Court File and Parties

Court File No.: CV-20-642208 Date: 2020-06-29 Superior Court of Justice – Ontario

Between: NJS Midtown Portfolio Inc., Applicant And: CMLS Financial Ltd., Respondent

Counsel: John Adair & Jordan Katz, for the Applicant John N. Birch & Kate Byers, for the Respondent

Heard: June 23, 2020

Before: Kimmel J.

Reasons for Decision

Overview

[1] The Applicant, NJS Midtown Portfolio Inc. (“NJS”) entered into an Agreement of Purchase and Sale on March 10, 2020 to sell an apartment building that it owns at 189 Vaughan Road (the “APS”). The APS had a closing date of June 26, 2020. The terms of the APS required NJS to deliver clear title to the purchaser. This application was approved for an urgent hearing by Zoom by Order of Myers J. dated June 12, 2020 because of the impending closing date.

[2] The Respondent, CMLS Financial Ltd. (“CMLS”) granted First and Second Mortgages [1] in June 2018 that are secured against three apartment buildings in Toronto owned by NJS, including 189 Vaughan Road. The Mortgages are closed. They contain no right of prepayment. The Mortgages do not give NJS the right to a partial or complete discharge of the Mortgages before maturity. The Mortgages contemplate that there could be circumstances under which CMLS might consent to a sale and agree to a discharge of the Mortgages, in whole or in part, but do not give NJS the right to sell any of the secured properties absent consent.

[3] CMLS did not consent to the APS transaction or agree to grant the partial discharge of the Mortgages as against 189 Vaughan Road that would have been required for NJS to meet its obligation to deliver clear title to the purchaser of 189 Vaughan Road.

[4] NJS argued that CMLS unreasonably withheld its consent to the APS transaction and to the partial discharge of the Mortgages that was required to allow the sale to proceed. NJS therefore asked the court for an Order:

a. Directing CMLS to provide, on or before June 26, 2020, its consent to the APS transaction and a partial discharge of the Mortgages over 189 Vaughan Road;

b. In the alternative, directing CMLS to grant a full discharge of the Mortgages in exchange for payment (or an undertaking to pay) by NJS of the full outstanding balance owed on the loan including accrued interest, all to take place on or before June 26, 2020.

[5] In advance of the June 26, 2020 scheduled closing date of the APS, I issued a brief hand-written endorsement on June 25, 2020 to advise the parties of the outcome of the Application, which I have dismissed.

The Issues to be Decided

[6] This Application raises the following issues:

a. Is NJS in default of the Mortgage for having entered into the APS without CMLS’s consent?

b. Has CMLS unreasonably withheld consent to the sale of 189 Vaughan Road?

c. Is there any contractual, statutory, common law or equitable basis on which NJS is entitled to a partial discharge of the Mortgage?

d. Is NJS entitled to a full discharge of the Mortgage upon NJS’s payment of the principal balance with any outstanding accrued interest?

Factual Context and Relevant Documents

[7] The factual context and relevant documents are, for the most part, not controversial. There are a few points of contention which I have identified and addressed where they are relevant to my findings. These reasons explain the decision that I released on June 25, 2020 without reasons because of the June 26, 2020 scheduled closing of the sale of 189 Vaughan Road. In the interests of expediency, I have relied heavily on the facta filed by the parties and their descriptions of the documents and the factual context, having regard to the supporting evidence that they helpfully identified to enable me to confirm their descriptions before adopting them.

The Mortgage Loan Documents

[8] NJS is a real estate development and holding company. It owns three non-contiguous pieces of real property (collectively, the “Property”), which are multi-residential apartment buildings located near Bathurst St. and St. Clair Avenue West in Toronto: (a) 147 Vaughan Road; (b) 189 Vaughan Road (“189 Vaughan”); and (c) 1592 Bathurst Street.

[9] In the spring of 2018, NJS began exploring options for refinancing an existing mortgage held by another lender over the Property. NJS reached out to CMLS through a commercial mortgage broker to determine whether CMLS would be interested in providing a 10-year, closed mortgage with a 40-year amortization (terms CMLS ultimately did provide).

[10] In reviewing NJS’s application for a 10-year closed mortgage, CMLS analyzed the Property as a whole, and did not distinguish between or place any separate value on each of the three parcels making up the Property (nor did any of the agreements underlying the ultimate transaction distinguish between the individual Properties). At the time, the collective appraised value of the Property was $19,000,000.00.

[11] The eventual Commitment Letter for the Loan dated June 19, 2018 and accepted on June 20, 2018 by NJS included the following key terms:

a. the Loan was to be for $10,575,500.00 on a net basis, and $10,849,337.50 on a gross basis;

b. the term of the Loan would be 10 years and the mortgage would be amortized over 40 years;

c. interest was set at 0.49% above a prescribed rate;

d. NJS had no right to prepay the Loan or obtain a discharge of the Mortgage prior to the maturity date;

e. the security for the Loan included the Mortgage, indemnities from principals of NJS’s parent company, a general assignment of rents and leases and insurance policies, a site-specific general security agreement providing a first ranking charge on certain property associated with the Property, and priority and postponement agreements from any parties with a prior interest in the Property.

[12] CMLS prepared the other loan and security documents, including the Charge/Mortgage (the “Charge”). The Charge incorporated by reference Standard Charge Terms No. 8616 (“Standard Charge Terms”), which were amended and supplemented by Schedule A to the Charge (the “Schedule A Terms” which together with the Commitment Letter, the Charge, and Standard Charge Terms, make up the “Mortgage Loan Documents”).

