Module 10 - Real Property - Sales & Mortgages

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Toronto Metropolitan University *

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Feb 20, 2024

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Readings: McInnes, M., Kerr, I., & VanDuzer, J. A. (2022). Managing the law: The legal aspects of doing business (6th Edition). Pearson. o Chapter 16: Real Property: Sales and Mortgages Introduction In this module we will continue our discussion on real property by delving into the buying, selling and financing of real property. We will also describe the types of land registration systems that exist, and the important role they play in facilitating real property transactions. Topics and Learning Objectives Topics This module will cover the following topics:  Land Registration Systems o Registry System o Land Titles System o Fraud o Unregistered Interests in Land  Sale and Purchase of Real Property o Risk Management o Agreement of Purchase and Sale o Conditional Contract o Closing o Remedies  Mortgages o Introduction to Mortgages o Nature of Mortgages o Mortgage Terms o Remedies for Mortgage Default Learning Objectives By successfully completing this module, students will be able to:

 Land Registration Systems o Identify the differences between the registry system and the land titles system. o Identify and explain the 3 principles upon which the land titles system is based. o Apply the concept of indefeasibility in the land titles system. o Apply the law pertaining to indefeasibility and fraud in the land titles system. o Identify and explain 5 different unregistered interests in land that can be enforced against the registered owner of an interest in real property.  Sale and Purchase of Real Property o Apply risk management (utilizing outside experts) when buying an interest in land. Explain what each expert would do to assist the buyer. o Explain the purpose of an agreement of purchase and sale. o Apply a condition (condition precedent) to an agreement of purchase and sale. o Apply different remedies in the event of a party breaches an agreement of purchase and sale.  Mortgages o Describe what a mortgage is. o Identify and explain who the mortgagor and mortgagee are. o Explain how the priority of mortgages is determined and the implication of their priority status. o Apply the priority rules with respect to mortgages. o Identify and explain a few common terms in a mortgage. o Apply 4 different mortgagee’s remedies when a mortgagor defaults under the mortgage. o Explain the challenges regarding mortgages on First Nation Land and how designations could be used to create a leasehold interest Overview As we learned in the previous module, many different types of estates and interests in land may exist in a parcel of land. Sellers do not have to legally disclose everything about their property, thereby leaving it to the buyer to carry out their due diligence, preferably with the assistance of real estate professionals. One important part of the due diligence process is to check the land registration records. All land in the hands of private parties is recorded in the public land registration system. We will explore the different types of land registration systems and look at what they can reveal about a property, but also what they don’t. Registry System

The Registry System is a much older system than the Land Titles System. Documents (e.g., deeds, mortgages, easements, restrictive covenants, etc.) that are filed in the Registry System are stored and made available to the public to review. The government does not review the documents filed nor do they give any assurance that the documents are valid and enforceable. Whoever carries out a search in the Registry System must satisfy themselves as to the veracity of the documents. This is a significant weakness in the system. If you were interested in buying a parcel of land you (or better still, your lawyer) would review the documents in the Registry System pertaining to that land to determine whether there is a good chain of title and what estates and interests exist in that land. The Ontario Registry System Act requires that a 40 years title search be done to determine whether there is a good chain of title. This means that you must determine who owned the estate and interests in the land 40 years ago and then follow each transfer thereafter to ensure they were passed properly. From time to time, different estates and interests in the same land may compete against each other. Generally, competing claims are resolved by the priority rule which is based upon the time of registration of the document. This priority rule incentives everyone to register their estate or interest as soon as possible after being acquired, because failure to do so permits someone to register ahead of you. Land Titles System The Land Titles System is a much better system than the Registry System. Documents filed in the Land Titles System (unlike the Registry System) are reviewed by the government for accuracy and validity. Once approved by the government, the documents are entered onto the certificate of title and the government gives an assurance that the documents are accurate and valid. In other words, the recorded estate or interest is indefeasible (i.e., cannot be defeated) subject to a few exceptions. The Land Titles System is based on 3 principles: 1. Mirror Principle : the documents recorded on the certificate of title to a parcel of land reflect (like a mirror) the estates and interests in that land. 2. Curtain Principle : the documents recorded in the certificate of title are valid and there is no need to “lift the curtain” and search the “chain of title” (as you would in the Registry System). 3. Insurance Principle : a person that suffers a loss by relying upon the certificate of title which contained an error can make a claim against the assurance fund. Similar to the Registry System, competing claims in the Land Titles System will usually be resolved by the priority rule, which is based upon the time of registration.

