A recent Ontario Superior Court decision demonstrates how the doctrine of equitable subrogation can rescue lenders from solicitor misconduct—and what transactional lawyers need to know to protect their clients.
The Ontario Superior Court’s recent decision in Bank of Montreal v. Hossain, 2025 ONSC 3950, serves as a stark reminder of how solicitor negligence can create complex priority disputes—and how the doctrine of equitable subrogation can provide relief in appropriate circumstances. For transactional real estate lawyers, this case offers important insights into mortgage priority protection and the potential consequences when transactions go awry.
The Facts: A Transaction Gone Wrong
The case involved a seemingly straightforward refinancing transaction that became complicated by solicitor misconduct. In July 2021, Mohammad and Tasnim Hossain purchased a residential property in Oshawa, securing their purchase with a CIBC mortgage for $644,800, registered in first priority.
In May 2022, the Hossains applied to BMO for refinancing to pay out the existing CIBC mortgage. BMO approved a $760,000 mortgage loan, with the clear understanding that BMO’s mortgage would be registered in first priority after the CIBC mortgage was discharged. The parties jointly retained lawyer Tofazzel Haque to complete the transaction.
What should have been a routine refinancing became problematic when the Hossains simultaneously obtained a short-term loan of $315,000 from 10655252 Canada Corporation (“106 Corp.”), unbeknownst to BMO. Neither lender knew about the other’s involvement.
The Solicitor’s Fatal Errors
The retained solicitor, Mr. Haque, made critical errors that fundamentally compromised the intended transaction structure:
- Delayed Registration: Despite receiving BMO’s funds on May 18, 2022, Haque failed to discharge the CIBC mortgage or register BMO’s mortgage until July 19, 2022.
- Failed Due Diligence: On July 18, 2022—one day before BMO’s mortgage was registered—106 Corp. registered its mortgage on title, subordinate only to the still-registered CIBC mortgage. Haque failed to conduct a title search before registering BMO’s mortgage.
- Deliberate or Negligent Conduct: The court found that Haque’s failures appeared deliberate, noting he was acting for the Hossains on both loans and has since been suspended by the Law Society.
The result was that BMO’s mortgage, intended to be in first priority, was registered in third position behind both the CIBC mortgage (which should have been discharged) and 106 Corp.’s mortgage.
Equitable Subrogation: The Legal Remedy
Faced with this priority dispute, BMO sought relief through the doctrine of equitable subrogation. Justice Charney outlined the four-part test established in Crosbie-Hill v. Sayer [1908] 1 Ch. 866:
- At the request of the first mortgagor: The Hossains had requested BMO’s refinancing loan
- The claimant pays off the first mortgage: BMO’s funds were used to discharge the CIBC mortgage
- With a view to becoming himself a first mortgagee: BMO’s clear intention was to obtain first priority
- Absent any contrary intention: No evidence suggested BMO intended anything other than first priority
The court emphasized that equitable subrogation is discretionary and requires “clean hands.” Importantly, where loss arises from solicitor negligence rather than the lender’s own conduct, the lender’s hands remain clean.
Key Considerations for the Court’s Decision
Justice Charney’s analysis focused on several critical factors:
No Prejudice to 106 Corp.: The court noted that 106 Corp. always understood it was providing a second mortgage. Whether the first mortgage was held by CIBC or BMO made no practical difference to 106 Corp.’s position.
Limited Subrogation: BMO’s subrogation was limited to the amount of the discharged CIBC mortgage ($638,835), not the full BMO loan amount ($760,000), ensuring no unjust enrichment.
Solicitor Misconduct: The court observed that BMO’s intention was frustrated, either by Mr Haque’s negligence, or possibly deliberate fraud.
Practical Lessons for Transactional Lawyers
This decision offers several important takeaways for real estate practitioners:
- Due Diligence is Critical
Always conduct up-to-date title searches immediately before registration, particularly in refinancing transactions where timing is crucial.
- Clear Communication Protocols
Establish clear communication protocols with clients about any other financing arrangements to avoid conflicts of interest and ensure proper transaction structuring.
- Priority Protection Mechanisms
Consider implementing additional safeguards in mortgage commitments, such as specific warranties about other encumbrances and clear default provisions for priority breaches.
- Client Education
Ensure clients understand their obligations regarding disclosure of other financing arrangements and the potential consequences of non-disclosure.
The Broader Implications
While BMO succeeded in this case, the decision illustrates the risks inherent in mortgage transactions and the importance of competent legal representation. The case also demonstrates that while equitable subrogation can provide relief, it requires specific circumstances and is not guaranteed.
For lenders, the case reinforces the importance of proper due diligence and clear documentation of intentions regarding mortgage priorities. For borrowers, it highlights the severe consequences that can flow from solicitor misconduct and undisclosed financing arrangements.
The decision in Bank of Montreal v. Hossain serves as both a cautionary tale about transaction management and a useful reminder that equitable remedies remain available when traditional priority rules produce unjust results. As transactional lawyers, understanding these principles and building appropriate safeguards into our practice remains essential to protecting our clients’ interests in an increasingly complex real estate environment.
