DATE: 20050429

DOCKET: C35759

COURT OF APPEAL FOR ONTARIO

WEILER, ARMSTRONG AND BLAIR JJ.A.

B E T W E E N :

ROYAL TRUST CORPORATION OF CANADA

Milton A. Davis, for the respondent

Plaintiff (Respondent)

• and -

880185 ONTARIO LIMITED, MICHAEL JOHN BEATTIE and PETER WAYNE BOSHART

P. M. Ledroit, for the appellants

Defendants (Appellants)

Heard: November 15, 2004

On appeal from the judgment Justice John A. Desotti of the Superior Court of Justice dated January 8, 2001.

R.A. BLAIR J.A.:

Overview

[1] In 1991, the appellants secured mortgage financing from the respondent on a 12-unit residential apartment building they owned and operated in the Town of Strathroy, Ontario. The mortgage was for $525,000 with interest at a rate of 10.125% per annum. It was in the name of the corporate appellant, which held title to the property, and was guaranteed by the individual appellants.

[2] In 1992, the mortgage went into default for non-payment of taxes. As a result, the respondent mortgagee took steps to realize on its security. It attorned the rents, took possession of and managed the property, and eventually sold the property under power of sale for a price of $445,000. It sued for the deficiency under the mortgage.

[3] The appellants defended on the basis that the respondent had not followed the proper procedures for realizing on its security, and counterclaimed for damages. Justice Desotti dismissed the respondent’s deficiency claim, and allowed the counterclaim to the extent of awarding the appellants a reduced amount of $19,673.26, but without any damages for lost profits and pre-judgment interest. The appellants seek to vary the judgment on the counterclaim to include damages for loss of business opportunity, together with pre-judgment interest and costs. The respondents cross-appeal seeking judgment for the deficiency under the mortgage.

[4] For the reasons that follow I would allow the appeal in part and the cross-appeal, and remit the matter for a re-trial on the issues as defined in para. 50 of these reasons.

Facts

[5] The apartment building was constructed in 1990 and early 1991 at a cost of $750,000. Boshart and Beattie, as the principals of the corporate appellant, arranged for the mortgage with Royal Trust in the fall of 1991. The mortgage loan documentation consisted of (a) a letter agreement dated November 8, 1991, outlining the mortgage terms (the “Offer to Mortgage”); (b) the standard charge terms of a mortgage, acknowledged by the appellants on November 26, 1991 (the “Standard Charge Terms”); and (c) the mortgage registered on title as of December 5, 1991. The loan was personally guaranteed by Messrs. Boshart and Beattie, and the corporate appellant granted a general assignment of rents and a security agreement to Royal Trust as security.

[6] The property was also encumbered by a second mortgage in the amount of $80,000.

[7] In the fall of 1992, a dispute arose between the appellants and the municipality over the payment of taxes. The appellants say they were assessed on the basis of twenty-three units rather than twelve units, and that they had the choice of paying the outstanding amounts either in 1992 or in 1993. It appears, however, that the assessment was not for twenty-three units, but rather for twelve units and twenty-three garbage units. The trial judge found that the taxes were in arrears at the relevant times and that the appellants “were aware of the outstanding taxes, and were aware that despite some minor correction to the number of units as related to garbage disposal, no further disagreement was outstanding with the municipality” (at para. 5). He also found that the appellants had failed to deliver financial statements to Royal Trust as requested. These findings are unassailable on the evidence. The mortgage was, thus, in default.

[8] In December 1992, the appellants sought to refinance the mortgage loan through Royal Trust. The application for a new mortgage loan was denied in late February or early March 1993.

[9] In view of the appellants’ arguments that Royal Trust unlawfully entered into possession and failed to follow the proper procedures in enforcing its power of sale remedy, a further explanation of the chronology of events may be helpful.

[10] On February 23, 1993, Royal Trust retained a company (“Gerlinco”) to manage the property and instructed it to attorn the rents. Royal Trust also instructed its legal counsel to prepare notices of attornment for that purpose. On March 2, Royal Trust sent a letter to the appellants demanding that the taxes be paid by March 17, 1993. On March 10, it paid the taxes for the 1992 taxation year directly to the municipality.

