- A borrower has agreed to accept a loan from a lender in the amount of $200. In one year, the borrower will need to repay this loan, along with $130 in interest. Which piece of legislation or statutory provision would automatically render this loan illegal?
(1) The Criminal Code
(2) Section 10 of the Interest Act
(3) Section 3 of the Interest Act
(4) The British Columbia Mortgage Brokers Act
- Answer: 1
The Criminal Code makes it an offence to agree to charge interest at a criminal rate, which is defined as an effective annual rate of over 60%. This applies to all types of loans. Section 10 of the Interest Act deals with the right of prepayment of mortgages. Section 3 of the Interest Act states that if a document does not mention interest, no interest may be charged. Finally, the Mortgage Brokers Act deals with the regulation of persons who deal with mortgages.
- Fanny granted a mortgage to Fly by Night Finance Co. with a term of five years and no right of prepayment until the expiration of five years. At the end of the five year term, she accepts a three year extension of the term, also without a right of prepayment. The date of the mortgage is deemed to be changed to the date of the extension agreement. Which of the following is TRUE?
(1) Because Fanny is an individual mortgagor (i.e., not a corporation), she has an automatic right to pay out her mortgage, so the provisions against prepayment are not enforceable.
(2) Because Fanny is an individual mortgagor with a mortgage having (now) an eight year term during which prepayment is prohibited, she may tender the full amount owing plus three months’ interest to Fly by Night, and no further interest is chargeable.
(3) Fly by Night may refuse prepayment to Fanny for any length of time, and Fanny has no rights in this regard unless the restriction on prepayment lasts so long that it constitutes a clog.
(4) The prepayment privilege in the Interest Act does not apply in these circumstances and therefore Fanny cannot prepay her mortgage until the new three year term expires.
- Answer: 4
The Interest Act provides a right of prepayment where the mortgagor is an individual, and where a mortgage prohibits prepayment for a period exceeding 5 years. In calculating this 5 year period, the courts will add together the original term with the terms of all extensions unless the renewal agreement (also known as an extension agreement) deems the date of the original mortgage to be changed to the date of the renewal.
- Elliot, a representative for City Wide Realty, entered a listing agreement with Belinda to sell her house for
$450,000. Within a month, he found a purchaser, Lorraine, who was willing to buy the house for the list price. After Lorraine arranged a mortgage with National Bank for $275,000, she told Elliot that she was still short on funds. Elliot suggested a vendor take back mortgage, to which Belinda agreed, and proceeded to prepare an offer which provided for a vendor take back mortgage in the amount of $220,000.
Which of the following statements are TRUE?
A. Elliot has a duty to ensure that Belinda receives adequate security for the loan extended to Lorraine.
B. If accepted, this offer would leave Belinda under-secured.
C. The federal Interest Act would not impose a limit on the rate of interest which Belinda could charge Lorraine with respect to the mortgage transaction.
D. Under the Mortgage Brokers Act, Belinda would be regarded as a mortgage broker.
(1) All of the above
(2) A, B, and C only
(3) A and B only
(4) C and D only
- Answer: 2
Elliot, as a licensee, has a general duty to protect the best interests of Belinda C this includes ensuring that the vendor receives a fair price for her property and that she receives adequate security for the loan. Statement A is therefore correct. Statement B is also correct because this arrangement would result in a situation where the total of the first and second mortgages would exceed the total purchase price of the property. Statement C is correct because the Interest Act does not limit the rate of interest which can be charged in a mortgage transaction, although provincial legislation or the Criminal Code may apply. Statement D is incorrect because under the Mortgage Brokers Act, a person must make at least ten mortgage loans in a year in order to be defined as a mortgage broker.
- Homer owns Simpsonacre, which has a market value of $300,000. He decides to transfer ownership of his property to his friend Flanders for $50,000 to raise capital to open a beer parlour. The transfer documents allow Homer to remain in his house rent-free for the duration of the agreement. Homer also has the option of having the property transferred back to him if, within 5 years, he repays Flanders the $50,000. Which of the following is TRUE?
(1) This is a transfer agreement which will be fully carried out if Homer does not repay Flanders the
$50,000 within 5 years.
(2) The transaction is a mortgage. After 5 years, Homer cannot regain title to the property.
(3) This is a transfer agreement, however, because Homer has an equity of redemption, Flanders can recover his $50,000 upon demand.
