The Court of Appeal in Leatherman found that when a mortgage is payable upon demand but the right to enforce arises upon default, the limitation period for enforcement of the mortgage security commences to run from the date of default – not the date of demand.
The Court of Appeal noted that a mortgage includes both a covenant to pay and security for the debt. The running of the 2 year limitation period for those two obligations can be triggered at different times depending on the language of the mortgage.
Where the debt is payable on demand, the covenant to pay is a demand obligation. Therefore, the 2 year limitation for recovery of the debt pursuant to the mortgagor’s covenant to pay starts to run when a demand is issued. In other words, a court proceeding must be started within 2 years of demand in order to recover the debt.
While the covenant to pay is a demand obligation, there may be other obligations in a mortgage which are not demand obligations. For example, the requirement to make periodic interest payments. Failure to make a periodic interest payment when due will constitute a default – without any need to issue a demand to trigger default. Where the mortgage security is enforceable upon default, the limitation clock would immediately start running on the date the mortgagor failed to make the interest payment.
In the Leatherman case, the Court determined that the 2 year limitation period for enforcement of the mortgage started to run from the date mortgagor failed to make the first periodic interest payment. Unfortunately the mortgagee started a foreclosure proceeding more than 2 years later. Therefore the Court held that the ability to enforce the mortgage security and the ability to recover interest payments which were due more than 2 years prior to commencing the foreclosure proceeding were statute barred.
However, the lender was not barred from recovering on the mortgagor’s covenant to pay (not including the more than 2 year old unpaid interest) because the accelerated demand for payment had been made less than 2 years before the foreclosure proceeding was started. The result however was that the mortgagee’s claim was now unsecured because the mortgage security was no longer enforceable.
Lenders should be aware that if a default persists for more than two years, the ability to enforce its security will be lost. Even a small default will trigger the limitation clock to start running. Lenders should scrutinize defaults to ensure they are remedied, and if not, then a foreclosure proceeding must be commenced within 2 years of the first default to avoid losing the right to enforce security.
A copy of the decision is available here.