Canada: Commercial Land Mortgage Enforcement

Prepared For Legal Education Society of Alberta by Douglas H. Shell, Q.C.

A. Demand(s) and Security Notice(s)

1. Upon receiving instructions the following initial searches and enquiries are generally made:

2. Demand is usually made on the corporate mortgagor for payment of the debt secured under the commercial mortgage. If the mortgage is a demand mortgage, a demand must be served on the corporate mortgagor.

3. If the mortgage secures a specific mortgage loan, inclusive of interest, and the periodic principal and interest payments payable over the term of the mortgage, consideration must be given to whether:

4. If the land charged by the commercial mortgage constitutes all or substantially all of the corporate mortgagor's property, a 10 day Section 244 Bankruptcy and Insolvency Act (the "BA") Notice of Intention to Enforce the Security of the Mortgage (the "S244 BA Notice") must be prepared and served with the demand on the corporate mortgagor.

5. A form of demand declaring all debt secured under a demand collateral mortgage, together with the applicable S244 BA Notice is attached as Tab 1, a form of demand demanding payment of the arrears under a commercial mortgage, together with the applicable S244 BA Notice is attached as Tab 2, and a form of demand declaring a mortgage loan fully due and payable together with the applicable S244 BA Notice is attached as Tab 3.

6. If the corporate mortgagor is a "farmer" as defined in Section 2 of the Farm Debt Mediation Act of Canada (the "FDMA"), namely a corporation "engaged in farming for commercial purposes that meets any of the prescribed criteria", as set out in the definition of "farming" also noted in Section 2 of the FDMA - see Tab 4, a 15 business days Section 21 FDMA Notice of Intention to enforce the mortgage (the "S21 FDMA Notice") must also be prepared and served upon the corporate mortgagor. [NOTE: failing to serve the S21 FDMA Notice is fatal to the lender's enforcement proceedings, and renders null and void all such proceedings taken before the requisite S21 FDMA Notice is filed and served - see Intek Holdings Ltd v. Grisnich (2003) 49 CBR (4th) 240 (Alta QB) with additional reasons at 49 CBR (4th) 263 (Alta QB), see also Mckenna v. Marshall (204) 1 C.B.R. (5th) 251 (Ont. C.A.)]

7. Attached as Tab 5 is a form of S21 FDMA Notice.

8. When issuing the S244 BA Notice and/or S21 FDMA Notice, consideration should be given to including any other collateral security held by the lender, including an assignment of rents and leases which quite often the secured lender obtains at the time of the granting of its commercial land mortgage, and/or any general security agreement that may charge the personal property located on or used in carrying on the business at the charged lands, or any other corporate mortgagor personal property.

9. Although the 10 day statutory period applicable to S244 of the BA, or if applicable, the 15 business days as required under a S21 of the FDMA, statutorily provide for a notice procedure, consideration must be given as well, to whether such time frames are reasonable having regard to the factors noted in the SCC Decision of Lister v. Dunlop [1982] SCJ No. 38. Attached as Tab 6 is a memorandum prepared by Davis LLP student, Gavin Millan, on the subject of the obligation of a lender to provide reasonable notice for the repayment of a demanded debt.

B. Alberta Commercial Foreclosure Procedure

1. Generally governed by Part 5 (Sections 37 - 50) of the Alberta Law Property Act (the "LPA") - see Tab 7, Division 5 (Rules 9.30 - 9.36 of the Alberta Rules of Court, Rule 6.5 of the Alberta Rules of Court) - see Tab 8.

2. See also Rules 3.3 and 3.4 of the Alberta Rules of Court - see Tab 9 , when giving consideration to commencing the action, and be aware of Section 191 of the Alberta Land Titles Act (Alta), when giving consideration to obtaining final relief in the foreclosure action - see Tab 10.