(4) The agreement is a disguised mortgage and Homer will have the right to redeem Simpsonacre free and clear upon repaying Flanders the $50,000.
- Answer: 4
In deciding whether a transaction is a sale or a disguised mortgage, the court will take into consideration such factors as: whether the sale price is far below the market value; whether the vendor is required to give up possession of the land or is allowed to live there rent-free; and whether the future sale proceeds will be shared with the mortgagee.
If the court characterizes a transaction as a mortgage, the mortgagor has, by definition, the right to redeem the property free and clear upon repaying the mortgagee.
The equity of redemption is a feature of mortgages ONLY.
- A mortgage is NOT:
(1) created by contract.
(2) a loan.
(3) security for a loan.
(4) an interest in land.
- Answer: 2
A mortgage is not a loan. Legally, it is an interest in land created by contract as security for a loan.
- In September of 1994, Hilary borrowed money from Big Bucks Bank to finance the launching of her new health food store. As security for the loan, Hilary mortgaged her house. In 1997, Christine bought the house and assumed the mortgage. One year later she stopped making payments on the mortgage. Which of the following statements is TRUE?
(1) Big Bucks Bank cannot sue Christine because she was not a party to the original mortgage agreement.
(2) If Big Bucks Bank fails to demand the outstanding payment from Hilary by December 1999, her liability will be extinguished by virtue of the Property Law Act provisions.
(3) After an order absolute, Hilary would only be liable for any amount still outstanding after foreclosure on the property.
(4) None of the above
6. Answer: 4 Only option (4) is correct. The Property Law Act provides a means of circumventing the privity of contract principle, and allows a lender to take direct action against a current owner. The provisions of the Property Law Act which limit a vendor's liability in the case of default in an assumed mortgage are not applicable if the loan was not initially for a residential purpose. Finally, if the lender elects to pursue an action in foreclosure, following the order absolute the lender will no longer be entitled to pursue the borrower on the borrower's personal covenant to pay.
- Beasely owns a house subject to a 5 year mortgage granted to Mah’s Finance Co. The mortgage provides that it can be assumed with the permission of the lender. Willy wants to buy Beasely’s house and assume the mortgage which still has three years left to run. Mah’s agrees to the assumption but informs Beasely that it still intends to hold Beasely liable if Willy defaults. Which of the following statements about the Property Law Act is TRUE?
(1) The Property Law Act does not apply on these facts since the mortgage involved is a residential mortgage.
(2) If Beasely telephones Mah’s and Mah’s give oral consent to the assumption of the mortgage, then Beasely is free from all liability under the mortgage.
(3) Mah’s may not refuse unreasonably to grant the assumption, and if Beasely satisfies the requirements of the Act then Mah’s will not be able to continue to hold Beasely responsible for Willy’s performance of the mortgage obligations.
(4) Both (2) and (3) are true.
- Answer: 3
The Property Law Act provisions regarding an original borrower’s release from liability upon assumption of the mortgage apply only to residential mortgages. To release the original borrower from liability, the lender’s approval of the new purchaser must be in writing.
- An equitable mortgage can be created in each of the following ways EXCEPT:
(1) by registration in the land title office of the duplicate certificate of title.
(2) by mortgage of the equity of redemption.
(3) by an agreement to give a mortgage.
(4) by disguising a mortgage as a transfer.
- Answer: 1
In British Columbia, mortgages are generally registered as charges against the land and the first registered mortgage is treated like a legal mortgage. Any subsequently registered mortgage will be an equitable mortgage charging the borrower’s equity of redemption. To properly create an equitable mortgage with a duplicate certificate of title, it is necessary to acquire the certificate from the land title office and to then deposit it with the lender.
- Because she has been transferred, Velma lists her home for sale at a price of $100,000. She bought the house only 6 months ago, and at that time financed the purchase by means of an $80,000 mortgage with a 3 year term. She receives an offer from ABC Ltd. for the full purchase price, payable by $20,000 cash, and the balance by ABC Ltd. assuming the $80,000 mortgage. The president and sole shareholder of ABC Ltd. is a very wealthy real estate developer easily able to afford the payments. Which of the following statements is TRUE?
(1) The financial profile of ABC Ltd. is crucial because the company, not its president, is assuming the mortgage.
(2) If house prices are clearly going to remain stable over the balance of the term of the mortgage, Velma need not worry about the assumption of the mortgage.
