COURT OF APPEAL FOR ONTARIO

CITATION: Walia v. 2155982 Ontario Inc., 2020 ONCA 493 DATE: 20200804 DOCKET: C66651

Huscroft, Zarnett and Coroza JJ.A.

BETWEEN

Surendra Walia

Plaintiff (Appellant)

and

2155982 Ontario Inc., Prem Chand Sharma, Agim Mollaj and Armoclan Engineering Ltd.

Defendants (Respondents)

Amandeep Sidhu and Shaun Singh, for the appellant

Gregory Weedon and Melissa Truong, for the respondents

Heard: in writing

On appeal from the judgment of Justice Pamela Hebner of the Superior Court of Justice, dated August 23, 2018, with reasons reported at 2019 ONSC 1059.

REASONS FOR DECISION

[1] The appellant, Surendra Walia (“Walia”), loaned money to 2155982 Ontario Inc. (“215”), which was jointly owned by Prem Sharma (“Sharma”) and Agim Mollaj (“Mollaj”). 215 owned properties located in Drumbo and Stratford, Ontario.

[2] Initially, 215 secured the sum of $208,500 from Walia on October 27, 2014 and granted him a mortgage over the property in Drumbo. The mortgage commitment was for a three-month term and the interest rate on the mortgage was 12 percent. Sharma and Mollaj signed the mortgage documents on behalf of 215 and in their personal capacities as guarantors.

[3] On December 24, 2014, 215 secured a further $141,500 pursuant to a second mortgage commitment ($350,000 in total as the registered amount). This mortgage commitment was for a four-month term and the interest rate on the mortgage was 12 percent. However, the second mortgage commitment also contained a condition that if the mortgage matured and was not paid, or there was a default of any payment, the interest rate would increase to 21 percent. Again, Sharma and Mollaj signed the mortgage documents.

[4] The mortgage matured on April 28, 2015 and it was not paid. A renewal agreement, dated April 24, 2015, was signed only by Sharma on behalf of 215, increasing the interest rate to 21 percent per annum, with payments to continue at 12 percent and the difference in interest to be paid as a lump sum at the time of sale of the property.

[5] By early 2017, 215 stopped making monthly payments on the mortgage. In September 2017, Walia filed a statement of claim to enforce the mortgage on the Drumbo property. In November 2017, the mortgage on the Drumbo property was transferred to the Stratford property. 215 then sold the Drumbo property.

[6] No further payments were made on the transferred mortgage. On January 4, 2018, Walia commenced an action to enforce the mortgage on the Stratford property. On March 22, 2018, he brought a motion for summary judgment against 215 and Mollaj as the guarantor, seeking possession of the Stratford property and prejudgment and postjudgment interest at the rate of 21 percent. In the alternative, Walia sought prejudgment and postjudgment interest at the rate of 12 percent.

[7] The motion judge declared that the condition in the second mortgage commitment that increased the interest rate from 12 percent to 21 percent was invalid, as it violated s. 8 of the Interest Act, R.S.C. 1985, c.I-15, which 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.

[8] The motion judge also declared that the renewal agreement was not enforceable because Mollaj had not signed the agreement. She rejected Walia’s argument that the indoor management rule applied to the circumstances of this case, as Walia knew, or ought to have known, that Mollaj’s signature was required on the renewal agreement.

[9] Walia appeals and raises two issues.

[10] First, he argues that the motion judge erred in her declaration that the condition of the mortgage increasing the rate of interest was invalid because it violated s. 8. Walia relies on the Supreme Court of Canada’s decision in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, [2016] 1 S.C.R. 273. He contends that the mortgage rate increase in the second mortgage commitment is triggered only by the passage of time and does not infringe s. 8.

[11] Second, he argues that the motion judge erred in finding that the renewal agreement was not valid because of the absence of Mollaj’s signature. Walia contends that pursuant to the indoor management rule, he was entitled to assume that 215’s internal procedures for entering into the renewal agreement had been followed and that the failure of Mollaj to sign is not fatal to the validity of the renewal.

