Real estate transactions frequently involve the transfer of properties subject to existing mortgage debt. While parties often rely on familiar phrases such as “assumption of mortgages” or “assumption of balances owing,” a recent decision by the Alberta Court of King’s Bench serves as a cautionary reminder that unclear drafting can give rise to significant legal and financial consequences.
In Moran v. 1715664 Alberta Inc., the Court was asked to determine whether a purchaser who agreed to “assume” mortgages merely undertook to make monthly payments, or whether that obligation extended to stepping fully into the shoes of the mortgagor and releasing the vendors from all ongoing liability. The Court’s analysis provides essential guidance on contractual interpretation, implied terms, and the availability of specific performance as a remedy, particularly where credit exposure (rather than immediate financial loss) is at stake.
Dispute Arose From Condo Mortgage Transactions
The plaintiffs owned ten condominium units in Lethbridge, Alberta. In 2015, they entered into a letter agreement drafted by the defendant, a numbered Alberta corporation. Under the agreement, title to all ten units would be transferred to the defendant for nominal consideration of $1, with the defendant assuming the mortgages registered against the properties.
Following the transfer, the defendant sold several of the units and used the proceeds to discharge the related mortgages. However, the defendant did not formally assume the remaining mortgages with the lenders. Instead, the plaintiffs remained the registered mortgagors, renewing the mortgages as they came due, while the defendant continued making the monthly payments.
Years later, the plaintiffs commenced an action alleging breach of contract and seeking specific performance or, alternatively, an order requiring the remaining units to be sold and the mortgages to be discharged. The matter proceeded by summary trial, focusing on two central questions: the meaning of “assumption” in the contract, and whether specific performance was an appropriate remedy.
The Legal Framework for Contractual Interpretation
The Court began its analysis by reaffirming the modern approach to contractual interpretation in Canadian law. Courts are required to read contracts as a whole, giving the words used their ordinary meaning while considering the surrounding circumstances known to the parties at the time the agreement was formed.
Importantly, surrounding circumstances are limited to objective background facts. Subjective intentions, after-the-fact explanations, or post-contract conduct cannot be used to rewrite the agreement or override its text. The task is to identify the parties’ objective intentions as expressed in the contract itself.
This framework proved central to resolving the dispute, as the agreement did not define what “assumption of the mortgages” meant and was silent on what would occur when the mortgages came up for renewal.
Interpreting “Assumption of Mortgages” in Context
The defendant argued that its obligation was limited to making the mortgage payments, without becoming the borrower under new or replacement financing. The Court rejected this interpretation.
Reading the contract as a whole, the Court found that the transaction was clearly intended to be a sale of the properties, with the outstanding mortgage balances forming the true consideration. Interpreting “assumption” as payment-only would leave the plaintiffs exposed to substantial and ongoing risk for up to 23 years, including:
- Continued personal liability as mortgagors;
- Ongoing exposure of their credit rating;
- Restrictions on their ability to obtain new financing; and
- The risk of default if the defendant failed to pay.
The Court emphasized that this interpretation would fundamentally undermine the nature of the vendor–purchaser relationship that the contract purported to create.
Consideration and Commercial Reality
A key element of the Court’s reasoning was the concept of consideration. Contracts require an exchange of value, and the defendant’s proposed interpretation created an ongoing benefit for the defendant with no corresponding consideration flowing to the plaintiffs.
By relying on the plaintiffs’ personal creditworthiness to maintain favourable mortgage terms, the defendant enjoyed lower interest rates and access to financing it could not otherwise obtain. The contract provided no compensation to the plaintiffs for this continued exposure and risk.
This imbalance strongly weighed against the defendant’s position and supported the conclusion that the parties objectively intended a full assumption of the mortgage obligations.
The Role of Implied Terms
Where contracts are silent on essential matters, courts may imply terms to give the agreement business efficacy, but only where those terms are necessary and reflect the actual parties’ presumed intentions.
The defendant argued that an implied term existed allowing it to avoid becoming the mortgagor. The Court disagreed, finding no evidence of industry custom or legal incident supporting such a term. Nor was the proposed implication consistent with the purpose of the agreement or the surrounding circumstances.
