Marshallzehr Group Inc. v. Ideal (BC) Developments Inc. et al.

[Indexed as: Marshallzehr Group Inc. v. Ideal (BC) Developments Inc.]

Ontario Reports Court of Appeal for Ontario Rouleau, Brown and Miller JJ.A. April 13, 2021 155 O.R. (3d) 200 | 2021 ONCA 229

Case Summary

Contracts — Damages — Commitment letter providing for plaintiffs to finance defendants' real estate project — Before any funds advanced, plaintiffs purporting to terminate commitment letter for defendants' failure to satisfy initial funding conditions — Motion judge rejecting defendants' argument that they were entitled to notice of termination and opportunity to cure default — Motion judge granting summary judgment and awarding damages, including for payment of lender fee — Motion judge failed to address defendants' submission that lender fee not payable without advance of loan — Award of damages reduced accordingly.

Contracts — Interpretation — Commitment letter providing for plaintiffs to finance defendants' real estate project — Before any funds advanced, plaintiffs purporting to terminate commitment letter for defendants' failure to satisfy initial funding conditions — Motion judge rejecting defendants' argument that they were entitled to notice of termination and opportunity to cure default — Defendants' appeal of summary judgment in favour of plaintiff dismissed — Cancellation provision allowed for cancellation of undrawn portion of loan at any time for any reason — With no advance, entire loan was undrawn and commitment letter terminated.

Pursuant to a commitment letter (CL) executed in November 2018, the plaintiff was prepared to provide the defendants with financing for a residential real estate project. The plaintiff intended to syndicate the loan, which was to be for a term of 13 months. By December, the plaintiff gave the defendants notice that the syndicated lenders had started to advance funds and that interest was beginning to accrue on the loan. Thereafter, the plaintiff advanced the syndicated funds to its counsel to hold in trust pending the defendants' satisfaction of the initial funding conditions specified in the CL. The loan never closed, and no funds were advanced to the defendants. In January 2019, the plaintiff notified the defendants that it was ending the CL pursuant to a cancellation provision which stated that the lender may at any time, for any reason and without notice, cancel the undrawn portion of the loan. The defendant, relying on the default and demand provisions of the CL, took the position that the plaintiff did not have the right to terminate without providing notice and giving the defendants an opportunity to cure any default. The plaintiff commenced an action to recover various fees and expenses. The defendants counterclaimed for damages for wrongful termination. The plaintiff moved for summary judgment. The motion judge held that the January 2019 letter constituted the exercise by the plaintiff of its right to end the relationship under the cancellation provision. The judge rejected the defendants' argument that the default and demand provisions governed the plaintiff's ability to terminate prior to the closing of the loan transaction. The motion judge granted default judgment and awarded damages in the amount of $508,071.09 for standby interest; expenses incurred for legal fees, document review and planning advice; and a lender fee. The defendants appealed.

Held, the appeal should be allowed in part.

The motion judge did not commit an error on an extricable question of law in his interpretation of the CL. The terms of the CL covered two time periods: the period from the date of execution to the closing of the transaction by the initial advance of funds to the defendants, and the period following the initial advance through to the end of the 13-month term of the loan. Provisions of the commitment letter clearly stated that the plaintiff, as lender, was not required to advance any funds prior to the defendants, as borrower, fulfilling stipulated pre-conditions to the plaintiff's satisfaction. When the plaintiff sent its January 2019 letter, the parties had not closed the financing of the loan and the plaintiff had not advanced any funds to the defendants. The CL contemplated one advance of funds, the initial advance, which would comprise the entirety of the loan. Accordingly, at the time of the letter the entirety of the loan remained undrawn. The effect of cancelling the undrawn portion of the loan would be to terminate the CL. By contrast, the default and demand provisions envisaged a situation where the loan transaction had closed and some advance of funds had occurred. The motion judge's interpretation was a commercially reasonable one. The defendants argued that the parties' inability to resolve a dispute over a standstill agreement was a default requiring the plaintiff to resort to the default and demand provisions rather than the cancellation provision, but the language of the CL did not support that interpretation. The defendants further argued on appeal that the plaintiff breached its duty of good faith by unreasonably demanding a standstill agreement in excess of its rights under the CL, but that argument was rejected. When viewed in the context of the entire agreement, the cancellation provision appeared to be designed, in part, to bring the relationship to an end if the borrower was unable or unwilling to satisfy the pre-conditions to lending. In the circumstances, there was nothing unreasonable about the plaintiff's use of the cancellation provision.