[11] On March 12, 1993, counsel for Royal Trust sent a letter to the appellants advising that (a) it had paid the outstanding property taxes; (b) if payment of the sum paid, plus legal fees, was not received within ten days, proceedings would be commenced against them immediately; and (c) Royal Trust would be attorning the rents immediately. On the same date, counsel wrote to Gerlinco instructing them to serve notices of attornment on the tenants, but this was not done by Gerlinco immediately.

[12] On March 22, 1993, Gerlinco took possession of the apartment building on behalf of Royal Trust. It did so by serving notices of attornment on all tenants, changing the locks on the laundry machine moneyboxes, taking over management of the building, instructing the superintendent to report to it and undertaking building maintenance.

[13] Two months later, the respondent commenced power of sale proceedings by notice of sale dated May 25, 1993. It obtained two pre-sale appraisals that valued the property at $495,000 and listed the property for that amount in September. The appellants had listed the property for sale at $775,000 in late June. There is a dispute between the parties as to the proper valuation of the premises. I need not deal with that dispute in detail because I am satisfied, for reasons I will explain below, that if the appeal or the cross-appeal is allowed, the matter must be remitted for a new trial on the issue of the value of the property.

[14] In any event, Royal Trust received four offers ranging from $310,000 to $380,000 and was ultimately able to sell the apartment on March 1, 1994, for $445,000.

[15] In the meantime, Royal Trust changed property managers from Gerlinco to the Carlton Group, apparently because Gerlinco did not have the leasing and tenant expertise required to manage the building.

[16] The appellants say that the building was fully rented while they were operating it, and that the premises began to deteriorate once Royal Trust took over possession and management. They submit that rental revenues were lost, and the trial judge found that Royal Trust’s property managers were not sufficiently aggressive in seeking out new tenants.

[17] Royal Trust denies these allegations. It called two former tenants, who testified that the state of the building as residential premises had deteriorated and that the building had fallen into disrepair prior to Royal Trust taking possession. This testimony was confirmed by a third witness. The trial judge did not disbelieve or make any findings of credibility with respect to this evidence.

Issues

[18] The issues on the appeal and the cross-appeal are whether the trial judge erred in:

a) holding that Royal Trust was entitled to attorn rents and enter into possession, and whether it followed proper procedures in enforcing its power of sale remedy;

b) valuing the premises at $625,000 at the time of sale, based upon an internal Royal Trust memorandum;

c) failing to award the appellants damages for lost profits, and for failing to award them pre-judgment interest; and

d) in dismissing Royal Trust’s deficiency claim.

The Positions of the Parties

[19] The appellants assert that Royal Trust unlawfully attorned the rents and took possession of the premises when it was not entitled to do so, and that the power of sale proceedings were improperly instituted. They do not make this submission in order to set aside the power of sale proceedings or the sale, however. They appear, on the appeal, to be putting it forward for three reasons, namely, (1) to defeat Royal Trust’s deficiency claim; (2) to found a claim for damages based upon trespass and conversion for wrongful possession; and (3) to bolster their claim for damages based on mismanagement and devaluation of the property. I do not think the claim for trespass or conversion can be raised at this stage, however, as it was not pleaded, and the case does not appear to have been put before the trial judge on that basis. Accordingly, I propose to treat this submission first as bearing on the issue of Royal Trust’s deficiency claim and, secondly, as part of the appellants’ counterclaim based in substance on a claim for damages for breach of Royal Trust’s obligation as mortgagee in possession.

[20] Both parties allege that the trial judge erred in basing his valuation of the premises on a suggested valuation of $625,000 contained in an internal Royal Trust memorandum prepared by its lending manager, a Mr. Ackland. The appellants argue that the value should have been found to be higher ($716,000), based on the value of a mortgage later obtained by a purchaser subsequent to the purchaser from Royal Trust. Royal Trust submits the value should have been found to be lower ($445,000), based upon the sale price actually obtained in the market and corresponding more or less with two appraisals Royal Trust had obtained prior to the sale.

[21] With respect to damages, the appellants contend that the trial judge erred in failing to award them damages for loss of rental revenues, lost profits and other business losses. They also dispute his failure to award them pre-judgment interest.

[22] On its cross-appeal, Royal Trust submits that the trial judge erred in dismissing its deficiency claim and in finding that the decline in the state of repair and value of the building occurred after Royal Trust took possession.