3. A grid summary of the Alberta Commercial Foreclosure Procedure is set out in Tab 11.

4. The Alberta Commercial Mortgage Foreclosure Procedure is for the most part the same as the foreclosure procedure for consumer land mortgages, save that:

5. After expiry of the demand and requisite security notices, and in the case where the FDMA applies, the expiry of any stays of proceedings that could be issued under S21 of the FDMA, the foreclosure action is commenced by way of Statement of Claim that includes as defendants:

6. An appraisal is needed to:

accordingly, consideration should be given to obtaining an appraisal from a qualified appraiser immediately upon obtaining initial instructions from the secured lender. [NOTE: be sure that the chosen appraiser is certified under the Appraisal Institute of Canada and licensed under the Alberta Real Estate Act. In particular, be sure that the appraiser is an accredited AACI appraiser, and is not merely a designated appraiser for residential properties that is not accredited to opine on the value of the income and investment commercial property.]

7. To be sure that the secured lender's appraisal can be claimed as a privileged document, if needed, the appraisal instructions should be given by counsel for the lender, so that once the appraisal is completed, it may be provided to the lender's counsel and only produced if the lender is satisfied with the opinion, and when required in pursuing the chosen foreclosure remedy.

8. In some circumstances, especially where the commercial property is subject to a number of leases, or has considerable improvements that need to inspected by the appraiser, issues may be encountered in arranging for the appraiser to inspect the condition of the lands and to review the leases, which is generally required to provide a reliable opinion on the appraised value of a commercial property. In those instances, it may be necessary once the action is commenced, to obtain an order in the action to enable the appraiser to gain access to the charged lands and to review applicable leases, in order to complete the appraisal.

9. A Court order appointing a receiver of rents, or a receiver/manager of the charged lands to operate and preserve the lands while the final order remedy is pursued by the secured lender, in many cases is the cornerstone of a successful commercial foreclosure action, since:

10. An application for receiver of rents can be made under S49 of the LPA without notice, that contains a clause allowing the registered owner/mortgagor or any other affected encumbrancer, to make application to set aside or vary such order (the "Comeback Clause") .

11. Generally rents are paid at the end or the beginning of the month, and where there is evidence that the lands are rented to a number of tenants, and the registered owner/mortgagor is in default of payment of realty taxes, the court, where there has not been sufficient time to issue notice on the registered owner/mortgagor, may grant a receiver of rents order subject to the Comeback Clause.

12. The receiver appointed by Court order under S49 of the LPA, as long as the land is not substantially all of the corporate mortgagor's property, need not provide reports to the Superintendent of Bankruptcy, as otherwise required under Part XI of the BA; but where there is any concern associated with the application of Part X1 of the BA, a licensed bankruptcy trustee can be appointed receiver (who will maintain all reporting referred to under Part XI of the BA) with the power to appoint such person as the receiver deems fit to collect the rents.

13. In a number of cases, the appointed receiver is a property manager experienced in carrying on the rental business on the lands that reports directly to the Court from time to time.

14. A sample Receiver of Rents Order, that limits the receiver's powers to collecting rents, enforcing leases to recover rental arrears, and to grant new leases subject to Court approval, and otherwise preserve the lands in the foreclosure action, is attached as Tab 12.

15. As an alternative, to apply for a Receiver of Rents Order, the lender can issue notice of its assignment of rents security upon the tenant and a sample notice letter to the tenants is attached as Tab 13.

16. Since the secured lender by issuing demands on the tenants will effectively control the cashflow for the lands, there is some risk that a secured lender may be found liable to the tenants as a mortgagee in possession (although the sample demand in Tab 13 states that the secured lender will not be liable as a mortgagee in possession); and by obtaining a Receiver of Rents Order under S49 of the LPA the lender can eliminate any risk that it could be found liable as a mortgagee in possession.

17. In most cases a commercial foreclosure can proceed summarily without a full trial, but in the rare cases where a defence is filed, and summary judgment cannot be obtained, it is common for a secured lender to seek an order under S49 of the LPA to appoint a receiver of rents and/or receiver/manager of the lands to ensure that the rental revenue and value of the lands is preserved pending the Court's determination of the commercial mortgage action.

18. Subsection 13(2) of the Alberta Judicature Act (see Tab 14) also applies when seeking an order for a receiver of rents or receiver/manager under Section 49 of the LPA. The Court must be satisfied in granting the interlocutory relief, that it is just and convenient (ie just and equitable) that the Order be made while the balance of the issues as between the secured lender and the mortgagor are determined.