The damages award was reduced from $508,071.09 to $162,071.09. The only error committed by the motion judge was in holding that the claim for the lender fee was recoverable under the cancellation provision. In reaching that conclusion, he did not address the defendants' submission that the lender fee was not payable without an advance of the loan. The language of the CL specified that the lender fee was to be deducted from the initial advance, and no initial advance was made. Accordingly, the award was reduced by $346,000, being the lender fee of $396,000 less the $50,000 good faith deposit.

Chijindu v. Prudential Property Management Inc., [2014] O.J. No. 4269, 2014 ONSC 4759 (S.C.J.), distd

Other cases referred to Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc. (2017), 135 O.R. (3d) 241, [2017] O.J. No. 1817, 2017 ONCA 293, 67 C.C.L.I. (5th) 36, 410 D.L.R. (4th) 14, 79 R.P.R. (5th) 1 [Leave to appeal to S.C.C. refused [2016 S.C.C.A. No. 249]; Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, 373 D.L.R. (4th) 393, [2014] 9 W.W.R. 427, 59 B.C.L.R. (5th) 1, 461 N.R. 335, 25 B.L.R. (5th) 1, 358 B.C.A.C. 1, 614 W.A.C. 1; Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 85 O.R. (3d) 254, [2007] O.J. No. 1083, 2007 ONCA 205, 222 O.A.C. 102, 29 B.L.R. (4th) 312, 56 R.P.R. (4th) 163, 2007 SOACQ para. 10,007, 2007 CSLR para. 900-202 (C.A.); Wastech Services Ltd. v. Greater Vancouver Sewerage & Drainage District, [2021] S.C.J. No. 7, 2021 SCC 7, 454 D.L.R. (4th) 1, [2021] 2 W.W.R. 193, EYB 2021-372790, 2021EXP-396

APPEAL by defendants from default judgment of Perell J., reported at [2020] O.J. No. 1092, 2020 ONSC 1547 (S.C.J.).

Mark A. Russell, for appellants. Stephen Schwartz, for respondents.

The judgment of the court was delivered by

BROWN J.A.: —

I. Overview

[1] The appellants, Ideal (BC) Developments Inc., Ideal (BC2) Developments Inc., 2490568 Ontario Inc., 2490564 Ontario Inc., Ideal Developments Inc., and Shajiraj Nadarajalingam (hereafter collectively "Ideal"), appeal the judgment of the motion judge that ordered them to pay the respondent, MarshallZehr Group Inc. ("MZ"), the sum of $508,071.09 and dismissed Ideal's counterclaim against MZ.

[2] By Commitment Letter dated October 31, 2018 (the "CL"), and executed by Ideal on November 8, 2018, MZ was prepared to provide Ideal with financing for a residential real estate project. Two of the appellants, Ideal Developments Inc. and Shajiraj Nadarajalingam, were to act as guarantors of the indebtedness.