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Since the Land Titles System is superior, the Ontario government has been converting lands in the Registry System into the Land Titles System. Today, most land in Ontario is in the Land Titles System, however, not all – some land still remains in the Registry System. Despite the “indefeasibility” of the Land Titles Certificate of Title, we will see there are exceptions (e.g., fraud; unregistered interests) to it, which will be discussed later. The indefeasibility concept in the Land Titles System makes the system simpler and more reliable. However, in the face of fraud, the indefeasibility concept can create injustice. We will explore this in the next section. Mortgage Fraud in Land Titles System Imagine an owner of fee simple having a fraudster impersonate them and sell their property, take the money, and abscond. Or, imagine a fraudster impersonating the owner and borrowing money from a bank and granting it a mortgage on the property. All of this is taking place without the true owner of the property being aware of what the fraudster is doing. Once the true owner finds out, who has the best rights to the property? The buyer? The bank? Let’s find out. Indefeasibility On a strict application of indefeasibility, whoever is shown on the Certificate of Title as the owner of fee simple or holder of a mortgage would have the best rights. In other words, the victim of the fraud would not succeed. He/she would have to make a claim against the assurance fund. Some courts have looked at the buyer’s conduct or lender’s conduct to assess whether they were careless in their due diligence to find in favour of the victim. However, in some cases there has been no carelessness. Deferred Indefeasibility In Lawrence v Wright (2007) the Ontario Court of Appeal applied what is known as the “deferred indefeasibility” rule. The court distinguished between “intermediate owners” and “deferred owners”, defined as follows:  Intermediate owner : a person who obtains an estate or interest directly from the fraudster.  Deferred owner : a person who does not obtain an estate or interest from the fraudster. Let’s assume that Tanya, a fraudster, impersonates Susan, the registered owner of a property, and creates a mortgage with a bank. The bank would be the intermediate owner because it obtained an interest in the property directly from Tanya, the fraudster.

Since the bank dealt with the fraudster it had an opportunity to discover the fraud, whereas Susan did not. The bank and Susan both claim valid rights in the property but they conflict with each other. The bank claims to be owed money, and if not paid it will use its remedies as against the property. As between Susan and the bank, Susan will prevail based upon the deferred indefeasibility rule. Assume that before Susan became aware of the fraud the bank had transferred the property to an innocent buyer, William. The bank was the intermediate owner. William is the deferred owner because he obtained ownership from the bank, not from the fraudster. William did not have an opportunity to learn about the fraud. Susan and William each claim the property. As between Susan and William, William will prevail based upon the deferred indefeasibility rule. If the property was in the Land Titles System, Susan would make a claim against the Land Titles assurance fund. If Susan had title insurance (which will be discussed in a later section) she could make a claim with her title insurer for compensation. After the Lawrence v Wright case the Ontario government amended the Land Titles Act (section 78(4.1) (4.2)) to make “deferred indefeasibility” a statutory rule. Activity Roger Smith has lived in his house for 30 years. He has a fee simple estate and it is registered in the Land Titles System. He paid off his mortgage many years ago. Sammy is a career criminal. He is impersonating Roger and applies for and receives a $200,000 loan from the bank. Sammy forges Roger’s signature and grants the bank a mortgage against the house, as collateral for the loan. The bank registers the mortgage. Sammy takes the $200,000. No payments are made on the mortgage and it is now in default. The bank commences its mortgage remedies. The bank is trying to have Roger evicted so that the bank can sell the house to pay the mortgage. Roger is shocked. He doesn’t understand what is happening. Question: Based upon the indefeasibility principle, who has the best legal rights to the house? Explain and support your answer. Answer: The bank . The Certificate of Title would show that the bank has a registered mortgage. On a strict application of the indefeasibility principle the bank would have the best rights despite the fact that a fraudster impersonated Roger Smith. Question: Based upon the deferred indefeasibility principle, who has the best legal rights to the house? Explain and support your answer. Answer:

Roger Smith . Sammy impersonated Roger and created a mortgage with the Bank. The Bank dealt with the fraudster, therefore the bank would be an intermediate owner . The deferred indefeasibility rule provides that when an original owner and an intermediate owner have competing claims against the property the original owner would prevail. Roger will succeed. Please note that there was no deferred owner in this case. In Ontario “deferred indefeasibility” is the law ((section 78 (4.1) - (4.2) of the Land Titles Act )). Title Insurance A buyer of real property can purchase title insurance to provide coverage for certain events. One of the coverages available is for fraud at the time of the purchase. If you bought a home, and after you were registered as the new owner you learned that you had dealt with a fraudster who had impersonated the real seller, who is legally entitled to the house. Based upon the deferred indefeasibility rule (section 78 (4.1) - (4.2) of the Land Titles Act ) the real seller would be entitled to the property, and you would not be. However, if you had purchased title insurance at the time of the purchase the title insurance company would compensate you. You don’t get the house but you get your money back. Title insurance policies usually cover frauds perpetuated after you become the owner. And, title insurance is available to mortgagees also. In Ontario, purchasing title insurance has become very common. Insurance coverage for fraud is comforting for buyers and mortgagees. Title insurance also provides coverage for other named risks. As we discussed, one of the principles upon which the Land Titles System was based is the “mirror principle”, namely that idea that everything that can affect a property will be reflected in the Certificate of Title. Unfortunately, this principle was not fully achieved. We already saw that fraud can undermine the “mirror principle” in certain circumstances. Now we will discuss some interests in land that do not need to be registered in the Land Titles System to be enforceable against the land. Unregistered Interests in Land Titles System There are numerous interests in land that affect land that do not need to be registered in the Land Titles System. Therefore, it is necessary to carry out additional inquiries to find out whether there are such unregistered interests affecting the land. Some common examples of unregistered interests in land are:

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 Short-term leases : a lease for a remaining term of 3 years or less with the tenant in occupancy does not have to be registered in order to bind the land. Accordingly, it is prudent to inspect the property for occupants.  Easements by prescription and adverse possession claims : these types of claims were discussed in the previous module. In Land Titles, in very limited circumstances, such claims may still be raised. It is advisable to inspect the property for any evidence of such claims.  Public easements : statutory public easements may exist without having to register them. An inspection of the property will reveal any physical indicators of an easement (e.g., overhead wires). For those easements not visible (e.g., below the surface of the land) become much more difficult to determine. Contacting the various utility and service providers to inquire as to any easements and their location would be prudent.  Unpaid taxes : municipal property taxes that are not paid for a statutory lien against the property. The lien remains regardless of a change in ownership. Failure to pay the taxes arrears will result in the municipality selling the property in order to pay the arrears. Requesting the municipality to advise as to any tax arrears would reveal this issue.  Unpaid judgment creditors : a successful lawsuit leads to a judgment, but if the defendant does not pay, the plaintiff can file the judgment with the sheriff’s office which becomes a writ of execution. This writ allows for the seizure of real property owned by the defendant, and the sale thereof, for purposes of paying off the judgment. The seizure and sale can occur after the defendant sold the property. A search at the sheriff’s office will reveal any outstanding writs of execution. In the Registry System many of the same claims can be made against a property despite those interests not being registered. Easements by prescription and adverse possession claims are not prohibited by the Registry Act but they are prohibited in the Land Titles Act . Acquiring an Estate in Land The most common way of acquiring an estate in land is by purchasing it from the present owner. The process of purchasing is complex. Furthermore, the law does not impose significant duties upon a seller therefore it becomes imperative that a buyer carry out thorough due diligence, including the hiring of real estate experts to assist. We will use “seller” and “vendor” interchangeably, and “buyer” and “purchaser” interchangeably Risk Management

