 25 R.P.R. (3d) 47 (B.C.S.C.) the mortgagor applied for a number of mortgages to be struck because no funds had been advanced on them and so consideration had not passed from the mortgagee to the mortgagor. Loo J. allowed the application and ordered that the mortgages be discharged for lack of consideration.

 

After a creditor takes a mortgage as security, he then has two means of recovering against the debtor if the debt is not paid:

 

If the mortgagee is not paid what is owed him in accordance with the contract he has two causes of action. One cause of action is in debt. That is a personal action. The other cause of action is to proceed against the land itself, which ultimately results in a sale of the land or a foreclosure absolute. That is a real action…

 

There is no obligation on a mortgagee to proceed with one cause of action before another. In fact, it is preferable if a mortgagee proceeds with all causes of action in one action to avoid a multiplicity of proceedings and to bind all persons against whom he may be claiming, even though later, by the proceedings.

(Humble Investments Ltd. v. Therevan Development Corp. (1982), 21 Alta. L.R. (2d) 40).

 

Because a mortgage is simply security for a debt, when that debt is paid the mortgagor has the right to redeem the security despite any contractual provision to the contrary: Santley v. Wilde, [1899] 2 Ch. 474 (Eng. C.A.).

 

Originally, at common law, the mortgagee took actual possession of the land at the time the mortgage was granted. In effect, the mortgagor gave up possession of the land and “deposited” it with the mortgagee as security until the debt was paid – the mortgagor obviously needed the money more than he needed use of the land; temporarily at least. Later, the practice became to include a term in the mortgage contract allowing the mortgagor to keep possession of the land until default of payment occurred, at which point the mortgagee would obtain possession. Under this system the mortgagee still took legal title to the land when the mortgage was given, but the mortgagor was allowed to remain in possession. The mortgagee obtained title that was subject to defeasance upon the mortgagor repaying the debt by the due date. In other words, the mortgagee took title to the land, but the mortgagor had a right of redemption that would be triggered when the debt was repaid.

 

In Smith v. National Trust Co. (1912), 45 S.C.R. 618 [Smith] the Supreme Court of Canada explained that statutory mortgages are not merely a codification of common law mortgages because under statutory mortgages the mortgagee does not get title to the land:

 

[I]t seems to me to be an artificial and unnatural reading of the statute to regard the mortgage contemplated by it as primarily a common law mortgage, and I think that in adopting such a reading one incurs some risk of losing the point of view from which the legislator envisaged the problem to which he was addressing himself. …[A]t common law the rights and powers of the mortgagee as such in respect of the mortgaged property are rights and powers which are incidental to the legal or equitable estate vested in him as mortgagee while under the statutory instrument the rights and powers of the mortgagee do not and cannot take their efficacy from any such estate because none is vested in him and his rights and powers must consequently rest directly upon the provisions of the statute itself.

 

In other words, while at common law when a mortgage is executed ownership is effectively transferred, under a statutory mortgage the mortgagee does not immediately acquire ownership of the land, but only a charge on the land which can be used to force the sale of the land if the debtor defaults. However, under a statutory mortgage the mortgagee can still force the sale of the land if the debt is not paid, and so the mortgage still affects the title held by the mortgagor.

 

Although in Smith the Supreme Court of Canada said that statutory mortgages are not merely a codification of common law mortgages, the Court went on to say that the principles of the common law may inform the relationship between the statutory mortgagor and mortgagee:

 

[W]here, in any particular case, it appears that the rules governing reciprocal rights of the mortgagor and mortgagee under the mortgage contract in relation to the mortgaged property are left to implication [because the statute is silent on that point,] then it is a question to be determined upon an examination of the statute as a whole how far the rights of the parties are to be governed by the rules of law which, apart from the statute, are applicable as between mortgagor and mortgagee.

 

Therefore, in practice, the common law mortgage rules still play a role in defining the rights and obligations under statutory mortgages.

 

Before the enactment of the Land Title Amendment Act, 1989, S.B.C. 1989, c. 9, effective April 1, 1990, B.C. Reg. 53-90, mortgages in British Columbia were essentially common law mortgages. 

 

There is no direct definition of “mortgage” in the Land Title Act, but mortgages are circuitously defined through the definitions for charges and encumbrances in s. 1:

 

“charge” means an estate or interest in land less than the fee simple and includes

(a) an estate or interest registered as a charge under section 179, and

(b) an encumbrance;

            …

“encumbrance” includes

(a) a judgment, mortgage, lien, Crown debt or other claim to or on land created or given for any purpose, whether by the act of the parties or any Act or law, and whether voluntary or involuntary, and …

 

Thus, a British Columbia statutory mortgage is an interest in land that is less than the fee simple interest which is what the mortgagee would have obtained at common law. This is consistent with the comments provided above from the Supreme Court of Canada in Smith.  

