Mar 12, 2020
Loan Guarantees: Another exception to the 2-year Limitations Act period
Published in Renx.ca | March 11, 2020
My last article addressed the 2-year general limitation period under Ontario’s Limitations Act (the “LA“) and the 6-year limitation period under the Real Property Limitations Act (the “RPLA“) dealing with a landlord’s claim for rent arrears.
There is also an important 10-year limitation period that lenders need to be aware of under the RPLA. This 10-year period was addressed by the Ontario Court of Appeal in its December 18, 2019 decision in Hilson v. 1336365 Alberta Ltd.
(The Hilson case is one of the top-10 decisions searched for in 2019 as reported by CanLII, the database for Canadian case law).
The Hilson case dealt with the issue of which limitation period applied to a lender’s claim respecting 5 personal guarantees for 25 corporate 2nd mortgage loans. The corporate mortgage loans went into default and the lender sued the guarantors. The guarantee covenants were contained in the mortgage documents and in separate stand-alone guarantees.
The guarantors argued that the 2-year limitation period under the LA had expired, thereby barring the lender’s claim. Alternatively, if the claim was not statute-barred, the guarantors argued that the amount owed should be reduced because the lender had successfully claimed against its lawyer (who acted for the lender on these and other loans) for negligence and received a settlement of $1.2 million. In other words, any claim against the guarantors should be offset by this settlement to prevent double recovery for the lender.
The lender argued that the 10-year limitation period under section 43(1) of the RPLA applied, so its claim was not statute-barred. Further, the lender argued that the negligence settlement should not be considered for the purposes of a set-off in favour of the guarantors as it was not only for the loan at issue but for other loans also.
Section 43(1) of the RPLA provides:
- (1) No action upon a covenant contained in an indenture of mortgage or any other instrument …. to repay the whole or part of any money secured by a mortgage shall be commenced after the later of,
- The expiry of 10 years after the day on which the cause of action arose; and
- The expiry of 10 years after the day on which the interest of the person liable on the covenant in the mortgaged lands was conveyed or transferred.
The Superior Court found that section 43(1) did apply to the guarantees. Accordingly, the limitation period was 10 years; therefore, the lender’s claim had not expired and was not statute-barred. However, the judge reduced the lender’s claim by 50% to account for the lender’s settlement with its lawyer (as the Court said that holding otherwise would allow for double-recovery for the lender).
The guarantors appealed the decision to the Ontario Court of Appeal and the lender appealed the set-off decision.
- Was the trial judge incorrect in finding that the 10-year RPLA period applied?
- Should the guarantee be reduced by the amount the lender settled for with its lawyer?
- No. The lender’s claim was not statute-barred as the 10-year limitation period applied.
- No. The claim was reinstated to its full amount (i.e. no deduction was made for the amount that lender accepted for its lawyer’s negligence) for the reasons below.
- Section 43(1) of the RPLA clearly applies to a guarantee whether contained in the actual mortgage or whether in a separate agreement. The Court found no reason for having different limitation periods for a mortgage debt and a guarantee of that debt simply because of where the guarantee covenant is located (i.e. in the mortgage or other document).
- The guarantee should not be reduced because the rule against double recovery does not preclude the lender from “pursuing different defendants for the same loss“. Instead, the rule “only precludes a plaintiff from recovering more than he or she lost.” There was no evidence presented at the trial that the negligence settlement was tied to the specific project but rather for negligence on various project loans. Accordingly, because the lender has not recovered anything yet under the guarantees, there can be no question of double recovery.
- Ensure the loan documents contain a clause setting which jurisdiction’s laws apply and which jurisdiction the parties have agreed to be subject to for disputes. In the Hilson case, the guarantors argued that they were Alberta residents and that they signed the guarantees there. Thus, because Alberta has a statute setting out requirements for executing guarantees in order for them to be binding and the Act was not complied with, the guarantees were therefore not enforceable. That might have been the case but for a clause in the guarantees that “The Guarantors hereby submit themselves and attorn to the jurisdiction of the courts of the Province of Ontario” and other strong factors in favour of Ontario law applying.
- The fact that an agreement contains a clause providing for which jurisdiction applies for court proceedings is not the same as a clause stating which jurisdiction’s laws will apply. Both clauses – whose laws apply and whose courts apply – should be in the agreement and ideally state the same jurisdiction.
- Only guarantees “associated with land transactions” have a 10-year limitation period, and not guarantees associated with contract claims.
- Lenders and counsel should make sure the documents state that the guarantees are being given as partial consideration for the loan (i.e. they must be tied to the loan being given in the commitment or a mortgage document).
- There should be “no justification for having different limitation periods depending on whether the guarantee covenant is in the mortgage or in a separate document”.
- Current title registration practice in Ontario is for Charges to be “submitted for registration electronically, and not actually signed by anyone . . . The procedure in Ontario is for the parties to an instrument to be registered on title to sign an Acknowledgement instructing the solicitor to register the instrument because of electronic registration. The parties no longer sign the actual document, they sign the authorization.” In the Hilson case, the guarantors only signed one authorization personally for 1 of the corporate borrowers. But for the stand-alone guarantees, the lender would have been unable to enforce the guarantees for the other corporate loans based solely on the guarantee clause in the mortgages.
Thank you to Thomas Witteveen, articling student, for assisting in the finalization of this article.