Mortgagees in possession: Considerations for condominium corporations

February 18, 2021 | Katherine Cavan

Condominium corporations are tasked with the difficult responsibility of managing the property and assets of the corporation on behalf of the various condominium owners and balancing the competing interests and needs of such owners.

What happens in the scenario where a unit owner is in default of the mortgage registered against their condominium unit, and the responsible mortgagee reaches out to seek assistance from the condominium corporation in enforcing its rights, be it by requesting that the condominium corporation grant the mortgagee access to the unit, bar the registered unit owner from further accessing the unit, or otherwise?

What duty, if any, does the condominium corporation owe to such a mortgagee, and how can any such duty be balanced against the competing interests of the defaulting unit owner?

In light of the continued impact of the COVID-19 pandemic on the employment and financial security of many Ontarians, it would not be surprising if condominium corporations face scenarios of this nature more often in the future.  It is, therefore, important for condominium corporations to be aware of their potential responsibilities and obligations.

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Does a condominium owe any duty of care to a “mortgagee in possession”?

It is of no dispute that a condominium corporation owes a duty of care to the registered owners of mortgaged condominium units. When we look at the Condominium Act, 1998  (the “Act”), the term “owners” is defined to “include a mortgagee in possession.”  Case law confirms that in the event of a “mortgagee in possession” with respect to a mortgaged condominium unit, the registered owner does not “lose” its ownership designation.  Rather, the registered owner as well as the “mortgagee in possession” are considered concurrent owners for the purposes of the Act.  Therefore, the condominium corporation owes a duty of care to both parties as concurrent owners.

When is a mortgagee considered “a mortgagee in possession”?

If approached by a mortgagee, a condominium corporation should first determine whether or not such mortgagee is in fact a “mortgagee in possession.”   While there is no statutory definition of the term “mortgagee in possession,” this term has been investigated thoroughly by the courts in Ontario, which have established some basic principles that are helpful for our purposes, namely:

  • a mortgagee is not a “mortgagee in possession” until such time as it asserts its rights as mortgager;
  • a mortgagee may be deemed a “mortgagee in possession” once it has “taken control and management of the mortgaged property out of the hands of the mortgagor”;
  • repossession is not required in order to become a “mortgagee in possession”; and
  • interception of rents after same are paid by tenant does not act to “take the mortgage property out of the control of the mortgagor.”

The test for whether or not a mortgagee is a “mortgagee in possession” is a question of fact, depending on the unique circumstances of each case.  It is not enough for a mortgagor to be in default of the mortgage. Therefore, a condominium corporation should require evidence more substantial than simply proof of mortgage payment arrears to establish a mortgagee’s position as a “mortgagee in possession” and, therefore, an “owner” under the Act.   Rather, a mortgagee must be able to demonstrate that it has taken active steps to deprive the unit owner of the control and management of the mortgaged unit.

How does a condominium balance competing interests of a “mortgagee in possession” and a registered owner?

When approached by a mortgagee purporting to be a “mortgagee in possession” and requesting the condominium corporation’s assistance in enforcing its rights against the registered owner of the mortgaged unit, it is important for the condominium corporation to first confirm whether or not the mortgagee is, based on the facts at hand, a “mortgagee in possession.”

If yes, then the condominium corporation must tread carefully to respect and honor its duties to both the registered unit owner and the “mortgagee in possession” as concurrent owners under the Act.  For example, when contacted by a bona fide “mortgagee in possession,” it is recommended that the condominium corporation clearly and promptly communicate with such party that it is in a position of competing obligations and, therefore, unable to choose sides or take any action that would be contrary to the interests of the registered owner.

A mortgagee may take possession of property upon a mortgagor’s default, provided it is able to do so peaceably. If the “mortgagee in possession” is unable to gain or maintain possession of the mortgaged unit peaceably, then its only available recourse is to apply to the Superior Court for an order to enforce same.  There is no positive obligation contained within the Act or the Mortgages Act that compels the condominium corporation to assist the “mortgagee in possession” in enforcing its rights against the registered owner of the mortgaged unit. Rather, there is only an obligation not to interfere with the exercise of such rights by the “mortgagee in possession.” Therefore, unless and until such an order is obtained and provided to the condominium corporation, which specifies the actions the condominium corporation is obliged to take with respect to the registered owner/the mortgaged unit, the condominium corporation should be reluctant to take any action upon request to do so by the “mortgagee in possession” that would be contrary to the registered owner’s rights (for example, by deactivating access fobs, denying entry to the condominium complex, etc.).

Furthermore, absent a court order compelling it to act, the condominium corporation may simply advise the mortgagee to seek assistance from law enforcement officers concerning their rights regarding the mortgaged unit (for example, on the basis of trespass).

When may a condominium corporation accept common expense payments from a mortgagee?

Under the Act, a “mortgagee in possession” has a right, on behalf of a registered unit owner, to pay any common expenses that are due and unpaid.  With that said, a condominium corporation should accept payment from a mortgagee only in the event that the relevant due date for such payment has come and gone (and the registered unit owner failed to pay same as due). Furthermore, if a condominium corporation finds itself in possession of post-dated cheques from both parties, it should endeavor to cash the registered unit owner’s cheque first, before resorting to the mortgagee’s payment.

If you are a property manager or condominium corporation board member and have specific questions or concerns regarding “mortgagees in possession” and the condominium corporation’s obligations with regards to same, please contact the writer or any other member of Miller Thomson LLP’s condominium law group to discuss.

Miller Thomson is closely monitoring the COVID-19 situation to ensure that we provide our clients with appropriate support in this rapidly changing environment. For articles, information updates and firm developments, please visit our COVID-19 Resources page.

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