Analysis

Possession, Attornment and Power of Sale

[23] The appellants submit:

a) that the failure to pay taxes does not constitute a “default of payment” under the mortgage;

b) that Royal Trust did not adhere to the notice requirements called for by the Standard Charge Terms for the exercise of power of sale proceedings;

c) that Royal Trust was not entitled to attorn the rents when it did; and

d) that there were two additional and substantial irregularities in the power of sale proceedings, namely, (i) the failure to give notice to the appellants at their proper address and (ii) the fact that the notice of sale included an incorrect statement of interest owing.

[24] The appellants therefore submit that Royal Trust unlawfully attorned the rents and took possession of the premises, and that the sale proceedings were invalid. They claim damages for trespass and conversion. In my opinion, however, these arguments cannot succeed. Although the trial judge’s reasons are unhelpful in explaining how he arrived at his conclusion, I am satisfied he was correct in finding that Royal Trust was legally entitled to attorn the rents, to take possession of the premises, and to commence and carry through the power of sale proceedings.

Default in Payment, Attornment and Taking of Possession

[25] On behalf of the appellants, Mr. Ledroit submits that the mortgagee’s right to take possession and to attorn rents is governed by the same principle that governs the exercise of a non-judicial power of sale which is only permitted where three requirements exist, namely, (a) a default in payment; (b) that has continued for at least fifteen days; and (c) thirty-five days notice has been provided to the mortgagor after the default of payment has existed for fifteen days. In this regard, he relies upon clause 8(a) of the Standard Charge Terms that form part of the mortgage. The material portion of clause 8(a) provides as follows:

The Chargee on default of payment for at least fifteen days may on at least thirty-five days notice enter on and lease the Lands or on default of payment for at least fifteen days may on at least thirty-five days notice sell the Lands provided that notice shall have been given to such persons and in such manner and form as is prescribed by Part III of the Mortgages Act . . .

[26] These terms resemble, but do not track, the requirements of s. 32 of the Mortgages Act, R.S.O. 1990, c. M.40, which is found in Part III of that Act (entitled “Notice of Exercising Power of Sale”), and which itself states:

32. Where a mortgage by its terms confers a power of sale upon a certain default, notice of exercising the power of sale shall not be given until the default has continued for at least fifteen days, and the sale shall not be made for at least thirty-five days after the notice has been given.

[27] I note there can be no quarrel with the notice of power of sale, itself, in this case. The notice of sale was not given until May 25, 1993 (well beyond the fifteen day period of default), and the sale was not completed until March 1, 1994 (well beyond the thirty-five day period after notice was given). The appellants’ complaint is about the taking of possession and the attornment of rents.

[28] They submit, first, that a failure to pay taxes does not constitute “a default of payment” within the meaning of clause 8(a) and that, although Royal Trust paid the taxes, and they thereby were automatically added to the principal outstanding under the mortgage, Royal Trust did not give a proper written demand of the acceleration of principal and interest in order to start the fifteen day period of default running. They rely on the High Court decision of Boyer v. Fox (1980), 29 O.R. (2d) 330 (H.C.) for these assertions.

[29] To the extent that Boyer v. Fox stands for the proposition that a default in the mortgagor’s covenant to pay taxes does not constitute “a default in payment” as contemplated in clause 8(a) of these Standard Charge Terms – given the wording of this mortgage, which is similar to that of the mortgage in Boyer – I think it is wrongly decided. Clause 5 of the Standard Charge Terms requires that “the Chargor shall pay or cause to be paid to the Chargee the Principal and Interest”, and that the Chargor “shall also pay all Taxes upon the Lands or in respect thereof”. Clause 7 provides that “The Chargor covenants with the Chargee (a) that the Chargor will pay the Principal and Interest and observe and perform the covenants herein contained”. Clause 12(a) says that “The Chargor will pay all Taxes as and when they shall fall due . . .” [emphasis added in all]. Although the covenant to pay principal and interest is a covenant to pay the chargee, whereas the covenant to pay taxes is in the first instance a covenant to pay a third party (i.e. the municipality), the character of the covenant remains the same. In both cases, the mortgagor covenants or promises to pay, and non-payment constitutes “a default in payment” under the mortgage.

