Standalone Mortgage Guarantees Subject to 10-year Limitation Period

On December 18, 2019, the Ontario Court of Appeal (the "OCA") upheld the Superior Court's decision in Hilson v. 1336365 Alberta Ltd.^[1] The noteworthy issues on appeal were:

1. Whether the trial judge erred in finding that claims on the standalone mortgage guarantees were subject to the ten-year limitation period under the Ontario Real Property Limitations Act (the "Real Property Limitations Act")^[2] rather than the standard two-year limitation period under the Ontario Limitations Act, 2002 (the "Limitations Act");^[3] and
2. Whether the trial judge erred in reducing the amount owing under the guarantees by 50% to account for the proceeds of settlement of a claim for negligence against the lawyer who had acted for the lender in whose favour the guarantees were granted (the "Settlement").

The lender's claim against the personal guarantors was based upon certain personal standalone mortgage guarantees. These guarantees were security for 25 mortgage loans given by the lender to certain named corporate entities formed by the personal guarantors to invest in a residential real estate development. The mortgages went into default and the lender sued the personal guarantors on their personal guarantees.

Two types of guarantees were given as security for the mortgage loans: (i) guarantees in the mortgages themselves; and (ii) five separate guarantees (the "Standalone Guarantees") under which the personal guarantors personally guaranteed the amounts owing on the mortgage loans.

The trial judge rejected the personal guarantors' argument that the claim was barred by the Limitations Act and found the personal guarantors liable pursuant to the Standalone Guarantees they provided. The trial judge then reduced the amount owing by the personal guarantors by 50% to account for the proceeds of the Settlement.

Regarding the first issue, the OCA determined that the Superior Court correctly decided that Standalone Guarantees are subject to the 10-year limitation period pursuant to the Real Property Limitations Act.

Subsection 43(1) of the Real Property Limitations Act states:

43. (1) No action upon a covenant contained in an indenture of mortgage or any other instrument made on or after July 1, 1894 to repay the whole or part of any money secured by a mortgage shall be commenced after the later of,

1. the expiry of 10 years after the day on which the cause of action arose; and
2. the expiry of 10 years after the day on which the interest of the person liable on the covenant in the mortgaged lands was conveyed or transferred.

The fundamental question was whether the Standalone Guarantees fell within the meaning of "any other instrument […] to repay the whole or part of any money secured by a mortgage". The personal guarantors argued that this language should be interpreted narrowly to exclude guarantees like the Standalone Guarantees. The OCA rejected the personal guarantors' argument for the following reasons:

1. legislative history does not support the argument that "instrument" should be given a narrow interpretation;
2. the plain meaning of the words "any other instrument" does not require or support a narrow interpretation;
3. there is no justification for having different limitation periods depending on whether a guarantee is included in the mortgage or in a separate, standalone document;
4. the principles of statutory interpretation do not support the narrow interpretation; and
5. the narrower Ontario Registry Act^[4] definition of "instrument" does not apply in these circumstances.

Regarding the second issue, the OCA analyzed the double recovery principle and found that the trial judge erred in reducing the amount owing by 50% to account for the proceeds of the Settlement. In its analysis, the OCA established that the rule against double recovery does not preclude a plaintiff from pursuing different defendants for the same loss and only precludes a plaintiff from recovering more than the plaintiff has lost. In this case, there was no evidence to conclude that the lender had recovered anything on the basis of the debt guaranteed by the personal guarantors. According to the OCA, until the lender actually receives full or substantial satisfaction of the debt owed, there can be no question of double recovery.