Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate Mortgage Enforcement, October 2008

Instead of taking possession of the mortgaged property directly, the lender may arrange to have a receiver take possession of the property, collect revenues and pay expenses. A receiver can be appointed pursuant to the specific provisions contained in the mortgage or the lender may apply to the court for the appointment of a receiver.

Consequences of Appointing a Receiver

On the appointment of a receiver of the mortgaged property:

  1. the duties of the borrower, including its officers and directors, over the mortgaged property are suspended;
  2. the floating charges contained in the mortgage in favour of the lender crystallize;
  3. the borrower, if a company, is not dissolved and the receiver does not become the assignee of the assets of the debtor; and
  4. the borrower continues to be the registered owner of the mortgaged property and the borrower is free to deal with those of its assets not affected by the charge of the mortgage.

Private Appointment

There are two major advantages to invoking a receivership clause included in a mortgage, as follows:

  1. the clause will usually allow the receiver to take a more positive role in the administration of the mortgaged property than that permitted a lender in possession; and
  2. the lender may take the position that the receiver is the agent of the borrower for certain acts and, therefore, a receiver may expend more monies on improvements even if such expenditure may ultimately impair the borrower's right to redeem.

The majority of receivership clauses contained in mortgages provide that "the appointment of a receiver shall not have the effect of constituting the lender a mortgagee in possession with respect to the mortgaged property or any part thereof". Notwithstanding such language, it must be recognized that, as a practical matter, the receiver is taking possession of the mortgaged property as the agent of the lender to realize on the mortgage security. By taking possession, the receiver is depriving the borrower of control over the mortgaged property and, accordingly, such entry by the receiver would trigger the legal implications of possession described elsewhere in this bulletin.

Court Appointment

If (a) the mortgage does not contain a provision entitling the lender privately to appoint a receiver or (b) the mortgage does contain such a provision but the language is not sufficiently precise or comprehensive or (c) special problems arise, the lender may apply to the court for the appointment of a receiver or a receiver and manager, if the receiver requires broader managerial powers. A receiver may not be appointed by the court if the result of the order would merely relieve a lender from the responsibilities of being a mortgagee in possession. Under Section 101 of the Courts of Justice Act (Ontario), the test to be considered by the court is whether or not the appointment is "just or convenient" under the circumstances.

It should be noted that, by applying to the court for a receiver, the lender will be committing itself to seeking the judicial sanction of the sale of the mortgaged property and to any major actions that the receiver may take with respect to the mortgaged property. Essentially, any sale would follow the procedure of a judicial sale as opposed to a sale conducted by a privately appointed receiver, which generally follows a procedure similar to a private power of sale.

From the lender's perspective, the appointment of a receiver by the court has the advantage of the power of the court which often precludes prior encumbrancers from exercising their respective rights of power of sale, obtaining possession or taking any other action with respect to the mortgaged property without the leave of the court. The receiver appointed by the court is not the agent of the lender or the borrower but, rather, an officer of the court that acts in a fiduciary capacity with respect to all interested parties.

Conversely, the appointment of a receiver by the court entails many disadvantages, including the following:

  1. delays caused by legal proceedings, such as obtaining hearing dates and serving parties, in contrast to a privately appointed receiver which can move expeditiously in realizing on the security;
  2. substantial costs; and
  3. loss by the lender of control of the realization process and the ability to direct the receiver to act as the lender sees fit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.