[3] According to the CL: (i) MZ intended to syndicate the loan and lend Ideal $15.2 million (the "loan"); (ii) the loan was to act as a first mortgage land loan for Ideal's development of the project; (iii) the CL stipulated that the funds for the project were to consist of the loan plus $5.9 million in equity; (iv) the loan would be for a term of 13 months; (v) the loan would consist of three facilities, with the facilities bearing interest rates ranging from Prime + 5.3 per cent per annum (floor rate of 9.25 per cent) on the largest facility to Prime + 10.05 per cent (floor rate 14.0 per cent) on the smallest; (vi) subordinate financing was subject to MZ's consent; (vii) the closing date for the loan was scheduled for December 5, 2018; and (viii) MZ was not required "to advance any funds prior to the Borrower having fulfilled to the Lender's satisfaction" the Initial Funding Conditions specified in s. 2.1 of the CL.

[4] By December 17, 2018, MZ had given Ideal notice that the syndicated lenders had started to advance funds. MZ informed Ideal on December 21, 2018 that interest was beginning to accrue on the loan. Thereafter, in accordance with the terms of the CL, MZ advanced the syndicated funds to its counsel, to be held in trust pending Ideal's satisfaction of the Initial Funding Conditions.

[5] In the result, the loan never closed, and no funds were ever advanced to Ideal. By letter dated January 23, 2019, MZ notified Ideal that it was ending the CL, stating, in part:

Please accept this letter as notice that the Lender is hereby terminating the Commitment Letter effective immediately in accordance with the terms thereof.

Notwithstanding the Lender's unilateral right to cancel the Commitment Letter at any time and as it may determine, in its sole and unfettered discretion, we have been advised by our client that the Obligors have not met the Initial Funding Conditions set out in Part II, Section 2.1 therein.

[6] MZ sought payment from Ideal of $553,899.48 for various fees and expenses in connection with the CL.

[7] By letter dated February 28, 2019, Ideal took the position that MZ did not have the right to terminate the CL without providing notice and giving Ideal an opportunity to cure any default.

[8] MZ brought this action seeking payment of various fees and expenses described in the CL. Ideal defended and, as well, counter-claimed for damages caused by MZ's wrongful termination of the CL. MZ then moved for summary judgment, which the motion judge granted.

[9] Ideal raises two main grounds of appeal. First, it submits that the motion judge erred in determining that MZ was entitled to end the loan facility under the CL's Cancellation provision and dismissing Ideal's counterclaim. Second, Ideal argues that the motion judge erred in calculating the fees and expenses to which MZ was entitled upon cancellation of the CL.

II. First Ground of Appeal: MZ's Right to End the Commitment Letter

A. The issue stated

[10] Ideal's first ground of appeal concerns the motion judge's interpretation of the CL, specifically the contractual basis of MZ's right to end the CL in the circumstances, as well as the application of that interpretation to the facts of the case. The applicable standard of review is that articulated in Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, and its progeny.

[11] Ideal submits that when interpreting the CL the motion judge committed an error on an extricable question of law. It argues the motion judge failed to interpret the provisions of the contract as a whole, with the result that he failed to assign meaning to all the contested terms of the CL: Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 2007 ONCA 205, 85 O.R. (3d) 254, [2007] O.J. No. 1083 (C.A.), at para. 24; Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc. (2017), 135 O.R. (3d) 241, [2017] O.J. No. 1817, 2017 ONCA 293, at para. 58, leave to appeal to S.C.C. refused [2016] S.C.C.A. No. 249.

[12] The contested terms of the CL are those that entitle MZ to bring its relationship with Ideal to an end. The first is found in Part I of the CL. Headed "Cancellation", the provision states:

The Lender may on demand require immediate payment of all amounts outstanding or accrued in connection with this Commitment. The Lender may at any time, for any reason and without notice, cancel the undrawn portion of the Loan.

(Emphasis added)

(Hereafter the "cancellation provision".)

[13] The other is contained in Part V of the CL, "Default Provisions". Section 5.1 identifies events of default, which include the neglect by any Obligor (the named borrowers and guarantors) "to observe or perform any covenant or obligation contained in any Document on its part to be observed or performed . . . and, such Obligor shall fail (in the case of those defaults which can be rectified by such Obligor) to remedy such default within a period of thirty (30) days after the giving of notice . . .".