[30] I agree that if the mortgagee is seeking to accelerate the principal and interest for default in performance of the covenant to pay the taxes, the mortgagee must give the mortgagor notice of the alleged breach, and the notice will then start the computation of the fifteen days default under s. 32 of the Mortgages Act, as noted in Boyer at p. 333. However, Royal Trust gave that notice in this case by their letter of March 2, 1993. Accordingly, I would not give effect to the argument that there was no default in payment under the mortgage.

[31] Nor do I accept the argument that Royal Trust was not able to go into possession on March 22, 1993 and attorn the rents, as it did.

[32] The appellants submit that notice of default was not given until Royal Trust’s letter of March 12, 1993, advising that the mortgagee had paid the taxes and demanding reimbursement within ten days, failing which proceedings would be taken. They therefore say that fifteen days default had not occurred, much less the additional thirty-five days, which they submit, is necessary before the mortgagee could attorn rents and take possession. The major problem I see with that argument, however, is that clause 8(a) of the Standard Charge Terms does not apply to situations where the mortgagee merely attorns the rents or exercises its right to possession under the terms of the mortgage, in my view. It is confined by its own language to circumstances where the mortgagee proposes to enter on the premises for purposes of leasing or where the mortgagee proposes to sell the property. Therefore, it has no bearing on the fact that Royal Trust took possession of the property on March 22, 1993, and attorned the rents commencing that date.

[33] When a mortgage contains the usual provision to the effect that the mortgagee is entitled to quiet possession upon default in payment – as this one does – a mortgagee is entitled to take possession of the mortgaged premises immediately upon default, provided that it does so peaceably, and it may exercise that right when it chooses. See Manufacturers Life Insurance Co. v. Granada Investments Ltd., [2001] O.J. No. 3932 (C.A.) at 11-12, leave to appeal dismissed [2001] S.C.C. A. No. 637 (S.C.C.). In the absence of a contractual requirement to do so, no notice is required. See Lee v. Guettler (1975), 10 O.R. (2d) 257 at 261 (C.A.); Lusk v. Perrin (1920), 19 O.W.N. 58 at 60; Royal Trust Corp. of Canada v. Gupta, [1997] O.J. No. 347; Marriott and Dunn, Practice in Mortgage Remedies in Ontario 5th ed. v.2 (Oakville: Thomson Carswell, 2005) at 46.2 and 46.4; Joseph E. Roach, The Canadian Law of Mortgages of Land (Toronto: Butterworths, 1993) at 209.

[34] In any event, Royal Trust attorned the rents and took possession on the same date, March 22, 1993. The double-barrelled timing of clause 8(a) did not apply, but, as I have indicated above, the appellants had been in default for more than fifteen days at that point in time and had received notice of that default twenty days earlier. Although Royal Trust was not in a position to sell the property on that date, it was entitled to take possession and attorn the rents on that basis..

Service of Notice

[35] The appellants complain that the demand letters and the notice of sale were not sent to the proper address. They were sent to the address for service of the appellants, as stated in the mortgage, namely, 157 Chestnut Street, St. Thomas, Ontario (or, in the case of the March 12 letter, to the address of the mortgaged premises). However, the appellants say they notified Royal Trust of a new contact address namely, 54 Hemlock Street, St. Thomas, and that Royal Trust had in fact communicated with them at this new address. They submit that service of a notice of sale at the address specified in the mortgage as the address for service does not constitute service at the “usual or last known place of address of the persons” where there is evidence to the contrary: see Morgan v. Canada Trust Co. (1983), 42 O.R. (2d) 246 (H.C.). This issue was not pleaded.

[36] Moreover, the trial judge was satisfied that the appellants had actual notice. He found “that the defendants were very much aware of these proceedings and were aware that they could bring the mortgage back into good standing through the payment of the outstanding taxes but did not dip into any resources to make up this shortfall” (at para. 5). There was evidence to support that finding, not the least of which was that the address in question was the address of Mr. Beattie’s mother, who passed the mail along, and that a cheque mailed to the appellants at the same address had been deposited within three days of its arrival.

[37] As the issue was not pleaded and the appellants had ample actual notice of the sale, I would not give effect to this ground of appeal.

