A Gift With A Catch: Bequests of Real Property and Mortgages
Assume that you are given real property in someone’s will, but the property is subject to a mortgage. Do you get the real property free and clear, or do you take it subject to the mortgage? Is the estate liable for paying off the mortgage?
The answer lies in s. 32 of the Succession Law Reform Act, and the terms of the will.
Pursuant to s. 32, the real property is primarily liable for satisfying the mortgage, unless there is a contrary or other intention in the will.
Section 32(1) provides:
Where a person dies possessed of, or entitled to, or under a general power of appointment by his or her will deposes of, an interest in freehold or leasehold property which, at the time of his or her death, is subject to a mortgage, and the deceased has not, by will, deed or other document, signified a contrary or other intention,
(a) the interest is, as between the different persons claiming through the deceased, primarily liable for the payment or satisfaction of the mortgage debt; and
(b) every part of the interest, according to its value, bears a proportionate part of the mortgage debt on the whole interest.
Thus, you take the property subject to the mortgage.
But, you may ask, what about the general direction to pay debts that is found in many wills? Isn’t that a “contrary intention”?
Section 32(2) states that a testator does NOT signify a contrary intention by a general direction for the payment of debts. Something more is needed.
While the property is subject to the mortgage, the mortgagee does not have to take action against the real property. Section 32(3) provides that nothing in s. 32 affects the right of a person entitled to the mortgage debt to obtain payment or satisfaction either out of the other assets of the deceased or otherwise.
When taking instructions for a will for a testator who owns property subject to a mortgage, the drafting lawyer should discuss the effect of s. 32 of the Succession Law Reform Act, and confirm whether this outcome is in keeping with the testator’s intentions. If it is not, and the testator wants the beneficiary to receive the property free of the mortgage, wording should be put into the will to set out this intention.
Have a great weekend.