[13] The Commitment Letter and Schedule A Terms each clearly state that the Mortgage is closed, with no right of prepayment. In this regard, under the heading “Prepayment Privileges” on page 7 of the Commitment Letter it states that:

There shall be no right to prepay the Mortgage in whole or in part prior to the Maturity Date.

[14] This is echoed by the “Prepayment” provision at section 6 of the Schedule A Terms, which similarly states that:

There shall be no right to prepay the Charge in whole or in part prior to the Balance Due Date [August 1, 2028].

[15] In certain circumstances, CMLS has the right or option to demand full payment of principal and interest from NJS in the event of a default by NJS (including in the event that NJS enters into an agreement to sell all or part of the Property without the consent of CMLS).

[16] Section 12 of the Schedule A Terms describes various events of default that give CMLS the right, at its option, to require NJS to immediately pay the entire amount of principal and accrued interest then outstanding, including:

3. Without the prior written consent of the Chargee, which shall not be unreasonably withheld:

(a) ….

(b) The Chargor sells, conveys, transfers or enters into an agreement for sale or transfer of title of the Property. [emphasis added]

[17] These same events of default are described on page 8 of the Commitment Letter.

[18] Page 10 of the Commitment Letter contains the following term:

The following clause(s) must be incorporated into the Mortgage documents for the Property.

The Borrower(s) covenants and agrees with the Lender that in the event of the Borrower(s) selling, conveying, transferring or entering into an agreement for sale or transfer of title of the Property hereby mortgaged to a purchaser or transferee not approved of in writing by the Lender, all monies hereby secured with accrued interest thereon shall be forthwith due and payable at the option of the Lender. [emphasis added]

[19] The following similar term is in section 14 of the Schedule A “Due on Sale” Terms:

The Chargor covenants and agrees with the Chargee that in the event of the Chargor selling, conveying, transferring or entering into an agreement for sale or transfer of title of the Property (including but not limited to, the sale of shares or other interest resulting in a transfer of majority ownership interest) to a purchaser or transferee not approved, in writing, by the Chargee, which approval shall not unreasonably be withheld, all monies hereby secured with accrued interest thereon shall at the option of the Chargee forthwith become due and payable. [emphasis added]

[20] Section 20 of the Schedule A Terms provides that:

No sale or other dealing by the Chargor with the Property or any part thereof shall in any way change or affect the liability of the Chargor hereunder, or in any way alter the rights of the Chargee as against the Property, the Chargor or any other person or persons liable for payment of the Principal Amout, Interest and Costs.

[21] Section 20 of the Standard Charge Terms under the Mortgage permits CMLS to agree to a partial release:

Provided that the Chargee may at all times release any part or parts of the Charged Premises or any other security or any surety for payment of all or any part of the monies hereby secured or may release the Chargor or any other person from any covenant or other liability to pay the said monies or any part thereof, either with or without any consideration therefor, and without being accountable for the value thereof or for any monies except those actually received by the Chargee and without thereby releasing any other part of the Charged Premises, or any other securities or covenants herein contained, it being especially agreed that notwithstanding any such release the Charged Premises, securities and covenants remaining unreleased shall stand charged with the whole of the monies secured by the Charge.

The CMHC Insurance and Mortgage-Backed Securities

[22] The Commitment Letter contained a condition requiring that that the Loan be insured by a mortgage insurance policy (the “CMHC Policy”) issued to CMLS by Canada Mortgage and Housing Corporation (“CMHC”) and that CMHC issue a certificate of insurance, which it did on June 21, 2018 (the “Certificate of Insurance”). In compliance with the Commitment Letter, NJS obtained this CMHC insurance policy in favour of CMLS for a fee of approximately $265,000.00. The terms of the Loan required that coverage under the CMHC Policy be maintained.

[23] By virtue of the CMHC insurance, the Loan was eligible for, and was included in, the Mortgage-Backed Securities (“NHA MBS”) Program, under the National Housing Act, R.S.C. 1985, c. N-11. As part of this program, CMLS acts as an approved lender to originate loans on behalf of issuers who are eligible for the program and supports the formation of a pool of eligible loans (a “Pool”). The issuer sells mortgage-backed securities (“MBS”) secured against the Pool and the CMHC-insured mortgages that back that Pool.

[24] The Loan is a ten-year, closed mortgage which, by its terms, does not grant NJS any right of prepayment (in whole or in part) prior to the end of its 10-year term, not even with a pre-payment penalty. The Mortgage was classified into a “non-prepayable” pool within the NHA MBS program, referred to as the “966” Pool. This Pool was made up exclusively of closed mortgages, none of which could be prepaid or terminated early at the option of the borrower/mortgagor. Eligible loans (including the Loan) benefit from a lower interest rate than would otherwise be available.

[25] Under the terms of the CMHC Policy, in the event of a default in a mortgage in a Pool, CMHC will indemnify the approved lender (and, by extension, the holders of the MBS) for any loss and expenses that they may incur, thus mitigating the default risk that investors in the MBS may be exposed to. CMHC guarantees that all investors in the 966 Pool will receive principal and interest payments throughout the entire terms of the closed mortgages within that Pool.

