There is a lot of risk that must be assessed before a mortgage lender provides a loan to a borrower.
A significant risk in residential lending that is sometimes overlooked or not considered relates to spousal rights under Ontario’s Family Law Act (“FLA”).
Mortgages registered on a matrimonial home, especially where both spouses are not the registered owners of the property, without proper spousal consent can be attacked, delayed, and in some cases completely invalidated. Courts have repeatedly held that a missing or forged spousal signature can jeopardize the validity of the lender’s security.
The Family Law Act: Why Spousal Consent Matters
Under FLA s. 21(1), a spouse cannot mortgage, sell, or otherwise encumber an interest in a matrimonial home without the other spouse’s consent, unless a statutory exception applies (e.g., court order, separation agreement expressly releasing rights). If a spouse does so anyway, s. 21(2) allows the court to set aside the mortgage unless the lender proves it acquired its interest (1) for value, (2) in good faith, and (3) without notice (actual or constructive) that the property was a matrimonial home. The effects of the mortgage being set aside could mean that the lender has loaned money to the borrower, but is left with no enforceable security for that loan, which becomes especially problematic if the borrower defaults and the lender attempts to enforce its rights under the mortgage.
Whether a mortgage survives or falls depends almost entirely on what the lender knew (or ought to have known) at the time of the advance or agreement to lend.
Judicial Outcomes at a Glance
Case #1 – Mortgage Upheld: Pessotski v. TD Bank (2011 ONSC 2387)
The borrower falsely declared that he was not a spouse. Despite this misrepresentation, the court upheld TD Bank’s mortgage because the bank had neither actual nor constructive notice of his true marital status at the time it agreed to lend and advanced the funds. Justice Corbett emphasized that a lender is entitled to rely on a borrower’s statutory declaration unless there is something in the surrounding circumstances to cast doubt on it. TD was not required to search the records of affiliated entities, such as TD Waterhouse, to verify the borrower’s claim, and there was nothing in the bank’s loan file or the conduct of the borrower that suggested otherwise.
Importantly, the court clarified that the relevant moment for assessing notice is when the lender acquires or agrees to acquire the mortgage security, not when the mortgage is ultimately registered. Because TD advanced funds and formed the mortgage agreement before any notice of the wife’s spousal rights appeared on title, it qualified as a good‑faith mortgagee without notice.
Case #2 – Mortgages Set Aside: Stoimenov v. Stoimenov (50 O.R. (2d) 1)
The borrower husband filed false affidavits asserting that he was not married and that the property had never been occupied as a matrimonial home. Unlike the lender in Pessotski, however, the mortgagees in this case possessed information that contradicted these statements. Credit bureau records showed the spouses living together at the property, and the solicitor’s title search revealed a prior transfer from husband and wife as joint tenants into the husband’s sole name. Because knowledge of a solicitor is imputed to the client, the lender was deemed to have actual notice of the falsity of the affidavits.
The Court of Appeal applied the two‑step framework under the predecessor to FLA s. 21, finding first that the presumption created by s. 42(3) was rebutted since the lender had actual notice “to the contrary” of what was sworn. The court then found that the lender failed to prove that it took the mortgage without notice (actual or constructive) that the property was a matrimonial home. As a result, the mortgages were set aside.
What indicators would contribute to a finding of constructive notice?
Indicators of constructive notice arise when the lender or its solicitor encounters information suggesting the property was jointly occupied or that a spouse may have rights—for example, a title history showing prior spousal ownership, a designation of matrimonial home registered by the off-title spouse, credit records listing both spouses at the address, or inconsistencies between the borrower’s statements and the file. Notice may also be triggered where the solicitor has prior knowledge of the marriage from earlier transactions, where an inspection shows obvious family occupation, or where the documents contain irregularities such as questionable signatures, mismatched dates, or missing notarizations. In all such cases, the courts expect lenders to inquire further, and failure to do so may be treated as notice under the Family Law Act.
Overall, lenders: if you see a red flag, chase it. Ignoring even a small inconsistency can jeopardize your entire mortgage and leave you unsecured. And if you ever find yourself facing a challenge to the validity of your mortgage, we’ve dealt with those situations too. Reach out – we can help guide you through the next steps and protect your position.
