ALBERTA LAW REFORM INSTITUTE MORTGAGE REMEDIES IN ALBERTA Report For Discussion No. 9 April 1991 ISSN 0317-1604 ISBN 0-8886-4171-0 ALBERTA LAW REFORM INSTITUTE EDMONTON, ALBERTA MORTGAGE REMEDIES IN ALBERTA Report For Discussion No. 9 April 1991 ALBERTA LAW REFORM INSTITUTE The Albert) L)* Re+or, Institute *as est)(lishe- on Januar/ 1, 1968, (/ the 0o1ernment o+ Al(ert)& the Uni1ersit/ o+ Albert) )nd the L)* Societ/ o+ Albert) +or the purposes& ),on2 others& o+ conductin2 le2al researc' and recommendin2 re+orms in the la*. Fundin2 o+ the Institute's oper)tions is pro1i-e- (/ the 0o1ernment o+ Albert)& the Uni1ersit/ o+ Albert) and the Alberta L)* Found)tion. The Institute's o4ce is )t 402 L)* 6entre& Uni1ersit/ o+ Albert)& E-monton, Albert)& T#0 2H5. Its telephone nu,(er is (403) 492-5291; +)< (403) 492-1790. The me,(ers o+ the Institute's Boar- o+ Directors )re 6.W. Dalton; J.L. Foster& =.C.; A. Fruman; A.D. Hunter& =.C. 96hairman); W.H. Hurlburt& =.C.; H.J.L. Ir*in; D.P. .ones& =.C.; >ro+essor J.C. Le1/; >ro+essor >.J.M. Lo*n (Director:; Dr. J.P. Mee?ison; The Honour)(le M)-am Justice B.L. R)*lins; A.C.L. Sims, Q.C.; and C.G. W)t?ins. The Institute's le2al st)@ consists o+ >ro+essor >.J.M. Lo*n (Director:; R.H. Bo*es; 6. 0au?; J. Henderson-L/p?ie& M.A. S'one and E.T. Spink. W.H. Hurlburt, Q.C. is a consult)nt to the Institute. ACKNOWLEDGEMENTS This report +or -iscussion has (een pro-uce- in t*o st)2es. The preliminar/ *or? *as -one (/ 0rant 7),,ond *hen he *as *it' the Institute. A +airl/ (ro)- consult)ti1e 2roup *as set up to -iscuss possible solutions and polic/ issues. The me,(ers o+ t')t committee are set out in chapter one. The second st)2e occurre- )+ter Mr. 7ammond's return to Ne* Zealand *hen the proBect *as assi2ne- to Janice Henderson-L/p?ie& *'o has carrie- the proBect throu2h to its current st)2e in the last 18 months. Janice Henderson-L/p?ie has up-)te- the *or? *hic' *as -one pre1iousl/. Her or2anise- researc' and present)tion o+ polic/ issues has 2re)tl/ assiste- the Boar- in its consider)tion o+ this )re). It has also (een extremel/ help+ul& (ot' to counsel and the Boar-& to ')1e ')- the (eneCt o+ the )-1ice o+ the >roBect 6ommittee& in particular& Michael J. >enn/ and H.J. L/ndon Ir*in. In )--ition, *e ')1e (eneCtte- fro, the comments o+ Eric Spin? *ho Boine- the Institute as Counsel in the Fall of 1990. There are man/ other people *ho ')1e (een consulte- on an informal (asis or *hose 1ie*s ')1e (een sou2ht *it' respect to parts o+ the report. All o+ these people ha1e impro1e- the scope and qualit/ of the report. INVITATION TO COMMENT This Report +or Discussion sets out the Institute's tent)ti1e 1ie*s +or -iscussion and comment. The Institute *ill reconsider its 1ie*s and prepare its Cnal report and recommend)tions in li2ht of comments recei1e-. 6omments should (e in the Institute's 'ands (/ Dece,(er 16, 1991. 