Can a Mortgage Secure Funds that Have Been Previously Advanced to a Borrower?

In a typical mortgage scenario, a lender advances funds to a borrower at the time the mortgage agreement is signed (e.g., to allow the borrower to purchase a home). In exchange for the borrowed money, the lender is given an interest in the borrower’s property. But what happens when a lender has advanced increasing amounts of money to a borrower over an extended period of time? Can the lender secure their prior advances through a mortgage agreement with the borrower sometime in the future?

The BC Supreme Court recently addressed these questions in the case of Derencinovic v. 7 West Homes Ltd., 2021 BCSC 1481.

In Derencinovic, two friends went into business together to purchase plots of land and develop high-end luxury homes for resale. While one friend (Paul) was responsible for the day-to-day operation of the business, the other friend (John) acted as the “banker” and loaned money to the business for each new project.

As the friends embarked on their fourth home project, John had concerns that the money he was investing was being diverted out of the company without his approval. He wanted to ensure that he would be repaid in full for all the money he loaned to the business for each new project. In order to do so, John and Paul signed a mortgage agreement which granted John an interest in the fourth project property to the extent of about $1.3 million.

After the fourth project was completed and the new home was sold, Paul tried to argue that the mortgage was invalid because, among other reasons, no money was advanced at the time the mortgage agreement was signed.

The Court found that advancement of money under the mortgage is not a requirement and that securing prior advances is a proper use of a mortgage agreement. If there is a discrepancy between the amount of money the lender has provided to the borrower and the face amount of the mortgage, then the Court will look to the intentions of the parties and will strive to give effect to those intentions.

“If advances have actually been made, then the inquiry ends and the mortgagee is entitled to the benefits of the mortgage. On the other hand, if all of the monies have not been advanced, then the court is to proceed to the next step and attempt to ascertain the intention of the parties. If the intention was to benefit the mortgagee, even absent actual advances, then effect should be given to that intention.”

In Derencinovic, the Court relied heavily on the mortgage agreement as evidence of the parties’ intention that John was entitled to be repaid $1.3 million. The terms of the agreement were clear and both parties received independent legal advice before signing the mortgage. In the end, the mortgage agreement was found to be valid and John was entitled to recover the sale proceeds of the company’s fourth project in partial satisfaction of the debt owing to him. This case highlights how legal arrangements can be used in creative ways to secure and enforce a person’s or a company’s rights. If you or your company are navigating a complex legal issue or need advice on crafting advantageous legal arrangements, contact our experienced corporate and commercial lawyers for a consultation and find out how we can help.