P.A.R.C.E.L. Inc. et al. v. Acquaviva et al.

[Indexed as: P.A.R.C.E.L. Inc. v. Acquaviva]

Ontario Reports

Court of Appeal for Ontario,

Cronk, Gillese and Rouleau JJ.A.

May 12, 2015

126 O.R. (3d) 108 | 2015 ONCA 331

Case Summary

Debtor and creditor — Interest — Single loan secured by promissory note that was itself secured by mortgage — Both promissory note and mortgage for same principal amount — Promissory note (but not mortgage) providing for escalation of applicable interest rate from 0.75 per cent to 10 per cent per annum upon default — Section 8 of Interest Act applying to note — Interest escalation provision offending s. 8 — Mortgage providing for late payment charge of $10 per day and missed payment fee of $300 — Late payment charges of $11,110 and default fees of $7,200 constituting fines or penalties which were prohibited under s. 8 of Interest Act in absence of any evidence that charges reflected real costs legitimately incurred for recovery of debt — Interest Act, R.S.C. 1985, c. I-15, s. 8.

The plaintiffs loaned $458,488.07 to the defendants. The repayment of the loan was secured by a promise to pay set out in a promissory note. That note was secured, in turn, by a mortgage on real property in the same amount. Both the promissory note and the mortgage provided for an interest rate of 0.75 per cent per annum. The promissory note (but not the mortgage) provided for the escalation of the interest rate to 10 per cent per annum after default. The mortgage [page109] provided for a late payment charge of $10 per day and a missed payment fee of $300 for each missed or late instalment. When the defendants stopped making payments under the note and the mortgage, the plaintiffs sued. They obtained summary judgment for the outstanding principal, plus interest at the rate of 10 per cent per annum, plus rate payment charges of $7,200 and default fees of $11,110. The defendants appealed.

Held, the appeal should be allowed in part.

Section 8 of the Interest Act applied to the promissory note. The application of s. 8 is not restricted to a "fine, penalty or rate of interest" imposed directly under the terms of a mortgage on real property. Section 8 can also apply in cases in which the prohibited charges are provided for in a debt instrument that evidences and secures a loan and that is secured by a mortgage on real property. Where, as here, the debt instrument and the mortgage that secures it are for the same principal amount and provide for the same payment terms, and where payment of one is payment of the other, the mortgage is not a true collateral or accessory security; the two instruments secure repayment of the original or principal liability -- here, the single loan -- and s. 8 applies to both. The escalated interest provision in the note ran afoul of s. 8 and could not be given effect.

The late payment charges and default fees provided for in the mortgage constituted fines or penalties prohibited under s. 8 of the Interest Act in the absence of any evidence that the charges in question reflected real costs legitimately incurred by the plaintiffs for the recovery of the debt.

NBY Enterprises Inc. v. Duffin, [2006] O.J. No. 982, [2006] O.T.C. 272, 2006 7519, 146 A.C.W.S. (3d) 718 (S.C.J.); Pizzey Estate v. Crestwood Lake Ltd. (2004), 2004 36108 (ON CA), 69 O.R. (3d) 306, [2004] O.J. No. 246, 236 D.L.R. (4th) 177, 181 O.A.C. 383, 41 B.L.R. (3d) 32, 43 C.P.C. (5th) 214, 128 A.C.W.S. (3d) 818 (C.A.) [Leave to appeal to S.C.C refused [2004] S.C.C.A. No. 459]; Reliant Capital Ltd. v. Silverdale Development Corp., [2006] B.C.J. No. 1028, 2006 BCCA 226, 270 D.L.R. (4th) 717, [2006] 7 W.W.R. 199, 226 B.C.A.C. 161, 52 B.C.L.R. (4th) 13, 149 A.C.W.S. (3d) 495 [Leave to appeal to S.C.C. refused [2006] S.C.C.A. No. 265], consd

Cases referred to

2088300 Ontario Ltd. v. 2184592 Ontario Ltd., [2011] O.J. No. 2178, 2011 ONSC 2986 (Master); Beauchamp v. Timberland Investments Ltd. (1983), 1983 1816 (ON CA), 44 O.R. (2d) 512, [1983] O.J. No. 3279, 4 D.L.R. (4th) 485, 1 O.A.C. 73, 30 R.P.R. 20, 23 A.C.W.S. (2d) 167 (C.A.); Bhanwadia v. Clarity Financial Corp., [2012] O.J. No. 5708, 2012 ONSC 6393 (S.C.J.); Chong v. Kaur, [2013] O.J. No. 4531, 2013 ONSC 6252 (S.C.J.); Hamilton v. Open Window Bakery Ltd., [2004] 1 S.C.R. 303, [2003] S.C.J. No. 72, 2004 SCC 9, 235 D.L.R. (4th) 193, 316 N.R. 265, J.E. 2004-470, 184 O.A.C. 209, 40 B.L.R. (3d) 1, [2004] CLLC Â210-025, 128 A.C.W.S. (3d) 1111; Headway Property Investment 78-1 Inc. v. Edgecombe Properties Ltd., [1998] O.J. No. 2676, 1998 3546 (C.A.); Mastercraft Properties Ltd. v. EL EF Investments Inc. (1993), 1993 8545 (ON CA), 14 O.R. (3d) 519, [1993] O.J. No. 1704, 103 D.L.R. (4th) 759, 64 O.A.C. 308, 32 R.P.R. (2d) 312, 41 A.C.W.S. (3d) 886 (C.A.); Nesci v. Ramrattan, [2009] O.J. No. 550, 2009 5153 (S.C.J.); Paragon Capital Corp. v. 395342 Alberta Ltd., [2004] A.J. No. 102, 2004 ABQB 25, 350 A.R. 370

Statutes referred to

Bills of Exchange Act, R.S.C. 1985, c. B-4, ss. 133(b), 186(1)

Courts of Justice Act, R.S.O. 1990, c. C.43 [as am.], s. 129, (5)

Interest Act, R.S.C. 1985, c. I-15, ss. 3, 8, 6-10

Mortgages Act, R.S.O. 1990, c. M.40, s. 17 [page110]

APPEAL from the judgment of P.A. Douglas J. of the Superior Court of Justice dated January 31, 2014.

