Law Times

LAW TIMES COVERING ONTARIO'S LEGAL SCENE | FEBRUARY 25, 2019 7 www.lawtimesnews.com COMMENT BY KENNETH PIMENTEL CONSUMERS are increas- ingly turning to private lenders for mortgage financings and re- financings. Whether this uptick is caused by mortgage stress tests, rising interest rates or bor- rowers simply wanting to cash in on the equity in their homes, the fact is that, in my opinion, lawyers are being asked to close a growing number of real estate transactions involving private lenders. And while private mort- gages are not something new in the legal profession, practitio- ners are faced with a unique set of challenges when dealing with private lenders. It is, therefore, crucial that lawyers understand these unique challenges and how best to overcome them. The first question lawyers need to answer is whether the mort- gage is, in fact, a private mortgage. A private mortgage is one involv- ing a lender that does not fall into any of the exceptions listed in s. 24(2) of bylaw 9 of the Rules of Professional Conduct (such as Schedule I or II banks, registered loan or trust companies, licensed insurers, pension funds or other entities that lend money in the ordinary course). If a lender does not fall into any of these excep- tions, chances are you are dealing with a private mortgage. If the mortgage is a private mortgage, the next question a lawyer should ask is: Who is my client? Rule 2.04 (11) of the Rules of Professional Conduct express- ly prohibits lawyers from acting for both a lender and borrower in a mortgage transaction unless one of the exceptions under Rule 2.04 (12) (the lawyer is practising in a remote location, the lender is a bank, trust company, insurance company or credit union or the consideration for the mortgage does not exceed $50,000) applies. Unless one of the exceptions listed in Rule 2.04(11) applies, a lawyer is prohibited from acting for both the lender and borrower on the same transaction. This is in con- trast to real estate transactions not involving private lenders, where lawyers routinely act for bor- rowers and lenders on the same transaction. It is, therefore, crucial for lawyers to determine at the outset who their client(s) will be and whether the lawyer is prohib- ited from acting for one or both of their clients. It is also important to recognize that certain practices acceptable in the context of insti- tutional mortgages are not accept- able when dealing with private mortgages. For example, where a property being acquired by a pur- chaser is subject to a mortgage in favour of an institutional lender, the purchaser's lawyer can rely on an undertaking from the vendor's lawyer to discharge that mortgage post-closing. This practice greatly simplifies and expedites closings and is standard practice among the real estate bar. However, where the mortgage on that same property is a private mortgage, lawyers cannot give or accept an undertaking from the vendor's lawyer to discharge that mortgage post-closing. A private mortgage must be discharged on or before closing. The pur- chaser's lawyer will, therefore, be in a position where they cannot release funds to the lender's law- yer to pay out the existing private mortgage (i.e., the new mortgage funds cannot be released until the private mortgage is discharged) and the lender's lawyer will not discharge its mortgage until it receives closing funds. How does the purchaser's lawyer deal with this challenge? It is acceptable practice to proceed on the basis of a three-party document reg- istration agreement, signed by the vendor's lawyer, purchaser's lawyer and lender's lawyer, which includes a discharge of the private mortgage by the private lender in the schedule of documents to be registered on closing. This way, payout funds can be paid to the lender's lawyer in escrow pending registration of the discharge. While not required, it is also recommended that a purchaser's lawyer request, prior to closing, an acknowledgement and direc- tion signed by the lender autho- rizing its lawyer to register a dis- charge of its mortgage on closing to ensure that the lender's lawyer is in a position to register the dis- charge at the appropriate time. Another challenge specific to private mortgages relates to title insurance. Policies of title insur- ance often include an exception to coverage to the effect that the policy will be voided in the case of mortgage/title fraud where funds from a private mortgage were paid to anyone other than the registered owner, the holder of a prior registered charge or encum- brance or certain other creditors. Title insurers have, at times, in- terpreted this exception to mean that, if a lawyer acting for a pri- vate lender disburses funds to the lawyer acting for the borrower, the policy could be voided in the event of fraud. This interpretation has been rejected by the courts on at least one occasion and certain title insurers have revised their private lender exception to allow payment by the lender's lawyer to the borrower's lawyer provided the borrower's lawyer undertakes to pay the mortgage proceeds to the registered owner, prior encumbrancers or other credi- tors described in the title insur- ance policy. It is, therefore, good practice for lawyers to review the lender's policy of title insurance and discuss the private lender's exception with the client prior to any advance being made. In terms of documenting the transaction, private mortgages are not much different from other mortgages. However, lawyers should keep in mind that, when acting for a pri- vate lender, they will need to com- plete a form 9D (Investment Au- thority) and 9E (Report on Invest- ment), both of which are required by the Law Society of Ontario. Private mortgages are not new for the legal profession and should not be looked upon with dismay. By thinking through some of the challenges particu- lar to private mortgages in ad- vance of closing, lawyers can po- sition themselves to successfully close the deal on time and in ac- cordance with their professional obligations to their client. LT Kenneth Pimentel is an associate with Daoust Vukovich LLP in Toronto. BY NIKOL AY Y. CHSHERBININ L ayoffs are spells of employees' tempo- rary unemployment. At common law, employers have no right to lay employ- ees off. Nor does the Employment Stan- dards Act, 2000 give employers such