[26] The CMHC Policy is issued in favour of CMLS and holders of the MBS which are backed by the Mortgage (and the other mortgages in the same Pool).

[27] The Certificate of Insurance incorporates by reference the terms of the Mortgage Loan Insurance Policy – Terms and Conditions dated September 2016 (the “CMHC Policy”, defined above). NJS specifically acknowledged that it had received a copy of the Certificate of Insurance and agreed that the terms and provisions contained therein would be read in conjunction with the Schedule A Terms.

[28] The CMHC Policy limits how CMLS may deal with the Loan and Mortgage. Specifically, under s. 5.2(2) CMLS agreed not to take any action that might “…impair any right of CMHC to recover against the Borrower under the Loan Agreement or the Security” [2] and also agreed that “[CMLS] shall not release any Security” that it has taken to a loan insured by CMHC.

[29] Other terms (such as ss. 4.5(1), 5.2(1)(c), and 6.1(1)) further oblige CMLS to ensure that the Security provided by the borrower remains valid and enforceable.

The Sale by NJS of 189 Vaughan Road and Dealings Regarding CMLS Consents

[30] NJS listed 189 Vaughan for sale and then entered into the APS for the sale of that property for $5,350,000.00 on or about March 10, 2020, less than two years into the term of the Loan. That sale required NJS to deliver clear title and was scheduled to close on June 26, 2020.

[31] At no point prior to entering the APS did NJS seek CMLS’s written consent to the sale of 189 Vaughan Road. During cross-examination, Mr. Nemetz, a principal at NJS, admitted that he had previously reviewed the Mortgage and he nonetheless decided to proceed to list and sell 189 Vaughan without seeking CMLS’s consent.

[32] In the context of exploring its refinancing options, and in particular, the possibility of prepaying the Mortgages and re-financing the two remaining properties with another CMHC approved lender, First National Financial Corporation, NJS had an appraisal done in late 2019 of the two remaining properties that indicated their value to be $19,000,000.00 at that time. This would have been a whole new loan from a different lender to be secured by the two remaining properties. In that context, CMHC provided written confirmation that it would insure a greater loan amount than is currently outstanding, secured by the two remaining properties. NJS did not ask CMHC about the existing Mortgage and Loan Documents and corresponding CMHC Policy.

[33] NJS suggests that Mr. Nemetz might have understood that CMLS had been made aware that a sale was one of the refinancing options that NJS was considering in the early part of 2020. This is based on hearsay evidence from Mr. Nemetz about communications he was advised about with one of CMLS’s representatives, Mr. McLean, that require some interpretation. Mr. McLean acknowledged on cross-examination that he had a general understanding that the borrower was looking to sell the Vaughan Road property and to deal with the CMLS loan at the lowest possible cost. However, NJS did not ever request consent from CMLS to a sale before entering into the APS in March 2020. NJS says it was under the belief at the time that it entered into the APS (the source of which belief is not attributed to CMLS) that it would be able to negotiate a payout of the Mortgage upon payment of the outstanding balance, accrued interest, and some to-be-agreed-upon penalty.

[34] Without admitting that it had any obligation to do so, after being approached by NJS about the APS Sale transaction in May 2020, CMLS did make efforts through the issuer of the MBS to determine whether CMHC would consent to the termination or amendment of the Loan and Mortgage to permit a partial or full prepayment of the Loan. CMHC advised that it would only consent to a full prepayment of the Loan (i.e., a consensual termination of the Loan/Mortgage) and that its agreement to such would be subject to an indemnity penalty in accordance with the NHA MBS Program. This would have required NJS to pay now all aggregate interest that would fall due to the end of the term in 2028 (not just accrued interest), together with the full principal amount of the Loan. CMLS informed NJS of CMHC’s position. Ultimately, the parties could not reach a consensual agreement to vary the terms of, or consensually extinguish, the Loan/Mortgage.

[35] There is no dispute that the Loan was secured by all three parcels comprising the Property and that there was no prepayment right before the Loan maturity in 2028, nor any express contractual right to a partial discharge. Mr. McLean acknowledged on cross-examination that he may have inferred before March 2020 that NJS might want a partial discharge if there was to be a sale. However, NJS did not ask CMLS for a partial discharge until after the APS was signed, by which point NJS had already bound itself to deliver clear title of 189 Vaughan Road to the purchaser. CMLS acknowledges that CMHC was not thereafter specifically asked about the possibility of providing a partial discharge and amending its Certificate of Insurance for this Loan, by either CMLS or by the issuer of the MBS on behalf of CMLS.

[36] No agreement was reached to amend the Mortgage Loan Documents. CMLS has not consented to the APS Sale transaction or to a partial discharge of the Mortgages. CMLS is also concerned that providing its consent could not only put it offside of the CMHC Policy but also jeopardize its CMHC insurance for this Loan and its status as a CMHC approved lender/originator under the NHA MBS Program.

Analysis of Issues to be Decided

[37] The issues to be decided identified earlier in these reasons will be addressed in turn. Although, in the interests of expediency, my analysis accepts and adopts various aspects of the Respondent’s submissions, the decisions and findings are my own.

Is NJS in default of the Mortgage for having entered into the APS without CMLS’s consent?

[38] NJS did not seek or obtain consent from CMLS before entering into the APS. That is an event of default under s. 3 of the Commitment Letter and s. 12 of the Schedule A Terms.