Howard Crosner, for appellants.

Domenic Saverino, for respondents.

The judgment of the court was delivered by

[1] CRONK J.A.: — This is an appeal from summary judgment on a promissory note and mortgage. The main issue is whether certain of the amounts claimed by the secured creditor based on the terms of the promissory note and the mortgage offend s. 8 of the Interest Act, R.S.C. 1985, c. I-15.

Background

(1) The parties

[2] The appellant Bijan Pardis ("Pardis") is a doctor and land developer. He is also the sole officer and director of two real estate holding companies, the corporate appellants, P.A.R.C.E.L. Inc. ("Parcel") and P.A.C.I.F.I.C. Inc. ("Pacific"). From time to time, Pardis entered into mortgage-financing arrangements concerning his various real estate holdings, including those held through Parcel and Pacific.

[3] The respondent Sam Acquaviva is a licensed real estate and mortgage broker, as well as a licensed paralegal. He is the sole officer, director and broker of record of the corporate respondent, Premier Homes Realty Ltd. ("Premier"), a real estate brokerage.

(2) Relevant security documents

[4] On June 6, 2011, the appellants executed a promissory note (the "Note") and a mortgage (the "Mortgage") in favour of the respondents, both in the principal amount of $458,488.07. The documents were executed in relation to a single loan. The stated consideration for the loan is the discharge by the respondents of a mortgage registered as Instrument AT2558219 on an unspecified property.

[5] All three appellants signed the Note as the "Borrower". Pardis signed the Note in his personal capacity and as president of Parcel and Pacific. The respondents are described in the Note, collectively, as the "Lender".

[6] The Note states that it is secured by the Mortgage, which charges lands owned by Parcel and situated at [page111] 28 Langstaff Road East, in the City of Markham, Ontario (the "Property"). Clause 9 of the Note reads in material part:

This Note is secured by a charge/mortgage of the Borrower in favour of the Lender, dated as of June 6, 2011, constituting a charge registered on title to the lands municipally known as 28 Langstaff Road East, Markham, Ontario.

[7] The mortgage referenced in clause 9 was granted by Parcel, as "Chargor", in favour of the respondents, as "Chargees", in respect of the Property in consideration for the sum of $458,488.07. As mentioned, this is the same principal amount as the debt stated in the Note.

[8] Both the Note and the Mortgage stipulate the same repayment terms, at least while there is no default. The Note requires that the principal amount together with interest thereon "outstanding from time to time" be paid "in 80 equal monthly instalments of $6,000 on the 15th day of each and every month" until maturity of the Note on August 15, 2017. The interest rate, before default, is 0.75 per cent per annum. Similarly, the Mortgage provides for the same monthly payments of $6,000 on the 15th day of each month until the "Last Payment Date" (also August 15, 2017) at the same interest rate of 0.75 per cent per annum.

[9] However, certain provisions in the Note and the Mortgage differ. Clause 2 of the Note is one such provision and is the focus of this appeal. It provides for the escalation of the applicable interest rate from 0.75 per cent to 10 per cent per annum "after demand, default, and pre and post judgment" (the "interest escalation provision"). Clause 2 reads:

The Principal Amount outstanding at any time, and from time to time, when not in default, shall bear interest at 0.75% per annum. In the event of default mentioned herein by the Borrowers, [sic] then the interest rate applicable shall be calculated at the rate of 10% per annum after demand, default and pre and post judgment.

(Emphasis added)

[10] Unlike the Note, the Mortgage contains no interest escalation provision.

[11] The Mortgage also contains several terms pertaining to additional fees and charges that are not found in the Note, including the following:

N.S.F. FEE

PROVIDED the Mortgagee shall be entitled to an administrative fee of $300.00 cumulatively in the event any payment hereunder shall be returned unpaid by the Mortgagor's bank for any reason or payments [are] not received on payments due date(s)[.] . . . [page112]

LATE PAYMENT CHARGE

PROVIDED that the Mortgagee shall be entitled to a late charge of $10.00 per day in the event that the mortgage payments are received by the Mortgagee later than the regularly scheduled payment date.

[12] The Mortgage further states:

ADDITIONAL PROVISIONS

Our current schedule of administration and servicing fees includes the following charges: . . .

$300.00 Missed [P]ayment Fee: Payable for each missed or late instalment and for processing each NSF cheque or other returned payment.

[13] Pardis and Pacific guaranteed Parcel's obligations under the Mortgage.

[14] The Note and the Mortgage were apparently intended to secure the payment of moneys owed by the appellants to the respondents under a series of professional services or consulting agreements. The parties disagree as to the enforceability and terms of those agreements.

[15] It is undisputed that, for the period January 15, 2011 to December 15, 2011, the appellants made payments to the respondents in the amount of about $4,000 each month, totalling approximately $48,000. Each monthly payment of $4,000 was credited in full against both the Note and the Mortgage -- the respondents do not contest that payment of the Note constitutes payment of the Mortgage, and vice versa. The respondents appear to have accepted these payments without complaint, even though both the Note and the Mortgage call for monthly payments in the amount of $6,000.

[16] In early January 2012, well before the maturity date of either instrument, the appellants ceased all payments under the Note and the Mortgage. Litigation followed.

(3) Litigation history in brief

[17] On March 21, 2012, the respondents sued Parcel under the Mortgage for (i) the amount of $410,795.10; (ii) interest at the rate of 0.75 per cent per annum; (iii) three months' interest under s. 17 of the Mortgages Act, R.S.O. 1990, c. M.40 ("Mortgages Act interest"); and (iv) possession of the Property. They also sued Pacific and Pardis for the same amounts, pursuant to their guarantee. Notably, the respondents made no claim under the Note as against any of the appellants in their original pleading.

[18] The appellants defended the action. They disputed the amount of fees owed to the respondents for consulting services [page113] and the amount outstanding under the Mortgage. They also counterclaimed against the respondents for orders directing the deletion of the registration of the Mortgage from the land registry system and requiring the respondents to repay all "overpayments" made on account of principal, interest or costs under the Mortgage.

