In the recent case of Kalsi v. Achary3, the British Columbia Supreme Court held that a mortgagee cannot recover payment from a party signing the mortgage as a guarantor when the terms of the guarantee were omitted from the mortgage, even though there was intent to give a guarantee.
The plaintiff was a private lender who lent money to the mortgagors (the “Mortgagors”), secured by a mortgage on the Mortgagors’ home. The defendants were relatives of the Mortgagors, and they agreed to guarantee repayment of the mortgage money in the event of a default by the Mortgagors under the mortgage.
The mortgage was prepared by the plaintiff’s lawyer. It was signed by the Mortgagors, and also by the defendants who were described as “guarantors”. The terms attached to the mortgage (the “Prescribed Standard Terms”) were those as prescribed under the Land Title (Transfer Forms) Regulation.4 They contained a definition of the term “covenantor” and provisions for the obligations of a covenantor, but none for a guarantor. The intended sachedule of guarantee terms simply never got attached.
The court considered the facts of the case and reviewed the Prescribed Standard Terms for a covenantor. The judge rejected the plaintiff’s argument that by signing as “guarantors” the defendants had signed as covenantors. He noted the fundamental difference between the obligation of a covenantor and a guarantor: a covenantor’s liability is primary like that of a co-borrower and a guarantor’s liability is secondary to that of the principal debtor. He emphasized that because section 226 of the Land Title Act allows the Prescribed Standard Terms to “be modified by making additions, amendments or deletions”, provisions relating to a guarantor could have been added to the Prescribed Standard Terms.
On this basis the court dismissed the plaintiff’s case with costs, as there was insufficient evidence to identify the terms of any guarantee given by the defendants. The court also rejected the notion that the defendants’ signatures on the form were sufficient to constitute a basic or “bare” guarantee.
The lesson from Kalsi is that the Prescribed Standard Terms should only be used as a template. Lenders preparing their own documents should ensure that conditions not specified in whatever standard mortgage terms they use are attached in a schedule to those terms. This is especially important as courts will not “fix” the mortgage terms or related schedules to reflect the actual intention of the parties. Similarly, financial institutions who have filed standard mortgage terms with the land title office should review and update their filed terms on a regular basis. This would help ensure that their filed terms are kept current, and include definitions and clauses for common mortgage transactions. In addition, as in Kalsi, to be effective the mortgages based on a lender’s own filed standard mortgage terms must be amended as appropriate to reflect any terms of the loan and security which are not dealt with expressly in the filed standard terms.