[39] The occurrence of this event of default on or about March 10, 2020 gave CMLS the option, upon learning of the APS, to exercise its right to require NJS to immediately pay the entire amount of the principal balance plus accrued interest then outstanding under the Mortgage. If CMLS had exercised this right and demanded payment that would have triggered NJS’s right to redeem the Mortgage and effectively converted what was a closed Mortgage into an open one. CMLS elected not to exercise this right. The Mortgage thus remained closed and in place.

[40] Although this election (not to demand immediate payment) could be construed as a waiver of that particular event of default, CMLS did not waive any of its other rights under the Mortgage Loan Documents by waiving its rights arising from this default. Section 37 of the Schedule A Terms makes this clear.

Has CMLS unreasonably withheld consent to the Sale of 189 Vaughan Road?

[41] If asked to consent to a sale of the Property, CMLS is contractually obligated under the Mortgage Loan Documents not to unreasonably withhold its consent.

[42] The words of the Mortgage Loan Documents make it clear that, because an event of default can be triggered if an agreement to sell the Property is entered into without CMLS’s written consent, the consent must be sought and obtained before the agreement is entered into for NJS to avoid triggering a default. No consent was sought by NJS before it entered into the APS. The fact that CMLS’s representative might have understood from communications prior to March 2020 that NJS was looking into the possibility of selling the 189 Vaughan Road property does not amount to a request for CMLS’s consent for it to do so.

[43] Accordingly, the arguments raised by NJS about CMLS unreasonably withholding its consent to the APS transaction can only arise in the context of what CMLS is alleged to have done, or not done, after the APS was already signed.

[44] Although I have found the initial event of default (of NJS entering into the APS without CMLS’s consent) to have been effectively waived, the sale of the Vaughan Road property under the APS, if it was completed on June 26, 2020, would constitute a new default absent CMLS’s consent. While no formal request was made in writing for CMLS’s consent to this sale, the communications from and on behalf of NJS since the end of May 2020 can be reasonably construed as encompassing a request for CMLS’s consent to the sale of the Vaughan Road property pursuant to the APS. Thus, the question of whether that consent was unreasonably withheld is not moot.

[45] NJS contends that the obligation not to unreasonably withhold consent is imbued with a duty to consider the value of the remaining Security, undertake a business-minded analysis, and take reasonable steps to determine whether CMHC’s consent could be obtained. The Applicant relies upon 1455202 Ontario Inc. v. Welbow Holdings Ltd., at para. 9 and Bhasin v. Hrynew, 2014 SCC 71, at paras. 45, 65-66 for this.

[46] NJS argues that CMLS failed to perform any analysis at all about whether it would be financially reasonable and feasible to maintain the Mortgage secured against the two remaining properties (e.g. a partial discharge) and that CMLS did not even consider the financial consequences of consenting to the sale of 189 Vaughan Road under the APS and granting a partial discharge. NJS argues that CMLS’s lack of attempt to address the question implicitly posed (for a partial discharge to permit the sale to be completed) means it was not “acting reasonably”.

[47] NJS’s contentions about CMLS’s unreasonable withholding of its consent fail on a number of grounds.

[48] First, CMLS’s contractual obligation not to unreasonably withhold its consent does not directly apply to the circumstances of this case. That obligation is in respect to a request to consent to a sale of the Property (which includes all three parcels, not just 189 Vaughan Road). In such a circumstance, CMLS could agree to consent on the basis of either a negotiated discharge or an assumption of the Mortgage, failing which s. 20 of the Schedule A Terms would preserve all of CMLS’s rights against the Property and against NJS in the event of such sale. In this case, the request that NJS made was for consent to a sale of only part of the Property.

[49] Consequent to this partial sale, NJS is also seeking CMLS’s consent to a partial discharge of the Mortgage. NJS is accusing CMLS of not having reasonably considered this consenting to this partial discharge. There is no mention in the Mortgage Loan Documents of any right in favour of NJS to ask for a partial release or discharge of the Mortgage, nor of any obligation on CMLS not to unreasonably withhold its consent if asked for such. The documents go no farther than to give CMLS the right (in s. 20 of the Standard Charge Terms) to release all or part of the Security.

[50] Second, the general duty of honesty in contractual performance that comes out of the Supreme Court of Canada in the Bhasin case does not apply to the circumstances that NJS complains of. In Bhasin, the Supreme Court of Canada created a new general duty of honesty in contractual performance mandating (at para. 73) that:

…parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance.

[51] There is no suggestion in this case that CMLS lied or misled NJS about anything. Further this duty of good faith in contractual dealings at common law does not impose a duty on CMLS to put NJS’s commercial interests (in reducing the Security for the Mortgage so it can sell one of the properties that stands as Security) ahead of CMLS’s interests to maintain the maximum security for its Mortgage and keep itself onside of its contractual covenants with CMHC.

[52] Nor does this common law duty of good faith require CMLS to demonstrate actual financial prejudice, as NJS suggests, to justify its withholding of consent to a reduction in the Security currently provided for under the Mortgage Loan Documents. A financial analysis of what would remain of the underlying Security for the Mortgage is not required in order to reach the obvious conclusion that any reduction in the Security would be contrary to CMLS’s commercial interests. Nor would such analysis, if undertaken, be meaningfully informed by the Applicant’s reliance on outdated appraisals, one from 2018 and one from 2019 (both pre-dating the COVID-19 pandemic).