(3) The financial profile of ABC Ltd. is irrelevant if the rent it can collect on the house will cover the mortgage payment.
(4) All of the above
- Answer: 1
Unless the president of ABC Ltd. is guaranteeing the loan, only the company’s finances are relevant. Stable house prices will not offset the accrual of interest if default occurs; further, if ABC Ltd. renegotiates with the same bank, Velma’s liability on the personal covenant may not necessarily end at the expiration of the term. Relying on rent as the means to make payments is very risky for a vendor, because it does not take into account what will happen if the property remains vacant.
- Which of the following statements about section 10 of the Interest Act are TRUE?
A. Section 10 only applies to residential mortgages of $150,000 or less.
B. Section 10 provides an absolute right to prepay a mortgage after 5 years from the date of the mortgage.
C. Section 10 does not provide corporate mortgagors with the right to tender prepayment of a mortgage.
D. After the mortgagor has made a tender in accordance with section 10 the mortgagee may not claim any additional interest.
E. An individual mortgagor will be able to make a tender under section 10 after 5 years have elapsed from the date of the mortgage.
F. If, at the end of the term, the parties renew the mortgage for an additional 5 years and move the date of the mortgage forward, the mortgagor will not be eligible to prepay his mortgage in accordance with section 10., until another 5 years has elapsed.
(1) C, D, E, and F only
(2) A, C, and D only
(3) B and D only
(4) A, B, and D only
- Answer: 1
There is no distinction drawn between residential and commercial mortgages under s. 10. The only distinction is between individual and corporate mortgagors, the latter may not prepay under s. 10. The right to prepay is not absolute. Firstly, it does not apply to a corporate mortgagor, and secondly, the mortgagee is not obliged to accept the tender, it is simply precluded from charging any further interest after a tender.
- Vendor “take back” mortgages:
(1) may be used when the purchaser cannot obtain a loan through a bank.
(2) are limited to a maximum loan value of 75% of each subject property’s value.
(3) are ranked lower in priority than mortgages held by institutional lenders.
(4) are secured both by the land and by the vendor’s guarantee of the lending institution’s loan.
- Answer: 1
Vendor take-back mortgages may be used when the purchaser cannot obtain a loan through a bank. Vendor take-back mortgages are not limited to a certain value. Like other mortgages, their priority is a function of contract and of time of registration. There is no lending institution involved in a vendor take-back.
- Section 3 of the Interest Act provides that:
(1) if a document does not mention interest, then only 5% per annum is chargeable.
(2) if a document mentions interest, but does not specify the rate of interest chargeable, then the rate prevailing in the community is chargeable.
(3) if a document does not mention interest, then no interest is chargeable.
(4) if a mortgage does not require interest at a set rate after maturity or default, the lender can only collect interest at the rate of 5%.
- Answer: 3
Section 3 of the Interest Act provides that if a document does not mention interest, no interest can be charged. The provision also stipulates that if a document requires interest to be paid, but does not set out the amount, then the rate allowed by law is only 5%.
- When an order absolute is obtained by a petitioner who is in the position of a second mortgagee:
(1) the petitioner may sell the property after taking title to it and the petitioner does not have to account to the mortgagor for any profit made.
(2) the petitioner will be entitled to recover the mortgage debt upon sale of the property, but must account to the borrower for any surplus amount.
(3) in the case of a shortfall between the sale proceeds and the mortgage debt, the petitioner can sue the borrower on the borrower’s personal covenant to pay.
(4) in order to sell the property, the petitioner must obtain the approval of the court.
- Answer: 1
Once a petitioner has been granted an order absolute, the petitioner can transfer title into his or her name and deal with the property as his or her own. If the petitioner later sells the land, there is no requirement to account for any profit; however, if there is a shortfall, the petitioner cannot later sue on the personal covenant. The granting of the order absolute is the court’s authority to the petitioner to deal with the property as his or her own, no further approval for any action is required.
- The Interest Act provides a number of rules relating to the charging of interest. Which of the following is not one of them?
(1) Where a mortgage calls for blended payments of principal and interest, a statement must appear in the mortgage showing the principal amount and the rate of interest calculated annually or semi- annually not in advance.
(2) Where a mortgage term provides for the payment of interest on default, unless the term specifies the rate of interest payable, the lender will be limited to 5%.
(3) The interest rate on arrears may not exceed the rate payable on the principal not in arrears.
(4) Where interest is not mentioned in a mortgage, only a rate of 5% can be charged.