a right; rather, it regulates the periods and effects of layoffs when the right exists. Absent an express or implied term in a contract of employment to the contrary, a unilateral layoff is a constructive dismissal that entitles employees to damages. Once dismissed, employees are ordinarily re- quired to mitigate their losses, sometimes by returning to work for the dismissing employer. A case in point is Gent v. Strone Inc., 2019 ONSC 155, where the court re- solved that the employee failed to mitigate his damages by refusing to resume his for- mer employment and, as such, declined to award him wrongful dismissal damages. In Gent, due to a significant decrease in business, Strone Inc. temporarily laid off its veteran employee, David Gent. At the time, Gent was 53 years old, had worked for Strone for 23 years and occupied the posi- tion of a health and safety training special- ist, where he earned $72,000 per annum. Strone advised that it would recall Gent back to work as soon as business improved. In response, Gent informed Strone that he considered his temporary layoff to be a con- structive dismissal and sued for wrongful dismissal. Two weeks later, Strone recalled Gent to work. Gent did not accept, because he felt that the relationship had broken down and it would have been embarrassing and degrading for him to return to work. On a summary judgment motion, the motions judge agreed that Gent was con- structively dismissed because there was no sufficient evidence to support Strone's argument that it had a contractual right to temporar- ily lay off Gent. Consequently, the motions judge concluded that Gent would have been en- titled to 18 months' pay in lieu of reasonable notice. However, because the motions judge also found that Gent failed to miti- gate his damages by refusing to accept Strone's offer of re- employment, his recovery was reduced to $4,846.15, being the amount that he would have earned between the date of the temporary layoff and the date of the recall. In Evans v. Teamsters, Local 31, 2008 SCC 20, the Supreme Court of Canada explained that where an employer offers an employee a chance to mitigate damages by returning to work for the employer, the central issue is whether a reasonable person would accept such an opportunity. This requires a multi-factored and contextual analysis. A reasonable person is expected to return to work for the dismissing employer where the salary offered is the same, the working conditions are not substantially different and the personal relationships involved are not acrimonious. The critical element is that an employee is not obligated to mitigate by working in an atmosphere of hostility, embarrassment or humiliation. The reasonableness of an employee's deci- sion not to accept the recall is assessed on an objective standard. In Gent, the motions judge accepted Strone's evidence that it would have treated Gent normally with no reprisals or hard feelings and rejected Gent's assertion that it would be too embarrassing and degrading for him to return to work, because no evidence was adduced to corroborate his sub- jective belief. Gent's argument that the offer of re-employment was made after he had already commenced litigation failed to persuade the motions judge of the inappropriateness of Gent resuming his former employ- ment. Having acknowledged that the existence of litigation is a factor that must be considered, the motion judge brushed it aside as being non-determinative and concluded that based on the objective standard Gent should have accepted Strone's offer of em- ployment to fulfil his duty to mitigate. Fail- ure to do so disentitled Gent to wrongful dismissal damages. Curiously, the decision is silent about Gent's entitlements to the statutory mini- mums under the ESA. When Gent's em- ployment was wrongfully terminated, he was entitled to termination and severance pay under the ESA. Given the length of his employment, s. 57(h) and 61 of the ESA entitle Gent to pay in lieu of notice in the amount that he would have earned during the eight-week statutory notice period. As- suming that Strone qualified as a severance pay employer under s. 64(1) of the ESA, Gent would also be entitled to 23 weeks' sal- ary of severance pay, thereby bringing his total statutory entitlements to 31 weeks' (or 7.16 months') pay. In Brake v. PJ-M2R Res- taurant Inc., 2017 ONCA 402, the Court of Appeal for Ontario made it clear that statu- tory entitlements are not damages and, thus, are not subject to mitigation. They are not linked to any actual loss suffered by the employee, but they are payable in any event. Arguably, Gent's recovery should not have been limited to $4,846.15, but it should have included the ESA amounts. Gent serves as a reminder that, in ap- propriate circumstances, an employee can be required to return to their workplace, even after a constructive dismissal. An of- fer of re-employment does not change the fact that an employer wrongfully breached a contract of employment. It serves to provide an opportunity for the employee to mitigate their loss resulting from the breach. It matters not that an employer's recall is motivated by a desire to avoid the payment of damages; rather, what matters is whether an employee may be exposed to hostility, embarrassment or humiliation upon returning to the workplace, thereby excusing them from the obligation to miti- gate the damages they have or will sustain by returning to their former position. Dis- missed employees must lead evidence capa- ble of corroborating their subjective beliefs as to why resuming their former employ- ment is not appropriate in their particular circumstances. Failure to do so is perilous. Prudent employers should be careful about recalling employees with a view to mini- mizing their exposure to damages, espe- cially in those instances where there is live litigation, because an aggrieved employee can do exponentially more damage to both morale and business as a whole. LT Nikolay Chsherbinin is an employment and im- migration lawyer and author of The Law of In- ducement in Canadian Employment Law. He can be reached at 416-907-2587 or by visiting nclaw.ca. Speaker's Corner The special case of private mortgages Offers of re-employment in constructive dismissals Labour Pains Nikolay Y. Chsherbinin

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