"Collateral Mortgages: Special Documentary Issues, Rights and Remedies" presented by Simon Crawford at the LSUC Practice Gems: Mortgage Enforcement Essentials session, September 13, 2016

1. Collateral Mortgages
(including, but not limited to, mortgages on collateral)
Simon Crawford, Partner, Bennett Jones LLP
Nicholas Arrigo, Student at Law, Bennett Jones LLP
I. What is a Collateral Mortgage?
Good question. There is the broad sense of the term and there is the technical sense of the term.
In common banking parlance, a collateral mortgage is one type of security document over so-
called collateral security, which The Court of Appeal in Royal Bank of Canada v Slack1
defined as
"any property which is assigned or pledged to secure the performance of an obligation and as
additional thereto, and which upon the performance of the obligation is to be surrendered or
discharged".
And, of course, this is where we want to make a distinction, because the use of the word
"collateral" is not, in our intended usage, referring to the asset (in the sense of the house charged
was collateral), but rather is referring to the security interest itself (in the sense that the charge
granted is collateral to something else).
Nor do we, in this paper, mean that a collateral mortgage means (only) an additional mortgage
given in support of a so-called "primary" mortgage, such as when one charges a second house as
additional credit support for the "primary" mortgage on one's main house. This is the usage
referred to in Falconbridge on Mortgages:
"Collateral security is a commercial rather than a legal term. It is a question of
construction in each case with particular reference to the course of dealings between the
parties, the type of transaction and the nature of the securities whether one mortgage is
to be resorted to first as the primary security or whether they are all to be considered as
parallel security."2
1
[1958] OR 262, 11 DLR (2d) 737.
2
Walter M. Traub, Falconbridge on Mortgages (Toronto: Thomson Reuters, April 2016), 1-11.

2. 2
What we do mean, however, by the term "collateral mortgage", in the context of this discussion,
is any mortgage that is not a self-contained conventional mortgage. A self-contained
conventional mortgage is a mortgage that, within the four corners of the document, contains the
primary obligation to repay a debt, the terms of such repayment and the grant of the security
interest over the real estate as security therefor.
In contrast, therefore, in our usage, a collateral mortgage, is any mortgage which stands as
security for an obligation created outside of the mortgage, or for an obligation wherever or
howsoever created, that is a performance and not a payment obligation. So to get our heads in
the right space for this, a collateral mortgage may include but is not limited to:
(a) a mortgage delivered as security for the repayment of a grid promissory note;
(b) a mortgage delivered as security for the payment and performance of a
guarantee;
(c) a mortgage delivered as additional security for the primary debt borrowed under
another mortgage;
(d) a mortgage delivered as security for an indemnity; and
(e) a mortgage delivered to secure the performance of a transactional obligation,
such as an undertaking to perform environmental work or to hold the seller of a
property harmless under an assumed mortgage that it was not released under.
Stated simply, although there may be arguable exceptions, collateral mortgages are (generally
speaking), security documents only. Their purpose is to create a security interest in real estate to
support a primary obligation that (more often than not) is contained in another unregistered
instrument or contract. As a consequence, the obligations secured by a collateral mortgage can,
generally speaking, more easily be amended from time to time without affecting or amending
the mortgage itself.3
3
Daniel Kofman, "Collateral Mortgages and Revolving Loan Facilities: What Makes Collateral Mortgages Different?", Commercial Mortgage
Transactions 2013, p 2.

3. 3
Although purists will no doubt balk at this, I am (again for the purposes of this discussion) also
going to lump in real property debentures in the collateral mortgage category, because they
satisfy my definition. While admittedly they secure both real and personal property, they are
invariably used (most often in the context of real estate bond issuances) only for the purposes of
creating a security interest in the property as security for obligations otherwise located.
When we think of mortgage enforcement or mortgage remedies, we don't generally think to
differentiate between conventional and collateral mortgages. More often, we think only of
ranking and priorities. But there are some concepts that we would do well to think of from time
to time as they are specific to collateral mortgages.
With that convoluted introduction behind us, let's consider our first collateral mortgage scenario
and issue.
II. Guarantees
A Co. borrows money from the bank and provides to the bank a conventional mortgage over its
office building. However, the bank is dissatisfied with the loan-to-value and so asks that A Co.'s
sister company, B Co. provide additional security over its manufacturing plant in support of the
loan. B Co. provides a mortgage over its manufacturing plant to the bank. You will note that I
have been intentionally cheeky and ambiguous about the nature of B Co.'s mortgage.
Questions that arise from this fact scenario are:
1. Is B Co.'s mortgage a collateral mortgage?
2. If it is a collateral mortgage, does B Co. have to provide a guarantee to the bank of A Co.'s
debt?
3. If it is not a collateral mortgage, does B Co. have to provide a guarantee to the bank of A
Co.’s debt?
4. Upon default, can the mortgagee enforce against the B Co.'s mortgage before enforcing
against A Co.'s mortgage?

4. 4
(a) Is a guarantee necessary?
Our first question was, "is B Co.'s mortgage a collateral mortgage?", and the
answer to that very much depends on the drafting of both A Co.'s mortgage and
B Co.'s mortgage. Arguably, if B Co.'s mortgage states only that it is provided as
security for the debt incurred under A Co.'s mortgage, then it is quite clearly a
collateral mortgage. However, if B Co.'s mortgage is, on its face a conventional
mortgage that appears in all respects to be a "mirror" of the mortgage granted by
A Co., it may in fact be that what has been created is a "co-borrower" situation in
which both A Co. and B Co. have agreed to be primarily liable for the repayment
of the same debt and to satisfy that debt from the security of their respective
charged assets, if need be.
In the context of a co-borrower situation, there is little controversy over the
structure of the loan, as both mortgagors have not only created a charge, but have
promised to repay the primary debt as primary obligor. However, if B Co. has
created a collateral charge, then what is its relation to A Co., and what is the
nature of the debt secured?.
Obviously, the best answer would be if B Co. had delivered a written guarantee in
favour of the bank, guaranteeing the payment by A Co. of the debt created under
A Co.'s mortgage. But what if no such guarantee exists?
Steven Pearlstein has taken the position that a guarantee is not required.4
His
reasoning is that a collateral mortgage itself creates a surety relationship. To
support this, he points to a line of arguments found in the 1938 case Re Conley,5
in which Clauson LJ of the English Court of Appeal wrote that suretyship may be
based on a simple pledge deposited with a lender, and that a collateral mortgage,
viewed as a pledge of land deposited with the primary obligor's creditor, is
4
Steven I. Pearlstein, "Collateral Mortgages – Do you need a Guarantee?", 8th
Annual Real Estate Law Summit 2011.
5
[1938] 2 All ER 127.