[19] On July 26, 2012, the respondents obtained default judgment on the Mortgage from Lauwers J. of the Superior Court of Justice (as he then was) as against all the appellants for the sum of $410,795.10, plus possession of the Property, leave to issue a writ of possession in respect of the Property, and pre- and post-judgment interest at the rate of 0.75 per cent per annum, as well as costs.

[20] On November 1, 2012, the parties agreed to a consent court order that (i) directed the appellants to pay the sum of $45,000 to the respondents on account of the debt at issue; and (ii) stayed enforcement of the writ of possession obtained by the respondents under the default judgment, subject to the respondents' receipt of the $45,000 payment, until January 2, 2013. The appellants complied with this court order and paid the agreed sum of $45,000 to the respondents.

[21] The appellants challenged the default judgment on the basis that service of the respondents' statement of claim was defective. In light of the parties' dispute about proper service, by order dated December 17, 2012, Lauwers J. set aside the default judgment and stayed the writ of possession obtained by the respondents.

[22] Shortly thereafter, on January 31, 2013, the respondents amended their pleading to include a claim against all the appellants for payment of the sum of $469,360.47 under the Note as well as the Mortgage.

[23] In their amended pleading, the respondents also claimed

(a) interest at the rate of 10 per cent per annum on the amount owing, in accordance with the interest escalation provision;

(b) the sum of $300, under the Note and the Mortgage, "to cover the Mortgagee's administration costs" for each late payment from the appellants;

(c) possession of the Property;

(d) three months' Mortgages Act interest and costs on a solicitor and client basis; and

(e) payment by Pardis and Parcel of all amounts owing under the Mortgage, pursuant to their guarantee. [page114]

[24] By court order dated March 19, 2013, the appellants were restrained from dealing with any of their real estate, except an unrelated property, prior to the determination of a pending motion for summary judgment brought by the respondents.

(4) Summary judgment

[25] The respondents' motion for summary judgment against the appellants pursuant to the Note and the Mortgage was ultimately heard in late January 2014. The respondents sought summary judgment for the amount of $541,512.98, consisting of the following:

(a) Outstanding principal, as at December 15, 2012: $455,794.59

(b) Interest from December 16, 2012 to January 31, 2014: $ 57,442.51

(c) Charges for late payments by the appellants during the period January 15, 2012 to January 15, 2014 (the "late payment charges"): $ 7,200.00

(d) Three months' Mortgages Act interest: $ 9,965.88

(e) $10.00 per day default fees (the "default fees"): $ 11,110.00

Total: $541,512.98

[26] Before the motion judge, the appellants did not deny that they had owed the principal amount of $458,488.07 to the respondents when the Note and the Mortgage were executed. Nor did they deny that default had occurred under both instruments. However, the appellants resisted payment of any amount on various grounds, including alleged misrepresentation, duress, undue influence and non est factum. Notably, it does not appear that the appellants opposed the summary judgment motion on the basis that any of the items claimed violated s. 8 of the Interest Act.

[27] The motion judge concluded that the appellants were indebted to the respondents under the Note and the Mortgage. He also accepted the respondents' calculation of the amounts due. He granted summary judgment as follows:

(a) as against Parcel, under the Mortgage and the Note, for (i) the amount of $541,512.98, plus "additional sums accruing thereunder to [the] date of this judgment"; and (ii) possession of the Property; and

(b) as against Pacific and Pardis, under the Note alone, for (i) the same amount ($541,512.98), plus "additional sums [page115] accruing thereunder to [the] date of this judgment"; and (ii) post-judgment interest at the rate of 10 per cent per annum.

[28] The motion judge did not expressly indicate what amounts or charges constituted the "additional sums accruing thereunder", to which he referred. However, based on his reasons as a whole, it seems clear that these sums correspond to the charges claimed by the respondents and accepted by the motion judge, described above, updated to the date of judgment (January 31, 2014).

[29] The motion judge also awarded the respondents their costs of the summary judgment motion in the net amount of $43,872.89 ($55,614.78, less amounts owed to the appellants by the respondents on account of outstanding costs orders and interest thereon).

Issues

[30] In framing the issues on appeal, it is useful to begin with those matters that the appellants do not contest.

[31] First, the appellants do not attack the summary judgment per se. In particular, they do not contend on appeal that there is a genuine issue requiring trial and that summary judgment should have been denied on that basis. Instead, the appellants challenge the respondents' entitlement to certain of the charges allowed under the judgment and, in other instances, the quantum of amounts awarded by the motion judge.

[32] In addition, during oral argument before this court, the appellants acknowledged that the principal sum of $374,294.65 is due and owing under the Note and the Mortgage. The appellants were unable to offer any explanation for their failure, to date, to pay any of this amount, save for the sum of $45,000 paid to the respondents in November 2012, as described above.

[33] The appellants also accept that interest is owed on the outstanding principal amount due under the Note and the Mortgage and, further, that three months' Mortgages Act interest is also due to the respondents. However, they dispute the rate of interest employed by the motion judge.

[34] The appellants raise four grounds of appeal.

[35] First, they argue the motion judge erred by awarding interest under the Note and the Mortgage, Mortgages Act interest and post-judgment interest at the rate of 10 per cent, rather than 0.75 per cent, per annum. The appellants submit that the interest escalation provision offends s. 8 of the Interest Act [page116] and that the appropriate interest rate is thus 0.75 per cent per annum.

[36] Second, the appellants challenge the respondents' entitlement to the late payment charges and the default fees. They submit that the terms of the Mortgage allowing for recovery of these charges also violate s. 8 of the Interest Act.

[37] Third, the appellants maintain the judgment under appeal is inconsistent in several respects with the default judgment that Lauwers J. granted in July 2012.

[38] Finally, the appellants contend the motion judge erred by awarding the respondents their costs of the summary judgment motion on a substantial, rather than a partial, indemnity scale.

Analysis

(1) Do specific amounts included in the judgment violate [s. 8](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html) of the [Interest Act](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html)?

