Author: Bill Denstedt, Loopstra Nixon LLP
I. Introduction: A Timely Remedy in a Shifting Landscape
In my May 2025 article for the Toronto Law Journal, "The Shifting Landscape of Mortgage Enforcement: A Power of Sale Perspective in Ontario,"[1]; I commented on the notable uptick in Power of Sale proceedings, a trend fueled by rising interest rates and persistent economic uncertainty. As this wave of mortgage defaults continues, real estate and litigation counsel are increasingly confronted with scenarios that extend beyond the straightforward exercise of paying out a mortgage on the borrower’s side or power of sale on the lender’s side. A particularly challenging situation arises when a guarantor is involved, creating a complex interplay of liability, security, and, in some cases, family drama.
We were recently faced with this scenario: a family member acted as a guarantor (also known as a “surety”) on a mortgage, but holds no registered interest in the property. The primary borrower has defaulted and the guarantor is now legally obligated to pay the debt. However, the borrower is being uncooperative and refusing to sell, putting the guarantor in a precarious position and liable for the debt with no control over the underlying asset. This article builds on the themes of our previous discussion by examining a powerful, and perhaps underutilized, statutory remedy for this very conundrum: Section 2 of Ontario's Mercantile Law Amendment Act (“the MLAA”).[2] This provision allows a guarantor who pays the debt to demand an assignment of the lender’s security, effectively "stepping into the shoes" of the lender. This transforms the guarantor from an unsecured creditor with limited options into a secured creditor, armed with the full enforcement rights of the original mortgagee.
II. The Statutory Architecture: Subrogation with Limits
Section 2 of the MLAA translates the equitable doctrine of subrogation into a clear, three-part legislative scheme.
- Section 2(1) - Entitlement to Assignment on Payment: “Every person who, being surety for the debt or duty of another or being liable with another for any debt or duty, pays the debt or performs the duty is entitled to have assigned to the person or to a trustee for the person every judgment, specialty or other security that is held by the creditor in respect of the debt or duty, whether the judgment, specialty or other security is or is not deemed at law to have been satisfied by the payment of the debt or the performance of the duty”.
- Section 2(2) - Standing in the Creditor’s Shoes: The paying surety "is entitled to stand in the place of the creditor, and to use all the remedies and, on proper indemnity, to use the name of the creditor in any action or other proceeding in order to obtain from the principal debtor, or any co-surety, co-contractor or co-debtor, indemnification for the advances made and loss sustained by such person, and the payment or performance made by the person is not a defence to such action or other proceeding by the person”.
- Section 2(3) - “Just Proportion” Ceiling Among Co-obligors: “No co-surety, co-contractor or co-debtor is entitled to recover from any other co-surety, co-contractor or co-debtor more than the just proportion to which, as between themselves, the last-mentioned person is justly liable”.
III. Van Den Broek v Ainsley (Gen. Div. 1995)
The practical application of this statutory scheme was illustrated in a 1995 decision of the Ontario Court (General Division) in Van Den Broek v Ainsley.[3] The case involved a failed real estate joint venture where several participants acted as co-sureties. When the primary loan was called, one co-surety, Ainsley (a 25% participant), paid the entire debt and received an assignment of all security from the lender, including the collateral mortgages on his partners' homes.
Justice Dunn upheld the validity of the assignment and Ainsley’s right to enforce it as assignee, but limited his net recovery based on the "just proportion" ceiling in s. 2(3). Ainsley could realize on the securities only until his outlay had been reduced to reflect his 25% share; in other words, he could recover only 75% from the others. Van Den Broek is a clear look at Ontario’s treatment of s. 2 of the MLAA in a mortgage context, confirming that the right to an assignment is mandatory, the assignee may use all lender remedies (including power of sale), and the equitable limit prevents the assigned security from being used to over-recover.
IV. Modern Appellate Refinements: Timing, Inchoate Rights, and Drafting
Ontario appellate decisions since 1995 have refined the preconditions and contractual context of a guarantor’s rights, without displacing the core balance established in Van Den Broek.