5. 5
arguably analogous. Clauson LJ runs through the history of suretyship, tracing the
concept back to its inception as a pledge of property:
“… there is no reason to believe that in its inception the idea of suretyship
necessarily involved the idea of the surety making himself generally liable
in person and property for the satisfaction of the obligation he undertook.
His obligation in its inception seems to have been limited to the pledge
deposited or indicated. In the gradual development of suretyship, the
obligee, as one would expect, would call for a simpler and wider obligation
on the part of a surety – namely, the obligation to satisfy the principal debt
to the full by his person or property, without regard to the value of the
pledge or gage – and more and more the delivery or indication of a
particular piece of property as a pledge tended to become a form. If this
be a correct account of the development of the law of suretyship, it is quite
intelligible that the terms surety and guarantor should become associated
mainly with cases where the sanction for the obligation of the surety or
guarantor was not limited to the pledge, but consisted of the surety’s
liability to answer his obligation in person or in any property available for
execution.”
So we might reason that, if suretyship exists by virtue of delivery as a pledge of
property for the obligations of another, it includes a charge of property likewise
delivered.
But what if Steven is wrong (sorry Steven, I'm just saying "what if"…)? Generally
speaking, you have to have an obligation to a third party in order for that third
party to be able to enforce a security interest against you. So in the absence of the
surety "at law" argument, a guarantee is required in order for the collateral
mortgage to be enforceable…..a written guarantee. Guarantees are part of a

6. 6
special class of deeds and contracts subject to the Statute of Frauds,6
which
provides as follows:
Writing required for certain contracts
4. No action shall be brought to charge any executor or administrator
upon any special promise to answer damages out of the executor's or
administrator's own estate, or to charge any person upon any special
promise to answer for the debt, default or miscarriage of any other person,
or to charge any person upon any contract or sale of lands, tenements or
hereditaments, or any interest in or concerning them, unless the
agreement upon which the action is brought, or some memorandum or
note thereof is in writing and signed by the party to be charged therewith
or some person thereunto lawfully authorized by the party.
While there is no common law requirement that a guarantee be evidenced in
writing, Section 4 of the Statute of Frauds imposes a formal requirement that
either a guarantee itself, or some memorandum or note thereof, be evidenced in
writing.7
The application of the Statute of Frauds turns on whether the agreement
(or such portion of the agreement at issue) gives rise to a primary obligation or
rather a "special" secondary or collateral obligation that constitutes a guarantee.
In short, every agreement which is a guarantee in substance must comply with the
Statute of Frauds in form and, while the Statute of Frauds does not require that
any particular form be adhered to, the essential elements of the agreement
generally must be in writing.8
As an aside, the law of guarantee does not require that consideration given by the
creditor benefit the guarantor directly. As Kevin McGuinness notes, "the
6
R.S.O. 1990, c. S. 19 (the "Statute of Frauds").
7
While there are a number of situations in which the requirement for written evidence may be dispensed with, the starting point of the analysis is
that such written evidence is required.
8
A. MacDonald & Co. v. Fletcher, [1915] 22 BCR 298.

7. 7
consideration given by the creditor is to act in accordance with the request of the
guarantor in respect of the principal".9
That's all well and good, but in the context of collateral mortgages, it is not a bad
idea to always ensure that the consideration flowing to B Co (the second entity
providing the additional security by way of collateral mortgage) is sufficient. It is a
contract, after all.
The consideration for a guarantee may take the form of a benefit flowing from
lender directly to the guarantor, and oftentimes guarantees (as well as other
contracts) will include a statement to the effect that some nominal payment has
been exchanged which, together with other "good and valuable consideration",
constitutes sufficient consideration. More often than not (or dare I say, nearly
always) the nominal consideration never actually changes hands and so, if the
nominal consideration is all you've got (or rather, purport to have), you may find
yourself a few peppercorns shy of an enforceable bargain. Furthermore, while
courts will generally not inquire as to the adequacy of consideration, some courts
have recognized a distinction between "nominal consideration" and "valuable
consideration" and have held that, notwithstanding the freedom of parties to
make bad bargains, nominal consideration which is not "real" consideration of
some value in the eyes of the law does not constitute sufficient consideration.10
In most instances the reference to nominal consideration is simply boilerplate
language that does not reflect the actual consideration changing hands, and the
presence of such boilerplate language certainly does not render a guarantee
unenforceable: the consideration for a guarantee need not be set out in writing,11
nor is it necessary that consideration flow to the guarantor,12
as the consideration
9
Kevin McGuinness, The Law of Guarantee, 3rd
ed (Markham, ON: LexisNexis, 2013), p 161.
10
See, for example, Glenelg Homestead Ltd v Wile, 2003 NSSC 155 (CanLII) at para. 26.
11
Statute of Frauds, at s. 6.
12
Canada Mortgage and Housing Corp. v. Elbarbari, 1996 CanLII 6712 (SK QB) per MacLean, J.