[39] As I have indicated, the appellants maintain that various components of the judgment must be set aside because they represent charges that are prohibited under s. 8 of the Interest Act. I again emphasize that, before the motion judge, the appellants do not appear to have challenged the respondents' summary judgment motion on the basis of s. 8 of the Interest Act. As a result, this court does not have the benefit of the motion judge's reasoning on this central issue.

[40] Section 8 of the Interest Act provides:

(1) No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

(2) Nothing in this section has the effect of prohibiting a contract for the payment of interest on arrears of interest or principal at any rate not greater than the rate payable on principal money not in arrears.

(Emphasis added)

[41] Relying on s. 8, the appellants attack the motion judge's awards of (i) contractual interest (interest under the Note and the Mortgage); (ii) Mortgages Act interest; (iii) post-judgment interest; (iv) the late payment charges; and (v) the default fees. I will consider these items in turn.

(a) Contractual interest

[42] For convenience, I again set out clause 2 of the Note, including the interest escalation provision: [page117]

The Principal Amount outstanding at any time, and from time to time, when not in default, shall bear interest at 0.75% per annum. In the event of default mentioned herein by the Borrowers, [sic] then the interest rate applicable shall be calculated at the rate of 10% per annum after demand, default and pre and post judgment.

(Emphasis added)

[43] The appellants argue that the interest escalation provision in clause 2 offends s. 8 of the Interest Act because it has the effect of increasing the rate of interest on arrears "beyond the rate of interest payable on principal money not in arrears" for a loan that is secured by a mortgage. In other words, the appellants submit that the interest escalation provision is void and unenforceable as a matter of law because it imposes a prohibited interest rate on default even though the impugned provision is contained in the Note, rather than in the Mortgage itself. Thus, the appellants say, the only enforceable contractual interest rate is 0.75 per cent per annum.

[44] The respondents disagree. They submit that s. 8 only applies to a "fine, penalty or rate of interest" imposed directly under the terms of a mortgage on real property. The respondents accept that, had they maintained their suit based solely on the Mortgage, s. 8 would preclude the recovery of interest in excess of 0.75 per cent per annum on the amounts outstanding under the Mortgage. However, because they amended their pleading to include a claim for the principal amount and interest outstanding under the Note, and because default occurred under the Note as well as the Mortgage, the respondents maintain that they are entitled to invoke the interest escalation provision in clause 2 of the Note to recover interest at the higher annual rate of 10 per cent as against all the appellants, each of whom is a signatory to the Note. In these circumstances, they say, s. 8 of the Interest Act does not apply.

[45] As the respondents acknowledge, on this view of the operation of s. 8 of the Interest Act, the amounts owing under the Note and the Mortgage may differ, since different interest rates would apply on default under each instrument. But the respondents argue that this is immaterial; they submit that s. 8 of the Interest Act does not apply to the Note and that they are entitled to recover the full amount of principal and interest owing, as against all appellants, pursuant to the Note.

[46] The respondents also say that they are entitled to recover the remaining amounts in dispute (the Mortgages Act interest, the late payment charges and the default fees) as against Parcel under the Mortgage and as against Pardis and Pacific on their guarantee of Parcel's obligations under the Mortgage. [page118]

[47] The crux of the dispute between the parties, therefore, concerns the application of s. 8 of the Interest Act to the Note. The critical question is whether s. 8 applies to the single loan secured by both the Note and the Mortgage, where the terms of the Note provide for escalated interest on default but where the Mortgage, which admittedly secures the Note, contains no such provision.

[48] In my view, on the facts of this case, the answer to this question is yes. I conclude that the arrears of principal and interest in question are "secured by [a] mortgage on real property" and that s. 8 of the Interest Act therefore applies to the debt instruments entered into by the parties, including the Note. It follows that, because the interest escalation provision applies to arrears that are secured by a mortgage within the meaning of s. 8, and because it has the effect of increasing the rate of interest charged on the arrears beyond the pre-default interest rate payable on the principal amount of the Note, the interest escalation provision violates the statutory prohibition in s. 8 of the Interest Act and is ineffective. I reach this conclusion for the following reasons.

[49] I turn, first, to the purpose of s. 8 of the Interest Act.

[50] In Reliant Capital Ltd. v. Silverdale Development Corp., [2006] B.C.J. No. 1028, 2006 BCCA 226, 52 B.C.L.R. (4th) 13, leave to appeal to S.C.C. refused [2006] S.C.C.A. No. 265, the British Columbia Court of Appeal conducted a detailed review of the Interest Act and its judicial interpretation and considered the purpose of the prohibition contained in s. 8. The court emphasized, at para. 36, that ss. 6 to 10 of the Interest Act "relate exclusively to interest charges on loans secured by mortgages on real property". In that context, the court explained that s. 8 is intended to "protect property owners against abusive lending practises, while recognizing that generally speaking parties are entitled to freedom of contract": at para. 56.

[51] Thus, s. 8 creates an exception to the general rule that lenders and borrowers are free to negotiate and agree on any rate of interest on a loan. Section 8 prohibits lenders from levying "fine[s], penalt[ies] or rate[s] of interest" on "any arrears of principal or interest" that are "secured by mortgage on real property". The Reliant Capital court elaborated, at paras. 51 to 53:

It is not uncommon now in the commercial world for loan contracts, other than mortgage loans, to require a substantially higher interest rate if the loan becomes in arrears. Common sense suggests that this is recognized as a legitimate and effective way to ensure the prompt or timely repayment of the loan. [page119]

The prohibition against extra charges on arrears remains in place for loans secured by a mortgage. Moreover, the additional charge on arrears is prohibited in mortgage loans whether that charge is expressed as such, or whether the interest provision simply has "the effect" of increasing the charge in respect of arrears.

Parliament has singled out mortgages on real estate for special treatment, or at least treatment that differs from loans that are not secured on real property. I infer that at least one legislative purpose was to protect the owners of real estate from interest or other charges that would make it impossible for owners to redeem, or to protect their equity. If an owner were already in default of payment under the interest rate charged on monies not in arrears, a still higher rate, or greater charge on the arrears would render foreclosure all but inevitable.

(Emphasis added)

[52] I agree with this description of the purpose and scope of s. 8 of the Interest Act.

