Enforcement of Cross-Default Clauses

It is common in Saskatchewan that a farmer will go to the same financer for more than one loan facility. In many cases, the typical situation plays out as follows:

The farmer, getting started or acquiring land from a parent, requires a mortgage to purchase the land. Then, as spring approaches each year, the farmer requires an input loan to purchase seed, fertilizer, fuel etc. Each year the farmer may consider purchasing new equipment, and each time he or she does, they likely ask for additional financing to purchase that equipment.

Typically included in the financing agreement is what is called a cross-default clause. Typically, only the land purchase is secured by a mortgage, and the lending agreements will often state that, while the input loan is not secured against the land, a default on the input loan is also a default on the mortgage and equipment loans, allowing the bank to call on all its security. From there, the bank may decide to enforce on all of the equipment and land and collect on all of its debts, even though the other loans are current.

Recently, the Honourable Madam Justice Richmond called into question whether this is permissible. In the unpublished decision of Farm Credit Canada and Bodnar (QB 167 of 2021 – JC of Yorkton), the Bodnars ran into financial difficulty and defaulted on their input loan with FCC. They also had mortgages with FCC, which remained current. FCC sought to enforce on the land and the mortgage under a cross-default clause in the input loan.

After attending Court mandated mediation, FCC sought leave to foreclose. The Court concluded that not only could the Bodnars meet their obligations under the mortgage (being the monthly payments), they were actually doing so. Given the remedial nature of The Saskatchewan Farm Security Act, as codified by section 4 of the same, the Court concluded that it was not just and equitable to grant FCC leave and dismissed the application. FCC was not permitted to realize on the land.

While each application before the Court is fact specific, and in no way should this be seen as preventing leave in every application relying on a cross-default provision, it does provide hope to the farmer who is trying their best and keeps their mortgage current. Provided the mortgaged lands are not at risk of loss, which in most cases they are not, the Court may not permit realizing on land where the mortgage is current, even where one, or perhaps more, of the other loans, are not current.

It should be noted, however, that if an input loan remains unpaid and judgment is obtained, the lender may eventually be able to enforce the judgment against the land. While this process is significantly lengthier, the decision in Bodnar should be considered a temporary reprieve and not a fulsome solution.

This article is intended to provide legal information only, not legal advice. For more information about debt enforcement issues in Saskatchewan, contact:

Travis K. Kusch
Direct: 306-933-1373
Email: [email protected]

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Area of ExpertiseAgricultureEnforcement of Cross-Default Clauses