[14] Section 5.2 provides that "[u]pon the occurrence of any Event of Default that has not been cured within the timelines set out herein, the Lender by written notice to the Borrower (an "Acceleration Notice") shall be entitled to: a) declare the loan and the right of the Borrower to apply for further Advances to be terminated; and b) declare all Obligations . . . of the Borrower to the Lender (including, without limitation, the all unpaid fees whether or not deemed earned) to be immediately due and payable . . . without further demand . . .".

[15] I will refer to ss. 5.1 and 5.2 collectively as the "default and demand provisions".

[16] Before the motion judge, Ideal argued that the default and demand provisions governed MZ's ability to terminate the CL prior to the closing of the loan transaction. It contended that MZ had wrongfully terminated the CL because it had failed to give Ideal notice that it had committed an event of default and afford Ideal an opportunity to cure the default.

[17] The motion judge did not accept that submission. He held that MZ's January 23, 2019 letter constituted the exercise by MZ of its right to end the relationship with Ideal under the cancellation provision. He stated [at paras. 52-53]:

Read literally, the Cancellation Provision required MZ to have a reason for the cancellation and its expressed reason was that Ideal had not satisfied the Initial Funding Conditions. Section 2.1 of the Commitment Letter provided that MZ shall not be required to advance any funds prior to Ideal having fulfilled to the Lender's satisfaction the funding preconditions.

Although MZ speaks of Ideal defaulting with respect to the Initial Funding Conditions, more felicitous and legally accurate language is that Ideal had not satisfied the pre-conditions for the loan. More importantly, by January 22, 2010 [sic] it was apparent that Ideal would not or could not satisfy the pre-conditions.

[18] Ideal advances two arguments in support of its position that the motion judge erred in holding that MZ was entitled, in the circumstances, to utilize the cancellation provision. First, a proper interpretation of the CL as a whole requires giving meaning and priority to the default and demand provisions. Second, MZ did not have a legitimate reason to terminate the CL and, as a result, MZ failed to exercise its discretionary powers under the CL in good faith.

B. Analysis

The interpretation of the CL

[19] I am not persuaded that the motion judge erred on an extricable question of law. In my view, his interpretation gave effect to all the CL's terms.

[20] The terms of the CL cover two periods of time in the relationship between MZ and Ideal: (i) the period from the date of execution of the CL to the closing of the transaction by the Initial Advance of funds to Ideal; and (ii) the period following the Initial Advance of funds through to the end of the 13-month term of the loan. When the CL is examined in its entirety, the provisions relating to the pre-closing period are, roughly speaking, found in the following portions of the CL: (a) s. 2.1, which specifies the Initial Funding Conditions; and (b) Part III, which describes the security and documentation to be delivered by Ideal. Those that concern the post-closing/post-Initial Advance period are: (c) s. 2.2, dealing with Funding Conditions for Borrower Draws (although the CL contemplated a single, Initial Advance); (d) Part IV, dealing with Borrower's Covenants; and (e) Part V, the Default Provisions. Parts I and VI, the General Provisions, contain terms that concern both periods of time.

[21] Provisions of the CL clearly stated that MZ, as lender, was not required to advance any funds prior to Ideal, as borrower, fulfilling stipulated pre-conditions to MZ's satisfaction. For example, Part VI states, in part: "The execution of this letter does not obligate the Lender to advance any of the agreed funds unless all of the conditions to such advances have been satisfied to the satisfaction of the Lender and its solicitors."

[22] When the motion judge's reasons are read against that background, I am satisfied that his interpretation gave effect to the basic bargain agreed to by the parties and gave meaning to all the CL's terms.

[23] Ideal contends that MZ could not use the cancellation provision because it merely permitted the Lender to "cancel the undrawn portion of the Loan". Ideal points to the definition of "Loan" in the opening paragraph of the CL, which states:

This commitment letter confirms that MarshallZehr Group Inc. (the "Lender") is prepared to provide financing (the "Loan") for the Project conditional on the terms and conditions contained in this letter agreement (the "Commitment").