19. As long as the Receiver of Rents Order preserves that "status quo", such that rents and profits are preserved, and the disposition of such rents and profits are applied to cover realty taxes, receiver's costs, and to the land's reasonable operating costs, the Court can generally be convinced to grant the interlocutory Section 49 Receiver of Rents Order, especially if the evidence indicates realty tax arrears, there is some question that lands have sufficient value to cover the secured debt, and the default of the mortgagor has continued for some time.

20. The other forms of order in a commercial mortgage foreclosure generally follow the standard forms of order that apply to mortgages granted by individuals, save that in my practice:

21. To obtain a final vesting order similar to the one attached as Schedule "A" to Tab 16, the supporting affidavit of the secured lender needs to include some evidence that the secured lender will suffer significant delay and damages, or some other real and determinable prejudice, if the Court does not grant the vesting order notwithstanding the requirements of ss191(1) of the LTA (see 124034 Alberta Ltd. v. Walton International Group Inc. [207] A.J. No 353 at paragraph 14 and Ridge Development Corporation v. Haji Holdings Inc. [209] A.J. No 1255 at paragraphs 43 - 44).

C. Potential Use of a Trustee Transfer under the Bankruptcy and Insolvency Act

1. In the event the registered owner of the lands subject to the lender's commercial mortgage is either voluntarily assigned by the registered owner into bankruptcy, or an order is obtained ordering such registered owner into bankruptcy, the Trustee of the registered owner's bankrupt estate (the "Trustee") is vested with all of the registered owner's right, title and interest in its lands; and by the Trustee filing a certified copy of either the bankruptcy order or the assignment with the Land Titles Registrar as provided for in Section 74 of the BA, the Trustee upon obtaining the approval of the inspectors of the bankrupt estate, is empowered to cause by transfer of land signed by the Trustee (the "Trustee Transfer"), the registered owner's interest in such lands to be transferred to a purchaser of the lands;

2. In those instances where the bankrupt registered owner of land subject to a secured lender's commercial mortgage is:

under arrangement by which:

3. The use of a Trustee Transfer can save the cost and expenses that could otherwise occur in taking the foreclosure action, and can maximize the realization on the lands in the best interests of the secured creditors, and the preferred and unsecured creditors of the registered owner's bankrupt estate.

4. Caution must be made in preparing a Trustee Transfer, to be sure that the trustee transfer is transferring the registered owner's (bankrupt's) interest in the lands to the purchaser for the sum of $1.00 and other good and valuable consideration, so as to limit the 5% levy that otherwise applies to the Trustee sale of property, to only the sale proceeds that would be available to the Trustee for distribution in the bankrupt estate.

5. A form of Trustee Transfer is attached as Tab17.

D. Potential Use of Interim Receivership

1. In some circumstances it may prove to be cost effective and commercially reasonable to utilize the appointment of an interim receiver of the registered owner of the lands subject to a lender's commercial land mortgage, to empower the appointed interim receiver by court order, to preserve the lands, to collect the rents and profits, and lease the lands.

2. Section 47 of the BA (see Tab 18) provides that if the court is satisfied that a Section 244(1) BA Notice is about to be sent or was sent, the court may appoint a licensed trustee as interim receiver of all of the debtor's (mortgagor's) property until the earliest of:

3. The interim receiver remedy is commonly taken when the lands, and rents and profits, subject to a secured lender's commercial mortgage, need to be preserved in the interim pending the expiry of the secured lender's demands and S244(1) BA Notice and, if applicable, a S21 FDMA Notice.

4. The Ontario Court held in Jacob's Hold Inc. v. Canadian Imperial Bank of Commerce (2000) 28 C.B.R.(4th) 50, that the appointment of an interim receiver to preserve a farmer's property is not a proceeding for the "enforcement of a debt", and accordingly an interim receiver of a corporate farm can be appointed in or about the time of serving the S244 BA Notice and the S21 FDMA Notice, provided that the appointment is ordered before the farmer applies for a stay under the FDMA.