[53] Third, the reasons that CMLS had for not consenting to the APS or to a partial discharge of the Mortgage were reasonable. In addition to the obvious commercial disadvantage to the giving up of existing security for a significant loan, CMLS had other good commercial reasons for not consenting to the partial discharge that NJS seeks. The securitization of this Mortgage was completed on the basis that it was a closed mortgage, there was no right of pre-payment and that it would continue to accrue interest through to the end of its term. While events of default might change the landscape and lead to earlier payments, triggering CMHC’s insurance for the investors in the Pool, CMLS as a lender in this business was justifiably concerned about maintaining the structural integrity of the MBS and not consenting to a partial release of security to facilitate a sale.

[54] All of the mortgages in the 966 Pool are closed mortgages, which by their terms cannot be repaid prior to maturity. Prepayment of the Loan/Mortgage (or indeed any of the mortgages in the 966 Pool) prior to maturity would affect the promised stream of regular principal and interest payments to investors. Further, CMLS maintains that if it were to release any of the security, including by permitting a discharge of the Mortgage over 189 Vaughan, that would put it offside of its obligations to CMHC under the CHMHC Policy, which could jeopardize the CMHC insurance coverage.

[55] I do not consider the fact that NJS says it was not aware of the Pool and the MBS to be relevant. CMLS can have a legitimate commercial reason for withholding consent, even if that reason does not arise within the four corners of the Mortgage Loan Documents. In the Welbow case relied upon by NJS, the court acknowledged that extra-contractual considerations, such as the market, might be relevant considerations for a landlord to consider in withholding consent.

[56] The uncontested evidence of CMLS is that the MBS arrangements affecting the Mortgage in this case are common in the industry. NJS challenges CMLS’s concerns, suggesting that they are overstated because they are based on what the CMHC Policy and other contractual documents say, and not on advice from CMHC that it will take the position that there has been a breach if CMLS consents to the APS (and partial discharge).

[57] NJS argues that CMLS has no meaningful evidence of any risk to CMLS’s relationships with third parties. I disagree. These concerns were not just theoretical or speculative, they arose in the commercial context in which CMLS operates. The assessment of the restrictions contained in valid and subsisting contracts with third-parties that are common place in the industry is a legitimate consideration.

[58] Furthermore, CMLS did not limit its consideration to the contractual restrictions. CMLS did, in good faith, cause inquiries to be made of CMHC to get a sense of CMHC’s position concerning changes to this Mortgage. NJS had indicated that it was interested in re-financing. CMHC was asked if it would consent to the termination or amendment of the Loan and Mortgage to permit a partial or full prepayment of the Loan (refinancing). CMHC advised that it would only consent to a full prepayment of the Loan (i.e., a consensual termination of the Loan/Mortgage) and that its agreement to such would be subject to an indemnity penalty equal to the full amount of principal and interest to the end of the Term of the Loan in accordance with the NHA MBS Program. This would have required an agreement to amend the Mortgage Loan Documents. NJS and CMLS did not reach an agreement on these terms.

[59] NJS relies on the absence of any express provision in the Mortgage Documents granting a specific right to CMLS to require prepayment of principal with accrued and future interest to maturity. This misses the point. CMLS is not arguing that it has a right to this under the Mortgage Loan Documents. CMLS is saying that is the only basis on which it would agree to amend the agreement between the parties to allow for the discharge of the Mortgage, based on what CMHC said it would require.

[60] NJS makes much of the fact that CMLS did not ask CMHC to consent to a partial discharge and amendment to the Certificate of Insurance. This is where my analysis of this issue began, with the point that there is nothing in the Mortgage Loan Documents that entitles NJS to seek a partial discharge, nor any corollary obligation on the part of CMLS not to unreasonably withhold such consent.

[61] Further, I do not consider CMLS to have been unreasonable or to have not acted in good faith by not going back to CMHC to ask whether it would agree to reduce the Security for the Loan (a partial discharge of the Mortgage) and amend its Certificate of Insurance for this Loan for no consideration. The response from CMHC to the first question regarding its conditions for any prepayment informs the reasonableness of CMLS’s position that it was not obligated by any good faith obligation to go back to CMHC to ask it to agree to an impairment of the existing Security.

[62] NJS asks the court to draw an adverse inference because CMLS did not produce its loan files or communications with CMHC when asked for them during cross-examinations that were held last weekend in order to comply with the tight timetable under which this application was proceeding. However, there is no suggestion that CMLS’s witnesses are lying about what they asked, and were told, by CMHC. It is not suggested that the CMLS witnesses are lying when they say that they did not ask CMHC if it would consent to a partial discharge and amendment to its Certificate of Insurance.

[63] Further, the outcome of this application does not turn on an inference or finding that CMHC would have, if asked, refused to permit the sale and partial discharge of Security, but rather on whether CMLS was required to ask for it, and I have found that it was not required to do so. Conversely, if NJS had wanted to establish that CMHC would have, if asked, agreed to such, NJS could have asked to examine a CMHC representative under Rule 39.03. It did not do so, and I am not going to infer this from the mere fact that the files were not produced.

[64] I can conceive of many good reasons why the production of the entirety of a commercial lender’s loan files and its communications with CMHC might be refused. I do not agree that an adverse inference should be drawn just because they were, where it was open to NJS to seek the evidence from CMHC directly under oath about what it was asked and what it answered.

