I Declare: This Mortgage is Unenforceable

Angela Folino and Laura Morrison recently succeeded in obtaining a declaration that a mortgage was unenforceable and an order paying out funds that had been paid into court to secure the mortgage’s discharge.

The Mortgage

In Chan v. 0975713 B.C. Ltd., 2018 BCSC 872, the (now deceased) mortgagor entered into the mortgage at issue in lieu of providing a cash deposit as security for a commercial lease. Justin Chan, now deceased, was one of a group of seven tenants who each leased one commercial unit in a building in Richmond, BC. The tenant group paid a cash deposit as security for the leases, but soon into the lease term the landlord demanded a further deposit of $40,000, which the tenant group could not provide. Instead, Mr. Chan agreed to a mortgage in favour of the respondent numbered company over his condominium.

Although the mortgage itself appeared to be a standard mortgage in the principal amount of $40,000 with interest payable at 12% per annum payable on demand, it was not disputed by the respondent mortgagee that no money was ever advanced under the mortgage and that its purpose was to secure the collateral obligations of Mr. Chan and the rest of the tenant group under their leases.

The Lease

The tenants only ever occupied two of the seven units, one for two months and one for three months. They moved into the units in October and November 2013 and moved out at the end of December 2013, before the six-month lease term expired. The landlord never made any claims against the tenants for breach of lease for either unpaid rent or physical damage to the units.

The Respondent’s Refusal to Discharge the Mortgage

Some time later, when attempting to obtain financing for an unrelated business venture, Mr. Chan attempted to secure the discharge of the mortgage, since the lease had been terminated and the mortgage no longer had a valid purpose. The respondent repeatedly refused to voluntarily discharge the mortgage, even after Mr. Chan’s death and following attempts by lawyers engaged by the estate to do so.

The Court Proceedings and the Decision

In the petition, Mrs. Chan sought to have the mortgage declared unenforceable and an order that funds that she had paid into court to secure the discharge of the mortgage (in order to allow the sale of Mr. Chan’s condominium to complete) be paid out to her.

The court agreed with each of the petitioner’s three arguments, which were:

1. The limitation period for the enforcement of the mortgage as collateral security started to run at the same time as the limitation period of the underlying obligation. In other words, since the mortgage was security for the tenants’ obligations under the leases, the limitation period started to run when the leases were terminated, assuming that such termination was a breach of the leases. The limitation period started to run at the end of December 2013 (when the tenants moved out) and expired at the end of December 2015. Therefore, the respondent was out of time to enforce the mortgage;

2. Even if the landlord had a valid claim, the respondent failed to provide any evidence of a debt owing by the tenant, or of the cost of any physical damage that the tenants caused that would allow the respondent to enforce the mortgage, despite having had many years to do so in response to multiple requests by Mr. Chan or his representatives; and

3. Since the respondent company had been dissolved for more than two years, all of its assets, including the mortgage, had escheated to the government and the respondent therefore no longer owned them. Further, the respondent’s representatives had taken no steps to restore the company such that it could take the mortgage back from the government. That being the case, and since the government advised the petitioner that it would not participate in the proceedings, the respondent had no right to enforce the mortgage.

Conclusion

In the result, the court granted the relief sought and made a declaration that the mortgage was unenforceable, with alternative declarations that the mortgage had been satisfied in whole or that the respondent had no interest in the mortgage. The court also ordered that the funds that had been paid into court, plus accrued interest, would be paid to Mrs. Chan, and that Mrs. Chan was awarded her costs of the proceeding against the respondent.