8. 8
may simply be the lender suffering some detriment or providing some benefit to
a third party, such as the granting of credit by the lender to the borrower.
However, a potential issue arises where a guarantee (and associated collateral
mortgage) are provided in circumstances where a borrower has defaulted or is on
the brink of default under an existing loan. The potential issue is that, while it is
generally sufficient that the lender has granted some specific type forbearance in
consideration for a guarantee and/or collateral mortgage, for example refraining
from commencing legal proceedings against the borrower or granting an
extension for repayment of the underling debt, mere voluntary inaction on the
part of the lender does not constitute sufficient consideration.13
So what's to be made of all of this? Although a collateral mortgage need not
explicitly describe the consideration for which it is granted, it is prudent to
consider whether, given the context of the transaction, valid consideration has in
fact moved from the lender. When in doubt, spell it out (particularly when acting
for the lender). Ensure that the collateral mortgage given in support for another's
debt, or the associated guarantee, contains an accurate (but sufficiently broad)14
description of the legally valuable consideration (for example making available
credit facilities or granting some specific forbearance to the borrower) for which
the guarantee is granted.
In summation…the enforcement of a collateral mortgage given by one person in
support of another's debt can be susceptible if the collateral mortgage has not
been structured in some manner (either as a primary obligation, as collateral for
a written guarantee, or (maybe) in a manner that creates a common law surety
13
Crears v. Hunter (1887), 19 QBD 341 at 346.
14
There is case law suggesting that, by describing the consideration in overly-specific terms, the scope of the guarantee may inadvertently be limited
because, while the description of consideration is not conclusive, it is relevant in construing the terms for the contract itself. See, for
instance, ING Lease (UK) Limited v. Harwood [2007] EWHC 2292 (QB), in which the High Court of Justice (Queen's Bench Division)
partially relied on the wording of a guarantee's consideration clause in finding that certain obligations of the borrower did not fall within
the scope of the guarantee. See also Neil Levy & John Phillips, "Aspects of Guarantee Clauses and Their Drafting" (September 2009),
online: Guildhall Chambers <http://www.guildhallchambers.co.uk/files/AspectsofguaranteeclausesFormattedNL.pdf>.

9. 9
relationship) that allows the lender to enforce the obligation or liability against
the grantor.
(b) Can the mortgagee enforce against the collateral mortgagor before enforcing
against the primary mortgagor?
Turning now to the fourth question above, assuming we have a valid
surety/guarantee relationship in place, generally speaking a mortgagee can
enforce under a collateral mortgage granted by a surety before enforcing against
a so-called primary mortgage. The basic rule is that "the bringing of an action
against the principal is not a condition precedent to a claim by the creditor against
the surety".15
This rule is, however, subject to certain qualifications. First, it does not mean that
the lender can seek to enforce the collateral mortgage at any time. As a guarantee
and its collateral mortgage is contingent in nature, the principal must be in default
before the guarantor becomes liable. Second, it follows from the first qualification
that if the primary obligation is a demand obligation, such as a demand mortgage,
then the collateral mortgagor cannot be liable until the mortgagee has made a
formal demand and has given the primary debtor the opportunity to respond.16
(c) Nominees and Beneficial Owners
Another structural issue arises in the context of nominees and beneficial owners,
and the issue is raised here because too often lenders misunderstand how
collateral mortgages are to be structured in the context of a split between legal
and beneficial ownership, and much of the issue relates to the law of guarantees.
The following is a typical manner in which commercial real estate in Ontario is
owned. A Co owns the beneficial interest in a property. A Co. owns all of the issued
and outstanding shares of B Co. and has directed (under a nominee or bare trustee
15
McGuinness, p 888.
16
McGuinness, p 889.

10. 10
agreement) that B Co. hold legal title to the property as nominee for A Co. As a
matter of law, B Co. hold the registered interest only and holds all rights and
benefits and all obligations and liabilities in respect of the property as nominee
and bare trustee for A Co. As a consequence it has financial statements that show
no assets or liabilities, notwithstanding that its name shows upon the title registry.
So then, as between A (the beneficial owner) and B (the nominee/registered
owner) how do you structure the loan documentation to create a valid charge over
the property and the obligation that such charge secures? Here is what we often
see:
Structure 1. The lender requires that the beneficial owner of the property act
as the borrower, and sets up the nominee title holder of the property as a
guarantor of the loan, who in turn grants a registered collateral mortgage as
security for its guarantee.
Structure 2. The lender requires that the legal title holder of the property act as
the primary borrower of the loan, signing the mortgage as evidence of its
mortgage debt, with a guarantee from the beneficial owner.
Now there is a third structure, but for the time being I am going to keep that one
for later.
Let's look at these two structures and ask ourselves whether they are effective
and immune from attack. And perhaps even more importantly, what problems
would they give counsel if counsel were required to give an enforceability opinion
with respect to the loan documents
In the first structure, the beneficial owner of the property is named as the
borrower and the nominee title holder is to sign a guarantee of its obligations
secured by a collateral mortgage.

11. 11
The structural problem arises from the nature of the nominee relationship. If
properly established, a nominee has, as it relates to the property, no assets and
no liabilities of its own, it being merely a holder of title and obligations for another.
Which is to say that, even when it signs a guarantee, it incurs that obligation for
and on behalf the beneficial owner (incurring them for that principal)…and if that's
the case, the beneficial owner is, by virtue of the guarantee, guarantying its own
primary obligation as principal debtor/borrower.
So in this one example, we have flushed out the cardinal rule of the construction
of guarantees: Thou shalt not guarantee thy own debt.
To quote the (strikingly sexist) language of the court in an 1898 decision in Bowen
v. Needles National Bank17
:
"Now…. men do not guaranty their own debts, nor do they employ that
word to designate an original undertaking. A guarantee is a promise to
answer for the debt, default or miscarriage of another person."
For clarity, women too do not guaranty their own debts.
So, in the law of guarantees, there must be at least "three to tango". A guarantee
is a trilateral relationship. There must be a primary obligor, a person to whom the
obligations is owed, and a distinct third person who guarantees that primary
obligation on its own account. Now this is not to say that there cannot be more
than three persons on the dancefloor, but there must be at least three, and any
attempt to guarantee one’s own obligations, directly or indirectly, runs the risk of
being a legal nullity (which, of course, may make the enforcement of the
supporting collateral mortgage suspect). Now, as a practical matter, a court
considering this structure will in all likelihood step back from the transaction and
impose on the legal imperfections a commercially reasonable interpretation,
having regard to the intentions of the parties, but I would venture that this is not
17
Bowen v. Needles National Bank (87 F 430 at 440)