[65] I find that CMLS satisfied any duty to act reasonably and in good faith that it may have had in relation to the withholding of its consent to the APS and its refusal to agree to a partial discharge (or to a full discharge that did not meet the CMHC condition of the payment of the principal amount of the Loan and all of the interest to the end of the ten-year term).

Is there any contractual, statutory, common law or equitable basis on which NJS is entitled to the partial discharge of the Mortgage that it seeks?

NJS has no Contractual Entitlement to Partial Discharge of the Mortgage

[66] Nothing in the Mortgage Loan Documents gives NJS the right to, or CMLS the obligation to provide, a partial discharge of the Mortgage.

[67] In Graystone Properties Ltd. v. Smith the Court of Appeal for Ontario held (at para. 11) that “[w]hether a mortgagor in default is entitled to a partial discharge depends upon the construction of the terms of the mortgage.” Despite grounding its application in a request for a partial discharge of the Mortgage, NJS has not pointed to any clause in the Mortgage Loan Documents providing such an entitlement.

[68] The only provision of the Mortgage Loan Documents that NJS has identified that even addresses the possibility that there could be a partial discharge is Section 20 of the Standard Charge Terms that allows CMLS to grant a partial release of the Loan security and provides for the preservation of CMLS’s rights in the event it were to do so.

[69] NJS asserts that it is entitled to a partial discharge because in its submission, had CMLS consented to the sale, it is “rather obvious that CMLS would in that case grant a partial discharge”, suggesting that the right to a discharge logically flows from a consent to a sale. It would appear that NJS seeks to have the court read this into the Mortgage Loan Documents. I decline to do so.

[70] The terms of the Mortgage Loan Documents give CMLS the option (but not the obligation) upon an event of default to exercise the right to convert the Mortgage to an open mortgage and require that the principal and accrued interest to date be paid. That would bring an early end to the Mortgage and the Loan, at CMLS’s option. The Mortgage Loan Documents also provide for a range of other remedies in the event of default. These other remedies (for example, the appointment of a receiver) could be undertaken even if NJS sold 189 Vaughan Road. The Mortgage would still remain on title and the purchaser would take title subject to the Mortgage, unless CMLS agreed to a discharge or partial discharge.

[71] The Schedule A Terms specifically provide that NJS’s sale of or dealing with the Property will not affect its obligations to CMLS or CMLS’s rights as against NJS. This is a standard provision that ensures that, while a property may be sold or dealt with (with or without consent), an existing mortgage will remain in effect and the original mortgagor will remain liable for principal, interest, and costs, unless the parties agree to amend the Mortgage.

[72] Nor would a sale prior to maturity with the consent of CMLS necessarily mean that the Mortgage would have to be discharged. It would simply mean that NJS did not commit a default. A purchaser might complete the sale transaction despite the existing mortgage on title. A purchaser might assume the Mortgage. While purchasing a property without clear title may be unattractive to a potential purchaser in cases where the purchaser is not assuming the existing mortgage, nothing in the Mortgage Loan Documents prevents NJS from selling part or all of the Property with the Mortgage still on title, if it wished.

[73] In circumstances where a mortgagor wants to sell property that is encumbered and there is no contractual right to prepay the mortgage and receive a discharge, the mortgagor must reach an agreement with the mortgagee to amend the terms of the mortgage and pay whatever penalty is negotiated, failing which the mortgagee is entitled to insist upon payment of full compensation for the interest it would lose over the remainder of the mortgage term. Pedahbun Lodge v. Canada Mortgage and Housing Corporation, at para. 42, citing Saperstein v. Royal Trust Corporation of Canada (1988), 24 B.C.L.R. (2d) 114.

NJS has no Statutory Entitlement to Partial Discharge of the Mortgage

[74] NJS relies on Section 12(3) of the Mortgages Act, R.S.O. 1990, c. M.40 over the objection of the Respondent since it was not pleaded and only was raised for the first time in the Applicant’s factum. While that might be a ground upon which to reject NJS’s request for a partial discharge grounded in this statute, I have considered and accepted the Respondent’s substantive submission that s. 12(3) does not apply in this circumstances of this case, and I would decline in any event to exercise my discretion to apply it.

[75] The opening words of s. 12(3) of the Mortgages Act establish that it is available in circumstances in which a mortgagor is “entitled” to pay off the mortgage, with specific examples being given of a mortgagee who cannot be found or is dead. It does not apply to circumstances where (as here) the mortgagor was not entitled to pay out the mortgage.

[76] The Court of Appeal for Ontario in Sub-Prime Mortgage Corporation v. 1219706 Ontario Limited, 2019 ONCA 581, at paras. 13-19 made it clear that s. 12(3) applies to situations where there is a right to pay the mortgage but the amount owing under the mortgage is in dispute or the mortgagee cannot be located, and gives the court discretion to grant a discharge (and to impose terms) in those particular circumstances. Section 12(3) does not create a broad general discretion to grant a discharge of a mortgage in any circumstances whatsoever.

[77] The cases under this section of the Mortgages Act relied on by the Applicant were cases in which there was a right to a discharge (and even then, s. 12(3) relief was still not granted). See Botiuk v. Hurowitz (1975) and Fernicola (In Trust) v. Creview Development Inc.. They do not assist the Applicant or change the analysis. Section 12(3) of the Mortgages Act does not apply to the circumstances of this case where I have found that NJS has no right to a partial or full discharge of the Mortgage.

