If two parties hold property together and one of them owes a debt to a third-party creditor, what are the creditor’s rights when the property is sold?

This question was recently addressed by the Ontario Court of Appeal, where it was held that creditors are only entitled to execute against the divisible interest of a debtor in the property.

The ruling not only provides protection to non-debtor joint property owners, but also serves as an important reminder to creditors of the limitations on their claims.

The case

In Senthillmohan v. Senthillmohan, a separated husband and wife found themselves in a legal battle over the division of their net family property and the sale of their matrimonial home.

An order was granted directing the sale of the home and that the net proceeds be held in trust pending further agreement or court order.

After the order was made, a third-party creditor (the “creditor”), had obtained a judgement against the husband in an unrelated civil action and filed a writ against him.

After the writ was filed, the husband and wife entered into an Agreement of Purchase and Sale to sell the matrimonial home and the creditor agreed to temporarily lift the writ to allow for the sale to proceed.

After entering into the Agreement of Purchase and Sale, the wife filed an urgent motion in the family action to sever the joint tenancy in the matrimonial home.

The motion was granted and title to the property was transferred to the husband and wife as tenants in common. However, the order did not address the creditor nor its judgment against the husband.

The wife then brought a successful motion to release her share of the net sale proceeds after the property sold.

In response, the creditor appealed the order by challenging the retroactive severance of the joint tenancy and asserted the wife’s interest should not take precedence over the writ.

The creditor also argued the writ should be attached to the entirety of the sale proceeds.

The Court of Appeal ruling

The Court of Appeal firmly rejected the creditor’s appeal, making it clear it could not seize the interest of a non-debtor joint tenant.

The court emphasized the creditor’s understanding of its remedies in jointly held property disputes was flawed, specifically when only one property owner guaranteed the debt.

The court noted the creditor’s argument was based on the notion that joint tenants hold an undivided interest in the entire property, which would give the creditor the right to claim against the full interest.

However, the court clarified that a joint tenancy, despite its unity of title, interest and possession, does not imply that the entire property can be divided when the debt is not jointly held.

In coming to its conclusion, the court examined the relevant provisions of the Execution Act, particularly section 9(1), which deals with execution against the lands of the execution debtor and any interest they hold in lands held in joint tenancy.

The court unequivocally established that seizure and execution are restricted to the debtor's severable interest in land held in joint tenancy.

The court also stressed the importance of interpreting section 10(6), which binds the lands against which the writ is issued, in conjunction with section 9 and the right of survivorship.

Consequently, if a writ is filed against jointly held land before the debtor joint tenant's death, it does not bind the surviving non-debtor's complete interest in the property.

Similarly, in this case, the creditor’s debt was only guaranteed by the husband and the wife therefore was not on the hook for debt. As such, the creditor’s writ could not trump her interest in the property.

This decision provides much-needed clarity regarding creditors' remedies in disputes involving jointly held property, especially when only one of the joint tenants is a debtor.

Although it was made in the context of a family law proceeding, the ruling provides important general principles for debt enforcement and real estate issues.