“Caveat Emptor” Generally, “caveat emptor” or “buyer beware”, applies to the buying of real property. Therefore, the buyer has the burden to make inquiries to satisfy themselves with the property. There are a number of exceptions to “caveat emptor”, but they cannot be fully discussed here. However, some important exceptions to “caveat emptor” arise with respect to the sale of resale homes:  A seller cannot cover up defects.  A seller must disclose all known latent defects that are dangerous, potentially dangerous or render a property unfit for occupation. A “latent defect” is a defect that a reasonable person would not see if they carried out an inspection. Activity Seller is selling house. There is a noticeable crack on the outside side wall. The buyer entered into the Agreement of Purchase and Sale. After closing, the buyer notices the crack. The repairs will cost $3000. The Buyer wants to sue the Seller for the cost of repairs. Question: Does the Buyer have a good legal case against the Seller? Yes or No. Explain and support your answer. Answer: No, the Buyer will not succeed. The defect was not a latent defect. It was a patent defect (i.e., a reasonable person could see it). The Buyer should have inspected the outside of the building. The seller does not have a duty to disclose patent defects. “Caveat emptor” applies. Seller owns a house. In the spring and fall water seeps into the basement through a visible crack in the foundation. Before putting the house up for sale, the Seller installed drywall in the basement. The foundation crack and water stains in the basement cannot be seen. A buyer looks at the house and agrees to buy it. After the closing there was a rainy period and water seeped into the basement. After investigating the buyer found the source of the leak, namely the foundation crack behind the drywall. The buyer wants to sue the seller for the cost of repairs. Question: Will the buyer succeed? Yes or No. Explain and support your answer. Click for answer. Answer:

Yes, the buyer will succeed. Prior to the drywall being installed, the defect was patent, and a reasonable person, such as the buyer, would have seen it. However, by installing the drywall the seller concealed the defect so that the buyer could not see it. The seller would be liable for deliberately concealing the defect. Real Estate Professionals In light of the complexity of real property many different professionals are available to assist. For example:  Real Estate Agent : a real estate agent can assist a seller in selling their property, and assist a buyer in finding an appropriate property. Real estate agents can also assist in preparing an agreement of purchase and sale, negotiating and assessing the value of the property.  Lawyer : A lawyer will be of critical importance in assisting a seller or buyer. The lawyer can negotiate and prepare an agreement of purchase and sale. For the buyer, the lawyer will carry out a land registration search and also other searches to ascertain unregistered interests (e.g., municipal tax arrears, sheriff’s office for writs of execution, zoning, etc.). The lawyer will prepare closing documents and mortgage documents, and ensure the appropriate documents are registered in the land registration system. And, the buyer’s lawyer will typically order title insurance for the buyer and mortgagee.  Appraiser : an appraiser can provide a professional opinion as to the approximate value of a property.  Surveyor : a surveyor will prepare an up-to-date survey of the land and the location of structures and registered easements. The survey will reveal whether structures encroach upon the easement and whether your neighbour’s buildings are encroaching on your land, or whether your buildings are encroaching on your neighbour’s land. A survey can also assist in determining whether buildings are in compliance with zoning by-laws.  Building Inspector : a building inspector will inspect the building and give an opinion as to the physical state of the building.  Environmental Auditor : an environmental auditor can inspect and investigate the property to opine on whether there are any environmental concerns. Please see Concept Summary 16.1 (Risk Management and the Purchase of Land) in the textbook. Agreement of Purchase and Sale An agreement of purchase and sale is a contract for the purchase and sale of real property. In Ontario the Statute of Frauds stipulates that an enforceable contract to buy and sell real property must be in writing and signed by the party you wish to enforce it against.