12. 12
the type of law you want to practice. The type where you intentionally or even
just consciously create or allow structures that are technically broken, relying on
the fact that ultimately a court may gloss over the imperfections in favour of
commercial intentions.
Why? Because you may not always get what you want. Consider for example, the
equitable defenses, based on longstanding principles of equity, that attach to a
guarantee that has been properly constituted. If, as counsel to the borrower, you
were to implement this structure is it your position that your nominee/guarantor
enjoys the benefits of these equitable defences? Is it your position, more
generally, that the guarantee given by the nominee is a valid guarantee? Would
you put those opinions in writing? If you do, you do so at your own peril.
Lender's counsel may care less, because ultimately the guarantee given by the
nominee title holder will likely still be acknowledged by a court as an admission by
the nominee of an obligation for the debt, whether as primary or secondary
debtor, and so it may matter less, so long as the lender can enforce the mortgage,
but again I would stress that it is precisely these imperfections in structure, and
taking these holidays from legal principles, that can lead to litigation. The point
being that, where your structure is broken technically, or you create ambiguity as
to what was intended, your structure can be misinterpreted. The same court
noted:
"In determining whether a promise is a guaranty or an original
undertaking, the language made use of, the situation and the surroundings
of the parties, and every other fact and circumstance bearing upon the
question, should be taken into consideration"
Hardly sounds like the scope of interpretive tools most lawyers want read into
their carefully prepared legal structure does it? Which is why your structure
should be precise. One note however: We have attacked this structure on the
factual assumption that we are dealing with a nominee who is nothing but a

13. 13
nominee. If the facts are that the nominee owns additional assets besides the
assets it holds as nominee, and that the lender is looking for that additional
covenant, then a guarantee from that company, on its own account, may have
merit.
Let's look at the second structure we contemplated at the outset. In the second
proposed structure, the legal title holder/nominee is the primary borrower. It
grants the mortgage as security for its debt and the beneficial owner guarantees
the debt of the nominee.
Of course, this is the same problem. The nominee only ever incurs its debts for
and on behalf of the beneficial owner, which of course means that the guarantee
given by the beneficial owner is a guarantee of its own debts. Which of course
means that it is not a guarantee. And if any client or any party was under the
misapprehension that any of the rights, obligations, remedies or defenses that are
particular to guarantees would apply to this document, they may find themselves
rudely awakened…on account of trying to tango with only two dancers.
What then is the correct structure? Well, curiously, to observe and respect the
legal nature of the nominee relationship that has been created, the better view is
to do one of two things: One favoured approach is to have the registered owner
act as the borrower and to charge the property in favour of the lender. The lender,
having a copy of the nominee agreement, and knowing that the nominee
relationship exists, has the beneficial owner acknowledge contractually that all of
the covenants, agreements and security interests made by the nominee are made
on its behalf, has the beneficial owner specifically direct the nominee in writing to
enter into those loan documents on its behalf, has the beneficial owner agree
specifically in favour of the lender to perform, and to be bound by, those
covenants as principal obligor, and has the beneficial owner grant a beneficial
charge over those assets charged by the nominee.

14. 14
It is similarly correct to have both nominee and beneficial owner act as co-
borrowers, recognizing that ultimately all obligations are incurred by the
beneficial owner, alone or in combination, with its nominee. The trick here, of
course, is to ensure always that careful thought is put into how to describe the
obligations that are secured by the collateral mortgage security package, as,
ultimately, the enforceability of the collateral mortgage may depend heavily of
the structure of the loan.
III. Marshalling and Subrogation
(a) Marshalling
The equitable doctrine of marshalling is a remedy that, by definition, requires that
one lender have security over more than one asset, and so it is particularly suited
to a situation where a debtor has provided mortgage security over multiple assets
to the same lender. The remedy is designed to lessen the chance that a junior
creditor may lose its security solely at the whim of a senior creditor's choice of
security to pursue.18
The doctrine requires that if a creditor has two funds of a
debtor (i.e. two properties) to which it can look to satisfy its claim, and a second
creditor has available only one of those funds (i.e. properties), then the first
creditor should order its recovery against the funds in a manner that reserves the
fund (property) available for the second creditor.19
In effect, this prevents a
creditor who can resort to two funds of a debtor from defeating another creditor
who can only resort to only one of them. For the doctrine to apply, five basic
criteria must generally be met:
(i) Two creditors;
(ii) One common debtor;
18
CIBC Mortgage Corporation v. Branch, 1999 CanLII 6394 (BC SC) at 6, citing Bruce MacDougall, "Marshalling and the Personal Property
Security Acts: Doing Unto Others…" (1994) 28:1 UBC L Rev 91,at 92.
19
Allison (Re), 1995 CanLII 7146 (ON SC).

15. 15
(iii) Two funds of the debtor with the superior creditor having access to both
and the inferior creditor to only one;
(iv) No interference with the choice of remedy of the superior creditor; and
(v) No prejudice to third parties.20
As set out in (iv) and (v) above, the right to marshall assets is subject to two
qualifications: marshalling will not be permitted if it interferes with the paramount
right of the senior creditor to pursue its remedies against either of the two funds,
and marshalling will not be applied to the prejudice of third parties. Where the
senior creditor chooses to recover its debt from the fund available to both
debtors, courts may apply the doctrine to provide the junior creditor a right of
subrogation, which is discussed below.
Little in the way of case law or scholarly writing has been produced about the
intersection of collateral mortgages (in particular) and marshalling. One relatively
recent case which dealt with both is Balemba v R.21
After a complex series of
transactions, the end result was that the debtor owned two properties, both of
which were mortgaged to a single numbered corporation. One of these mortgages
was described in the agreement as being "collateral" to the other. The Crown also
had an interest in the property subject to the collateral mortgage, and argued
under the doctrine of marshalling that the numbered corporation should enforce
against the other property, as that mortgage was not "collateral". The court noted
that merely calling a mortgage "collateral" does not make it so, and that, in any
event, there is no requirement to enforce against a collateral mortgage first.
Moreover, on the facts, it was financially disadvantageous for the numbered
corporation to enforce against the property in which the Crown had no interest.
20
Green v. Bank of Montreal, 1999 CanLII 821 (ON CA) at 10.
21
[2009] 175 ACWS (3d) 429 (“Balemba”).