[53] Given the protective purpose of s. 8 of the Interest Act, in what circumstances is the section triggered? There are several prerequisites to the application of s. 8 of the Interest Act. First, as this court explained in Mastercraft Properties Ltd. v. EL EF Investments Inc. (1993), 1993 8545 (ON CA), 14 O.R. (3d) 519, [1993] O.J. No. 1704, 64 O.A.C. 308 (C.A.), at pp. 521 to 22 O.R., s. 8 requires a finding that the covenant in question imposes a "fine", "penalty" or "rate of interest". If it does not, then s. 8 is not engaged.

[54] Second, the "fine", "penalty" or "rate of interest" must relate to "any arrears of principal or interest secured by mortgage on real property" (emphasis added). The arrears may arise on default occurring before or after maturity of the relevant debt instrument: Beauchamp v. Timberland Investments Ltd. (1983), 1983 1816 (ON CA), 44 O.R. (2d) 512, [1983] O.J. No. 3279, 1 O.A.C. 73 (C.A.), at p. 516 O.R.

[55] Third, assuming that the covenant stipulates for a "fine", "penalty" or "rate of interest", the covenant must also have the prohibited effect of "increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears". In other words, the covenant "must both stipulate for a 'fine', 'penalty' or 'rate of interest' and have the prohibited effect": Mastercraft, at p. 522 O.R. (emphasis in original).

[56] Finally, the arrears of principal or interest must be "secured by mortgage on real property".

[57] In this case, there is no dispute that the first three prerequisites for the application of s. 8 of the Interest Act are satisfied. The interest escalation provision concerns a "rate of interest" relating to arrears of principal or interest under the Note arising on default, before and after the date of maturity (August 15, 2017). It is also apparent that the interest escalation [page120] provision is intended to extract a higher rate of interest in the event of default under the Note. It therefore has the prohibited effect of "increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears". The controversial point is whether s. 8 applies to the Note at all. In other words, does the elevated rate of interest agreed on by the parties apply to arrears "secured by mortgage on real property", thereby satisfying the fourth prerequisite for invocation of s. 8?

[58] There is no doubt that, as in Reliant Capital, the covenant said to trigger s. 8 is often incorporated in a mortgage instrument itself, thereby clearly meeting the "secured by mortgage on real property" requirement of s. 8. As this court observed in Headway Property Investments 78-1 Inc. v. Edgecombe Properties Ltd., [1998] O.J. No. 2676, 1998 3546 (C.A.), at para. 14: "[t]he Interest Act governs contractual relations between parties and has application where a claim is made under the terms of a mortgage". The question is whether, as the respondents argue, the covenant must always be set out in the terms of a mortgage instrument.

[59] For several reasons, I would reject this proposition.

[60] First, as held in Reliant Capital, at para. 52, the s. 8 prohibition against extra charges on arrears applies to arrears of principal or interest "secured by [a] mortgage on real property". I do not read the decision in Reliant Capital as limited to cases in which the prohibited charges are provided for in a mortgage that secures the loan in question. Rather, in my view, s. 8 of the Interest Act can also apply in cases in which the prohibited charges are provided for in a debt instrument that evidences and secures a loan and that is secured by a mortgage on real property. Where, as here, the debt instrument and the mortgage that secures it are for the same principal amount and provide for the same payment terms, and where payment of one is payment of the other, the mortgage is not a true collateral or accessory security; the two instruments secure repayment of the original or principal liability -- here, the single loan -- and s. 8 applies to both.

[61] Second, the language of s. 8 itself supports this conclusion. Section 8 does not specify that the prohibited fine, penalty or rate of interest must be imposed under the terms of a mortgage instrument in order to engage the s. 8 prohibition. Section 8 simply refers to a "fine, penalty or rate of interest . . . on any arrears of principal or interest" that are "secured by mortgage on real property", provided that the fine, penalty or rate of interest "has the effect" of increasing the charge on the arrears [page121] "beyond the rate of interest payable on principal money not in arrears".

[62] Third, the decision of this court in Pizzey Estate v. Crestwood Lake Ltd. (2004), 2004 36108 (ON CA), 69 O.R. (3d) 306, [2004] O.J. No. 246 (C.A.), leave to appeal to S.C.C. refused [2004] S.C.C.A. No. 459, is instructive in this regard.

[63] In Pizzey, this court was required to determine the post-maturity interest rate that applied to a loan secured by a promissory note and a collateral mortgage that contained inconsistent terms regarding post-maturity interest. The personal defendants in Pizzey had signed a promissory note for part of the purchase price for shares acquired by them from the plaintiffs. A corporation of which the personal defendants were the sole shareholders had guaranteed payments under the note and had secured its guarantee obligation by providing a collateral mortgage on land. The note made no mention of interest after maturity but did provide for interest at the rate of 10 per cent per annum to the date of maturity. In contrast, the standard charge terms of the collateral mortgage provided for interest at 10 per cent annually "as well after as before maturity".

[64] When the defendants fell into default under the note and the mortgage, the plaintiffs sued on the mortgage for the balance due. The trial judge found that the note was the "sole debt instrument" and, therefore, that it established the terms of the loan between the parties. He also found that interest on the note after maturity was payable by law under s. 133(b) of the Bills of Exchange Act, R.S.C. 1985, c. B-4.[^1] However, because s. 133(b) did not stipulate a rate of interest, s. 3 of the Interest Act[^2] applied and established a rate of 5 per cent per annum.

[65] On appeal to this court, the plaintiffs argued that the trial judge erred in characterizing the promissory note as the "sole debt instrument". They maintained that the collateral mortgage [page122] created a distinct debt obligation that was complementary, not subordinate to the note.

[66] This court disagreed. Justice Laskin, writing for the majority, indicated, at para. 15, that "[f]aced with the two inconsistent interest obligations in the note and the mortgage, the trial judge had to determine which obligation the [debtors] were required to meet. That determination turned on how he characterized the nature of the transaction."