[24] In Ideal's submission, the cancellation of the undrawn portion of the loan would not amount to a termination of the CL or the loan, which is what MZ purported to do in its January 23, 2019 letter. Instead, according to Ideal, any "termination" of the loan required MZ to resort to the default and demand provisions. Only if MZ gave notice of a default and an opportunity for Ideal to cure the default could it then proceed, under s. 5.2, to issue to Ideal an acceleration notice that would "declare the Loan and the right of the Borrower to apply for further Advances to be terminated".

[25] I do not regard the interpretation advanced by Ideal as a commercially reasonable one. While I agree with the motion judge's observation, at para. 45, that "the Commitment Letter is far from plainly written", in my view his interpretation gave practical meaning to all the CL's terms and was commercially reasonable.

[26] When MZ sent its January 23, 2019 letter, the parties had not closed the financing of the loan. As a result, MZ had not advanced any funds to Ideal. The CL contemplated one advance of funds, the Initial Advance, which would comprise the entirety of the loan. Accordingly, at the time of the January 23, 2019 letter the entirety of loan remained undrawn because the loan transaction had not yet closed and no funds had been advanced. In those circumstances, the cancellation provision would be available to "cancel the undrawn portion of the Loan". The effect of the cancellation would be to put an end to, or terminate, the CL.

[27] By contrast, the following language of s. 5.2 envisages a situation where the loan transaction has closed and some advance of funds has occurred: "declare the Loan and the right of the Borrower to apply for further Advances to be terminated" (emphasis added). Section 5.2 of the CL contemplates circumstances where some portion of the loan has been advanced, an uncured event of default has occurred, as a result of which the Lender can declare the loan to be terminated and accelerate all obligations, with the loan becoming immediately due and payable.

[28] Is the language of the cancellation provision a "perfect fit" with only pre-closing circumstances? No. One could argue that its reference to the "undrawn portion of the Loan" covers a situation where the borrower already had made a draw and, therefore, the transaction had closed. But, in my view the motion judge's interpretation was a more commercially reasonable one in the actual circumstances of this case: the loan transaction had not closed; no advance had been made to Ideal; the CL contemplated a single, "Initial Advance", not multiple draws; and MZ was under no obligation to advance funds before Ideal fulfilled the stipulated pre-closing conditions to MZ's satisfaction.

[29] I therefore conclude that the motion judge did not commit an error on an extricable question of law. His interpretation of the CL was a reasonable one, which gave practical recognition to the structure of the CL and meaning to all its terms. Accordingly, I see no reversible error in his interpretation of the cancellation provision and his conclusion that MZ could use the provision in the circumstances. Nor do I see any palpable and overriding error in his finding that by sending its January 23, 2019 letter MZ was purporting to exercise its right under the cancellation provision. That finding was available to the motion judge on the record.

The availability of the cancellation provision in the circumstances

[30] Ideal also submits that its dispute with MZ about the terms of subordinate financing did not entitle MZ to exercise its rights under the cancellation provision.

[31] Feature Corp. held an existing third mortgage on the project properties. Since the "Subordinate Financing" clause in Part I of the CL required MZ's prior written consent to any junior mortgage, Ideal discussed with MZ terms for subordinating and postponing the third mortgage. The parties could not agree on the length of a standstill period during which the third mortgagee could not enforce its rights in the event of a default by Ideal: MZ wanted a standstill period for the entire term of its loan; Ideal wanted only a 90-day standstill period.