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An agreement of purchase and sale will be entered into by the parties on one date, but the transaction will not be completed until a future date (i.e., “completion date”). The time between the creation of the agreement until the completion date is to allow the parties to prepare for the completion. Depending upon the circumstances and the agreement, the buyer may need the time to: have a building inspector inspect the property; apply for mortgage financing; sell their existing home; have their lawyer carry out searches against the property; arrange for movers, etc. The seller, on the other hand, may need the time to find a new home and prepare to move out of their existing home. Below, we will discuss conditions in an agreement, and remedies available for breach of the agreement. Conditional Contract It is not uncommon for a contract to buy and sell land to contain a condition (or condition precedent ). A condition sets out a requirement that must be fulfilled before the contract is to be completed. A buyer may wish to enter into a contract to buy a property but reserve the right not to proceed with the transaction if he/she cannot obtain financing or is not satisfied with a building inspection. A condition could be used to accomplish this objective. A seller may, on the other hand, wish to enter into a contract but insert a condition reserving the right not to proceed with the transaction if the seller cannot find a suitable home to buy within 20 days. For both buyers and sellers, conditions can be useful in achieving their objectives. A condition does not prevent the creation of the contract, it suspends the primary obligation of the contract (money in return for the title to the property). A condition implies a subsidiary obligation upon one of the parties to use their reasonable efforts to fulfil the condition. For example, a condition for the buyer to obtain financing for the transaction implies that the buyer will make reasonable efforts to obtain the financing. If he/she does make reasonable efforts but cannot get the financing, the condition is not satisfied and the contract comes to an end. However, if the buyer makes no effort to get financing, he/she is in breach of their implied obligation to reasonably attempt to get financing, and therefore can be liable for damages. Remedies In the event a party breaches an agreement of purchase and sale the innocent party may have available the following remedies: 1. Damages : Compensatory damages based upon what the innocent party expected to receive. In some cases, punitive or nominal damages may be appropriate.

2. Specific performance : In Semelhago v Paramadevan (1996) the Supreme Court of Canada clarified that specific performance is an equitable remedy and would not be ordered unless monetary damages would not be an adequate remedy. 3. Purchaser’s Lien : A buyer entering into an agreement of purchase and sale usually pays a deposit. If the seller breaches the contract the buyer will want the deposit back. The buyer can register a lien permitting the buyer to take action to sell the property to recover the deposit. 4. Vendor’s Lien : In the event a seller transfers ownership to a buyer without having received the full purchase price the seller can register a lien for the balance owing. In the event the balance is not paid the lien would permit action to sell the property to pay the balance outstanding. Please read Business Decision 16.1 (Vendor’s Lien and Priority) in the textbook. Activity Assume that Sukie has exercised her unpaid seller’s lien and has had the property sold for $90,000. Question: How much of that amount will she receive? How much will Anthony’s other creditors receive? Answer: Sukie is owed $60,000 representing the unpaid part of the purchase price. Assuming she registered her lien when the property was sold, she would have priority to $60,000, and the balance of $30,000 would be available to the other creditors. Question: What would likely happen if Sukie did not have the right to exercise an unpaid seller’s lien? Assuming that Anthony sold the land to pay his debts, how much would Sukie receive? How much would the other creditors receive? Answer: Assuming Sukie does not have a seller’s lien, Sukie would be treated as a regular creditor. So, the $90,000 would be shared pro rata among all the same ranking creditors. Sukie would have 1/3 of the total debt (i.e., $60k of total $180k) therefore she would be entitled to 1/3 of $90,000 which would be $30,000. Definitions Since buying real property is a significant purchase most people borrow money to pay for it. A lender will almost certainly demand some form of security (collateral). If you do not repay the loan the lender can seize the security (collateral) and sell it to pay off the loan. When the security is real property it is referred to as a mortgage or charge. In this

