Limitations Act of British Columbia – Mortgage Debts

BC Limitations Act

In 2013 the new BC Limitation Act (“BCLA”) came into force.  There are many differences between the BCLA and the old BC Limitation Act.  Two of these differences are in relation to s. 14 and s. 15 of the BCLA.

S.14 of the BCLA relates to the limitation period for demand obligations. S. 14 states: “A claim for a demand obligation is discovered on the first day that there is a failure to perform the obligation after a demand for the performance has been made.” In other words, the countdown period for the limitation period does not start until the borrower under an agreement fails to pay an obligation once a demand has been made.  The old BC limitation act had a six year limitation period for demand obligations in which the countdown period for the limitation period would start from the date the initial obligation arose.

S.15 of the BCLA relates to the limitation period for realizing or redeeming security.  S. 15 states: “A claim to realize or redeem security is discovered on the first day that the right to enforce the security arises.”  This is a marked difference from the old BC Limitation Act which had a six year limitation period for bringing action on collateral that was not in the secured party’s possession.  Lenders in secured transactions need to be aware of this striking change.

These two provisions of the BCLA were judicially scrutinized for the first time since their enactment in the recent British Columbia Court of Appeal decision Leatherman v 0969708 BC Ltd., 2018 BCCA 33.  This case is illustrative of the wariness lenders should have in regards to the new BCLA.

In Leatherman a mortgage was granted to secure a debt.  Under the mortgage the loan was payable on demand, with payments of interest to be paid annually.  The Mortgagor failed to make a required interest payment on Oct 31, 2013.  This is effectively the date of default.  No further action was taken by the mortgagees until Nov, 2015.  At that time correspondence was exchanged between the parties in relation to the debt and its repayment.  A demand was made by the mortgagees on Nov 9, 2016.

The Court stated “This Mortgage, like most mortgages, includes both a covenant to pay and security for the debt. The covenant to pay the principal, considered on its face, and alone, is a demand obligation. With respect to it, s. 14 applies; that is, it is not payable until demand. The obligation to pay interest, however, is not a demand obligation because it was payable without demand on October 31 of each year. The Mortgage also provides that the property mortgaged is security for the debt. With respect to security for the debt, s. 15 of the Act applies. The right to realize on the security arises upon discovery of that right.”  In other words, the mortgage became enforceable as of the date of default, Oct 31, 2013, and would be statute barred two years later.  However, the mortgagor was still liable for his personal covenant as two years has not elapsed since demand for payment was made.

Going forward, where there is a default on a mortgage a lender must foreclose within two years of that default even if the loan, which is supported by the mortgage, is payable on demand, and no demand has been made.

The limitation period could be extended beyond two years after default where a mortgagor acknowledges liability.  This is governed by s.24 of the BCLA.  S. 24(1)(a) states “If, before the expiry of either of the limitation periods that, under this Act, apply to a claim, a person acknowledges liability in respect of the claim, the claim must not be considered to have been discovered on any day earlier than the day on which the acknowledgement is made.”

Acknowledgement under s .24 includes a debtor’s performance of an obligation under or in respect of a security agreement (s. 24(8)).  In other words, for a conventional mortgage where there are specified payments, when the mortgagor under a mortgage makes a payment after their initial default this will postpone the date of discovery to the date on which the mortgagor made the after default payment.