16. 16
Thus the court did not apply the doctrine of marshalling to require enforcement
against the collateral mortgage.
This case reminds second mortgage holders that, on realization, they should
always have one eye as to whether the senior mortgage holder can be compelled,
by the doctrine of marshalling, to seek recourse against other secured assets.
(b) Subrogation
Subrogation is the equitable right of a party (a "subrogee") to be substituted in
place of some other party (a "subrogor") in relation to a third party who is
indebted or otherwise liable to the subrogor, so that the subrogee succeeds to the
rights of the subrogor in relation to the debt or claim.
Subrogation serves to prevent double-recovery by the subrogor, and to also
prevent unjust enrichment by entitling a subrogee to seek reimbursement from
the debtor for payments made by the subrogee in respect of the debtor's
obligations. 22
In common speak, subrogation allows one party to "step into the
shoes" of another party.
As we have discussed, many collateral mortgages are given in support of another's
primary debts, and are therefore supported by a guarantee. Although most
guarantees will provide that the guarantor (grantor of the collateral mortgage) is
prevented from claiming any amount from the debtor until the creditor is paid in
full. Such language is intended to prevent a guarantor, who has guaranteed only
part of a debt, from paying only the guaranteed amount (that is, less than the
entire debt of the primary obligor) and claiming rights in the lender's security.
22
Subrogation is not the only manner by which a guarantor can seek reimbursement, as a guarantor who pays a guaranteed debt is also entitled to
be indemnified by the principal debtor, and to obtain contribution from other guarantors. Although the right to be indemnified is quite
similar to the right of subrogation, these are distinct rights. For example, the right of indemnity allows a guarantor to sue the debtor in
the guarantor's own name, while a guarantor who is subrogated to the rights of creditor can be in no better position than the creditor. So,
if the creditor's right of action against the debtor is barred, so too is the right of the subrogated guarantor. See, for example, Canada
(A.G.) v. Becker, 1998 ABCA 283 (CanLII).

17. 17
While the waiver of subrogation case law is most developed in the context of
insurance contracts, it is clear that courts will generally give effect to a clause
which waives the rights a party may otherwise hold as creditor. In Wimpey
(George) Canada Ltd. v. Northland Bank,23
a guarantor provided a limited
guarantee of the debts of another company. The debtor defaulted and the
guarantee was called by the lender. The guarantor paid the maximum amount that
the guarantor was obliged to pay under the guarantee, which was less than the
amount owing by the debtor to the lender, and demanded that the lender assign
to the guarantor a proportionate share of the mortgage granted by the debtor.
The lender refused, relying in part on the express terms of the guarantee to argue
that the guarantor was only entitled to claim against the lender's securities upon
payment in full of the amount owing to the lender. McFadyen J. agreed, holding
that
“…even assuming that by the applications of certain general principles of
law or equity the plaintiff would be entitled to a pro rata share of the
mortgage held by the bank, the plaintiff has expressly contracted out of
any such right.”24
The express terms in question dealt with an assignment by the guarantor of
indebtedness owed to it by the debtor, and a postponement by the guarantor of
its claims against the debtor. However, the crux of this line of reasoning in Wimpey
was that the guarantor had contracted out of rights the guarantor may otherwise
have had, as creditor of the debtor, prior to the repayment of the whole of the
debt owing to the lender.25
23
1985 CanLII 1223 (AB QB) ("Wimpey").
24
Wimpey at para 13.
25
McFadyen J. also held at para. 22 that, even if the lender could not rely on the contracting out provisions, the guarantor's claim must fail on the
basis that, because the guarantee was a guarantee of the whole debt but with a limitation on the amount that the guarantor was liable to
pay, the guarantor may only claim the right to an assignment of securities upon the payment of the whole of the debt. For further
discussion of the distinction between a guarantee of the whole debt with a limit on liability, and a guarantee of only part of the debt, see
QK Investments Inc. v. Crocus Investment Fund et al., 2008 MBCA 21 (CanLII).

18. 18
Accordingly, we are left with the curious question of whether the
guarantor/grantor of a collateral mortgage can pay to the lender the maximum
amount of the guarantee/collateral mortgage and be entitled to a pro rata share
of the primary mortgage held by the bank. Wimpey suggests that it can.
IV. Limitation Periods
The question of when the limitation period for enforcement of a demand collateral mortgage
begins to run has received some judicial attention in the past decade. A full understanding of the
issue requires consideration of conventional demand mortgages as well. Three key cases made
the law of limitation periods what it is today, as it applies to mortgages: Hare v Hare,26
The
Mortgage Insurance Company of Canada v Grant Estate,27
and Bank of Nova Scotia v
Williamson.28
(a) Hare v Hare
The first case, Hare, does not concern collateral mortgages, but it sparked the
judicial interest in demand obligations more broadly. Hare dealt with the
transition from the old Limitations Act, RSO 1990, to the new Limitations Act,
2002. The plaintiff loaned money to the defendant in return for a demand
promissory note. When the defendant ceased to pay interest, the plaintiff waited
several years before making a demand. The question before the court was when
the limitation period began to run. A majority of the Court decided that, under
both the old Act and the new Act, the rule is the same: the period begins upon
delivery of the demand note, not on the making of a demand. As a result, the
plaintiff's action was barred.
Following Hare, new retroactive language was added in 2008 to the Limitations
Act, 2002. The new subsection 5(3) states that the limitation period for demand
obligations begins "once a demand for the performance is made". This language
26
[2006] 83 OR (3d) 766 (“Hare”)
27
2009 ONCA 655 (“Grant Estate”)
28
2009 ONCA 754 (“Williamson”)

19. 19
applies to all demand obligations created after January 1, 2004. But neither Hare
nor this legislative change sheds any light on the limitation period for demand
mortgages under the Real Property Limitations Act RSO, 1990, which is the subject
of the second in our trilogy of cases, Grant Estate.
(b) The Mortgage Insurance Company of Canada v Grant Estate
In Grant Estate, TD Bank loaned Rebanta Holdings a sum of money, and Mortgage
Insurance Company of Canada (MICC) acted as surety. MICC then entered into an
Indemnity Agreement with multiple parties, one of which was the borrower
Rebanta itself. Rebanta and the other indemnitors provided demand collateral
mortgages to MICC as security for the Indemnity Agreement. Rebanta defaulted
on the original loan and MICC made a payment to TD, on account of the
suretyship. MICC then waited over ten years before commencing an action under
the Indemnity Agreement. The Court dealt with several issues, but the important
question for our purposes is when the limitation period of ten years on the
demand mortgages began to run.
The Court's answer turned on two key distinctions: first, whether the mortgage is
conventional or collateral and, second – if there is a collateral mortgage – whether
the collateral mortgagor is also the primary obligor. Based on these distinctions,
Grant Estate creates three possible scenarios:
(i) If the mortgage in question is a conventional mortgage, the limitation
period begins running immediately, at the creation of the obligation.
(ii) If the mortgage in question is a collateral mortgage, and the collateral
mortgagor is not the same person as the main mortgagor, the limitation
period begins running on the demand.
(iii) If the mortgage in question is a collateral mortgage, and the collateral
mortgagor is the same person as – or a principal of – the main mortgagor,
the limitation period begins running when the obligations under the main

