Suppose a couple holds land in joint tenancy, but each of them leaves their estate to their children – a common scenario in the blended family context.  Does it matter whether there is a mortgage on the land?  Does it matter what the mortgage money was used for?

During estate planning meetings, I am always surprised by the number of clients who tell me they do not have a mortgage, when they actually do.  They know they have a line of credit, but when we sub-search their property, we discover a mortgage that was registered as collateral security.  Most clients are unaware that the line of credit they obtained from their financial institution resulted in a charge being registered against title to their real property.

Ontario legislation provides that in the absence of a contrary intention, mortgage debt associated with real property that is left specifically in a Will must be paid from the interest in the land itself and not from the general estate of the testator.   So if the will-maker leaves a house to her son, he will take it subject to any mortgage.

Similarly, where joint tenants own real property with a joint and several mortgage, the entire mortgage debt follows the real property against which it is secured following the death of one of the co-owners. The surviving joint owner (who inherits by right of survivorship) cannot ask the estate of the deceased co-owner to pay a proportionate share of the mortgage.

This legal doctrine makes sense if you think of conventional mortgage debt used to acquire or improve real property.  The person receiving the real property is not put in a better position than the deceased person and does not receive a windfall. But what if the debt has nothing to do with the real property at all?

There is some old authority in Ontario to support an equitable claim that mortgage debt is crystallized as between joint owners, so that the estate of the deceased would have to pay half of the mortgage.

This claim was advanced in a 2006 B.C. case dealing specifically with line of credit debt secured by a collateral mortgage.    In Parrott-Ericson, the deceased spouse held land in joint tenancy with his wife, who became the sole owner of the land by right of survivorship.  But there was a collateral mortgage securing a line of credit for $400,000.00.  The wife applied to court to have the deceased husband’s estate pay one-half of the line of credit as co-borrower.  The wife argued that the debt was joint and several, and had crystallized at death, as in the Ontario case.  The BC Court distinguished the Ontario case, where the land and the mortgage debt were not connected.  In the BC case, the line of credit debt was used to acquire the property. The Court dismissed the wife’s equitable claim and held that the entire line of credit debt and mortgage stayed with the land. The estate did not have to pay any part of it!

Would the result have been different if the line of credit had been loaned to a corporation or used to buy a sports car?  Parrott-Ericson suggests it might. The debt in both of these instances would not appear to be “connected to land,” so an equitable claim by the surviving joint tenant might have a better chance of succeeding.

So the answers to the questions I began with are “Yes” and “Maybe.” The law is not what many of those with home equity credit lines expect.  Your intentions, if you are co-owners of real property, need to be properly documented as part of your estate planning process.