Court ruling clears path for power of sale despite title dispute

QUICK HITS 

• An Ontario court has ruled that mortgage lenders can ask a court to remove a certificate of pending litigation — a legal notice registered on title — even when they are not party to the underlying dispute.
• The case involved a woman who claimed an equitable interest in a property registered solely in her former partner’s name, and whose legal claim had blocked the lender from completing a power of sale. 
• The ruling confirms that where no one is challenging the lender’s interest in the property, the court has discretion to clear the way for the sale to proceed.

Where litigation concerns an interest in land, a party may seek to register a certificate of pending litigation (CPL) on title to the property at issue. A CPL provides notice to potential buyers or other parties of a litigant’s claim and may interfere with efforts to sell the property during the course of litigation, including under a power of sale. However, the court may discharge a CPL on a variety of specific grounds, including any grounds considered “just.”

A recent Ontario Court of Appeal decision addressed whether a mortgagee could discharge a CPL during ongoing litigation commenced by an unregistered owner claiming an interest in the mortgaged property.

Background: A mortgage, a separation and a stalled sale

In 2022, the mortgagee loaned $410,000 to a borrower who provided security in the form of a first mortgage registered on a residential property in London, Ont. The mortgage came due Jun. 1, 2023.

The respondent was the borrower’s common law spouse at the time the property was acquired and when the mortgage was registered. According to the respondent, she and her spouse had decided to jointly purchase the property and she made substantial contributions to the down payment. Title, however, was registered solely in her spouse’s name.

The respondent separated from her spouse in May 2023, at which point her spouse stopped making mortgage payments — despite the respondent having previously provided funds for that purpose.

She then commenced litigation against her former spouse for an equitable interest in the property, based on her financial contributions to the purchase, renovations and mortgage payments. She obtained leave to register a CPL against title in August 2023. No claims were made against the mortgagee lender, which was not named as a party in those proceedings.

Power of sale blocked by the CPL

After the mortgage went into default in October 2023, the lender served a notice of sale under mortgage on both parties. The respondent attempted unsuccessfully to negotiate with the lender to bring the mortgage back into good standing.

The lender subsequently obtained default judgment against the borrower for the amount owing under the mortgage and for possession of the property. In October 2024, the lender entered into an agreement to sell the property to a third party and brought an application to discharge the CPL so that title could be transferred to the purchaser.

The application judge dismissed the application, concluding that the court had no power to discharge a CPL at the instance of a mortgagee completing a power of sale.

The Court of Appeal’s reasoning

The Court of Appeal disagreed. It noted that the CJA permits discharge of a CPL on “any other ground that is considered just.” Nothing in that wording precluded a mortgagee — even one not party to the lawsuit in which the CPL was obtained — from seeking its discharge where the mortgagee was nonetheless affected by it.

A mortgagee whose interest ranks prior to the disputed claim, and against whom no priority challenge is made, is affected by a CPL if it prevents a sale the mortgagee would otherwise be entitled to complete. In this case, the respondent was not challenging the validity of the mortgagee’s interest. Where no reasonable claim against the mortgagee’s interest is being made, the court has discretion to discharge the CPL on the basis that doing so would be just.

The court also found that this interpretation is consistent with the Mortgages Act and the Land Titles Act (LTA). Under the LTA, the parcel register is intended to be a complete and accurate reflection of the state of title. Under the LTA, the land registrar may delete the entry of an instrument that appears to rank subsequent to the charge under which the land is sold — extinguishing any interest claimed under that instrument.

Granting a discharge of a CPL that ranks subsequent to a mortgagee’s interest is appropriate where it gives effect to the purchaser’s good title and facilitates removal of an instrument that no longer affects the land.

The court noted that appropriate terms may always be imposed — such as requiring that the discharge take effect only on registration of the transfer to the purchaser, or that any surplus from the sale be paid into court. Whether to grant the discharge, and on what terms, will depend on the facts of each case.

The appeal was allowed, but the matter was returned to the Superior Court to determine whether the grounds to discharge the CPL were made out.

What this means for mortgagees

The decision provides helpful guidance for mortgagees seeking to sell under power of sale where a CPL has been registered by a party asserting an interest in the property.

The court identified a practical gap in the legislation: the Mortgages Act does not require deletion of a CPL from the parcel register, and it was not the practice of the land titles office to do so without either the CPL holder’s consent or a court order. The discretionary jurisdiction under the CJA is broad enough to fill that gap.

In most cases, the key issue will be whether the mortgagee’s interest has priority over the competing claim. Where it does — and where no challenge to the mortgagee’s interest is being advanced — there is a clear basis to seek discharge of the CPL and proceed with the sale.

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