[67] Further, the trial judge's characterization of the transaction -- as a share purchase, paid for by cash and a promissory note, with the note guaranteed and the guarantee secured by a collateral mortgage on the property -- attracted deference on appeal and, in any event, was supported by the loan documentation. Justice Laskin explained, at para. 17:

First, the agreement of purchase and sale stipulates that the purchase price consists of the down payment and "take back financing" in the form of the promissory note secured by [the defendant corporation's] mortgage. The [personal defendants] are not parties to the mortgage and, thus, the [plaintiffs] have no claim against them under the mortgage. Second, the mortgage provides that "[p]ayment of the note is payment of the mortgage and payment of the mortgage is payment of the note". Therefore, once the [personal defendants] (or [the defendant corporation]) have paid off the promissory note, [the defendant corporation] is entitled to a discharge of the mortgage. For these reasons I would not interfere with the trial judge's finding that the promissory note alone governs the [personal defendants'] debt obligation.

[68] In this case, the substance of the transaction between the parties is relatively straightforward. The respondents loaned $458,488.07 to the appellants. The loan proceeds were applied to discharge an existing mortgage. The repayment of the loan was secured by a promise to pay set out in a promissory note. That note was secured, in turn, by a mortgage on real property in the same amount. The Note and the Mortgage pertain to one loan between the parties, the repayment of which is secured equally by the Note and the Mortgage.

[69] It is true that, unlike in Pizzey, no term in the Mortgage provides that payment of the Note constitutes payment of the Mortgage. Nor does the Note provide that payment of the Mortgage constitutes payment of the Note. However, as I have said, there is no dispute that, in this case, both propositions are true.

[70] Further, in Pizzey, as in this case, there was no commonality between the parties to the promissory note and the parties to the mortgage. Here, all the appellants are signatories to the Note, while Parcel alone is the named mortgagor under the Mortgage. Nonetheless, the debt owed under the Note is the same debt owed under the Mortgage and the parties to both instruments are associated. And, it is clear that, as in Pizzey, [page123] if the appellants had paid off the Note, Parcel would have been entitled to a discharge of the Mortgage and Pardis and Pacific would have been freed of the obligations under their guarantee. Conversely, if Parcel had paid off the Mortgage, the debt owed under the Note would have been satisfied.

[71] In these circumstances, in my view, as in Pizzey, the terms of the Note determine the post-default rate of interest payable on the one debt between the parties. And the Note is secured by a mortgage on real property. Consequently, given the agreed-upon structure of this loan transaction, both instruments fall within the ambit of s. 8 of the Interest Act on the facts of this case.

[72] This conclusion is buttressed by the decision in NBY Enterprises Inc. v. Duffin, [2006] O.J. No. 982, 2006 7519 (S.C.J.). NBY Enterprises concerned the question whether provisions for the escalation of interest on default, contained in promissory notes and mortgages that secured those notes, offended s. 8 of the Interest Act. Citing Pizzey, the court concluded, at para. 21, that the terms of the promissory notes, as secured by the mortgages, determined the terms of the loan. The court went on to hold, at paras. 23 and 24, that "[t]here can only be one term of interest on one loan" and that, "s. 8 of the Interest Act was breached by the increased interest rate after default, which clearly had the effect of 'increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears'". See, also, Paragon Capital Corp. v. 395342 Alberta Ltd., [2004] A.J. No. 102, 2004 ABQB 25, 350 A.R. 370.

[73] Based on these authorities, I therefore do not accept the respondents' submission that the enforceable post-default interest rates applicable under the Note and the Mortgage may differ in respect of the same loan. In my view, this proposition is contrary to common sense and, if accepted, would result in commercial uncertainty, as well as fundamental unfairness to the appellants.

[74] Consider, for example, that Parcel is a signatory to both the Note and the Mortgage. To hold, as the respondents suggest, that Parcel may be liable for one interest rate under the Mortgage (0.75 per cent per annum) and a different and higher interest rate under the Note (10 per cent per annum) on default under the same loan in respect of the same debt would result in uncertainty as to which obligation Parcel -- and the remaining appellants -- were required to meet. This result is avoided where the same loan transaction is viewed as subject to the same rate of interest on default under both instruments. [page124]

[75] Since there are conflicting rates of interest on default with respect to the same loan under these instruments, it must be determined which rate of interest applies. I find the approach and reasoning of this court in Pizzey apposite in this case. Where, as here, the debt between the parties is secured by a promissory note that is itself secured by a mortgage, each for the same principal amount, and where payment of one is payment of the other, but where each contains different terms regarding post-default interest, the terms of the promissory note determine the applicable post-default interest rate. And, in this case, the Note contains an interest escalation provision that runs afoul of s. 8 of the Interest Act.

[76] I therefore conclude that the interest escalation provision conflicts with s. 8 of the Interest Act and cannot be given effect. It follows that the only enforceable contractual interest rate agreed on by the parties is 0.75 per cent per annum.

[77] In the result, akin to Pizzey, the appropriate post-default interest rate is the same as the agreed 0.75 per cent pre-default rate stipulated under the Note. That this interest rate may have been below the prevailing market rate of interest at the time the Note and the Mortgage were executed is a consequence of the bargain struck by knowledgeable and sophisticated business parties.

(b) Mortgages Act interest

[78] Before this court, the appellants acknowledge the respondents' entitlement to three months' interest under s. 17 of the Mortgages Act on the principal amount outstanding under the Mortgage. The full text of s. 17 is set out in Schedule "A" to these reasons.

[79] On the record before this court, the basis for this concession and, hence, the rationale for invocation of s. 17 of the Mortgages Act, is unclear.[^3] Nonetheless, I emphasize that the appellants do not attack the respondents' claim to Mortgages Act interest. Instead, they argue the motion judge erred by allowing Mortgages Act interest calculated at the rate of 10 per cent, rather than 0.75 per cent per annum. The respondents' entitlement to Mortgages Act interest having been conceded, I will address only the question of the applicable rate of interest. [page125]

[80] In a notice of sale under mortgage, dated April 13, 2012 and delivered by the respondents prior to their 2013 amendments to their statement of claim, the respondents claimed Mortgages Act interest in the amount of $774.13, that is, at the rate of 0.75 per cent per annum as stipulated in the Mortgage. By the time of the May 2013 summary judgment motion, the respondents' Mortgages Act interest claim had increased to the amount of $9,965.88, based on application of a 10 per cent per annum interest rate. In contrast, on the appellants' calculations, three months' interest at the rate of 0.75 per cent per annum on the principal outstanding as of January 31, 2014 -- the date of judgment -- would yield $921.21 on account of Mortgages Act interest.