[32] By e-mail dated January 14, 2019, MZ repeated that it required a full standstill, observed that the issue had been addressed multiple times, and advised that the parties "should move on from it". By further e-mail dated January 16, 2019, MZ advised Ideal that "[w]e will not limit the timeframe around our standstill clause". On January 18, 2019, Ideal's counsel formally wrote to MZ that its insistence on an "indefinite standstill period" was unreasonable as such a provision was not expressly required by the CL. Counsel advised that unless MZ altered its position and, as well, agreed to a $2 million increase in the third mortgage, "we will seek our client's instructions regarding termination of the Commitment Letter, without prejudice to their rights and remedies in law and equity". MZ remained firm in its position.

[33] Ideal submits, in effect, that the language of the Subordinate Financing clause treats the parties' inability to resolve the dispute over the standstill agreement as a "default" which, in turn, required MZ to resort to the default and demand provisions, not the cancellation provision, to end the relationship.

[34] I am not persuaded by that submission.

[35] The Subordinate Financing clause uses the word "default" in two places, each involving a different circumstance. The first refers to a situation where Ideal obtains additional financing without MZ's consent; the second is where an approved secondary lender issues a discharge certificate greater than zero without MZ's consent.

[36] Neither circumstance applied to the dispute between MZ and Ideal, which involved Ideal's obligation to satisfy the Initial Funding Conditions for the loan. Section 2.1(a) of the Initial Funding Conditions required the execution of all the security and "ancillary loan agreements and documents" before MZ was obligated to advance any funds. Ideal's obligation under Part III of the CL required Ideal to deliver security "in the form and on the terms acceptable to the Lender's solicitors", including (a) in s. III.j, postponements from "such other creditors as the Lender may require upon completion of its due diligence", and (b) in s. III.o, "[s]uch further security . . . and ancillary documents and agreements as the Lender or its solicitors may, acting reasonably, deem necessary to adequately secure the Loan obligations and complete and perfect the Security".

[37] The record discloses that Ideal was not prepared to agree to the form of subordination agreement acceptable to MZ. At para. 54 of his reasons, the motion judge found that "the negotiations over whether MZ would consent to the additional financing and about what would be the terms of the postponement, subordination and standstill agreement had reached a dead-end, which was a very serious impediment to going forward with the loan for both parties". I see no palpable and overriding error in that finding; ample evidence supported it.

[38] The motion judge stated, at para. 52, that "the Cancellation Provision required MZ to have a reason for the cancellation and its expressed reason was that Ideal had not satisfied the Initial Funding Conditions". Given the requirements of s. 2.1 regarding the Initial Funding Conditions and Part III regarding Security, I see no palpable and overriding error in the motion judge's conclusion that the parties' impasse over the terms of the Feature Corp. subordinate financing provided MZ with a legitimate "reason" to exercise its rights under the cancellation provision.

[39] Ideal makes one further argument. In its statement of defence and counterclaim, Ideal pleaded that MZ breached its duty of good faith "by unreasonably demanding a permanent standstill agreement from subordinate financiers in excess of its rights under the [CL] and by terminating the [CL] without proper notice of alleged default or providing a required cure period to remedy the same". Ideal did not advance that argument before the motion judge. However, during oral submissions on appeal, Ideal, relying on the recent decision of the Supreme Court of Canada in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, [2021] S.C.J. No. 7, 2021 SCC 7, 454 D.L.R. (4th) 1, argued that MZ did not exercise its rights under the cancellation provision in a good faith manner.

[40] I am not prepared to give effect to this submission. I put to one side the issue of whether it is open to Ideal to argue on appeal a pleaded defence that it elected not to pursue below in response to MZ's motion for summary judgment. As well, the lateness of the hour at which Ideal has raised this issue has deprived the panel of the benefit of the parties' considered submissions on how the principles articulated in Wastech would apply to a party's conduct in the pre-closing phase of a contractual relationship, such as in the present case. Nevertheless, I would observe that while Wastech states that contractual discretion must be exercised reasonably, in light of the purpose for which it was conferred, the decision notes that such a duty of good faith "does not displace the detailed, negotiated bargain as the primary source of justice between the parties": at paras. 4 and 5.

