May You Foreclose on Demand?

Critical considerations to preserve the right to realize on the security

May You Foreclose on Demand?

The case of Leatherman v. 0969708 B.C. Ltd., 2018 BCCA 33 (“Leatherman”) shows the significance of advising lenders of the limitation periods applicable to enforcement of the security as well as the mortgagee’s rights under the covenant.

In Leatherman, 0969708 B.C. Ltd. assumed the obligations of Kootenay Lake Estates Ltd. (“Kootenay”) under a mortgage that Kootenay had granted to Charles and Sandra Leatherman in 2013. The mortgage stipulated that the principal was due on demand with accrued interest due annually on October 31 commencing October 31, 2013. The Prescribed Standard Mortgage Terms granted the mortgagee the option to accelerate the debt and realize on the security upon the first incident of default. No interest or principal was paid. On November 9, 2016, the Leathermans issued a demand for payment of principal and interest and in December 2016, filed a foreclosure claim. Kootenay Lake Estates Ltd. and 0969708 B.C. Ltd. applied for dismissal of the claim on the basis that it was filed after the two-year limitation period set out in the Limitation Act (“Act”).

Section 14 of the Act provides that demand obligations are “... discovered on the first day there is a failure to make repayment once a demand has been made.” Under section 15 of the Act, the right to realize on the security “… is discovered on the first day that the right to enforce the security arises.” Section 24 of the Act provides that if a person acknowledges liability in respect of a claim before the expiry of a limitation period that applies to the claim, then the discovery of the claim is postponed to the date when the acknowledgment is made.

The application of the Act led to three different triggering events in terms of the discovery of the three different components of the mortgage:

  1. The right to realize on the security was discovered on the date of the first default in payment of the interest as per section 15 unless postponed under section 24;
  2. The right to enforce the (unsecured) covenant to pay the interest was discovered on the date of each default of that payment as per section 6; and
  3. The right to enforce the (unsecured) covenant to pay the principal was discovered on the mortgagor’s failure to pay following demand as per section 14.

As a result, the court found that the limitation period for the right to realize on the security had passed and overturned the lower court’s dismissal of the application. The matter was remitted to the trial court to determine whether postponement had occurred. The trial has not been heard. The motion for leave to appeal to the Supreme Court was dismissed.

To avoid the unfortunate expiry of a limitation period, lenders would be well advised to consider the following:

  1. Including language in the standard form contracts so the right to enforce the security is not automatic upon default but that something more such as a demand or a declaration by the lender is also required upon default to enforce the security. Such language should ensure that the clock does not start running under section 15 upon default;
  2. Monitoring instances of default as defined in the contract through established procedure;
  3. Requiring borrowers to report likely events of default; and
  4. Obtaining an acknowledgment from the mortgagor if the security has become enforceable to postpone the expiry of the limitation period.

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