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.
The recent decision of Fletcher’s Fields Limited v Estate of Samuel Harrison Ball, 2018 ONSC 2433 considered whether an appointment of trust funds for a particular purpose created an interest in land.
Fletcher’s Fields is a not-for-profit Ontario corporation which owns land that is predominantly used as a sports facility for rugby football union (the “Land”). Mr. Jenkins was the trustee of the estate of Samuel Harrison Ball. He was also a lawyer, and over the years had been actively involved with Fletcher’s Fields, as General Counsel, and as a member of the board of directors. In Jenkins’ role as trustee of Mr. Ball’s estate, he had the power to appoint money forming part of the estate as he saw fit.
In 1994, Jenkins exercised his power to provide Fletcher’s Fields with $100,000.00 pursuant to a “Deed of Appointment”. The Deed of Appointment provided that (a) the money must be used solely for the purpose of improving the sports facility on the Land; (b) the trustee had the right to revoke any or all of the money if the Land was not kept in good condition suitable for playing the sport; and (c) if revoked, Fletcher’s Fields was required to transfer the fund to the trustee, with interest.
In 2015, a new board of directors for Fletcher’s Fields was elected, which did not include Jenkins. It seems that Jenkins may not have been pleased with this development. The following year, Fletcher’s Fields discovered that a notice had been registered on title to the Land by Jenkins, under s. 71 of the Land Titles Act, R.S.O. 1990, c. L.5. It appears that the notice had been registered after Jenkins had ceased to be a member of the board.
Fletcher’s Fields took the position that the funds provided pursuant to the Deed of Appointment were a gift or, alternatively, trust funds. Jenkins took the position that the Deed of Appointment was not a trust, but rather that it was a loan that was to be repaid if certain conditions crystallized. He characterized it as an equitable mortgage.
The Court noted that the terms of the Deed of Appointment were key to determining whether or not an interest in land had been created. There was no indication of an express intent to create an interest in the Land, or provide that failure to repay the funds would result in a charge over the Land. Without such an express intent, the notice should not remain on title to the land. The Court also held that the parties’ conduct supported the position that there was never any intention to create an interest in the Land.
The Court ordered that the notice that had been registered by Jenkins on title to the Land be removed. The result of this case seems correct, as one would expect that an interest in land should not be created unilaterally and without notice. There are significant differences between types of financial arrangements such as loans, mortgages, gifts, and appointments of trust funds. It is reassuring that the Court in this situation upheld the integrity of the parties’ intentions in crafting their financial arrangement and did not impose a charge-type interest in the Land where none existed.
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The topic of home ownership, and, particularly, the ability of young adults to buy their first home is a trending topic lately. According to a Globe and Mail article on whether millennials are being pushed “into a financial abyss of home ownership”, Manulife Bank has conducted a survey which revealed that 45% of millennial home buyers received a gift of money or loan from family, and that one-third of these lucky youngsters received more than $25,000.00.
Regardless of whether prospective first time home buyers are wasting money on delicious, but expensive, avocado toast as Tim Gurner may have controversially implied, home buyers with mortgages should give consideration to how they would want the mortgages on their properties to be satisfied upon their death.
Pursuant to section 32 of the Succession Law Reform Act, a mortgage on an estate property shall be proportionately satisfied through the interest of the beneficiaries of that property, if the deceased has not, by will, deed, or other document, signified a contrary or other intention. For each beneficiary of a property, “every part of the interest, according to its value, bears a proportionate part of the mortgage debt on the whole interest”. The Act is also clear that a general direction for the payment of all debts from the residue of the Estate does not suffice to rebut the application of section 32 unless “he or she further signifies that intention by words expressly or by necessary implication referring to all or some part of the mortgage debt”.
Regardless of the foregoing, nothing in section 32 of the Act shall affect the mortgagee’s right “to obtain payment or satisfaction either out of the other assets of the deceased or otherwise”.
Just for fun, here is a link to a CNBC article on some statistics related to millennials, their spending habits, and the average price of a single avocado.
