Written by Denise Bright, David Gruber and Stephanie Ridge
Recently, the British Columbia Court of Appeal held that the two-year limitation period to enforce mortgage security ran from the first date of a default entitling the mortgagee to realize a security, not from the date of a demand for performance in Leatherman v 0969708 BC Ltd, 2018 BCCA 33 [Leatherman]. This is the first decision considering sections 14 and 15 of the "new" Limitation Act, SBC 2012, c. 13.
Key Facts from the Judgements
Kooteney Lake Estates Ltd (KLE) granted a mortgage to the Leathermans with respect to KLE's interest in land to secure a loan of $1,500,000 owed by KLE to the Leathermans. KLE sold its interest in the land to 0969708 B.C. Ltd. (708 BC), which assumed KLE's obligations under the mortgage. KLE and 708 BC (together, the Mortgagors) granted the lenders a general security agreement over the proceeds of the sale of the lots that might be subdivided from the mortgaged land, which could be realized on if the Mortgagors were in breach of the mortgage.
The mortgage did not have a maturity date but was stated to be payable on demand. In October 2013, 708 BC failed to make its required interest payment and did not make any other interest payments in the following years. In 2015, there was an exchange of emails concerning the debt and its repayment; however, the lenders took no formal action in response to the failure to pay until November 9, 2016, at which time they issued a demand for payment of the principal in full including interest due. The lenders filed for repayment and foreclosure in December 2016.
The "new" British Columbia Limitation Act sets out several special situations to which specific exceptions to the standard two-year limitations apply, including the following two sections considered in Leatherman:
Discovery rule for claims for demand obligations
14 A claim for a demand obligation is discovered on the first day that there is a failure to perform the obligation after a demand for the performance has been made.
Discovery rule for claims to realize or redeem security
15 A claim to realize or redeem security is discovered on the first day that the right to enforce the security arises.
At trial, the BC Supreme Court characterized the mortgage as a demand loan and held that the lenders had the right to demand repayment at any time after the agreement was made. As a result, pursuant to section 14, the limitation period commenced once the lenders issued their demand for payment in November 2016, and their claim was not limitation-barred.
The Mortgagors appealed, arguing that the lenders' claim was out of time because the mortgage was a "contingent loan with a demand element" under section 15 of the Limitation Act, and the limitation period had actually begun to run after the first default in October 2013 triggered the lenders' right to realize on the mortgage security. The lenders argued that the mortgage and security obligations were demand obligations and that, in accordance with section 14, the limitation period for their claim only began to run in November 2016 when they issued their demand.
Writing for the Court of Appeal, Justice Savage compared demand and contingent obligations, noting that under section 14 of the Limitation Act, demand obligations are "…discovered on the first day there is a failure to make repayment once a demand has been made."
In contrast, a claim to realize or redeem a security under section 15 of the Limitation Act is a contingent obligation: the obligation is discovered "…from the first day the right to enforce the security arises"—that is, the day on which the contingency occurs. Justice Savage went on to add that if a security is either realizable upon default or enforceable upon demand, then the limitations clock begins to run when the contingency—either a default or demand, respectively—occurs.
Applying this analysis to the mortgage, Justice Savage held that the covenant to pay the mortgage principal was, on its face, a demand obligation. In support of this interpretation, Justice Savage pointed to Clause 8, which stated that "if a default occurs, all the mortgage money then owing to the lender will, if the lender chooses, at once become due and payable" (emphasis added). Accordingly, the limitation period for an action to recover the mortgage principal began to run the first day after the formal demand in November 2016, and was not limitations-barred.
The Court considered the property mortgaged as security for the debt separately from the principal (and interest) and held that, as a security, it is subject to the discovery rule of section 15. The language in the mortgage stated "if a default occurs, the lender may, in any order that the lender chooses, do any one or more of the following:
(a) demand payment of all the mortgage money;
(b) sue the borrower for the amount of money due;
(f) apply to the court for an order that the land be sold on terms approved by the court;
(g) apply to the court to foreclose the borrower's interest in the land so that when the court makes its final order of foreclosure the borrower's interest in the land will be absolutely vested in and belong to the lender;
The mortgage provided the trigger for realization was default (as opposed to demand) and consequently, the Court determined the clock began to run "on the first day that the right to enforce the security," which the Court held was the date of the Mortgagors first default on the interest owed on October 31, 2013. Based on this analysis, the Court held that the limitation period to realize on the security had expired, absent any postponement.
Finally, the interest payments were found to be neither a demand obligation nor a contingent obligation, and the usual two-year limitation period was found to apply. As a result, the Mortgagers were entitled to pursue their claim for any interest that had gone unpaid within two years of the December 2016 foreclosure and repayment claim.
The Court held that the limitation period to realize on the security and some interest had expired, unless postponed. However, the ability to sue on the debt was not limitations barred. The matter of postponement was remitted to the British Columbia Supreme Court for reconsideration.
Merely the insertion of "payable on demand" does not render a mortgage a "demand obligation" if the context does not support such a characterization.
When drafting documents, care should be taken with respect to the timing of and triggers to the exercise of remedies of both repayment and realization so as to not inadvertently shorten limitation periods.
At Bennett Jones, we have considerable experience with credit and security agreements and the enforcement thereof and would be pleased to assist in the drafting of loan and security documents and the enforcement thereof.