- The “No Volunteers” Rule:
In Can-Win Leasing (Toronto) Limited v Moncayo,[4] the Court of Appeal for Ontario denied a co-guarantor’s contribution claim where he paid before a default or demand had occurred, holding that the rights of contribution and subrogation require payment "in a situation where the surety was legally obliged to pay." Paying prematurely makes the payer an "officious volunteer" with no recourse. The guidance is clear: a guarantor who wants an assignment under s. 2 must wait for an actual default or a legally enforceable demand.
- The “Payment-First” Rule:
In Posocco v Battista,[5] a guarantor argued that the lender’s conduct had impaired his future subrogation rights. The Court of Appeal rejected the contention, stating that s. 2(1) "only entitles a surety to an assignment of the security where he has actually paid the debt." Until then, any subrogation or assignment right is merely inchoate and cannot be wielded as a defence.
V. Applying the Law to Popular Residential Mortgages
The contractual architecture of certain popular mortgage products offered by major banks is highly relevant to the application of s. 2 of the MLAA. Standard institutional collateral charge documents often create a clear legal distinction between the party receiving the funds and the party providing the property as security. For example, certain collateral mortgage products create a guarantor/surety type of relationship without it being expressly defined as so in their documents. This can occur where a bank has a party sign the credit documents as a debtor, making them liable for the loan, without that party being noted on title as an owner or as a guarantor. This drafting effectively establishes a surety relationship where one party has secured the debt of another. When a non-owner who has provided this security pays the lender after a default and demand, they have paid the debt of another. That is precisely the fact pattern that triggers s. 2 of the MLAA. Even in these “off title” scenarios, the guarantor is entitled to take an assignment of the lender's mortgage and enforce it in the lender’s place, subject to any contractual waivers and the “just proportion” ceiling.
VI. Mechanics: From Payout to Power of Sale
Translating the rights in the MLAA into a practical outcome requires a series of deliberate, practical steps. This journey transforms the guarantor from a passive obligor to an active, enforcing creditor and requires careful navigation of the legal mechanics from payout to the eventual exercise of the power of sale.
- Stage 1: Payout and Demand for Assignment. Counsel should first confirm legal default and demand (to avoid the “volunteer” pitfall), obtain a payout statement, deliver certified funds, and simultaneously serve a written demand for the assignment of the charge and all related security under s. 2(1) of the MLAA.1
- Stage 2: Assignment of Charge. The lender executes an Assignment of Charge, which is then electronically registered on title. This act officially substitutes the guarantor as the chargee, a necessary step before any enforcement action can be taken.1
- Stage 3: Enforcement. As assignee, the guarantor “stands in the place” of the lender and may proceed under the Mortgages Act and the charge terms. This typically involves exercising the power of sale, which requires issuing a notice of sale, observing the statutory 35-day redemption period, and adhering to the mortgagee's duty to act in good faith and obtain true market value for the property.1
VII. Conclusion
The MLAA remains in force, and its provisions in s. 2 are unamended. Courts and practitioners continue to invoke the section in complex insolvency and commercial disputes where subrogation and assignment issues arise. However, its utility may soon see a marked increase in residential real estate. The use of guarantors and other forms of third-party support has become increasingly common to secure financing. Separately, the current pressures of high interest rates and deflated property values are causing a corresponding rise in mortgage defaults and power of sale proceedings. When these mortgages default, the guarantor is left in the difficult position of being liable for the debt without any control over the property and this is especially difficult when it is a situation involving family, which is often the case. In these circumstances, s. 2 of the MLAA provides a critical enforcement path. As such, what was once a remedy seen primarily in commercial contexts may become an essential tool for residential real estate practitioners guiding clients through the fallout of the current market.
[1] The Shifting Landscape of Mortgage Enforcement: A Power of Sale Perspective in Ontario.
[2] Mercantile Law Amendment Act, R.S.O. 1990, c. M.10.
[3] Van Den Broek v Ainsley, 1995 CanLII 7165 (ON SC).
[4] Can-Win Leasing (Toronto) Limited v Moncayo, 2014 ONCA 689 (CanLII).
[5] Posocco v Battista, 2016 ONCA 419 (CanLII).