[41] In the present case, MZ was faced with a situation where: (a) Ideal had been unable to renew its existing first mortgage; (b) Ideal had agreed, in the CL, to use equity to source the balance of funds for the project but ultimately wanted to maintain and increase the amount of its third mortgage; (c) Ideal had agreed, in the CL, that MZ's consent was required for any subordinate financing and relevant security and ancillary documentation had to be satisfactory to MZ and its solicitors; and (d) Ideal's counsel had put MZ on formal notice that its insistence on a total standstill was unreasonable and might lead Ideal to terminate the CL. Ideal's position that its subordinate lender need only agree to a 90-day standstill on its enforcement rights understandably would cause MZ concern about the degree of additional risk it would be assuming if it were to advance funds to Ideal on that basis.

[42] The agreed Initial Funding Conditions reflected many of the limits to the risk that MZ was prepared to assume in lending to Ideal. When viewed in the context of the entire agreement, the cancellation provision appeared to be designed, in part, to bring the relationship to an end if the borrower was unable or unwilling to satisfy the pre-conditions to lending. Faced with a potential borrower who was not prepared to conclude an agreement within the CL's agreed-upon risk limits, the cancellation provision was available for MZ to use to avoid such unbargained for risk. Again, recall that s. 2.1 of the CL provided that MZ was not required to advance any funds until Ideal fulfilled the Initial Funding Conditions to MZ's satisfaction. In those circumstances, I see nothing unreasonable about its use of the cancellation provision.

Conclusion

[43] For those reasons, I am not persuaded by Ideal's first ground of appeal. I see no basis to interfere with the motion judge's conclusion that MZ was entitled to exercise the cancellation provision in the circumstances.

III. Second Ground of Appeal: The Recoverable Fees and Expenses

[44] The $508,071.09 judgment in MZ's favour consists of awards for: (i) standby interest: $101,958.82; (ii) expenses consisting of payments by MZ for legal fees, document review, and planning advice: $60,112.27; and (iii) a lender fee of $396,000, less the $50,000 good faith deposit (net $346,000).

[45] Ideal submits that the motion judge erred in granting judgment for those amounts because none were recoverable under the terms of the CL in the event MZ exercised the cancellation provision. MZ submits the motion judge made no error. I will consider each item in turn.

Standby interest

[46] The CL stated that MZ intended to syndicate the loan, which it did. Part I of the CL stipulated that if the loan was not fully advanced by December 5, 2018, "interest will commence on the advance date established herein for such advance, in the form of standby interest ("standby interest") on any unadvanced portion of the Loan and will become due and payable on the date the Loan is advanced or upon the termination of this Commitment Letter without any advances having been made" (emphasis added).

[47] By December 17, 2018, MZ had advised Ideal that it had syndicated the loan. Over the next few weeks, MZ transferred the syndicated funds to its counsel to be held in trust, pending closing of the loan transaction.

[48] Ideal submits that the motion judge erred in finding that MZ was entitled to standby interest pursuant to the cancellation provision. Since such interest was payable only "upon the termination of this Commitment Letter without any advances having been made", according to Ideal MZ was only entitled to standby interest if it had proceeded under the default and demand provision's termination language.

[49] I am not persuaded by Ideal's submission. The practical effect of MZ proceeding under the cancellation provision was to terminate the CL "without any advances having been made", the very circumstance contemplated by the CL's standby interest provision. Pursuant to that provision, MZ was entitled to recover from Ideal interest on the syndicated funds that had been put in place pending closing of the loan. I see no error in the motion judge granting judgment for that amount.