section, the term “mortgage” will be used for consistency. A few definitions will be helpful: Mortgage An interest in land that provides security for the repayment of a debt. Mortgagor Person who borrows the money and grants the interest in land to the lender (mortgagee). Mortgagee Person who lends the money and acquires the interest in land. Please see Figure 16.1 (Mortgage) in the textbook. It illustrates the creation of a mortgage and the relationship between the parties. In the event the mortgagor repays the loan the mortgagee’s interest in the property will be extinguished. However, if the mortgagor does not repay the loan, the mortgagee has a number of remedies available to it, including the power to sell the land and use the proceeds to repay the loan and costs. The law pertaining to mortgages is very complex and requires an understanding of common law rules, statutory rules and contractual provisions. A detailed analysis will not be attempted here, however, a few basic concepts and remedies will be discussed. Subsequent Mortgages Let’s assume Sally holds a fee simple estate in land worth $500,000. Sally could borrow $200,000 from ABC Bank and grant it a registered mortgage on the land. Two years later Sally may wish to borrow $100,000 from XYZ Bank. Despite granting a mortgage to XYZ Bank, Sally still retains an interest in the land. If the value of the land is still approximately $500,000 there would be considerable equity in the land ($300,000). Sally could grant XYZ Bank a subsequent registered mortgage on the land. So, ABC Bank would have a first mortgage and XYZ Bank a second mortgage. Generally, the priority of mortgages is determined by time of registration of the mortgage at the land registry office, not when the mortgage was signed. Sally, as mortgagor, must repay both mortgages, and failure to do so could result in her losing the land. In the event, Sally defaults on both mortgages, ABC Bank’s mortgage would have priority over XYZ Bank’s mortgage. This becomes particularly important if the value of the property has dropped to, say, $300,000. If the land is sold, ABC Bank

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would be entitled to have its mortgage paid off first, and if there is anything remaining it would be paid to the second mortgagee, XYZ Bank. Terms of the Mortgage The terms in a typical mortgage are very lengthy. A few of the common terms are set out below:  Repayment o Mortgagor must make regular payments in the amount and on the dates stipulated in the mortgage. o Prepayment Privilege Clause – if such a clause is in the mortgage it allows the mortgagor to make additional payments, with or without penalty depending upon the terms. o Acceleration Clause – this clause states that if the mortgagor misses a payment the entire loan becomes immediately payable. This clause is very harsh to a mortgagor and many provinces have statutory provisions giving the mortgagor relief from its effect. o When the mortgagor repays the entire loan the mortgagee will discharge its mortgage from the property.  Taxes o The mortgagor promises to pay taxes to the government when due and payable. o Despite a mortgagee registering its mortgage, the government has a statutory lien for unpaid taxes that ranks ahead of registered mortgages. For this reason, a mortgagee wants the mortgagor to stay current on taxes, and in some cases a mortgagee will insist that the mortgagor pay the taxes to the mortgagee and the mortgagee pays the taxes on behalf of the mortgagor.  Insurance o The mortgagor must obtain and maintain insurance coverage throughout the life of the mortgage. In the event there is a fire or some other peril that destroys the building the insurance provides proceeds to rebuild or payout the mortgage.  Waste o Mortgagor must not commit an act of waste because such act may reduce the value of the property, which in turn reduces the value of the mortgage security Remedies

A mortgagor’s default under the mortgage will give the mortgagee the right to exercise one or more of its remedies. The rules on mortgage remedies are complex and vary from province to province. Four common remedies are:  Suing on the covenant  Possession of the property  Foreclosure  Power of sale We will briefly discuss each remedy below. Suing on the Covenant This remedy allows the mortgagee to sue the mortgagor for the outstanding debt and get a judgment against the mortgagor. Possession of the Property This refers to the mortgagee taking action to gain possession of the property. This may appear attractive at first instance, but once the mortgagee is in possession it assumes significant legal responsibilities, such as repairing and maintaining the property, attempt to generate income, no acts of waste, and possibly dealing with tenants. This creates a significant burden that most mortgagees do not want. However, sometimes it is necessary to take possession such as when the mortgagor has abandoned the property or is devaluing it. Foreclosure The foreclosure remedy will give the mortgagee ownership of the property in full settlement of the outstanding mortgage debt. Most mortgagees do not want to own the property; they prefer to be paid. However, foreclosure may be an attractive remedy in some cases. For instance, if the first mortgage debt is $200,000 and the second mortgage debt is $75,000, and the property is worth $500,000, it would be financially beneficial for the first mortgagee to foreclose. The foreclosure would eliminate the mortgagor’s interest in the property, and the mortgagor would get nothing. The first mortgage having priority over the second mortgage would wipe out the second mortgage and the second mortgagee would get nothing. The first mortgagee would become the owner of a property worth $500,000, even though it is only owed $200,000. It is obtained a $300,000 windfall. This rarely occurs because the mortgagor could demand that the property be sold under a court supervised judicial sale so that the excess proceeds are distributed to the second mortgagee and the mortgagor. Also, the second mortgagee could stop the foreclosure