- Answer: 4
While the first three options are all in the Interest Act, Option (4) is not. Where no interest is stipulated in a mortgage, none may be charged. However, if an indication of some interest exists, but the actual rate does not appear, a rate of 5% may be charged.
THE NEXT FOUR (4) QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION:
Maurice operates a beauty salon in a small shop which he owns. He decided to expand the size of his shop by doing a renovation. To finance the renovation Maurice granted a mortgage on his shop to Beauty Corp., an international manufacturer of hair and skin care products. Beauty Corp. loaned Maurice $150,000 for a period of 8 years at an interest rate of 15.5% calculated yearly not in advance. The mortgage contained the following terms:
CLAUSE A: In case the borrower defaults and the mortgagee has to take legal action to recover the mortgage monies, the mortgagee may retain an amount equal to three months at the specified rate of interest by way of indemnity.
CLAUSE B: In consideration of one dollar receipt of which is hereby acknowledged, the borrower grants to the mortgagee an irrevocable option to purchase the mortgaged property at any time within the mortgage term for a payment of $200,000.
CLAUSE C: The borrower agrees to use and sell only the mortgagee’s lines of hair and skin care products for a period of 10 years from the date of this mortgage.
CLAUSE D: In the event the borrower sells or agrees to sell the mortgaged property, the full amount of principal and interest owing shall become due and payable immediately, at the mortgagee’s option.
- Which of the following statements is TRUE?
(1) Clause A is an enforceable clause designed to protect a mortgagee from bearing expenses related to recovering its money where a borrower defaults.
(2) Clause A is a clog on the equity of redemption and for that reason is unenforceable.
(3) Clause A is a collateral advantage which is unenforceable under the Consumer Protection Act.
(4) Clause A is an indemnity clause which is unenforceable because it offends against the Interest Act.
- Answer: 4
The Interest Act prohibits the interest to be charged when the loan is in arrears from exceeding the rate chargeable when the loan is in good standing. The penalty amount provided for in an indemnity clause has the effect of raising the interest rate in arrears above the rate payable when not in arrears, thus offending the Act. For this reason, it is unenforceable.
Maurice operates a beauty salon in a small shop which he owns. He decided to expand the size of his shop by doing a renovation. To finance the renovation Maurice granted a mortgage on his shop to Beauty Corp., an international manufacturer of hair and skin care products. Beauty Corp. loaned Maurice $150,000 for a period of 8 years at an interest rate of 15.5% calculated yearly not in advance. The mortgage contained the following terms:
CLAUSE A: In case the borrower defaults and the mortgagee has to take legal action to recover the mortgage monies, the mortgagee may retain an amount equal to three months at the specified rate of interest by way of indemnity.
CLAUSE B: In consideration of one dollar receipt of which is hereby acknowledged, the borrower grants to the mortgagee an irrevocable option to purchase the mortgaged property at any time within the mortgage term for a payment of $200,000.
CLAUSE C: The borrower agrees to use and sell only the mortgagee’s lines of hair and skin care products for a period of 10 years from the date of this mortgage.
CLAUSE D: In the event the borrower sells or agrees to sell the mortgaged property, the full amount of principal and interest owing shall become due and payable immediately, at the mortgagee’s option.
- Which of the following statements is TRUE?
(1) Clause B would be enforceable if it (or the entire document) were under seal.
(2) Clause B is an example of a “sales clause”.
(3) Clause B is a valid option to purchase supported by consideration, which is enforceable during the term of the mortgage.
(4) Clause B constitutes a clog on the equity of redemption and is therefore unenforceable.
- Answer: 4
An option to purchase the property such as Clause B, when negotiated at the same time as the mortgage, constitutes a clog on the equity of redemption of the mortgagor. This is so because, if the mortgagee exercises the option, it will not be possible for the mortgagor to repay the debt and redeem the property. Therefore, the clause is unenforceable. However, if an option to purchase is granted at a different time than the mortgage, and is contained in a separate agreement, the option will generally be enforceable.
Maurice operates a beauty salon in a small shop which he owns. He decided to expand the size of his shop by doing a renovation. To finance the renovation Maurice granted a mortgage on his shop to Beauty Corp., an international manufacturer of hair and skin care products. Beauty Corp. loaned Maurice $150,000 for a period of 8 years at an interest rate of 15.5% calculated yearly not in advance. The mortgage contained the following terms:
CLAUSE A: In case the borrower defaults and the mortgagee has to take legal action to recover the mortgage monies, the mortgagee may retain an amount equal to three months at the specified rate of interest by way of indemnity.
