Mortgage default occurs when a borrower breaches or violates a term of their mortgage agreement. The mortgage terms are found in the mortgage commitment or agreement, along with a document called the Standard Charge Terms, which is incorporated into the registered mortgage document by the inclusion of a filing number. Most institutional lenders have developed and filed their own Standard Charge Terms, whereas private lenders more commonly utilize the generic Standard Charge Terms produced by Dye and Durham, a legal technology company. In any event, the Standard Charge Terms set out the obligations of the borrower, along with the rights of the lender upon the borrower’s breach of those obligations. While Standard Charge Terms may vary from lender to lender, the obligations of the borrower as set out therein are fundamentally the same.

Not all events constituting default are obvious to a borrower. It is important for a borrower to consult with their real estate lawyer on the contents of their Standard Charge Terms, to fully understand their obligations in relation to their mortgage, and what the consequences of breaching them will entail. The events which most commonly constitute default under a mortgage are as follows:

• Failing to make payments as per the mortgage agreement. This is the most obvious form of default under a mortgage and gives rise to the lender’s rights to commence enforcement proceedings.

• Failing to pay property taxes. Defaulting on the payment of property taxes constitutes default under the mortgage, as it could lead to a property tax lien being registered on title to the mortgaged property. If property taxes remain outstanding for some time, the municipality has the right to sell the property to recover the unpaid property taxes. The right of the municipality to recover the unpaid property taxes takes priority over any registered mortgage. In addition to this, the amount of interest that accrues on outstanding property taxes can be very significant. When a borrower is delinquent in their property tax payments, the lender is left with no choice but to pay the property taxes on behalf of the borrower, or risk losing their priority on the land. The lender will then have a right to commence default proceedings, and the amount paid towards property taxes is added to any outstanding balance under the mortgage.

• Failing to keep prior mortgages in good standing. When a borrower fails to make payments on a prior existing mortgage, this puts the subsequent lender’s interest at risk, especially if the lender on the prior mortgage commences enforcement proceedings. The subsequent lender is left with the option to bring the prior mortgage payments up to date on behalf of the borrower, or risk losing control of enforcement proceedings if the prior lender commences legal action against the borrower first. As such, failing to keep prior mortgages in good standing constitutes default and may cause the lender to take enforcement action.

• In Condominium properties, failing to pay the Common Expenses. Failing to pay the monthly common expenses in a condominium property, also known as maintenance fees, constitutes default under the mortgage. As with property taxes, failure to pay common expenses to the condominium corporation can result in the registration of a lien on the property. Section 86 of the Condominium Act, 1998 states that liens registered due to default in the payment of common expenses have priority over all registered encumbrances/mortgages. The lender is again left with the option of paying the arrears on behalf of the borrower, or risk losing their priority on the land.

• Failing to adequately insure the Property. Borrowers are obligated to maintain adequate fire insurance on the mortgaged property. The typical requirement is “full insurable value”, or “guaranteed replacement cost”, which means the cost to replace the structure on the land is covered if it burns down or is otherwise damaged. Failing to obtain such insurance, or allowing it to lapse, constitutes a default under the mortgage as it puts the value of the property, and in turn, the lender’s equity, at risk.

While there are many more events that may constitute default under a mortgage, the above-mentioned events are the most common. When in doubt, a borrower should consult with Kormans LLP, and speak with one of our real estate lawyers for advice on the legal aspects of their mortgage, and their obligations thereunder.

Mortgage default can lead to significant consequences for a borrower. If you are in default, or at risk of defaulting on your mortgage, contact Kormans LLP, to speak to one of our real estate lawyers immediately! There may be options to delay or prevent the loss of your property.

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