When a mortgagor (borrower) defaults on their payments to a mortgagee (lender), the mortgagee has a few options. One of those options in some circumstances may be to take possession of the property to recoup their losses. A recent case before the Ontario Court of Appeal discusses how this can be done.

Mortgagee took possession of property after fire and mortgagor default

In the recent case of Hume v. 11534599 Canada Corp., a fire occurred at a property owned by the mortgagors on October 13, 2020. The mortgagee held the second mortgage on the property, which the mortgagors had defaulted on just before the fire. The mortgagees took possession of the property after the fire.

After the fire, the property was uninhabitable. However, the mortgagee did not notify the mortgagors before taking possession of the property, and the locks were changed. The mortgagors relied on paragraph 10 of the terms of the mortgage agreement, which read:

10. Upon default in payment of principal and interest under the Charge or in performance of any of the terms or conditions hereof, the Chargee may enter into and take possession of the land hereby charged and where the Chargee so enters on and takes possession or enters on and takes possession of the land on default as described in paragraph 9 herein the Chargee shall enter into, have, hold, use, occupy, possess and enjoy the land without the let, suit, hindrance, interruption or denial of the Chargor or any other person or persons whatsoever.

Application judge took issue with how mortgagee took possession of the property

The mortgagors brought an application to regain possession of the property. At the original hearing, the application judge found that although the mortgagors had indeed defaulted on the mortgage, the mortgagee was not allowed to take possession of the property. The judge agreed that paragraph 10 of the mortgage agreement did not require the mortgagee to give notice before taking possession of the property. However, the court held that the mortgagee had not taken “peaceable possession of the property”. 

The Mortgages Act requires “quiet possession”

Section 7(a)(iv) of Ontario’s Mortgages Act provides that “on default, the mortgagee shall have quiet possession of the land, free from all encumbrances [emphasis added].” 

Moreover, at common law, it has been held:

“When a mortgage contains the usual provision to the effect that the mortgagee is entitled to quiet possession upon default in payment – as this one does – a mortgagee is entitled to take possession of the mortgaged premises immediately upon default, provided that it does so peaceably, and it may exercise that right when it chooses.”

Defining the term “peaceably”

To determine the meaning of “peaceably,” the application judge turned to criminal law. Section 41(1) of the Criminal Code provides that a person in “peaceable possession” of a dwelling can use reasonable force to prevent anyone from trespassing on their property.

Relying further on a 1992 case from the Court of Appeal of Alberta, the judge held that “‘peaceable possession’ means passion that is ‘not seriously challenged by others’ and that is ‘unlikely to lead to violence’.” The judge decided that because the mortgagors had not vacated the property or acquiesced to the mortgagee taking possession, it was not done peaceably.

After finding the property had not been taken peaceably/peacefully, the judge determined the amounts outstanding under the mortgage and ordered the mortgagors to pay. After payment, the mortgagees were to assign the mortgage to a different lender.

What constitutes “peaceable possession”?

On appeal, the central issue was whether the mortgagee was barred from taking possession of the property after the mortgagors’ default.

The Ontario Court of Appeal determined that the application judge had erred in relying on the criminal law understanding of “peaceable possession.” The definition under the Criminal Code is limited to the context of justifiable use of force in protecting one’s property from trespass.

The Court of Appeal admitted that the case law around the meaning of “peaceable possession” in the context of this particular case is scant. Only two other decisions from the Ontario Court of Appeal on this issue exist. A lower court decision distinguished between the possession of residential and non-residential properties. For residential properties, it suggested that mortgagees could only take possession by applying for a writ of possession from the court. The action of changing locks and dispossessing the occupants was not considered peaceable possession. 

Possession was peaceable, but mortgagee still required to assign mortgage

On reviewing the limited authorities available, the Court of Appeal found that, at a minimum, possession is considered peaceable if there is no violence or threat of violence. The use of the property in question is also relevant. Changing the locks while the owners are away is not violent per se, but if they are not given an opportunity to make other arrangements, it is not peaceable.

However, the Court of Appeal found that the possession was peaceable. The residence could not be inhabited after the fire. The mortgagee inspected the property and found no signs that the mortgagors were living in the residence at the time. In fact, the mortgagors had not notified the mortgagee of the fire. The Court found that, in these circumstances, the mortgagees acted reasonably. While it would have been ideal for the mortgagees to communicate with the mortgagors before taking possession, it was not required. 

The Court of Appeal allowed the mortgagee’s appeal. However, the Court maintained the requirement for the mortgagee to assign the mortgage to a new lender, as the mortgagee had deliberately refused to comply with earlier orders to this effect.

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