5. An appointment of an interim receiver will only be made under Section 47 of the BA if it can be shown that such appointment is necessary for the protection and preservation of the charged lands in the interests of the secured lender that is serving the Section 244 BA Notice. That being said, the courts exercise the interim receivership remedy with "considerable caution" and the onus is on the applicant secured lender to prove that it has a strong prima facie case under its security, and that the appointment is necessary for the preservation and protection of the registered owner's lands (namely, evidence that assets will disappear or the estate of the registered owner will be absolutely affected in some other way). See Allied Hock Bee (Canada) Ltd. v. 979504 Ontario Ltd. (1993) 24 C.B.R. (3d) 15, and other cases cited by Holden and Morowitz under the heading "Discretion to Appoint" in their commentary on the interim receivership remedy also included in Tab 18.

E. Use of a Receivership of the Mortgagor and the Mortgaged Lands

6. The lender is certain circumstances, may also wish, in lieu of pursuing its foreclosure remedy, or any of other above remedies, to enforce its commercial mortgage, through exercising the receivership appointment remedy provided for in most, if not all, commercial mortgages.

7. The receivership remedy is commenced by Statement of Claim, and the application to appoint a receiver of the corporate mortgagor and its lands is generally made pursuant to S243 of the BA, ss13(2) of the JA and/or ss99(a) of the Business Corporations Act of Alberta.

8. The Alberta Template Receivership Order, for use in such circumstances is attached as Tab 19.

9. The receivership remedy is commonly utilized when a corporate mortgagor has a number of employees, and owns a considerable number of parcels of land subject to a secured lender's collateral mortgage, which are either leased to commercial tenants, and/or are in a state of disrepair or need completion.

10. The receivership Order empowers the Receiver to carry on the business on the lands, preserve the lands, market the lands for sale, and cause the lands to be sold with court approval under a vesting order.

F. Possible Use of the Companies' Creditors' Arrangements Act ("CCAA")

1. Where the corporate mortgagor, together with the debts of any companies affiliated with the corporate mortgagor, is more than $5,000,000, the CCAA may be utilized either by the corporate mortgagor and its affiliates or, in rare cases, by a secured lender to the corporate mortgagor or its affiliates, to apply for an initial CCAA order to obtain time to conclude an arrangement approved by the court to restructure and continue the corporate mortgagor and its affiliates, so that the corporate mortgagor and its affiliates can continue to carry on business under terms and conditions of the initial order as may be extended by the Court, pending the court approval of its arrangement, and ultimately if such approval is obtained and the mortgagor's plan of arrangement complied with, the corporate mortgagor can then continue in business in the best interests of the corporate mortgagor and its affiliates, and its respective creditors.

2. Since a CCAA initial order stays all creditors for an initial 30 days, as may be thereafter extended by the Court, including the secured lender under its collateral mortgage, is not used very often, or if at all, by a secured creditor to realize on its commercial mortgage.

3. The Alberta template standard form CCAA Order is attached as Tab 20.

4. In most cases, if a corporate mortgagor or its affiliates wishes to utilize the CCAA to work through a new plan or arrangement and preserve its business in the best interests of the stakeholders, the corporate mortgagor prior to applying for an initial CCAA Order, takes steps to secure the cooperation of its secured creditors, as the CCAA Order not only stays the secured lender but as well provides for a number of statutory charges, including debtor in possession financing, director's charges, and monitor's charges, that rank in priority to all secured lenders, including a secured lender under a collateral land mortgage.

5. I am aware of at least in one case, namely the CCAA proceedings taken in Calgary, Alberta by UBG Builders Inc. and a number of the Greenboro Homes companies and related affiliates, where a CCAA initial order was granted (I believe with the cooperation of the applicable secured mortgagees), to enable the mortgagor to continue in business, and complete the construction of its homes at commercially reasonable prices in the best interests of its creditors.