 

Division 5 of the Land Title Act (ss. 224-231) deals with mortgages. Section 225 states that, subject to limited exceptions, mortgages in British Columbia must be in two parts. The first part consists of a two page prescribed form which contains the key elements of the mortgage including: the parties; the legal description of the land; and signatures (execution). The second part contains all other terms of the mortgage.

 

Section 225(5) provides that the parties have three options for part 2:

 

If standard terms are being used, whether they are those under s. 227 or a set filed under s. 228, the mortgagee must, at or before the time the mortgage is executed, provide the mortgagor with a copy of those terms and obtain an acknowledgment that they have been received: s. 229(1). If proper notice is not given of the set filed under s. 228, the mortgage is still binding but the standard set of terms under s. 227 apply to the mortgage.

 

Section 231 sets out the effect of statutory mortgages under the Land Title Act. Section 231(1) states that a mortgage:

 

operates to charge the estate or interest of the mortgagor to secure payment of the debt or performance of the obligation expressed in it, whether or not the mortgage contains words of transfer or charge subject to a proviso for redemption.

 

This is consistent with the comments above that, unlike common law mortgages which transferred the full legal estate in the land, statutory mortgages merely give the mortgagee a charge on the land.

 

Section 231(2) states:

 

Whether or not a mortgage referred to in section 225 contains words of transfer or charge subject to a proviso for redemption, the mortgagor and mortgagee are entitled to all the legal and equitable rights and remedies that would be available to them if the mortgagor had transferred the mortgagor' interest in the land to the mortgagee, subject to a proviso for redemption.

 

The effect of ss. 231(1) and 231(2) is clarified in s. 231(3):

 

231(3) Subsections (1) and (2) do not

(a) validate a mortgage that, at law or in equity, is void or unenforceable,

(b) operate to change the general law of mortgages or the legal and equitable rules that apply between mortgagor and mortgagee, or

(c) preclude the inclusion of express words of transfer or charge subject to a proviso for redemption in a set of standard or express mortgage terms referred to in section 225 (5).

 

The effect of these mortgage provisions is that a charge by way or mortgage does not operate as a transfer of the legal estate in the land as it did at common law, but that the remedies available to the mortgagee are not reduced.

 

Although this article does not deal with vendor’s liens, it is worth noting that a vendor’s liens and mortgages (whether statutory or equitable) are distinct.

 

A mortgage is a contract of security and the very purpose of the contract is to create the mortgage. A vendor’s lien, which is a special type of equitable lien, does not arise by contract, but only as an incident to the contract of sale.

 

The vendor’s lien is founded on the principle of equity that he who has obtained possession of property under a contract for payment of its value will not be allowed to keep it without payment.

(Silaschi v. 1054473 Ontario Ltd. (2000), 186 D.L.R. (4th) 339 (Ont. C.A.)).

 

The moment you have a contract of sale of which specific performance could be obtained the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser, the vendor having a right to the purchase-money, a charge or lien on the estate for the security of that purchase-money, and a right to retain possession of the estate until the purchase-money is paid, in the absence of express contract as to the time of delivering possession.

(Martin Commercial Fueling Inc. v. Virtanen (1993), 84 B.C.L.R. (2d) 289 citing Mowbray et al., Lewin on Trusts, 16th ed. (London: Sweet & Maxwell) at p. 153)

 

A vendor’s lien arises upon the sale of the property and, if necessary, can be used to force the re-sale of the property such that the vendor can be paid. The vendor’s lien is effective to give the vendor priority over unsecured creditors, such as an execution against the purchaser, but the lien holder is a secured creditor subject to the normal rules of priority under provincial legislation.

 

Typically, vendor’s will not rely on their vendor’s lien rights, but will take back a statutory mortgage on the property to secure whatever amounts are not paid to the vendor at the time of closing. 

 

The common law rules for redemption were very strict; if the mortgagor missed the deadline for payment by even one day the mortgagee’s right to the land became absolute and the borrower lost all rights to the land. Equity modified this harsh situation by allowing the mortgagor to exercise his right of redemption even after the time for redemption had expired. This equitable right to redeem evolved into an equitable interest in the land, known as the “equity of redemption”.

 

There is only one legal estate in each piece of property. Therefore, at common law, the mortgagor could only give a mortgage to one mortgagee. However, after development of the equity of redemption concept, the mortgagor could grant an equitable interest in the equity of redemption to subsequent mortgagees. In effect, the mortgagor says to the second mortgagee: “after the first mortgagee has been paid and I get the land back, you can have first right to use that land to recover the amount that you have lent me”. All mortgages, apart from the first mortgage (which may or may not be a legal mortgage) will be equitable mortgages in the equity of redemption.