20. 20
mortgage are triggered. The reasoning here is that "there is no special
need for demand under the collateral security as the principal debtors
have full knowledge of, and control over, the status of their debt" (para
24). This was the scenario applicable in Grant Estate, as Rebanta was
both the main borrower and one of the indemnitors that provided a
collateral mortgage.
Since Grant Estate was decided under the Real Property Limitations Act, the
amendment to the Limitations Act, 2002 stating that all limitation periods begin
on demand did not factor into the ruling. That amendment was addressed in the
third case, Williamson.
(c) Bank of Nova Scotia v Williamson
The facts of Williamson are simple: a borrower defaulted on a loan from the bank,
and the bank sought to enforce against a guarantor. The guarantor argued that
the limitation period had elapsed. This case gave the Court of Appeal the
opportunity to confirm that the 2008 legislative amendments to the Limitations
Act, 2002 do indeed mean that the limitation period on all demand mortgages
subject to the Act begins to run on the making of a demand, whether the mortgage
is primary or collateral. It is worth pointing out, though, that the transactions at
issue in Williamson predate January 1, 2004. As a result, the legislative
amendments do not apply, and the Court's comments on the subject are
technically obiter dicta. Nonetheless, the Court notes that it is relying on the
amendments as an indication of legislative intent.
(d) Summary
We can distil this line of cases into a short summary of the state of the law. First,
after the legislative amendments and the persuasive obiter dicta in Williamson, it
seems clear that the limitation period on a primary or collateral demand obligation
subject to the Limitations Act, 2002 begins to run from the demand. This is not

21. 21
helpful, however, in the case of demand mortgages, as they would likely be
subject to the Real Property Limitations Act. Instead, unless the legislature decides
to amend the RPLA in a manner consistent with the LA, it appears that Grant
Estate is still good law. Thus, to determine the relevant starting date for the
limitation period, we must always ascertain the type of mortgage (conventional
or collateral) and the identity of the mortgagor (principal or third party).
As a final point on limitation periods, there may be situations in which it is difficult
to tell which of the LA or the RPLA should apply. The ONCA offered some guidance
in Equitable Trust Co v 2062277 Ontario Inc, 2012 ONCA 235, noting:
"…it may not always be easy to determine whether a particular guarantee,
like the guarantee in Bank of Nova Scotia v. Williamson, is subject to the
Limitations Act, 2002 or, like the guarantee in the case at bar, is subject to
the Real Property Limitations Act. However, it does not follow that all
guarantees should be treated the same way. It has been the case
historically that guarantees associated with land transactions have
different limitation periods from guarantees associated with contract
claims. Moreover, as already noted, it is my view that the Legislature
intended that all limitation periods affecting land be governed by the Real
Property Limitations Act."
Thus, following Equitable Trust, a guarantee that is not itself a collateral mortgage,
but that guarantees a primary mortgage transaction, would have a sufficient
nexus to real property to fall within the jurisdiction of the RPLA, rendering it
subject to Grant Estate rather than Williamson.
V. Foreclosure
All of the issues discussed so far have been sensitive to whether the collateral mortgagor is the
same person as the primary mortgagor. The following topic – foreclosure – is not so sensitive.

22. 22
In Price v Letros29
, the defendant gave both a main and a collateral mortgage to the plaintiff. The
plaintiff foreclosed on the main property and sold it, then sold the second property under power
of sale, and finally sought to recover the deficiency that remained after both sales. The court held
that the plaintiff was not entitled to the deficiency, and that the plaintiff also had to account to
the defendant for the sale of the second property. The foreclosure and subsequent conveyance
of the first property fully satisfied the debt, such that the collateral mortgage was extinguished.
Some years later, the ONCA explained the law in more detail, in Bank of Nova Scotia v Dorval et
al.30
Here, the defendant husband gave two promissory notes to the plaintiff wife. The husband
gave the wife a mortgage, collateral to the notes. On the husband's default, the wife foreclosed
on the real property that was the subject of the mortgage, then sought to bring an action on the
promissory notes claiming the deficiency. The court ruled in favour of the husband; by foreclosing
on the property, even though it was collateral security, the wife settled the debt in full. The ONCA
helpfully summarized the principle as follows, citing Falconbridge:
"If a mortgagee holds collateral security for the payment of the mortgage debt, he should
realize the security before seeking to foreclose under the mortgage because, if he obtains
foreclosure first, 'he deprives himself of the benefit of the security in the sense that the
foreclosure will be reopened if he subsequently realizes the security".
Crucially, it is not any realization on the primary mortgage that extinguishes a collateral
mortgage. Rather, it is specifically the mortgagee's act of giving up its ability to reconvey the
mortgaged property. As the Court notes in Dorval, referring to some preceding cases:
"These cases do not … stand for the proposition that the holder of both primary and
collateral security must, as a matter of law, realize upon the collateral security first;
rather, they support the more general proposition that where security is pledged for a
debt and the lender has put it beyond his power to restore the pledge, he must be taken
to have elected to accept the amount realized in satisfaction of the debt and to have
29
(1974), 2 OR (2d) 292 (CA).
30
[1979] 25 OR (2d) 579 (“Dorval”)

23. 23
foregone recourse to any other security for that same debt, whether that other security
be characterized as secondary, additional, primary or collateral".
Thus it would be perfectly acceptable to seek to enforce a collateral mortgage after enforcing a
main mortgage through power of sale or judicial sale, without prejudicing one's other security.
Note to self: do not foreclose under a collateral mortgage as I may extinguish my rights to claim
under any other security, including any other collateral mortgage.
VI. Venue
We now get to the hot topic of venue. A recent amendment to the Rules of Civil Procedure,
effective March 31, 2015, has introduced sub rule 13.1.01(3), which provides that mortgage
enforcement proceedings must be commenced "in the county that the regional senior judge of a
region in which the property is located, in whole or in part, designates within that region for such
claims". If claims fall into more than one designated centre, it has been suggested that the
plaintiff may choose the jurisdiction in which to sue, though the rule does not say how or on what
basis.31
The types of actions caught by the rule include those that contain a "claim relating to a
mortgage". The phrase "claim relating to a mortgage" is undefined, but clearly includes collateral
mortgages and an action to enforce a collateral mortgage that is supplemental to a main
mortgage would be caught by the rule. A more uncertain scenario, however, may arise if the
collateral mortgage is collateral to a non-mortgage debt obligation. At what point is the nexus to
the mortgage so tenuous that the claim no longer "relates" to a mortgage?
As discussed above, the Court in Equitable Trust held that the test for whether the Limitations
Act, 2002 or the Real Property Limitations Act applies is whether it is a limitation period "affecting
land". It may be the case that a similarly broad test will be applied to the new venue rule, with
the result that the mere presence of a mortgage within a series of transactions would trigger
subrule 13.1.01(3).
31
Doug Bourassa, “New Issue in Mortgage Enforcement – Changes in the Venue Rules: There’s No Place Like Home” (Aug 31, 2015).