6. Attached as Tab 21 is a filed copy of a vesting order granted in the Greenboro CCAA proceedings, complete with a copy of the monitor's certificate, which was utilized to enable the Greenboro affiliated companies to complete and to sell homes to purchasers at commercially reasonable prices, free and clear of all land mortgages and builders liens, simply through the filing with the Land Titles Registrar a Monitor's Certificate approving the conveyance to the purchaser. This court order, makes clear that although a home is transferred to a purchaser free and clear of all financial encumbrances, including any lender collateral mortgage, the sale proceeds replace the lands, and are distributed in accordance with the priorities at law that existed through the registration at Land Titles prior to the closing of the sale to the purchaser.

G. Commercial Land Mortgage Enforcement Priority

1. The payment of outstanding realty taxes, inclusive of penalties, levied against land, takes priority in all circumstances over a registered commercial land mortgage, whether such realty taxes are payable prior to or after the registration of such mortgage.

2. Subsection 11(5) of the Builder's Lien Act R.S.A. 2000 c.B-7, as amended, provides that to the extent any debt secured under a collateral mortgage, constitutes loan advances made by the secured lender to the mortgagor after a lien has been registered, the builder's lien will rank in priority to the prior registered commercial mortgage to the extent of such advances – see Tab 22.

3. Pursuant to ss227(4) and 4.1 of the Income Tax Act of Canada (the "ITA") and the counterpart provisions found in ss221(1) and (3) the Excise Tax Act of Canada (the "ETA"), Canada Revenue Agency ("CRA") holds a statutory deemed trust for payment of outstanding source deductions and GST that grants to Canada Revenue Agency, subject to prescribed security interests set out in the ITA and ETA Regulations, a priority charge over all mortgaged security for the repayment of source deductions and GST payable by the secured lender's mortgagor.

4. Pursuant to ITA Regulation 2201 - see Tab 23, and ETA Regulation 2 - see Tab 24, the CRA deemed trust priority for the repayment of outstanding source deductions and GST is subject to a secured lender's rights under a mortgage that is registered before the time that the outstanding source deductions and GST become payable by the mortgagor, and provides that the CRA most probably will take priority over a secured lender's mortgage for the repayment of outstanding source deductions and GST payable by the mortgagor:

5. There is no reported decision on the CRA's deemed trust priority over registered collateral mortgages, save for the decision of MCAP Service Corp. v. Hunter [205] O.J. No. 5574 which paid "lip service" to the CRA's potential deemed trust priority over a real property mortgage (this decision was subsequently reversed by the Ontario Court of Appeal in [2007] O.J. No. 429 on the ground that the summary judgment granted in the lower court in favour of MCAP Service Corp. was set aside and sent back to trial on the issue of whether the mortgagor (Hunter) failure to remit GST payments and employee source deductions to CRA resulted in a default under his residential mortgage).

6. If in the future, CRA claims any priority over secured creditors lender for the repayment of outstanding GST, the secured lender should consider taking proceedings to order the mortgagor into bankruptcy, since by virtue of 136 of the BA, CRA's claim for outstanding GST most probably will be relegated to a preferred claim subject to the secured lender's collateral mortgage. CRA's statutory deemed trust priority for the payment of source deductions and priority over a collateral mortgage is not affected by a mortgagor's bankruptcy.

7. Unfortunately there is no CRA registry that can be searched by a secured lender, or its solicitor, to determine the extent of any outstanding source deductions or GST payable by a mortgagor, prior to a secured lender making any advance secured under its collateral mortgage.

8. A secured lender can obtain from its mortgagor, at the time of granting the mortgage, a consent in the form attached as Tab 25, to authorize a secured lender to conduct a search at CRA but the practical reality is that it will be difficult to obtain a reply from CRA on a timely basis, and accordingly, in most instances, secured lenders make mortgage advances without conducting any such search.

9. Now that secured lenders are commonly obtaining collateral land mortgages limited to a certain principal sum to secure all present and future debts of its mortgagor, including an operating line of credit provided by a secured lender to its mortgagor from time to time, priority issues will result if:

NOTE: When providing a solicitor's opinion on the enforceability of a collateral land mortgage, counsel for the secured lender, should bring this potential priority issue to the attention of the secured lender.

10. Other priorities that apply to commercial land enforcement in Alberta are as follows:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.