 

The second mortgagee does not have to be fearful of the mortgagor being apathetic and not bothering to redeem his interest in the property from the first mortgagee: if the mortgagor fails to redeem his interest in the land from the first mortgagee, the second mortgagee can foreclose on the mortgagor’s interest in the land (i.e. the mortgagor’s first right of redemption) and invoke the first right of redemption against the first mortgagee. In other words, when granting a second mortgage, the mortgagor does not only give the second mortgagee the second right of redemption, but also the right to invoke the first right of redemption against the first mortgagee: s. 231(2) of the Land Title Act.

 

Equitable mortgages are, by definition, mortgages that do not involve a transfer of legal title, but create, in equity, a charge upon the property: London County and Westminster Bank Ltd. v. Tompkins, [1918] 1 K.B. 515 (C.A.).

 

An equitable mortgage may be created in a number of ways. First, the mortgagor may execute a written agreement stating that the specified property stands charged as security for a specified sum. The requirement for writing is imposed, in British Columbia, by s. 59(3)(a) of the Law and Equity Act, R.S.B.C. 1996, c. 253, which states that, subject to certain exceptions: “A contract respecting land or a disposition of land is not enforceable unless…there is, in a writing signed by the party to be charged…, an indication that it has been made and a reasonable indication of the subject matter.”

 

There is an exception to this requirement for writing: an equitable mortgage may be created by the mortgager depositing with the mortgagee the duplicate certificate of title: Bank of British Columbia v. Andrews, [1979] 6 W.W.R. 574 (B.C.S.C.). Equitable mortgages created by handing over the duplicate certificate of title work as follows. The registrar of the land title office must, at the request of the registered owner, issue a duplicate certificate of title: Land Title Act s. 176(1). The registered owner can then hand that duplicate certificate to a creditor (the mortgagee) who the registered owner (as mortgagor) owes a debt (or some other obligation). The mortgagee then retains the duplicate as proof that he holds a mortgage from the registered owner. It is important that the mortgagee have the actual duplicate, having a copy of the duplicate is not sufficient.

 

The method of handing over a precious document as proof of an agreement was originally used with title deeds. Maitland, Lectures on Equity, 2nd. ed. (1936) explains it this way at p. 198-199:

 

A has handed over the title deeds of a certain estate to B. Why on earth should he have done this? Here is cogent evidence of some agreement between them. Something we must do. To say that B has no charge upon the land and yet to allow him to keep as his own, or to destroy the title deeds of another man’s property, this would be absurd. On the other hand it would be hard to force B to give back the title deeds when it is plain that they were put into his hands for some purpose about which there was an agreement between him and A. So we allow B to prove, though he has no note or memorandum in writing, what this agreement really was, we allow him to prove that there was an agreement for a mortgage. I think that we ought to regret this doctrine of equity; it has done a good deal of harm; but there it is…

 

The mortgagee possessing the duplicate certificate of title must prove, on a balance of probabilities, that a security agreement was made. Mere possession of the duplicate certificate of title does not prove this – it is possible that it was handed over my mistake, or for safekeeping.

 

Although handing over a duplicate certificate of title to a mortgagee is a common way to create an equitable mortgage, it is not the only way to do so. As noted at the beginning of this section, an equitable mortgage can be created merely be executing an agreement that says that a particular piece of land stands as security for a debt owed by the registered owner. Therefore, even if the duplicate certificate of title is “in” the land title office, there may still be an equitable mortgage outstanding.

 

A further way in which an equitable mortgage may be created is by the mortgagor executing an agreement in writing that he or she will, in specified circumstances, execute a legal (statutory) mortgage: C.I.B.C. v. Zimmerman (1984), 27 B.L.R. 38 (B.C.S.C.). However, in C.I.B.C. v. Rehnby (1992), 22 R.P.R. (2d) 93 (B.C.S.C.) [Rehnby] it was held that an undertaking to deliver a mortgage on demand was merely an “executory contract” and did not create an equitable mortgage. Ultimately, the bank in Rehnby was found to hold an equitable mortgage, but that was because it had requested the debtor to execute the legal mortgage as provided for by the contract. Although the debtor had not done so, the court found that an equitable mortgage came into existence when the request was made. 

 

Equitable mortgages may also be created when a statutory mortgage is found to be defective, perhaps because of improper execution (Re Caldwells Ltd., [1934] 2 D.L.R. 341 (Ont. C.A.)) or because of an incorrect description of the property (Hawkins v. White (1923), 25 O.W.N. 51 (Div. Ct)).

 

Equitable mortgages cannot be registered under the Land Title Act. Section 33 says:

 

33 An equitable mortgage or lien created by the deposit of a duplicate indefeasible title or other instrument, whether or not accompanied by a memorandum of deposit, is not registrable.

