If the mortgagor has not concurred in the assignment of the mortgage the assignee takes subject to any claim existing at the date of the assignment which would form the subject of a set-off as between the mortgagor and the mortgagee in an action on the covenant (z).

An equity cannot be set up against the assignee unless it is an existing and not merely a potential equity at the time of the assignment. For instance, A mortgages to B and then sells to C with a covenant against encumbrances, (that is to say, as between A and C, A agrees to pay off the mortgage), and C gives back a second mortgage for the balance of the purchase money. If C, in order to protect his property, pays off the first mortgage, he can set off the amount so paid against the second mortgagee. If the second mortgage is subsequently assigned, this right of set-off is good against the assignee because it is an existing equity at the time of the assignment, but if the second mortgage is assigned before C pays off the first mortgage the assignee does not take subject to the merely potential right of set-off (a).

(u) Phillips v. Vaughan, 1685, 1 Vern. 335; Anon., 1707, 1 Salk. 155; Davis v. Barrett, 1851, 14 Beav. 542, 554.

(v) See 21 Halsbury, Laws of England, pp. 176, 177; cf. 2 W. & T.L.C. 47.

(w) Salmon v. Dean, 1851, 3 Mac. & G. 344.

(x) Ashenhurst v. James, 1746, 3 Atk. 270.

(y) Matthews v. Wallwyn, 1798, 4 Ves. 118, 18 R.C. 244; 21 Halsbury, Laws of England, p. 177.

(z) Court v. Holland, 1881, 29 Gr. 19, at pp. 20, 22, following Norrish v. Marshall, 1821, 5 Madd. 475, at p. 481; cf. Pressey v. Trotter, 1878, 26 Gr. 154; Galbraith v. Morrison, 1860, 8 Gr. 289; Rox-burghe v. Cox, 1881, 17 Ch.D. 520, at p. 526.

It has been held that the assignee of a mortgage takes subject not only to an equity or a right of set-off affecting the mortgage account, but also to an equity to set aside or reform the mortgage itself, and that even as against an equity of the latter kind the assignee cannot set up the defence of purchase for value without notice so as to put himself in any better position than his transferor. The owner of land made a mortgage which though not registered was good as between the parties, and afterwards conveyed to a purchaser without notice who registered his deed and therefore took free from the mortgage. The purchaser gave back a mortgage for part of the purchase money. This second mortgage was registered, but in the hands of the mortgagee it was of course subject to the prior mortgage made by the mortgagee. It was afterwards assigned to a transferee for value without notice. It was held that the purchaser of the second mortgage took subject to the first mortgage and could not set up the defence of purchase for value without notice (b). A mortgage which was made in fraud of creditors was held to be void even in the hands of an assignee for value without notice (c).

(a) This distinction was drawn in the dissenting judgment of Strong V.C. in Henderson v. Brown, 1871, 18 Gr. 89, which was adopted as correct in Egleson v. Howe, 1879, 3 O.A.R. 566. In both cases the assignee had notice of the facts giving rise to the potential equity. See also Watson v. Mid-Wales, Ry. Co., 1867, L.R. 2 C.P. 593. Cf. Harter v. Colman, 1882, 19 Ch. D. 630, at p. 633, where a similar distinction is drawn in connection with the doctrine of consolidation.

It was however enacted in Ontario in 1876 by the statute 39 V. c. 7, s. 10, as follows:

10. The purchaser in good faith of a mortgage may, to the extent of the mortgage, (and except as against the mortgagor, his heirs, executors and administrators,) set up the defence of purchase for value without notice in the same manner as a purchaser of the property mortgaged might do (e).

This section was invoked by the assignee of a mortgage in the following circumstances. A certain lot was by error included with other lands in a mortgage. The mortgage was assigned for value, and subsequently the mortgagor conveyed away the equity of redemption. The deeds were all registered in the order of their execution. In an action by the purchaser of the equity of redemption against the assignee of the mortgage to compel the defendant to rectify the error by conveying the lot in question to the plaintiff it was held (f) that a complete defence was afforded by the combined operation of the section above quoted and of the- provision of the Registry Act that no equitable lien, charge or interest affecting land should be deemed valid as against a registered instrument executed by the same party, his heirs or assigns (g). The opinion was also expressed that the defendant would have had a good defence even if the mortgagor himself had been the plaintiff, on the ground that a collateral equity to reform the mortgage is not one of the equities subject to which the assignee of the mortgage takes (h).

(b) Smart v. McEwan, 1871, 18 Gr. 623; cf. Cockell v. Taylor, 1852, 15 Beav. 103, at p. 117.

(c) Elliott v. McConnell, 1874, 21 Gr. 276; but see Totten v. Douglas, 1869, 15 Gr. 126, 16 Gr. 243, in which in similar circumstances the purchaser of the mortgage failed only because he was put upon enquiry by his knowledge of suspicious circumstances.

(d) Now R.S.O. 1914, c. 112, s. 12.

(e) As to the circumstances in which a purchaser may rely upon the defence of purchase for value without notice, see chapter 7, Equitable Principles governing Priorities. It was enacted by 39 V.c. 7, s. 11, (now R.S.O. 1914, c. 109, s. 39), that "it shall in no case be necessary, in order to maintain the defence of a purchase for value without notice, to prove payment of the purchase money or any part thereof."

(f) Bridges v. Real Estate Loan and Debenture Co., 1885, 8 O.R. 493.

It will be observed that the plaintiff in the case just mentioned was the purchaser of the equity of redemption and was therefore not within the protection of the exception contained in the statute quoted above -"except as against the mortgagor, his heirs, executors or administrators." The provision in question is however now part of the Mortgages Act, the excepting clause reads, "except as against the mortgagor" (i) and the word "mortgagor" is defined by the interpretation clause to mean "any person deriving title under the original "mortgagor or entitled to redeem a mortgage, according to his estate, interest or right in the mortgaged property" (j). It is submitted that on a reasonable construction of the provision in question it ought to be held that the scope of the excepting clause has not been enlarged by the inclusion of the particular provision in the more general statute (k), but it must be admitted that on a strict construction of the revised statute a purchaser of the equity of redemption would be within the excepting clause. In any event the provision would still make the defence of purchase for value without notice available as against creditors of the mortgagor (l).

(g) R.S.O. 1914, c. 124, s. 73. See chapter 8, The Registry Act, S75.

(h) This more general question is further discussed below. See Sec. 106.

(i) R.S.O. 1914, c. 112, s. 12. This wording was introduced by 10 E. 7, c. 51, s. 11.

(j) R.S.O. 1914, c. 112, s. 2 (d)

(k) Cf. 3 & 4 G. 5, c. 2, s. 9, as to the general effect of the consolidation .of the statutes.