24. 24
VII. Further Advances and Tacking
(a) Further advances on a revolving line of credit
When a collateral mortgage secures a primary debt obligation that allows for
further advances by the lender to the primary debtor (for instance, a revolving line
of credit), the priority of these further advances may come into question. The
following discussion is based on a simple scenario. Suppose that Lender has given
a revolving line of credit to Debtor. This debt is secured by a collateral mortgage
by Mortgagor. Further suppose that Mortgagor gives a second mortgage on his
property to Second Mortgagee. The question is whether further advances made
on the line of credit from Lender to Debtor would be subordinated to the interest
of Second Mortgagee.
The basis for this subordination is the equitable doctrine of tacking. The doctrine
has two limbs. The first, not at issue here, is described in Falconbridge as follows:
"In a mortgage context, [tacking] arises where a third mortgage is taken
without notice of the second. If the third mortgagee gets in the legal estate
by purchasing the first mortgage, he or she is allowed to 'tack' the third
mortgage to the first mortgage, and obtains priority as to both over the
second mortgage".32
More significant in our situation is the second limb of the doctrine of tacking,
which deals with further advances. The common law rule was that a lender making
further advances enjoyed priority over subsequent encumbrancers so long as
notice of such intervening interests was not given to the lender.33
The common
law rule appears to date back to the 1861 House of Lords decision in Hopkinson v
Rolt,34
which was cited favourably in Ontario some thirty years later in Pierce v
Canada Permanent Loan and Savings Co.35
This rule has been codified in a number
32
Falconbridge, 9-11.
33
Law Reform Commission of British Columbia, "Report on Mortgages of Land: The Priority of Further Advances" (1986), pp 8-9.
34
(1861), 9 HL Cas 514, 11 ER 829.
35
(1894), 24 OR 671 (Ch Div), affd 23 OAR 516.

25. 25
of provinces, the relevant provisions in Ontario being Subsection 93(4) of the Land
Titles Act and Section 73 of the Registry Act.
The underlying problem with this branch of tacking, of course, is that a second
mortgage lender can cause further advances under a senior mortgage (perhaps
securing a revolving line of credit) to be subordinated to its subsequent
encumbrancer upon notice. Curiously, notice is not deemed to be given simply by
virtue of the registration of the second mortgage, and so the first mortgagee
actually has to know of the second mortgage registration. One might argue that a
first mortgagee may simply take a position of "ignorance is bliss" and never
subsearch title before subsequent advances, but this would prove a precarious
practice given the statutory priority that certain liens are given over subsequent
advances.36
The protection for first mortgage lenders against tacking is imperfect. Firstly they
should contractually prohibit second mortgages; secondly they should provide
that the registration of any second mortgage is an immediate default giving rise
to the payment of makewhole amount; and thirdly, they should specifically
provide that, to the extent any second mortgages are permitted, they are
permitted only on the grounds that a satisfactory subordination and
postponement agreement is entered into.
The concern for first mortgage lenders is that they might unknowingly receive
actual notice of a subsequent mortgage, which would then take priority over
further advances on the first mortgage. The test for actual notice was articulated
in CIBC v Rockway Holdings37
, in which Justice Salhany wrote:
36
See, for instance, Subsection 78(4) of the Construction Lien Act, which reads:
“Subject to subsection (2), a conveyance, mortgage or other agreement affecting the owner’s interest in the premises that was registered
prior to the time when the first lien arose in respect of an improvement, has priority, in addition to the priority to which it is entitled
under subsection (3), over the liens arising from the improvement, to the extent of any advance made in respect of that conveyance,
mortgage or other agreement after the time when the first lien arose, unless,
(a) at the time when the advance was made, there was a preserved or perfected lien against the premises; or
(b) prior to the time when the advance was made, the person making the advance had received written notice of a lien.”
37
(1996), 29 OR (3d) 350 (Ont Gen Div) (“Rockway”).

26. 26
“[T]he term “actual notice” means actual notice (as opposed to
constructive notice) of the nature of the prior agreement and its legal
effect. There is no requirement that there be actual notice of the precise
terms of the agreement, such as the amount of the consideration passing
between the parties or the term of the agreement. The test, in my view, is
whether the registered instrument holder is in receipt of such information
as would cause a reasonable person to make inquiries as to the terms and
legal implications of the prior instrument”.
So if a second mortgage lender requests a statement of indebtedness from the
first mortgage lender, it would constitute actual notice on the Rockway analysis.38
A first mortgage lender should therefore protect itself contractually, as described
above, either by prohibiting subsequent mortgages outright, or by subordinating
them explicitly.
(b) Cap on advances
As discussed, collateral mortgages are often designed as such because they secure
debts created outside of the four corners of the document. Revolving credit
facilities and lines of credit are common examples. Therefore, because they so
often involve the extension of additional credit or the advance of additional funds,
they are more prone to being caught by the caps on advances concepts set out in
the legislation.
Subsection 93(4) of the Land Titles Act and Section 73 of the Registry Act provide
that the "money or money's worth" acts as a cap on the security realizable by the
lender.39
As explained in Falconbridge:
"A registered mortgage is only security for the money or money's worth
actually advanced under it up to the amount for which the mortgage is
38
Kofman, p 7.
39
Kofman, p 4.

