Taking in payment in case of second mortgage
Let’s go back to the example of a bank that granted a $200,000 mortgage for an immovable worth $325,000, for which there is still $160,000 to pay.
If Jean-Pierre had already repaid more than $100,000, the bank would have to obtain authorization from the court.
What would happen if Jean-Pierre, while still having $160,000 to repay, had taken out a second mortgage for $30,000 on his immovable with another bank?
- First bank $160,000
- Second bank $30,000
- Current value $325,000
The second bank (which is the later ranking mortgage creditor) may, within the period allowed for surrender, demand that the first bank abandon its claim to payment and sell the property itself or have it sold under judicial authority.
Why would the second bank demand this?
Section 2783 of the Civil Code of Québec states:
“A creditor who has taken property in payment becomes the owner of it from the time of registration of the prior notice. He takes it as it then stood, but free of all mortgages published after his. […]”
It is in the second bank’s interest to do so, since its mortgage was registered after the first bank’s, and it will lose its security if the first bank makes use of this remedy. It will then have only a personal recourse against the debtor.
Article 2780 of the Civil Code of Québec states:
“A creditor required to sell shall proceed to do so unless he prefers to pay the later ranking creditors who registered the notice, or, if the notice was registered by the debtor, unless the court authorizes the creditor to take the property in payment on such conditions as it determines. If the creditor does not act, the court may allow the person who registered the notice requiring the sale, or any other person designated by him, to proceed with it.”
In our example, the first bank could opt to pay the second bank to release its interest.
Where the default has not been remedied or the payment has not been made in the time allotted for surrender, the creditor takes the property in payment by the effect of the judgment of surrender, or by an act voluntarily made by the person against whom the mortgage right is exercised, and accepted by the creditor, if neither the later ranking creditors nor the debtor required him to proceed with the sale.1
In summary regarding the taking in payment
The judgment of surrender or the act voluntarily made and accepted constitutes the creditor’s title of ownership.2
Consequently, a broker can sign a brokerage contract with the mortgage creditor, who will then have become the owner of the property. The broker must obtain and keep on file the judgment of forced surrender or the deed of voluntary surrender, which constitute title to the property.
This mortgage remedy is relevant when there is equity in the property. When the creditor believes that the sale of the immovable will not yield enough to cover the debt, he will prefer another method.
1 S. 2781 C.C.Q.
2 S. 2781(2) C.C.Q.