Expenses and good faith deposit

[50] The Expenses section in Part I of the CL stated that: "All reasonable expenses of the Lender and the Borrower shall be paid by the Borrower including (but not limited to), the cost of any third-party reports and all legal costs regardless of whether the Borrower proceeds with the transaction . . ." (emphasis added). The "Good Faith Deposit" section stated:

$50,000 non-refundable if Borrower fails to proceed based on the terms of this Commitment Letter and is full compensation to the Lender for its work and efforts in preparation of this Commitment Letter. The Borrower shall also be responsible for the Lender's legal and other, professional fees and out of pocket expenses if the Borrower fails to proceed with the Loan.

(Emphasis added)

[51] The motion judge held that MZ was entitled to recover its legal fees, consultants' expenses, and the good faith deposit pursuant to the cancellation provision. Ideal submits that the motion judge erred in so holding because MZ's exercise of the cancellation provision did not amount to Ideal, as borrower, failing to proceed with the transaction or loan.

[52] The motion judge found, at para. 53, that by January 22, 2019 "it was apparent that Ideal would not or could not satisfy the pre-conditions". Ample evidence supported that finding, at least in respect of certain informational requirements and the terms of the subordinated financing. Given that conduct by Ideal, I see no error in the motion judge's implicit conclusion that Ideal did not proceed with, or failed to proceed with, the transaction.

Lender's fee

[53] The "Fees" section of Part I of the CL provides that: "$396,000, the Lender Fee, less the Good Faith Deposit shall be deducted from the Initial Advance" (emphasis added). Part I defines the "Initial Advance", in part, as follows:

The Loan shall be advanced in one draw:

The first draw ("Draw 1" or the "Initial Advance") is anticipated to be in the principal amount of $15,200,000 and advanced upon satisfaction of the conditions contained herein and by the applicable Notices (see Appendix A, B, C and D). The Initial Advance is expected to be as follows:

Land Debt Refinancing $13,000,000

Lender Fee $ 396,000 . . .

[54] The motion judge held that the claim for the lender fee was recoverable pursuant to the cancellation provision. In reaching that conclusion, he did not address Ideal's submission that the lender fee was not payable without an advance of the loan. On its part, MZ argues that the lender fee was earned upon its completion of due diligence and "advance of the Loan to the Trust Account".

[55] I am persuaded by Ideal's submission. The language of the CL specifies that the lender fee "shall be deducted from the Initial Advance" and MZ did not make an Initial Advance to Ideal. The CL does not contain any other language of entitlement to the lender fee.

[56] I do not accept MZ's argument that the fee was earned upon the advance of the loan to the Trust Account; the CL clearly distinguishes between the Lender Advance -- the transfer of the syndicated funds to MZ's trust account -- and the Initial Advance, which is an advance to the Borrower.

[57] Nor do I accept MZ's submission that the decision in Chijindu v. Prudential Property Management Inc., [2014] O.J. No. 4269, 2014 ONSC 4759 (S.C.J.), applies to the facts of the present case. That case is distinguishable in two respects. First, the mortgage commitment letter did not contain the language found in the CL that the fee was to be deducted from an advance. Second, in Chijindu the mortgagee in fact had advanced the first draw under the mortgage commitment letter, and the issue was whether the mortgagee was entitled to the entire lender's administrative fee or only an amount pro rated to the amount of the actual advance. The application judge held that the language of the mortgage commitment letter entitled the mortgagee to the entire amount: at paras. 10 and 13.

[58] Consequently, I conclude that the motion judge erred in granting judgment for the lender fee.

Conclusion

[59] By way of summary, the fees and expenses to which MZ is entitled under the CL total $212,071.09 ($101,958.82 standby interest + $60,112.27 expenses + $50,000 good faith deposit). MZ has already received the good faith deposit. Therefore, the amount remaining payable by Ideal is $162,071.09.

IV. Disposition

[60] For the reasons set out above, I would allow the appeal in part and vary para. 1 of the judgment from $508,071.09 to $162,071.09.

[61] If the parties are unable to agree upon the costs of this appeal, they may file brief (no more than five pages) cost submissions within ten days of the release of these reasons.

Appeal allowed in part.

End of Document