by placing the first mortgage into good standing. The second mortgagee can add those payments to the debt they are owed from the mortgagor. In Ontario, foreclosure is not a common remedy. However, in some provinces it is common due to applicable legislation and/or caselaw in those provinces. Judicial Sale A judicial sale occurs when a mortgaged property is sold under the supervision of the court. Once the court approves the sale, the proceeds will be distributed to the mortgagees in accordance with their priority (first mortgagee is paid first, second mortgagee next, third mortgagee, etc. and mortgagor last). If there is not enough money to pay off all the mortgagees, the mortgagor can be sued on the covenant for the balance due. Power of Sale The power of sale remedy is a contractual remedy set out in the mortgage that allows the mortgagee to sell the property on behalf of the mortgagor. The mortgagee must act reasonably in selling the property. The proceeds of sale will be distributed in accordance with the priority rules. If the full mortgage debt is not paid, the mortgagor can be sued on the covenant. In Ontario, power of sale is the most common remedy. Combination of Remedies Certain remedies can be combined. For instance, the mortgagee can take possession of the property, then use the power of sale remedy to sell it, and if the sale proceeds are not sufficient the mortgagor can be sued on the covenant. Please see the Concept Summary 16.2 (Remedies for Mortgage Default) in the textbook. Mortgages on First Nations Land This subsection of the textbook explains the problem faced by First Nations who would like to obtain financing by mortgaging land and some possible solutions to that problem. Please review this section of the textbook and be sure to note the following key points that the authors make:  Mortgages facilitate access to financing  Reserve land transfer restrictions prevent mortgages and deprive First Nations of potential financing opportunities

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 Designation and mortgaging leasehold interest as a “workaround” solution Activity A First Nation would like to start a business but lacks the necessary start-up capital. This First Nation has several land reserves. The First Nation approached a bank for a $1 million loan. The bank is willing to loan the $1 million to the First Nation but would like a mortgage as security for the loan. Based on the textbook discussion in this section, please state whether a mortgage (as in a fee simple type of mortgage) is possible and any suggestions you might advise the bank and First Nation to consider. It is generally not possible to mortgage the fee simple of reserve land. This is because reserve land may not be transferred to any party (the only exception is a surrender to the Crown). This important legal point means that a mortgage would not work in favor of the bank. Typically a lender wants a mortgage so that, if there is a default on the loan, the lender can seize the mortgaged land and sell it (transferring ownership to the buyer) in order to pay the outstanding debt. This is not possible if the reserve land cannot be transferred. There is however a potential solution. A leasehold interest in land is a property right and it can be mortgaged as well. In this case, the First Nation could undergo the process of designation (recall this concept from Chapter 15) and have the Crown lease the land on its behalf. Here is the interesting legal technique described in the textbook: the Crown would lease the reserve land to the First Nation’s economic development corporation. This would be a long term lease (e.g. 90 years). The First Nation economic development corporation could then mortgage its leasehold interest to the lender (in this case, the bank). This should provide the bank some comfort. If there was a default on the loan, the First Nation economic development corporation would assign the lease to the bank and the bank would then be able to lease out the land to a tenant. The rent from the lease could help repay any outstanding debt. While not as comforting as a fee simple mortgage, it would nevertheless provide some collateral for the bank. Whether the leasehold mortgage would be sufficient to satisfy the bank is unclear, but the possibility should at least be explored. Summary We have reviewed the features of the Land Titles System and Registry System. Searching title in the land registration systems is important but other searches are also required since not all interests affecting the land needs to be registered in the land registration system. The use of real estate professionals in real property transactions will help reduce the risks. The Agreement of Purchase and Sale is the contract to buy and sell, and it is common to use conditions to protect the parties. Lastly, we looked at

mortgage financing, and the remedies available in the event of defaults under the mortgage.

Module 10 - Real Property - Sales & Mortgages

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