 

However, when the registrar of the land title office issues a duplicate certificate of title to the registered owner the duplicate indefeasible title notation on the title document is marked as “out”. Therefore, one can tell by looking at the title document whether the duplicate certificate of title is in or out. But, one cannot tell whether anyone has an equitable mortgage in the property; the registered owner may still have the duplicate certificate of title in his or her possession.

 

The holder of an equitable mortgage does have an interest in land sufficient to support a caveat: Matrix Engineering Ltd. v. Royal Bank of Canada (1990), 75 Alta. L.R. (2d) 193. See also Yeulet v. Matthews, [1982] 4 W.W.R. 5 (B.C.S.C.) and Bank of British Columbia v. Andrews, [1979] 6 W.W.R. 574 (B.C.S.C.).

 

Section 282 of the Land Title Act provides as follows:

 

282(1) A person, in this Act referred to as the “caveator”, claiming

(a) under an unregistered instrument which is incapable of immediate registration,

(b) by operation of law, or

(c) otherwise,

to be entitled to land the title to which is registered under this Act, may by leave of the registrar, granted on terms, if any, the registrar may consider proper, lodge a caveat with the registrar prohibiting registration of a dealing with the land either absolutely or in the manner or to the extent expressed in the caveat.

 

To protect itself from claims by third parties against title, an equitable mortgagee should, when taking an equitable mortgage, register a caveat against title to give notice to the world that an equitable mortgage has been issued. If the equitable mortgagee fails to do so, its interest in the property may be defeated by a bona fide purchaser for value, in which case the mortgagee will have to rely on its debt claim against the mortgagor.

 

Section 20 of the Land Title Act, set out above, states that generally interests in land are not valid until registered. But that sterility provision does not apply to equitable mortgages because they are not registerable: Cochrane, Ladner & Reinhard v. Phillips, [1924] 3 D.L.R. 996 (B.C. Co. Ct.). Therefore, an equitable mortgage creates a valid interest in land despite not being registered, but the key issue is who the interest is effective against.

 

Equitable mortgages are more risky than statutory mortgages because equitable mortgages cannot be registered, and therefore they are not covered by the protections registration brings. Furthermore, s. 303 of the Land Title Act states that the assurance fund will not, under any circumstances, be liable for compensation for losses suffered by an equitable mortgagee by deposit of the duplicate indefeasible title.

 

Acknowledging the validity of interests in land under equitable mortgages, the Land Title Act restricts the transactions which can take place when the duplicate certificate of title is out. For example, no transfer may be registered regarding that property: Land Title Act s. 189(1). Furthermore, before a mortgage or agreement for sale will be registered, the duplicate indefeasible title, if any, must be surrendered to the registrar for cancellation: s. 195(1). In addition, a duplicate certificate of title will not be issued if the property is subject to a registered mortgage.

 

The maxim nemo dat quod non habet, “no one [can] give what one does not have”, means that a person who has granted an equitable mortgage cannot transfer free and clear title to a third party i.e. having given the equitable mortgage they no longer have a full interest to give. Similarly, a judgment creditor cannot recover full title to the land of a judgment debtor if that debtor has already granted an equitable mortgage on the property – the creditor can only attach to the interest the debtor has in the property. This is sometimes called the rule in Jellet v. Wilkie (1896), 26 S.C.R. 282: “an execution creditor can only sell the real estate of his debtor subject to the charges, liens and equities to which the same was subject in the hands of the execution debtor”.

 

Therefore, a prior unregistered equitable mortgagee is entitled to priority over a registered writ of execution: Yeulet v. Matthews, [1982] 4 W.W.R. 5 (B.C.S.C.). Similarly, if the mortgagor becomes bankrupt, the trustee in bankruptcy will take the land subject to the equitable mortgage i.e. the equitable mortgage holder is a secured creditor.

 

This is particularly relevant for judgment creditors in British Columbia: finding that the judgment debtor owns what appears to be unencumbered property for which the duplicate certificate of title is in the land title office, does not mean that the creditor will be able to recover the full interest in the land; an equitable mortgage may have been given.

 

However, an equitable mortgage cannot be enforced against a bona fide purchaser for value without notice – which is why equitable mortgage holders should file caveats against title to give notice to the world.

 

Despite the system of land title registration in British Columbia, registered land owners may grant valid mortgages which cannot be registered against title. Equitable mortgages may be created in a number of ways and will give the secured party (the mortgagee) the right to recover against the land if the debtor (mortgagor) defaults.

 

However, being an equitable mortgagee is more risky than being a legal mortgagee, and equitable mortgagees should register caveats against title to protect their interest being defeated by bona fide purchasers for value without notice.

 

Judgment creditors may be pleased to find the judgment debtor holds unencumbered property, but, even if the duplicate certificate of title is in the land title office, the property may still be subject to an equitable mortgage granted by the registered owner and the judgment creditor’s claim will be subordinate to that of the equitable mortgagee.