Inaccurate Statement of Interest

[38] The appellants argue that the Notice of Sale stated an inaccurate interest calculation of $13,060.52, whereas the actual amount due was $6,645.08. Relying on authorities to the effect that the statutory conditions under which a power of sale contained in a mortgage may be exercised must be strictly complied with, they say that a Notice of Sale that claims twice the amount of interest that is owing must be deemed to be invalid.

[39] I would not give effect to this ground of appeal either. Again, the issue was not pleaded. Moreover, the error is not as significant as the appellants contend. Their argument is founded on an alleged admission by Royal Trust’s representative that the amount of interest owing was $6,645.08. But the representative made no such admission. He admitted that accrued interest set out in the mortgage statement sent to the appellants on April 22, 1993, was that amount. That interest was calculated as of May 1, 1993. The notice of sale is dated May 25, 1993 and the amount stated to be payable for interest “to 25 May, 1993” is the larger amount of $13,060.52. The per diem interest rate was stated to be $142.31, which accounts for $3,557.75, leaving at most an incongruity of $2,867.69 on a total amount of $551,838.21 owing. This is a relatively minor discrepancy overall, and minor irregularities in a notice of sale should not render it inoperative: Toronto-Dominion Bank v. Pallett Developments Ltd. (1984), 47 O.R. (2d) 251 (Div. Ct.). A minor discrepancy of this nature can readily be remedied in the ultimate accounting of proceeds: Walter M. Traub, Falconbridge on Mortgages, 5th ed. (Aurora: Canada Law Book Inc., 2004).

[40] For all of these reasons, I am satisfied that Royal Trust was entitled to take possession of the premises on March 22, 1993, and, further, that it did not improperly exercise its power of sale remedies under the mortgage. Accordingly, even if the appellants were permitted to advance their claim based upon trespass and conversion at this stage, it follows that damages cannot be awarded for trespass or conversion, or for wrongful possession. It also follows that the counterclaim for damages for mismanagement and devaluation – more accurately characterized, I think, as a claim for damages for breach of obligation as mortgagee in possession – cannot be bolstered by a finding of wrongful possession or the wrongful exclusion of the appellants from the premises.

Other Issues

Deficiency/Mismanagement and Devaluation

[41] Whether Royal Trust is entitled to recover on its deficiency claim, and if so, to what extent, and whether the appellants are entitled to damages for mismanagement and devaluation (as they have phrased it), and if so, to what extent, all turn on whether Royal Trust breached its obligations as mortgagee in possession. That obligation is to act prudently and diligently in the management of the property, and to obtain a reasonable and fair purchase price. The obligation exists because until the property is sold or foreclosed, the mortgagee has the right to redeem. See Manufacturers Life Insurance Co. v. Granada Investments Limited, supra at 12; Canada Trustco Mortgage Co. v. Windsor Painting Contractors Ltd. (1991), 22 R.P.R. (2d) 222 (Ont. Gen. Div); Marriott and Dunn, Practice in Mortgage Remedies in Ontario, 5th ed., supra at 46-29; and Falconbridge on Mortgages, supra, at paras. 32:40 – 32:90.

[42] With these principles in mind, the following questions needed to be addressed by the trial judge: Did Royal Trust breach its obligation as a mortgagee in possession to act prudently and diligently in the management of the property and to obtain a reasonable and fair purchase price? To what extent, if at all, did Royal Trust’s conduct cause or contribute to the decrease in value of the premises, as opposed to simply a decrease in the income stream from the property? To what extent, if at all, did it contribute to the latter and therefore lead to an obligation to account?

[43] The trial judge did not specifically address these questions. He found that Royal Trust, through its agents, did not do a good job in managing the complex and was not aggressive enough in seeking out new tenants. He concluded that Royal Trust “[was] under a positive duty to ensure that the management of [the] building was properly conducted and every effort taken to maximize the ultimate sale price.” (at para. 8). He made certain findings in favour of the appellants. But he did all of this in a very conclusory and perfunctory fashion. For instance, the trial judge found that Royal Trust, or its agents with Royal Trust’s knowledge,

a) had “abdicated their legal responsibility to the owner of the property”;

b) “were more concerned in getting the building ready for an ultimate sale to a third party than managing the rents or aggressively seeking new or any tenants [for] the complex”;

c) had caused the shortfall between the purchase price obtained and the true value of the premises by “precipitous action”; and

d) had fallen short of complying with its “positive duty to ensure that the management of [the] building was properly conducted and every effort taken to maximize the ultimate sale price”.