NJS has no Equitable or Common Law Right to Partial Discharge of the Mortgage

[78] Equitable relief can only be granted when specific equitable doctrines are invoked and the criteria for such relief are all met. NJS’s Notice of Application does not assert any equitable cause of action nor invoke any equitable doctrines, nor have any applicable equitable doctrines been identified.

[79] Equity is not a freestanding concept that can permit a court to vary the terms of an agreement simply because one of the parties to it contends that the other party would not be prejudiced by such an amendment (here, NJS alleges that because the value of the two remaining properties, according to its 2019 appraisal, are worth as much as the entire Property was appraised at the time the Loan was granted, there is no prejudice). Rather, Hanbury & Martin: Modern Equity (Jill E. Martin, 16th ed; London: Sweet & Maxwell Ltd, 2001) states at p. 3 that:

A litigant asserting some sort of equitable right or remedy must show that his claim has ‘an ancestry founded in history and in the practice and precedents of the court administering equity jurisdiction.’ It is not sufficient that because we may think that the ‘justice’ of the present case requires it, we should invent such a jurisdiction for the first time.

[80] Further, NJS is not coming with clean hands required in order to obtain an equitable remedy, given its decision to flout its known obligation under the Mortgage Loan Documents by selling 189 Vaughan Road on terms (clear title) it had no right to provide. See 2324702 Ontario v. 1305 Dundas, 2019 ONSC 1885, at paras. 17-21. In this case, NJS sought a ten-year closed mortgage of its own volition and now seeks to escape that Mortgage just two years into its term by triggering a default (the APS and/or the sale without CMLS’s consent) and then insisting that CMLS exercise its option to require the prepayment of this closed mortgage.

[81] NJS does not allege that any of the terms of the Mortgage are oppressive or unconscionable, and indeed they are not. Closed mortgages that postpone the right of redemption for 20 or even 40 years have been upheld rather than declared oppressive or unconscionable (Falconbridge on Mortgages, 5th Ed. (ProView) at para. 3.20).

[82] Further, there is no basis to order a discharge on the basis that the Mortgage imposes a restraint on alienation. The cases relied on by NJS are distinguishable. Neither Hongkong Bank of Canada v. Wheeler Holdings Ltd. nor Re Bahnsen and Hazelwood directly address the issue in this case, about whether a lender’s refusal to consent to a sale of part of the lands standing as security for a mortgage is an unlawful restraint on alienation. Further, the defendant’s counsel in the case of Briar Building Holdings Ltd. v. Bow West Holdings Ltd., 1981 CarswellAlta 44, 126 D.L.R. (3d) 566 (AB QB) relied upon by the Applicant advised the court at para. 16 of that case, which is that there is no Canadian case that has found a “due on sale” clause in a mortgage to constitute a restraint on alienation of land. The Applicant has not identified any such case either.

[83] Nor do these authorities provide a basis for the court to order the partial (or full) discharge of the Mortgage on terms that CMLS has not agreed to and that the Mortgage itself does not provide for.

Is NJS entitled to a full discharge of the Mortgage upon NJS’s payment of principal balance and accrued interest?

[84] In the alternative to its request for a partial discharge, NJS seeks a full discharge of the Mortgage and the right to prepay the principal balance plus accrued interest to date. This is in effect a request to prepay the Mortgage.

[85] NJS sought and received a lower interest rate in exchange for entering into a closed mortgage. NJS is an experienced real estate investor whose principal is well aware of the benefits and drawbacks of closed versus open mortgages. At the time NJS signed the Commitment Letter and negotiated and executed the Mortgage Loan Documents, it was represented by sophisticated real estate and lending counsel. At all times, NJS was aware—and fully accepted—that the Loan was for a locked-in term of 10 years and that it could not unilaterally elect to prepay the Loan by tendering the full outstanding balance and obtain a discharge, or otherwise deal with the Mortgage, until maturity in 2028.

[86] The closed aspect of this Mortgage is a fundamental term of the Mortgage Loan Documents that informs the court’s interpretation of them.

[87] The circumstances expressly contemplated by the Mortgage Documents that might lead to repayment before the end of the ten-year term are few and clearly spelled out. CMLS can require the immediate payment of the outstanding balance and accrued interest in the case of an event of default under s. 12 of the Schedule A Terms, the appointment of a receiver under s. 23, and a power of sale proceeding as provided for in s. 24 of the Mortgages Act.

[88] I agree with the submission of the Respondent that, if NJS’s position were to be accepted, the entire closed nature of this mortgage would be frustrated, and mortgagors could cause these mortgages to be opened for prepayment by selling the property without consent. NJS’s position effectively attempts to re-write the Mortgage Loan Documents.

[89] This court has held “[t]he general rule is that a mortgagor is not entitled to redeem before the due date unless the first mortgagee has taken steps to compel payment”. See Household Realty v. Avestel Credit Union Ltd., 1996 CarswellOnt 4318, at para. 17. This interpretation protects the rights of the mortgagee to uphold the terms of the bargain between the parties. As this Court stated in Bankruptcy of CAF+, 2013 ONSC 2749, at para. 20:

An interpretation that permits a mortgagor to cap its liability for the interest owing under a closed mortgage simply by going into default during the term of the mortgage is unattractive. This is for two reasons. Firstly it would allow the mortgagor to benefit from its own breach of contract. Secondly it would render s. 18 [of the Mortgages Act] meaningless.