Instead, the Court held that the contract’s express terms already supported the plaintiffs’ interpretation. As a result, no additional implied term was required to determine the scope of the defendant’s obligations.
Breach of Contract Established
Having interpreted the contract as requiring the defendant to assume the mortgages fully, the Court had little difficulty concluding that the defendant was in breach. More than a decade after the agreement was signed, the plaintiffs remained exposed as mortgagors on the remaining properties.
The defendant had received title to the units without providing the agreed consideration as contemplated by the contract. This breach set the stage for the Court’s analysis of remedies.
Specific Performance and Modern Real Estate Law
Specific performance is an equitable remedy requiring a party to perform its contractual obligations. While historically presumed in real estate transactions, modern Canadian law no longer treats specific performance as automatic.
Courts now focus on whether damages would be an adequate remedy. In most real estate disputes, this inquiry turns on whether the property itself is unique. However, the Court in Moran recognized that this case presented an unusual scenario.
The plaintiffs did not claim that the condominiums were unique or irreplaceable. Instead, they argued that their credit and the risk to their financial profile was the unique asset at stake.
Credit as a Protectable Interest
The Court accepted that credit can constitute a unique and valuable asset. A strong credit profile enables individuals to access favourable financing, invest in opportunities, and manage financial risk. In this case, the defendant was effectively leveraging the plaintiffs’ credit to advance its own investment objectives.
Unlike purely monetary losses, damage to creditworthiness is challenging to quantify and may have long-term consequences that cannot be adequately addressed through damages. The Court found it “difficult to imagine” how a monetary award could fairly compensate the plaintiffs for the ongoing risk and exposure they faced.
Why Damages Were Not Adequate
Several factors led the Court to conclude that damages were not an adequate remedy:
- The breach was ongoing and indefinite;
- The plaintiffs’ exposure was tied to future events and market conditions;
- The defendant had already enjoyed years of benefit from the plaintiffs’ credit; and
- The mortgages themselves constituted the purchase price.
In effect, allowing the breach to continue would permit the defendant to retain the properties without ever fully paying for them in the manner agreed.
Specific Performance Found to Be Best Remedy
To give effect to the parties’ reasonable expectations and restore contractual balance, the Court ordered specific performance. The defendant was required to secure financing and assume the mortgages within 30 days.
Failing that, the defendant was ordered to list the remaining properties for sale and apply the proceeds to discharge the mortgages. If the sale proceeds were insufficient, the defendant would remain responsible for any shortfall.
This remedy ensured that the plaintiffs would be released from their mortgage obligations, either through refinancing or sale, and prevented the defendant from continuing to benefit from the plaintiffs’ credit indefinitely.
Practical Takeaways for Alberta Businesses and Property Investors
This decision highlights several important lessons:
- Contractual language matters. Terms like “assumption of mortgages” should be clearly defined, particularly where long-term financing is involved.
- Courts will interpret contracts in light of commercial reality. Interpretations that create unreasonable risk or imbalance are unlikely to succeed.
- Credit exposure can justify equitable relief. Even where no immediate financial loss is shown, ongoing exposure to liability may support specific performance.
- Parties who draft agreements may face heightened scrutiny if ambiguities arise.
Equitable Remedies Are Key Where Damages Don’t Yield a Fair Result
Moran v. 1715664 Alberta Inc. underscores the importance of precision in real estate contracts and confirms that Alberta courts will look beyond formalistic interpretations to ensure agreements function as intended. Where a purchaser agrees to assume mortgage debt as consideration, that obligation may extend far beyond making monthly payments.
For property owners, investors, and businesses alike, the decision is a reminder that unclear drafting can lead to years of litigation, and that equitable remedies remain available where justice cannot be achieved through damages alone.
DBH Law: Calgary Litigation Lawyers Advising on Mortgage Disputes
Mortgage disputes often turn on nuanced distinctions in contract language, with significant financial consequences. If you are involved in a dispute over property transactions, mortgage assumptions, or contractual obligations, experienced legal advice is essential. The skilled litigation lawyers at DBH Law can assess your agreement, explain your rights, and pursue remedies to protect your financial interests and reduce your long-term exposure. To book a consultation, please contact us online or call 403-252-9937.