6omments in *ritin2 are pre+erre-. Oral comments ,)/ (e ,)-e to .)nice Henderson-L/p?ie. Her telephone nu,(er is (403) 492-1798. MORTGAGE REMEDIES IN ALBERTA T)(le of Contents PART I — SUMMARY 1 PART II — REPORT 1 CHAPTER 1 — INTRODUCTION 1 A. >urpose and Scope of Report 1 B. The Form of the Report 2 6. Ac?no*le-2ments 3 D. Terminolo2/ 3 CHAPTER 2 — THE GENERAL NATURE OF THE PROBLEM 4 A. Intro-uction 4 B. The Pendulu, Phenomenon 4 6. Second Le1el Pro(lems 5 D. O1erall O(Becti1es 6 (1) The Extension of Cre-it 6 95: The Pre1ention of Unconscionable Ju-2ments 7 9 : The I,portance of A-eDu)te Transitional Arran2e,ents 8 9$: The St)(ilit/ of Sales 8 98: The Re-uction of Costs 8 9#: The MinimiE)tion of Losses 9 E. 6onclusion 9 CHAPTER 3 — THE DEVELOPMENT OF ALBERTA MORTGAGE REMEDIES 10 A. Intro-uction 10 B. Mort2)2es at Co,,on L)* 10 6. The Inter1ention of EDuit/ Courts 11 D. Le2islation and Proce-ure in the Nort'*est Territories 14 E. Alberta Le2islation (To World War I) 16 F. World War I to the Depression 18 0. The Gre)t Depression and World War II 20 H. Oil and the Economics of Risin2 Expect)tions, 1946-1980 21 I. The 1980s Recession and the Le2islati1e Response 26 J. The 1980s Recession: The Ju-icial Response 29 G. 6onclusion 33 CHAPTER 4 — EXISTING LAW AND PRACTICE 35 A. Intro-uction 35 B. Reme-ies A1ailable to the Lender 35 (1) 0eneral 35 95: Action on the Co1enant for P)/ment 36 9): The general restriction 36 9(: Scope of general restriction 37 9i: Interpret)tion of section 41(1)(a) 37 9ii: Situ)tions outside the scope of section 41(1)(a) L>A 38 (c: E@ect of section 41 on borro*ers' liabilit/ under ad-itional securit/ 39 9-: E<ceptions to the general restriction 41 9i: Mort2)2es gi1en to secure loans under the National Housing Act 41 9ii: Mort2)2es gi1en b/ corpor)tions 41 9iii: Mort2)2es grante- to the Cro*n 42 (e: Liabilit/ under the co1enant when action not (arre- 48 9+: Liabilit/ of trans+erees under section 62 of the Land Titles Act 49 92: Rene*als 53 9i: Section 43(1)(() 53 9ii: Ho* should section 43(1) be interprete-H 55 9A: The interpret)tion of section 43(1) be+ore Royal Trust Company v. Potash 55 (B: Royal Trust Company v. Potash 57 96: Interpret)tion of section 43 )+ter Royal Trust Company 1. Potash 59 9iii: 6onclusions 63 9i1: >otential future de1elopments 65 9': Due-on"sale clauses 68 9i: W')t is a due-on"sale clauseH 68 9ii: Ialidit/ of due"on-sale clauses 69 9iii: Relief from enforcement of due-on"sale clauses 71 9A: Section 18(1) of the Judicature Act 71 (B: Section 39 of the Law of Property Act 72 9i1: The American position 73 9 : Sale 80 9): Ju-icial sale of land 80 9(: Direct sale to the lender 83 (c: >ri1)te sale b/ lender 84 9$: Foreclosure 86 9): Where section 41(2) applies 86 9(: Where section 41(2) does not appl/ 87 (c: E@ect of a final or-er for foreclosure 87 9i: 0eneral discussion 87 9ii: Foreclosure or-ers and guarantees 89 9iii: Foreclosure or-ers and leases 90 9-: Ri2ht of re-e,ption after foreclosure 91 98: T)?in2 Possession 92 9#: Appointin2 a Recei1er 94 9): >ri1)te appoint,ent 95 9(: 6ourt appointment 95 9!: Attornment Clauses 97 9): Enforce,ent of attornment clauses in Alberta 98 9i: E1er/ attornment clause is voidJ section 35(1) of the Law of Property Act 98 9ii: E<ceptions 98 9A: A mort2)2e in f)1our of the Farm Cre-it 6orpor)tion: 35(2)(a) of the Law of Property Act 98 (B: National Housing Act mort2)2esF sections 35(2) 9() and 36 Law of Property Act101 96: Mort2)2e of business premisesF section 37 of the Law of Property Act101 9(: Restrictions on enforcin2 valid attornment clause102 6. Relief A1ailable to the Borro*er102 (1) 0eneral102 95: Section 39(1) of the Law of Property Act103 9 : Section 41 of the