[81] The motion judge accepted the respondents' claim for Mortgages Act interest in the amount of $9,965.88. However, his reasons offer no explanation for the calculation of Mortgages Act interest at an annual interest rate of 10 per cent, or any discussion whether the relevant rate was 0.75 per cent per annum.

[82] Nor did the respondents advance a justification on the appeal hearing for the calculation of Mortgages Act interest at a 10 per cent annual interest rate. Presumably, the respondents' claim for interest at this rate also rests on the higher rate of annual interest contemplated under the interest escalation provision in clause 2 of the Note.

[83] In my view, neither the Mortgage nor the Note provide any tenable basis for the calculation of Mortgages Act interest at the rate of 10 per cent per annum. The Mortgage itself provides for interest only at the rate of 0.75 per cent per annum. Clause 2 of the Note provides for pre-default interest at the same annual rate. I have already concluded that no effect may be given to the interest escalation provision in clause 2 of the Note.

[84] No viable contractual or other footing for the calculation of Mortgages Act interest at the rate of 10 per cent per annum having been advanced, I agree with the appellants that the motion judge's Mortgages Act interest award, which was calculated on the basis of a 10 per cent annual interest rate, cannot stand. In light of the appellants' concession that the respondents are entitled to Mortgages Act interest, the applicable rate is therefore the 0.75 per cent annual rate stipulated in the Mortgage.

[85] Accordingly, I would set aside the motion judge's $9,965.88 award of Mortgages Act interest and substitute in its stead an award of three months' interest calculated at the rate of 0.75 per cent per annum on the outstanding balance under the Mortgage as of January 31, 2014. [page126]

(c) Post-judgment interest

[86] I reach a similar conclusion regarding the motion judge's award of post-judgment interest.

[87] The motion judge, again without elaboration, awarded post-judgment interest at the rate of 10 per cent per annum as against Pacific and Pardis on the outstanding amounts owed under the Note. He made no mention of post-judgment interest in respect of Parcel's indebtedness to the respondents, under either the Mortgage or the Note. The formal judgment as issued and entered, dated January 31, 2014, stipulates that the judgment "BEARS INTEREST at the rate of 10 percent per year, commencing February 1, 2014".

[88] The only rationale advanced by the respondents for post-judgment interest calculated at this rate is the interest escalation provision under the Note. There is no suggestion that the Mortgage provides for interest at the rate of 10 per cent per annum, before or after default. Since, in my view, the interest escalation provision is unenforceable by reason of s. 8 of the Interest Act, it follows that a 10 per cent per annum post-judgment interest rate based on that provision is unsustainable.

[89] In these circumstances, what rate of post-judgment interest ought to apply? None of the parties relied on or made any submissions on appeal regarding the post-judgment interest provisions of the Courts of Justice Act, R.S.O. 1990, c. C.43.[^4] Nor did they seek to invoke the Bills of Exchange Act or any provision of the Interest Act to supply the post-judgment rate of interest.

[90] In my opinion, in these somewhat unusual circumstances, Pizzey affords guidance as to the appropriate approach for determining the rate of post-judgment interest. In Pizzey, the court held, at paras. 38 to 39:

The last question that needs to be determined is what prejudgment interest rate should be awarded after maturity of the note. The statutory prejudgment interest rate under s. 128(1) of the Courts of Justice Act is 4.8 per cent.

However, s. 130 gives the court discretion to vary the prejudgment interest rate where the "circumstances of the case" so require. Here, the appropriate post-maturity rate is the same as the pre-maturity rate on the note, 10 per cent. This is consistent with the reasoning of Major J. in Bank of America Canada [v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601], at paras. 49-50: [page127]

Absent exceptional circumstances, the interest rate which had governed the loan prior to breach would be the appropriate rate to govern the post-breach loan. The application of a lower interest rate would be unjust to the lender.

This analysis applies equally to pre-judgment interest and post-judgment interest.

I would therefore award prejudgment interest on the note at 10 per cent per annum.

(Emphasis added)

[91] In this case, the 0.75 per cent per annum interest rate governed the appellants' debt prior to default under the Note, and under the Mortgage both before and after default. In my view, it is the appropriate rate to govern the post-default debt and, hence, post-judgment interest.

(d) and (e) Late payment charges and default fees

[92] The appellants contend that the late payment charges ($11,110) and the default fees ($7,200) allowed by the motion judge also offend s. 8 of the Interest Act.

[93] The Mortgage provides that the respondents are entitled to a late charge of $10 per day in the event of their late receipt of monthly payments due under the Mortgage. It also provides for the payment of a $300 "Missed [P]ayment Fee" if payments under the Mortgage are missed or late or returned for payment. The appellants submit that the late payment charges and the default fees awarded by the motion judge, which are based on these provisions of the Mortgage, constitute "fine[s]" or "penalt[ies]" prohibited under s. 8 of the Interest Act.

[94] I agree.

[95] The respondents point to no evidence on the record before this court demonstrating that they incurred any actual losses as a result of late or missed payments under the Mortgage, apart from the amount of the non-payment itself. This is not a case where it is alleged that payments made by or on behalf of Parcel under the Mortgage were returned "NSF" or otherwise rejected for payment, giving rise to administrative costs for the respondents.

[96] In the absence of evidence that the charges in question reflect real costs legitimately incurred by the respondents for the recovery of the debt, in the form of actual administrative costs or otherwise, the only reason for the charges was to impose an additional penalty or fine, apart from the interest otherwise payable under the Mortgage, thereby increasing the burden on [page128] the appellants beyond the rate of interest agreed upon in the Mortgage. The courts have not hesitated to disallow similar charges on the basis that they offend s. 8 of the Interest Act: see, for example, Chong v. Kaur, [2013] O.J. No. 4531, 2013 ONSC 6252 (S.C.J.), at paras. 54 to-56; Bhanwadia v. Clarity Financial Corp., [2012] O.J. No. 5708, 2012 ONSC 6393 (S.C.J.), at paras. 43 to 46; NBY Enterprises Inc., at para. 29; 2088300 Ontario Ltd. v. 2184592 Ontario Ltd., [2011] O.J. No. 2178, 2011 ONSC 2986 (Master), at paras. 22 to 23; Nesci v. Ramrattan, [2009] O.J. No. 550, 2009 5153 (S.C.J.), at para. 28.