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One would be forgiven for believing that the determination of who is entitled to take on an intestacy is fairly settled law. In accordance with Part II of the Succession Law Reform Act (the “SLRA“), if a person were to die intestate leaving a surviving married spouse and two children, the first $200,000.00 of their estate would go to the surviving spouse as a preferential share. In the event that there were any assets in the estate after the payment of the $200,000.00 preferential share, such funds would be equally shared between the spouse and the two children, with each party receiving 1/3 of such amounts.
In Re: Estate of Richard Lewis Crane, the Ontario Superior Court of Justice was faced with the issue of whether mortgage insurance should be taken into account when calculating the “net estate” available for distribution on an intestacy. In such a case, the Deceased died intestate with a surviving wife and two children. The majority of the Deceased’s assets passed outside of his estate to his wife as the surviving joint owner. The only asset which passed through the estate was real property worth approximately $294,500.00, which was subject to a mortgage in the amount of $100,339.26. The Deceased held mortgage insurance on such a mortgage, which provided that the mortgage was to be paid off in its entirety in the event of his death.
The question which was posed to the court was whether, as a result of the fact that the mortgage in question would never be payable by the estate as a result of the mortgage insurance, if the value of the mortgage should not be deducted from the value of the property in calculating the “net value” of the estate which would be available for distribution. If the value of the mortgage insurance was included as part of the “net value”, the Deceased would have died with an estate valued at approximately $294,500.00. As such an amount is in excess of the $200,000.00 preferential share, it would result in funds being available for distribution to the two children. If the value of the mortgage insurance could not be taken into account in calculating the “net value” of the estate, the Deceased would have died with an estate valued at approximately $194,160.74. As such an amount is below the $200,000.00 preferential share, such a valuation would result in the entirety of the estate being distribution to the surviving spouse.
After reviewing the jurisprudence on point, and careful consideration of what they viewed as the intention of the statute, Justice Broad ruled that the value of the mortgage insurance was to be taken into account in calculating the “net value” of the estate available for distribution. As a result, the Deceased died with an estate valued at approximately $294,500.00. As such an amount is in excess of the $200,000.00 preferential share, it would result in funds being available for distribution to the Deceased’s children.
This week on Hull on Estates, Paul Trudelle and Stuart Clark discuss the recent decision of Re: Estate of Richard Lewis Crane, 2016 ONSC 291, and the issue of whether mortgage insurance should be taken into account when calculating the “net estate” available for distribution on an intestacy
Should you have any questions, please email us at firstname.lastname@example.org or leave a comment on our blog.
On Tuesday I blogged about mortgage fraud and suggested that financial institutions may be at greater risk because of the B.C. Court of Appeal decision: Re Oehlerking Estate, 2009 BCCA 138.
Why would they be at increased risk?
In the B.C. case, the Judge ordered that the fraudster’s title be set aside and that a new title be issued in the name of the plaintiff executrix. However, the Judge was satisfied that the financial institution had not “participated in the fraud” therefore the mortgage remained as a valid charge on title to the land.
The B.C. Court of Appeal overturned that latter point when it declared that the mortgage is null and void as against the plaintiff and her title.
The reasons were the same as those presented in a B.C. Court of Appeal decision released on the same day in Gill v. Bucholtz (2009 BCCA 137). There is a thorough review of the Torrens land registry system and the development of B.C.’s Land Title Act. Land title systems differ per province but the B.C. decision is likely persuasive.
In Gill v Bucholtz, the Court held that the B.C. Legislature adopted the policy that the cost of frauds perpetrated against mortgagees and other chargeholders should be borne not by the public (as the funders of the Assurance Fund but by lenders and other chargeholders themselves.”
Parties to real estate transactions rely on title searches. The case law shows that title searches have limitations, especially if a fraudster has used someone else’s identification to change the title document. It is up to lenders to now perform due diligence that may require that they delve deeper than the documents alone. Sometimes good old fashioned shoe leather might be put to work to check out the property in question; even a knock on the door to ensure that the owner is actually refinancing by way of a new mortgage. This extra work may come with a fee though.
Thank you for reading.
Listen to Investment Account Issues and Considerations
This week on Hull on Estate and Succession Planning, Ian and Suzana talk about how good trustees deal with accounting issues in volatile markets and other investment considerations.
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