[12] Turning to the first issue, the motion judge found that the condition of the second mortgage commitment increasing the rate of interest violated s. 8. For ease of reference, the condition is set out below:

The mortgage will become due and payable at the end of the term, failing which or in default of any payment interest rate of interest will be 21% per annum.

[13] During the motion, Walia conceded that the phrase “or in default of any payment” violated s. 8. However, he urged the motion judge to strike out the offending language and find that the condition, as amended, did not violate s. 8. He argued that the 21 percent interest arose only because of the passage of time (i.e. the mortgage continued past the end of the term).

[14] The motion judge disagreed, and she held that even if the offending words were removed, the provision would still have the effect of an increase to 21 percent because either one of two triggering events has occurred: (1) nonpayment of a monthly payment; or (2) nonpayment of the principal on the due date.

[15] In her view, the condition offended s. 8 because it did not increase the rate of interest solely because of the passage of time. To the contrary, she held that once a mortgage has matured, and it has not been repaid on the date of maturity, the balance becomes outstanding and is in arrears. Therefore, the condition in this case increased the rate because of default.

[16] We agree with the motion judge’s finding.

[17] Generally speaking, s. 8 creates an exception to the rule that lenders and borrowers are free to negotiate and agree on any rate of interest on a loan. The purpose of s. 8 is to prohibit lenders from levying fines, penalties, or rates of interest on any arrears of principal or interest that are secured by mortgage on real property. The prohibited effect is increasing the charge on arrears beyond the rate of interest payable on principal money not in arrears: P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331, 126 O.R. (3d) 108, at para. 51. In order to violate s. 8, the mortgage must both: (1) stipulate for a fine, penalty, or rate of interest; and (2) have the prohibited effect: P.A.R.C.E.L., at para. 55, citing Mastercraft Properties Ltd. v. El Ef Investments Inc. (1993), 1993 CanLII 8545 (ON CA), 14 O.R. (3d) 519 (C.A.), at p. 522, leave to appeal refused, [1993] S.C.C.A. No. 463.

[18] Brown J., writing for the majority in Krayzel, held that in assessing whether a term violates s. 8, “[w]hat counts is how the impugned term operates, and the consequences it produces, irrespective of the label used” to describe the term. If the effect of a term is to impose a higher rate on arrears than on money not in arrears, then s. 8 is offended: Krayzel, at para. 25.

[19] Krayzel involved a lender who was granted a mortgage that bore interest at the prime rate plus 2.875 percent per annum. On maturity, the parties entered into a renewal agreement for several months that provided the interest rate in the last month would increase to 25 percent. The parties then entered a second renewal. The second renewal set the interest rate at 25 percent per annum, but a discounted rate would apply if the mortgage was in good standing.

[20] A majority of the Supreme Court concluded that the first renewal complied with s. 8, but the second renewal did not. The majority held that an interest rate increase triggered by the mere passage of time (and not by default), such as that imposed under the first renewal agreement, did not offend s. 8: Krayzel, at para. 33.

[21] The motion judge considered the Krayzel decision. She acknowledged that a rate increase triggered by the passage of time alone does not infringe s. 8. However, she reasoned that the effect of the condition was a rate increase when the mortgage became due and the entire arrears were not paid by the due date.

[22] We see no error in the motion judge’s analysis. In this case, on a plain reading of the condition, there can be no doubt that the increase from 12 percent to 21 percent is triggered as a result of the nonpayment of the mortgage on the expiry of its term, which is a default. We agree with the motion judge that the condition contravenes s. 8 and is invalid.

[23] Turning to the appellant’s second ground of appeal that the motion judge erred in declaring that the renewal agreement is not enforceable, we note that the motion judge held that the indoor management rule did not apply in the circumstances of this case based on her assessment of the “factual constellation”: at para. 45. We see no basis to disturb her careful finding of fact that Walia knew or ought to have known that Mollaj’s signature was required to give effect to the renewal agreement and that, therefore, the indoor management rule did not apply.

[24] The appeal is dismissed. The parties may make brief submissions of two to three pages on costs within ten days of this decision.

“Grant Huscroft J.A.”

“B. Zarnett J.A.”

“S. Coroza J.A.”