[44] Yet the trial judge did not review any of the evidence underlying these findings. In particular, he does not appear to have directed his mind at all to the evidence of three witnesses called by Royal Trust whose testimony supported a finding that the problems with tenants and the general deterioration of the building began well before Royal Trust went into possession on March 22, 1993. He neither accepted, nor rejected, nor made any findings of credibility with respect to this evidence, which was not contradicted by any direct evidence to the contrary. In addition, the trial judge failed to consider the evidence that Royal Trust made certain repairs and corrected damage after it took possession. No finding could properly be made that Royal Trust had breached its obligations as mortgagee in possession by permitting or causing the value of the property to depreciate until this evidence had been properly assessed and weighed. Respectfully, the reasons of the trial judge do no demonstrate that he did so.

[45] The authorities indicate that even though there is a heavy onus on the mortgagee to demonstrate prudence and due diligence, it is not every default in dealing with rental receipts that gives rise to an obligation to account, but a wilful default; it is not every deterioration that occurs while the mortgagee is in possession that leads to liability, but only deterioration caused by gross or wilful negligence: see Falconbridge on Mortgages, supra, at 32-10 and 32-12. The trial judge did not consider these principles and did not analyse and review the evidence pertaining to them or the other principles outlined above.

[46] The matter must therefore be remitted for a re-trial on the issue of Royal Trust’s alleged mismanagement and the relationship, if any, between that mismanagement, if any, and the depreciation in the value of the premises. Only when that question has been properly addressed and answered can the issues regarding Royal Trust’s deficiency claim and the appellant’s claim for damages for breach of Royal Trust’s obligations as mortgagee in possession be determined.

[47] A resolution of those issues requires a reconsideration of the trial judge’s determination of the value of the premises at the time of the sale as well. His valuation based upon the figure of $625,000 found in Mr. Ackland’s internal memorandum cannot stand. Both parties take this position. I agree that this figure did not constitute a valuation at all, but rather a speculative musing on the part of Mr. Ackland – who, because of his death, was not available to be examined at trial. The memo does not identify any foundation for his opinion and there is some suggestion in the evidence that it may have been formed on the basis of unverified information obtained from the appellants. There is no evidence of Mr. Ackland’s qualifications to form such an opinion and he gives no indication of what examination of the property he had conducted, if any, before arriving at it. There was no reasonable basis upon which the trial judge could have relied on that statement for the true value of the premises.

[48] The trial judge did have expert evidence tendered on behalf of both the appellants and Royal Trust. He gave no consideration to that evidence. Nor does he appear to have considered the fact that Royal Trust listed the premises for sale only after obtaining two appraisals on which it relied – for $495,000 – and that it received four offers at prices below $380,000 before finding a purchaser at $445,000.

[49] There is no suggestion that $445,000 was not the market value of the premises at the time of the sale, viewed in a power of sale context. The question that has to be determined, however, is whether the value of the premises should have been higher were it not for the alleged breaches by Royal Trust of its obligations as mortgagee in possession. This, in turn, requires a resolution of the prior issue regarding breach of those obligations. Neither of these matters can be decided by this court.

Disposition

[50] I would accordingly allow both the appeal and the cross-appeal to the extent of ordering a new trial on the issues of:

a) whether Royal Trust breached its obligation as a mortgagee in possession to act prudently and diligently in the management of the property and to take reasonable precautions to obtain the true market value of the premises at the time of the sale;

b) the extent to which, if at all, Royal Trust’s conduct resulted in a decrease in the true market value of the premises from what that value would otherwise have been at the time of the sale, and what that true market value would otherwise have been;

c) the extent to which, if at all, Royal Trust’s conduct resulted in a reduced income stream from the premises, and Royal Trust’s obligation to account in that event;

d) any accounting that may flow from the resolution of the foregoing; and

e) the quantum of Royal Trust’s deficiency claim, in light of the above.

[51] Since both the appeal and the cross-appeal are allowed and there are other issues still to be resolved, I would make no order as to costs.

“R.A. Blair J.A.”

“I agree K.M. Weiler J.A.”

“I agree R.P. Armstrong J.A.”

RELEASED: April 29, 2005