Equitable Subrogation: A Shield Against Unjust Enrichment in Mortgage Priority Disputes

By: Joseph (Joey) Jamil

A recent decision from the Ontario Superior Court of Justice, Bank of Montreal v. Hossain, 2025 ONSC 3950, offers a timely reminder of the equitable doctrine of subrogation and its crucial role in resolving complex mortgage priority disputes. This case highlights how courts can intervene to ensure fairness when a lender, through no fault of their own, loses the priority they intended to secure.

The Facts

The case involved a residential property in Oshawa owned by the Hossains respondents. They initially held a first mortgage with CIBC. The Applicant, Bank of Montreal (“BMO”), provided a new loan to refinance and pay off this CIBC mortgage, with the clear intention of registering its own mortgage as a first charge on the property. However, due to the negligence or deliberate failure of the lawyer handling the transaction, the CIBC mortgage was not discharged, and the BMO mortgage was not registered in the intended first position. In the interim, the respondent mortgagee, 10655252 Canada Corporation (“106 Corp.”) registered a second mortgage, which, due to the procedural error (i.e. the lawyer’s negligence or deliberate failure), inadvertently gained priority over BMO's mortgage.

The Law: Understanding Equitable Subrogation

Equitable subrogation is a powerful legal doctrine that allows a party who pays off a prior mortgage to "step into the shoes" of that original mortgagee and claim the same priority position. It is a discretionary remedy[1] rooted in the principle of fairness and aims to prevent unjust enrichment. The Court in Bank of Montreal v. Hossain reiterated and outlined four key criteria for its application, consistent with established Ontario jurisprudence:

1. At the mortgagor's request: The party seeking subrogation must have paid off the prior mortgage at the request of the property owner.
   
   
2. Payment of the first mortgage: The claimant must have actually paid off the first mortgage.
   
   
3. Intention to become the first mortgagee: The party advancing the funds must have intended to become the new first mortgagee.
   
   
4. Absence of contrary intention: There must be no evidence to suggest that the party intended otherwise.

The fundamental principle guiding the application of equitable subrogation is one of fairness in light of all the circumstances.[1] Courts often grant this remedy to prevent an "unanticipated windfall" or "unjust enrichment" for another party.[2]

Importantly, the negligence of the party claiming subrogation is not necessarily a bar to the remedy; the doctrine is often invoked precisely because of a mistake or inadvertence.[3] The focus remains on fairness between the affected parties.[4]

Key Takeaways and Analysis

The Court in Bank of Montreal v. Hossain found that all criteria for equitable subrogation were satisfied:

• BMO advanced funds to pay off the CIBC mortgage at the Hossains' request;
  
• BMO clearly intended to become the first mortgagee; and
  
• There was no evidence to suggest a contrary intention on BMO's part.

The Court specifically noted that the negligence of the lawyer handling the transaction did not undermine BMO's claim. Furthermore, 106 Corp. was aware that it was providing a second mortgage, meaning that granting BMO priority would not place 106 Corp. in a worse position than it originally understood. This aligns with the principle that subrogation should not create an injustice or severely prejudice the party against whom it is sought.

By exercising its discretion to grant equitable subrogation, the Court declared BMO's mortgage as having first priority over 106 Corp.'s mortgage and ordered the Land Registrar to rectify the title accordingly. This decision underscores the judiciary's commitment to preventing unjust enrichment and upholding the original intentions of the parties involved in mortgage transactions.

This case serves as a vital reminder for lenders, borrowers, and legal professionals alike about the importance of due diligence in real estate transactions and the equitable remedies available when unforeseen errors occur. It reinforces that while strict adherence to registration rules is paramount, equity can provide a necessary safeguard to ensure fair outcomes.

[1] Grahoui v. Yassine at para 213(b); Toronto-Dominion Bank v. Ndem at para 29; Armatage Motors Ltd. v. Royal Trust Corp. of Canada, 1997 CanLII 1629 (ON CA) at p. 159.