[97] Accordingly, I would set aside the impugned late payment charges and default fees.

(2) Suggested inconsistency with prior default judgment

[98] During oral argument, the appellants did not press their claim that the judgment under appeal is inconsistent with the July 26, 2012 default judgment granted by Lauwers J. I understood this complaint to be based on the fact that, unlike the judgment under appeal, the earlier default judgment contemplated the payment of interest (including post-judgment interest) at the rate of 0.75 per cent per annum, rather than 10 per cent per annum. Further, no late payment charges or default fees were awarded under the default judgment.

[99] Any inconsistency between the default judgment and the judgment under appeal grounds no relief for the appellants. The default judgment was set aside by court order dated December 17, 2012. The appellants' appeal from parts of that order was subsequently withdrawn. In these circumstances, the prior default judgment is essentially irrelevant to the matters at issue on this appeal.

[100] In any event, the claims at issue before Lauwers J. were solely claims under the Mortgage. And the Mortgage provides for interest at the annual rate of 0.75 per cent. The respondents amended their statement of claim in January 2013, after the date of the default judgment, to include claims based on the Note. As a result, the matters at issue and the record before the motion judge were materially different than those before Lauwers J. when he granted default judgment.

[101] Accordingly, I would reject this ground of appeal.

(3) Motion judge's costs award

[102] The appellants argue the motion judge erred by awarding the respondents their costs of the summary judgment motion on a substantial, rather than a partial, indemnity scale.

[103] I disagree. [page129]

[104] The motion judge's costs award attracts considerable deference from this court. Unless the award is plainly wrong or based on an error of principle, appellate interference with the award is precluded: Hamilton v. Open Window Bakery Ltd., [2004] 1 S.C.R. 303, [2003] S.C.J. No. 72, 2004 SCC 9.

[105] The standard charge terms that form part of the Mortgage provide for recovery by the mortgagee of its legal fees incurred in enforcing the Mortgage on a solicitor and client scale, together with associated expenses. The respondents sought costs of the summary judgment motion in the total amount of $97,809.34, calculated on a substantial indemnity scale and based on a $425 hourly billing rate for counsel. However, the motion judge rejected this hourly rate and calculated costs utilizing a $375 per hour counsel rate. Thus, it is inaccurate to suggest that the motion judge awarded costs on a substantial indemnity scale.

[106] In addition, the motion judge made various other deductions from the quantum of costs the respondents claimed. His reasons reveal that he considered carefully the respondents' costs claim, the appellants' objections to that claim, and the applicable principles governing an award of costs. Having done so, he awarded costs to the respondents in the reduced amount of $55,614.78, less various credits to the appellants for amounts owed to them by the respondents.

[107] In these circumstances, I see no basis for interference with the motion judge's discretionary costs ruling. In my view, his costs award is neither plainly wrong nor infected by an error of principle.

[108] In reaching this conclusion, I recognize that the costs awarded to the respondents took account of their full success before the motion judge. On the disposition of this appeal that I propose, I would allow the appeal in part, and set aside certain of the awards made by the motion judge. Nonetheless, the respondents remain successful in obtaining summary judgment for the core relief that they sought against the appellants. No variation in the motion judge's costs award is therefore warranted.

Disposition

[109] For the reasons given, I would allow the appeal, in part, by setting aside (i) the awards of interest under the Note and the Mortgage, the Mortgages Act interest and post-judgment interest at the rate of 10 per cent per annum, [page130] substituting in their stead awards of interest at the rate of 0.75 per cent per annum; and (ii) the awards for late payment charges and default fees. In all other respects, I would dismiss the appeal.

[110] The appellants shall deliver their brief written submissions concerning the costs of this appeal to the registrar of this court within ten days from the date of these reasons. The respondents shall deliver their brief responding costs submissions to the registrar within ten days thereafter.

Appeal allowed in part.

SCHEDULE "A"

Mortgages Act, R.S.O. 1990, c. M.40, s.

17

Payment of principal upon default

17(1) Despite any agreement to the contrary, where default has been made in the payment of any principal money secured by a mortgage of freehold or leasehold property, the mortgagor or person entitled to make such payment may at any time, upon payment of three months interest on the principal money so in arrear, pay the same, or the mortgagor or person entitled to make such payment may give the mortgagee at least three months notice, in writing, of the intention to make such payment at a time named in the notice, and in the event of making such payment on the day so named is entitled to make the same without any further payment of interest except to the date of payment.

Exception

(2) If the mortgagor or person entitled to make such payment fails to make the same at the time mentioned in the notice, the mortgagor or person is thereafter entitled to make such payment only on paying the principal money so in arrear and interest thereon to the date of payment together with three months interest in advance.

Saving

(3) Nothing in this section affects or limits the right of the mortgagee to recover by action or otherwise the principal money so in arrear after default has been made.

Notes

[^1]: Under s. 186(1) of the Bills of Exchange Act, the provisions of that Act relating to bills apply to promissory notes. Section 133(b) states that when a bill is dishonoured, the measure of damages includes interest after maturity.

[^2]: Section 3 of the Interest Act provides that "[w]henever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum." In Pizzey, this court ultimately concluded that the trial judge erred in applying the 5 per cent interest rate from s. 3 of the Interest Act. Rather, the appropriate post-maturity interest rate was the same as the pre-maturity rate on the note, that is, 10 per cent per annum.

[^3]: For example, the record does not indicate whether the appellants have sought to exercise any prepayment privilege or to redeem the Property, and whether they have provided the respondents with three months' written notice of their intention to do so.

[^4]: I note that the post-judgment interest rate provisions of s. 129 of the Courts of Justice Act do not apply "where interest is payable by a right other than under [s. 129]": s. 129(5).