[90] While, in that case, the Court was interpreting a section of the Mortgages Act, the same logic and policy considerations apply here. Were this Court to do as NJS asks in the alternative and order CMLS to provide a complete discharge of the Mortgage upon NJS paying the principal and accrued interest (which is far less than the full amount of interest that would have to be paid monthly for the remaining eight years of the mortgage), NJS would be permitted to effectively cap its liability under the Mortgage just two years into its ten-year term, contrary to the clear terms of the closed Mortgage. The fact that NJS says that its actions were due to a misunderstanding (as opposed to intentional as was the case in CAF+), does not change the concern about making an order that rewards a party for its breach.

[91] NJS effectively asks the Court to compel CMLS to exercise a remedy under the Mortgage Loan Documents, even though it is acknowledged that the remedy is available to CMLS at its sole option and CMLS has no obligation to exercise it. NJS is seeking to transform CMLS’s unilateral option into a mutual right and re-write the Mortgage Loan Documents that were negotiated by sophisticated parties with legal representation.

[92] In contrast, CMLS’s legal position on this application is supported by the Mortgage Loan Documents and by clear, well-known principles of mortgage law.

Final Disposition, Costs and Implementation

[93] The application is dismissed.

[94] At the conclusion of the hearing the parties were directed to exchange their costs outlines/bills of costs in advance of the anticipated release of my decision on June 25, 2020. I assume that this exchange occurred prior to the release of my endorsement dismissing the application on June 25, 2020.

[95] The Applicant’s position at the hearing was that the successful party should be awarded their partial indemnity costs.

[96] The Respondent seeks full indemnity costs based on the terms of the Mortgage Loan Documents.

a. Specifically, the “Legal and Other Costs” provision in the Commitment Letter that provides that:

All third-party costs and expenses incurred whether directly or indirectly by the Lender, whether directly or indirectly in connection with this Commitment Letter, including without limitation legal fees and disbursements…are payable by the Borrower(s).

b. And Section 8 of the Schedule A terms provides that “Costs shall be forthwith due and payable by the Chargor to the Chargee and shall bear Interest until fully paid.” “Costs” and “Interest” are defined at section 2 as follows:

(g) Costs shall include but not be limited to all of the fees, costs, charges, losses, damages and expenses incurred by the Chargee as a direct or indirect consequence of granting the loan secured by this Charge including, without limitation, all expenses incurred in the construction, preservation, maintenance, repair, insuring, and realization of the security contained herein, and all legal costs incurred by the Chargee as between a solicitor and his own client;

[97] The Court of Appeal for Ontario noted in Bossé v. Mastercraft Group Inc that: “as a general proposition, where there is a contractual right to costs the court will exercise its discretion so as to reflect that right” (though the court retains its discretion in so deciding). See also Orkin on the Law of Costs, 2nd ed at s. 219.1.1.

[98] This contractual provision for recovery of costs extends to all costs incurred as a “direct or indirect consequence of granting the loan secured by this Charge including, without limitation, all expenses incurred in the construction, … of the security”. This application fairly falls within the general proviso as well as the specific aspect dealing with the construction of the security (e.g. the interpretation of the Mortgage Loan Documents). However, this provision only provides for substantial indemnity costs (costs between solicitor and his own client), not full indemnity costs. The Respondent is contractually entitled to that scale of costs. That is a relevant and important consideration under Rule 57.01 and, in the exercise of my discretion, I am awarding CMLS its substantial indemnity costs of this Application.

[99] Counsel were optimistic at the conclusion of the hearing that they would be able to reach an agreement on the quantum of costs, under whichever scale was awarded. I encourage them to do so and to advise the court of such agreement by July 15, 2020 if reached.

[100] Failing agreement, the Respondent may serve and file a written submission on the quantum of costs of no more than three (3) pages double-spaced together with a costs outline/bill of costs and any supporting authority on or before July 22, 2020. The Applicant may serve and file a written responding submission on the quantum of the Respondent’s costs of no more than three (3) pages double-spaced with supporting authorities on or before July 29, 2020. The Respondent may serve and file a brief reply submission of no more than 1.5 pages double spaced on or before August 5, 2020. These submissions should be filed electronically through my assistant, Linda Bunoza (linda.bunoza@ontario.ca). In the event that I do not receive any written cost submissions by July 22, 2020, I will deem the issue of costs to have been settled unless these timelines have been altered before then.

[101] Notwithstanding Rule 59.05, this judgment is effective from and after the date indicated below and it is enforceable without any need for the entry and filing of a formal judgment. In accordance with Rule 1.04, no formal judgment is required unless an appeal or a motion for leave to appeal is brought to an appellate court. Any party may nonetheless submit a formal judgment for original signing, entry and filing when the Court returns to regular operations.

Kimmel J. Released: June 29, 2020

Footnotes

[1] Although there are first and second mortgages in place, both parties have asked the court to focus on the First Mortgage for purposes of this Application. I understand that the same outcome will apply to the Second Mortgage. Any reference in these reasons to the “Mortgage” is to the First Mortgage. The terms “Mortgage” and “Mortgages” may be used interchangeably without any intention to differentiate between the two.

[2] “Security” is defined as “the security given to [CMLS] as security for repayment of the Housing Loan and includes a mortgage or hypothec over the Property and any guarantee or suretyship”.