Can the Activities of Your Borrowers or Tenants Lead to Seizure of Your Property? 

publication 

Summer 2007 - (Real Estate Brief Winter 2007/2008)

Real Estate Brief Winter 2007/2008

Introduction

Would the Canadian government ever try to seize investment property, mortgage investment security or any other valuable assets, even from law abiding taxpayers? The surprising answer is "yes." There is a little-known provision of federal drug enforcement legislation which the government has been using that supports these actions. Even to its non-drinking, non-smoking, non-drug-using and environmentally friendly citizens. Even to those of society's best-behaved and productive contributors.

Controlled Drugs and Substances Act

How could a landlord or lender find their property tied up? First a little background on Canadian criminal drug enforcement. The Controlled Drugs and Sub­stan­ces Act ("CDSA") is an important device in the federal government's law enforcement arsenal. At the government's request, it permits a court to order the seizure and restraint of any offence-related property pending the outcome of the offender's criminal trial and, on conviction, complete forfeiture of the property to the government. "Offence-related property" under the CDSA includes any property, within or outside Canada, that is used in any manner in connection with the commission of a designated substance offence. An obvious example is a home used as a grow-op for the production of marijuana. If the Crown establishes reasonable grounds to believe that a house has been used as a grow-op, then a judge may make a restraint order under section 14(3) of the CDSA "prohibiting any person from disposing of, or otherwise dealing with any interest in, the offence-related property specified in the order other than in such manner as may be specified in the order." This section serves to prevent the disposition of offence-related property pending a criminal trial so that, if the accused is convicted, the Crown may seek as part of the sentencing package the property's forfeiture to the government. These restraint and forfeiture provisions of the CDSA are intended by Parliament to serve as a general deterrent, make offence-related property unavailable for further criminal use and impose a very high cost to committing a criminal act. So far, this appears to be quite reasonable. The government must arm itself with powerful tools to fight crime. Other than the criminals themselves and their lawyers, no one would complain about the government's seizure of a convict's property.

The Reach of the CDSA

The trouble is that the government does not believe that the CDSA should be limited only to participants in the alleged crime. On the contrary, the Crown says the statute empowers the government to tie up for interminable periods and ultimately confiscate property even from those not charged with any offence. In two recent cases ( Scotia Mortgage Cor­pora­tion v. Leung , and Maple Trust Company v. Walton ) in­volving foreclosures of alleged grow-op homes in B.C., the Crown argued that a CDSA restraint prevents mortgage lenders from foreclosing on their security before the criminal proceedings are concluded – potentially for many years. The Crown said that it is necessary to stop the lenders' foreclosures, pending the outcome of the borrowers' criminal trials, because the mortgages themselves are liable to future CDSA forfeiture. After a borrower's conviction, the onus is on the lender to prove that they were innocent of collusion or complicity in the crimes, and that they "exercised all reasonable care to be satisfied that the property was not likely to have been used in connection with the commission of an unlawful act." The Crown could presumably make the same argument in respect of a realization of a landlord exercising remedies against a tenant. How does a mortgage lender or a landlord prove that? How would the average person? Parliament doesn't say. And that is not the Crown's problem. Of course, the Crown never suggested that either Scotia Mortgage Corporation or Maple Trust Company participated in any way in the alleged drug cultivation. These are large Canadian lending institutions interested only in the residential mortgage business, not drug cultivation, and it is absurd to even suggest that these lenders were complicit or participated in any alleged criminal activity. Both the B.C. Supreme Court and Court of Appeal ruled that clearly innocent lenders should not be dragged into the middle of their borrowers' criminal disputes with the Crown and should not be delayed in their mortgage realization. At the time of writing, it is not yet known whether the Crown will appeal the B.C. rulings.

Conclusion

If a lender takes mortgage security on a B.C. home that, through no fault of its own was used as a grow-op, is it fair that their attempts to foreclose are delayed until after the criminal trial (and appeals) and they are forced to incur the legal expense of proving their innocence to protect their mortgage investment from the government? Fortunately, B.C. courts don't think so. This may be because when a mortgage investment in Canada is made, the lender is more concerned with the borrower's creditworthiness than the expense of a legal battle.

By Lindsay Goldberg

This article was reprinted with permission by  CCH  Canadian Limited in  British Columbia Real Estate Law Developments , August 2007.

This article appeared in the Real Estate Brief Winter 2007/2008.