CLAUSE B: In consideration of one dollar receipt of which is hereby acknowledged, the borrower grants to the mortgagee an irrevocable option to purchase the mortgaged property at any time within the mortgage term for a payment of $200,000.
CLAUSE C: The borrower agrees to use and sell only the mortgagee’s lines of hair and skin care products for a period of 10 years from the date of this mortgage.
CLAUSE D: In the event the borrower sells or agrees to sell the mortgaged property, the full amount of principal and interest owing shall become due and payable immediately, at the mortgagee’s option.
- Which of the following statements is TRUE?
(1) Clause C is a valid collateral advantage which is enforceable for the specified period.
(2) Clause C is an unenforceable restraint of trade.
(3) Clause C is a collateral advantage which may be enforced against Maurice only while the mortgage continues in force.
(4) Clause C is a clog on the equity of redemption because it continues longer than the mortgage term, and is therefore unenforceable.
- Answer: 1
Today, a collateral advantage, even where it exceeds the term of the mortgage, will be enforceable provided that it does not constitute an unreasonable restraint of trade or a clog. Product agreements such as clause C are common and this does not seem to be unreasonable. It only extends beyond the mortgage term by 2 years, and should be valid for the specified 10 years.
Maurice operates a beauty salon in a small shop which he owns. He decided to expand the size of his shop by doing a renovation. To finance the renovation Maurice granted a mortgage on his shop to Beauty Corp., an international manufacturer of hair and skin care products. Beauty Corp. loaned Maurice $150,000 for a period of 8 years at an interest rate of 15.5% calculated yearly not in advance. The mortgage contained the following terms:
CLAUSE A: In case the borrower defaults and the mortgagee has to take legal action to recover the mortgage monies, the mortgagee may retain an amount equal to three months at the specified rate of interest by way of indemnity.
CLAUSE B: In consideration of one dollar receipt of which is hereby acknowledged, the borrower grants to the mortgagee an irrevocable option to purchase the mortgaged property at any time within the mortgage term for a payment of $200,000.
CLAUSE C: The borrower agrees to use and sell only the mortgagee’s lines of hair and skin care products for a period of 10 years from the date of this mortgage.
CLAUSE D: In the event the borrower sells or agrees to sell the mortgaged property, the full amount of principal and interest owing shall become due and payable immediately, at the mortgagee’s option.
- Which of the following statements is TRUE?
(1) Clause D is a sales clause which enables a mortgagee to avoid being involved with a borrower who is an unacceptable credit risk.
(2) Clause D prohibits the assumption of a mortgage.
(3) Clause D is unenforceable because it offends against the Interest Act.
(4) Clause D is an enforceable collateral advantage.
- Answer: 1
Clause D is known as a sales clause. It prevents a mortgage from being automatically assumable. The clause gives Beauty Corp. exclusive discretion as to whether the mortgage may be assumed or not. The Interest Act only deals with rates of interest chargeable and has no relevance to whether or not a mortgage can be freely assumed. This is not a collateral advantage.
- Which of the following statements regarding section 10 of the Interest Act are TRUE?
A. Section 10 gives all mortgagors the right to prepay a mortgage in specified circumstances.
B. If the mortgage is for an amount in excess of $150,000, section 10 of the Act does not apply.
C. If a tender is made under section 10 and the mortgagee does not accept it, the mortgagor is not obligated to make any further payments of interest under the mortgage.
D. The relevant date for the determination of the 5 year period under section 10 is the date of the mortgage or of the mortgage renewal.
(1) All of the above
(2) A, C, and D only
(3) A, B, and D only
(4) C and D only
- Answer: 4
Section 10 of the Interest Act does not apply to mortgagors who are companies. There are no restrictions on the value of mortgages to which s. 10 applies.
- Which of the following provides the best definition of an equitable mortgage?
(1) It is the name given to a mortgage of the equity of redemption.
(2) It arises where an agreement to grant a mortgage in the future exists.
(3) It is created where title deeds are given as security for a loan.
(4) (1), (2) and (3), taken together, provide the best definition of an equitable mortgage.
- Answer: 4
Your course manual reviews the different types of equitable mortgages in detail. All of the items named describe different kinds of equitable mortgages.