Law of Property Act104 9$: Ri2ht of Re-e,ption104 98: The Farm De t Review Act106 CHAPTER 5 — THE MORTGAGE INDUSTRY IN ALBERTA109 A. Intro-uction109 B. The General Dimensions of the Mort2)2e Industr/ in Alberta109 6. >articular Industr/ Su(sets110 D. 6lassific)tion b/ Borro*in2 C)te2ories110 (1) Farm Mort2)2es110 95: Residential Mort2)2es111 9 : 6ommercial Mort2)2es112 E. 6lassific)tion b/ Priorit/ of Mort2)2e113 F. 6lassific)tion b/ Insurance114 0. The Economic Do*nturn of the 1980s115 H. The Foreclosure Epidemic116 I. The Dispar)te I,p)ct of Foreclosures118 J. The E@ect of the 1980s Experience on the Suppl/ of 6re-it120 G. The "Man)2ementK Issue121 L. The Enforce,ent of the Co1enant121 M. The I,p)ct on the Ju-icial S/stem of the Foreclosure Epidemic122 N. 6onclusion123 CHAPTER 6 — MORTGAGE REMEDIES IN OTHER CANADIAN JURISDICTIONS125 A. Intro-uction125 B. Sas?)tche*an126 (1) 0eneral126 95: The Land Titles Act126 9 : The Limitation of Civil Rights Act127 9$: The Land Contracts (Actions) Act128 98: The $as%atchewan Farm Security Act129 9#: The Agreements of Sale Cancellation Act130 9!: Sas?)tche*an Queen's Bench Rules130 9%: 6onclusion131 (9) L)* Re+orm in Sas?)tche*an132 6. British Colu,(ia132 (1) 0eneral132 95: The Land Titles Act133 9 : Foreclosure and Re,e-ies Generall/133 9$: L)* Re+orm in British Colu,(ia134 D. Ontario136 (1) 0eneral136 95: >o*er of Sale137 9 : Foreclosure140 9$: The Protection of the Borro*er141 98: >ossession of the Mort2)2e- Propert/142 9#: Anachronisms and Anomalies143 9!: Action on the Co1enant144 9%: Recei1erships146 (9) L)* Re+orm in Ontario146 E. 6onclusion147 CHAPTER 7 — FRAMEWORK FOR REFORM148 A. Intro-uction148 B. The General Direction of Re+orm148 6. DeCcienc/ Ju-2ment Limit)tions155 (1) Intro-uction155 95: >u(lic Polic/ Underl/in2 Le2islation T')t Protects Borro*ers From DeCcienc/ Ju-2ments155 9 : 6o,parison of Le2islation T')t Protects Certain Borro*ers From DeCcienc/ Ju-2ments156 9): The protection of indi1iduals156 9(: The protection of purchase mone/ mort2)2es156 (c: DeCcienc/ ju-2ment protection if land sold b/ lender157 9-: DeCcienc/ ju-2ment protection if re-e,ption perio- shortene-158 (e: Appraisal as restriction on deCcienc/ Bu-2ments158 9$: Other Met'o-s of Protectin2 Borro*ers158 98: Which Borro*ers Should be Protecte-H159 9): The hearth and home philosop'/ for deCcienc/ Bu-2ment protection159 9(: Su22estions for re+orm160 9i: No deCcienc/ ju-2ment protection for corpor)te borro*ers160 9ii: DeCcienc/ ju-2ment protection for some, but not all, indi1idual (orro*ers160 (c: Ho* should indi1iduals w'o ha1e mort2)2e- their home or farm be protecte- from -eCcienc/ ju-2mentsH162 9i: Metho-s of protectin2 these indi1idual (orro*ers162 9ii: Recommend)tions for re+orm165 9#: W')t is the extent of the protection?166 9): DeCnition of residential land and farm land166 9i: Land de1elopment167 9ii: Mo(ile homes 168 9iii: Recommend)tions169 9(: Must the indi1idual borro*er reside on the residential land or carr/ on a f)rmin2 oper)tion on the farm landH170 9i: Intro-uction170 9ii: R)tionale behind imposin2 a use reDuirement170 9iii: 6han2e of use171 9i1: Multiple uses174 91: Anal/sis174 91i: Recommend)tions176 (c: Tre)tment of mort2)2es t')t char2e different t/pes of propert/177 9-: Assi2nments of rent178 D.