27. 27
expressed to be security and any advances over and above the registered
amount of the mortgage may not be secured and may lose priority to any
subsequently registered interests".40
Sounds simple enough. Your security cannot secure indebtedness above and
beyond the stated cap of the mortgage. Put another way, a lender only has
security to the extent of the funds advanced, and the funds may only be advanced
to the extent of the collateral mortgage's principal amount without risking the loss
of priority. As the line of credit is paid down, the repaid amount once again
becomes available for future advances.41
A contrary view, now seemingly defunct,
is what has been called the “ratchet advances” problem.42
The idea, historically,
was that the cap on further advances is reduced with every payment, up to the
principal amount of the loan. In other words, it was thought that a $500,000
payment, made on a $1 million loan and subsequently repaid, meant that only
another $500,000 could be advanced, regardless of the repayment. Intuitively,
this makes little practical sense, and the more palatable modern approach has
found favour with commentators. Kofman suggests that the “ratchet advances”
problem is not a risk, as “no one would sensibly claim that a mortgage lender
which advances $6 million, but then is subsequently repaid $6 million, continues
to have enforceable mortgage security for $6 million”.43
I tend to agree with Mr.
Kofman, but would add that this notion of a cap should remind lenders that
collateral mortgages are on their terms capped their stated principal amounts.
Too often, lenders amend or modify the terms of their loans in unregistered
instruments without revisiting their collateral mortgages to ensure that they are
securing the full amount of indebtedness.
40
Falconbridge, 8-28.
41
Kofman, p 10.
42
Bryan G. Clark and Jeffrey W. Lem, “Debenture Pledges: A Buggy Whip for your Porsche… Wound into the Crankshaft?”, Best Practices for
Commercial Mortgage Transactions, LSUC, March 26, 2003.
43
Kofman, p 10.

28. 28
I will also pause here to go off topic (not the first time, I know) on the broader
issue of amending the unregistered instrument that creates the primary obligation
secured by the collateral mortgage. It is not unusual, for instance, for the collateral
mortgage to state that it secures all obligations and liabilities as set out in a
commitment letter, indemnity, undertaking, credit agreement or similar
instrument. Over time, the commercial terms of the unregistered instrument are
amended, modified, supplemented, added to, restated, replaced or otherwise
recast, without regard to the collateral mortgage on title. The concern is that the
collateral mortgage may need to be amended or reaffirmed to ensure that it
secures such new or modified obligations, and that such obscene things as
novation have not inadvertently happened.
(c) Reduction to zero
A third issue raised by attaching a collateral mortgage to a revolving debt
obligation is the possibility that, if the debt is paid down to zero, the mortgage
may be automatically redeemed. This rule is codified in Ontario in Subsection 6(2)
of the Land Registration Reform Act, which reads: "A charge ceases to operate
when the money and interest secured by the charge are paid, or the obligations
whose performance is secured by the charge are performed, in the manner
provided by the charge". The words “in the manner provided by the charge”
suggest that an easy workaround is to include in the charge language that keeps
the charge alive despite a reduction to zero.
While such a workaround would be necessary in Ontario, other provinces have
enacted rules to prevent the automatic redemption of collateral mortgages upon
the reduction to zero of the underlying revolving debt obligation. For instance,
Subsection 28(3) of the British Columbia Property Law Act provides a special rule
for running accounts like revolving lines of credit. It reads:
"If a mortgage is expressed to be made to secure a current or running account, it
is not deemed to have been redeemed merely because

29. 29
(a) advances made under it are repaid, or
(b) the account of the mortgagor with the mortgagee ceases to be in debt,
and the mortgage remains effective as security for further advances and retains
the priority given by this section [i.e., further advances are subordinated to
subsequent mortgages with notice] until the mortgagee has delivered a
registrable discharge of the mortgage to the mortgagor but, if the mortgagor is
not indebted or in default under the mortgage, the mortgagee must, on the
mortgagor's request and at the mortgagor's expense, execute and deliver to the
mortgagor a registrable discharge of the mortgage".
But, to reiterate, in practice, an Ontario mortgagee wishing to prevent the
automatic redemption of a mortgage should simply include in the charge a clause
providing that the mortgage is not redeemed on the reduction to zero of the
underlying running account.
VIII. Securing a Performance Obligation
We now will touch on issues that arise when a collateral mortgage secures a
performance obligation that is not yet monetized – for instance, a promise to complete
a particular task, an undertaking, or an indemnity against a future loss. Should a
subsequent mortgagee wish to "pay off" the collateral mortgage and exercise a right of
subrogation, it is unclear what value the subsequent mortgagee should ascribe to the
mortgage when seeking to discharge it or if it can exercise a right of subrogation at all.
Legislation is silent on the interaction between collateral mortgages and performance
obligations, with the exception of Subsection 6(2) of Ontario's Land Registration Reform
Act, discussed above, which provides that "a charge ceases to operate when … the
obligations whose performance is secured by the charge are performed". Thus, as in the
"reduction to zero" problem for revolving debt obligations, a collateral mortgage
securing a performance obligation could be redeemed upon the completion of the
obligation.

30. 30
The difficulty arises because, in a situation where the collateral mortgage secures an
unquantified amount, the subsequent mortgagee does not want to pay to the first
mortgagee the face value (or maximum secured amount) under the mortgage, nor can it
ask the senior mortgagee for a mortgage statement evidencing the amount then due (it
may in fact be zero at the time). So what to do?
Your author spent a good deal of time noodling on this one, and much to his dismay
(after trying to analogize to any manner of argument, including on whether one could
seek relief on the basis of it being a clog on the equity of redemption) has come to this
rather unsatisfactory conclusion. The best that a subsequent mortgagee could attempt
to do, is to make application to court for the cash or near cash (i.e. letter of credit)
collateralization of the senior mortgage in an amount equal to the maximum amount of
the senior mortgage.
IX. Conclusion
As noted at the outset, the term "collateral mortgage", though used by courts, does not
have a well-settled judicial definition. It is more a commercial term than a legal one. It is
therefore unsurprising that, when courts and lawyers comment on collateral mortgages,
they do so meaning different things at different times. That said, there is one
commonality, and that is that all collateral mortgages are posted as security for an
obligation that is not entirely contained within that mortgage. It is not a self-contained
loan and security document. Accordingly, any analysis or enforcement of a collateral
mortgage requires a complete view of the loan and security package, its construction,
and those particular remedies and defenses set out herein.
WSLEGAL0008500099716039376v1