8 January 2024
Mortgages – The contractual right to indemnity vs. the “usual rule” clarified.
While most loan agreements and mortgages documents contain a contractual right allowing the lender to recover indemnity (actual) legal costs in foreclosure proceedings, the “usual rule” provides that costs in unopposed foreclosure matters are generally awarded on a party and party basis under Tariff Scale A.
The net result of the “usual rule” is that the legal costs recovered by a lender in foreclosure proceedings are significantly less (typically by a large margin) than the legal costs that are actually expended.
Legislative basis for the “usual rule”
The jurisdictional basis for the “usual rule” is found in:
1. Section 20 of the Law and Equity Act, which confers a discretionary power in foreclosure proceedings and provides that the court “may” order costs as party and party costs despite a covenant or mortgage term to the contrary;
2. Rule 14-1(1) and (2) of the Supreme Court Civil Rules, (the “Rules”) which provide that if costs are payable under the Rules, they “must” be assessed as party and party costs in accordance with Appendix B except in prescribed circumstances which includes that an order for special costs is made; and
3. Section 5 of Appendix B which requires that party and party costs in an unopposed foreclosure proceeding under R. 21 “must” be assessed under Tariff Scale A.
Blueshore Financial v. 1134038 B.C. Ltd., 2023 BCSC 2304, serves as a reminder that the “usual rule” is not necessarily the default position in foreclosure proceedings, and an award of costs should always be considered in light of the particular circumstances of a case.
In Blueshore foreclosure proceedings were commenced by the lender to recover under a loan agreement and execute on mortgage security. The order nisi (typically the first order made by the court which grants judgment for the debt, sets the amount required to redeem the mortgage and the time given to the borrower to redeem) was made on an unopposed basis which would typically give rise to a costs award calculated in accordance with the “usual rule”. However, Blueshore sought to recover (and was granted) its costs of the proceedings on a full indemnity basis. In issuing Reasons, the court had occasion to consider the legislative provisions which apply to costs in foreclosure proceedings and clarify the approach taken by the courts in British Columbia when awarding costs.
As a starting point, the court noted that there has been an inconsistent approach to costs in foreclosure proceedings on the issue of whether or not Appendix B is a complete codification of the costs regime in foreclosure matters, notwithstanding the discretionary wording in the Law and Equity Act. The authorities disclose contrasting approaches to the question of whether the plain words of R. 14-1 and s. 5 of Appendix B (effectively the “usual rule”) must be given effect as a complete code.
Historically (prior to the Law and Equity Act provisions) the authorities suggested that the court had no right to deprive, as a matter of discretion, a lender of its contractual right to an indemnity for its legal fees.
Subsequent to the enactment of section 20 (formerly section 18.2) of the Law and Equity Act (and despite its inconsistent implementation) the authorities suggested that:
- the plain meaning of section 18.2 of the Law and Equity Act was to confer upon the court a discretion (in foreclosure proceedings) to order costs on a party-and-party or an indemnity basis
- the contract between the mortgagor and mortgagee no longer exclusively governs the awarding of costs which will depend on the circumstances of the particular case;
- the starting point in considering an award of costs was the party-and-party scale; and
- while costs are presumptively awarded to a successful party in civil proceedings on a party-and-party basis (unless the successful party has been put to unnecessary legal expense as a result of reprehensible conduct), the discretion conferred by the Law and Equity Act to award costs on an indemnity basis is not limited to such conduct.
With those principles in mind, the court in Blueshore found that the mandatory requirements of Appendix “B” are only triggered after the court has decided whether to exercise its discretion under the Law and Equity Act to award party and party costs.
In addition to clarifying the proper approach to determining how costs should be awarded in foreclosure proceedings, Blueshore also provides helpful guidance, including a non-exhaustive list of factors to be considered, in the exercise of that discretion.
Those factors include:
- the specific mortgage terms or covenants as they relate to costs, albeit that the mere existence of a covenant or term in the lending documents will not generally be sufficient to compel the court to depart from the “usual rule”, particularly in the case of a simple residential foreclosure;
- the sophistication of the parties and the involvement of legal counsel in the preparation and execution of the lending documents;
- whether the loan was for commercial purposes where the funds were intended to generate an opportunity to profit or earn income ;
- whether, although brought as a foreclosure, other agreements are being enforced as part of the proceedings such as personal property security, guarantees and indemnity agreements, each of which may have their own covenant or term + which provides for indemnity costs;
- whether there have been delays in prosecuting the matter, including the need to obtain alternative service orders and requests for forbearance by the mortgagor, such that the mortgagor has had an extended use of the borrowed funds after default; and
- the overall complexity of the proceedings including the number of parties, and the extent of the security and collateral.
Although Blueshore may not constitute a fundamental change to the approach to costs in foreclosure proceedings, it does represent a helpful summary and reminder of the appropriate approach to costs, particularly in commercial foreclosures. Blueshore should remind both borrowers and lenders (and the court) that the “usual rule” is perhaps not as usual as it sounds.
About the Author
Jeremy West is a partner at Watson Goepel LLP, practicing commercial litigation with a focus on insolvency, restructuring, and realization proceedings. If you require further assistance on matters relating to the enforcement of security instruments or other contractual terms, Jeremy is available for consultation.