CITATION: Alleghe Mortgage Fund Ltd. v. 1988758 Ontario Inc., 2021 ONSC 4887

DIVISIONAL COURT FILE NO.: DC 21 174-00

DATE: 20210823

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

McWatt A.C.J.S.C.J. and Sachs and Penny JJ.

BETWEEN:

ALLEGHE MORTGAGE FUND LTD.

Appellant

– and –

1988758 ONTARIO INC.

Respondent

Ryan J. Atkinson and A. Mauti, for the Appellant

HEARD at Toronto: July 8, 2021

BY THE COURT

[1] This is an appeal of the January 19, 2021 decision of Myers J. in which he determined the amount due under a mortgage.

[2] The Mortgagee appeals on the basis that the motion judge’s interpretation of the Mortgage Commitment was incorrect. It seeks judgment in an amount that accounts for the increased interest rate for the final month of the term.

[3] The Mortgagor\Respondent has not filed materials and has not appeared at the hearing.

The Facts before the Motion Judge

[4] The parties entered into a mortgage on August 23, 2019. The mortgage was registered against the commercial property at 2823-2829 Eglinton Avenue East, in Toronto for $3,800,000 (the “Commitment”). The Mortgagee is Alleghe Mortgage Fund Ltd. The Mortgagor is 1988758 Ontario Inc. and Eglinton Oswego Limited Partnership. The second defendants, Senthillmohan Sockalingam and Sanjeevan Jeganathan were guarantors of the mortgage. They also did not participate in this appeal.

[5] The Commitment establishes a mortgage term of seven months. The Mortgagors were required to make interest-only payments on the 23rd day of each month until the mortgage maturity date of March 23, 2020. The interest rate was set out in two places in the Commitment. First, on page 1:

8.25% per annum for the first six (6) months of the mortgage term and 18.00% per annum thereafter, unless renewed or discharged, or after the second renewal term has expired.

[6] And second, on page 7:

The principal amount of the mortgage will bear interest at 8.25% per annum for the initial six months and 18.0% per annum thereafter and will be repayable upon loan maturity.

[7] The Commitment also contained a renewal provision:

The Chargor can renew the herein mortgage for a further term of seven (7) months commencing February 08, 2020 at the rate of 8.99% per annum for the initial six (6) months of the renewed mortgage term, with an interest rate of 18.0% per annum thereafter, plus payment of a renewal fee of 1.5% of the outstanding principal. On written notice to the Chargee on or before January 8, 2020, and the first month of the second term will be the 7th month of the first term and will pay interest at a rate of 8.99% (the “Renewal Provision”)

[8] The Mortgagors provided 7 post-dated cheques for each month of the term, as follows:

1. September 23, 2019

8.25%

$26,125.00

2. October 23, 2019

8.25%

$26,125.00

3. November 23, 2019

8.25%

$26,125.00

4. December 23, 2019

8.25%

$26,125.00

5. January 23, 2020

8.25%

$26,125.00

6. February 23, 2020

8.25%

$26,125.00

7. March 23, 2020

18.00%

$57,000.00

[9] The second and third cheques, dated October 23, 2019, and November 23, 2019, returned NSF and therefore the Mortgagors defaulted on their obligation.

[10] On November 15, 2019, the Mortgagee issued a Statement of Claim, Notice of Sale Under Mortgage, and a Notice of Intent to Enforce Security.

[11] On December 31, 2019, the Mortgagors paid the interest payments for October, November and December 2019. The January, February and March 2020 cheques then all returned NSF. According to the Mortgagee, the interest rate increased to 18% on February 23, 2020 per the terms of the Commitment.

[12] The Mortgagors listed the property for sale on November 12, 2019. The Mortgagee allowed the Mortgagors to control the sale process. There was a pending sale in May 2020, but the closing was extended several times.

[13] On November 20, 2020, the Mortgagee provided the Mortgagors a mortgage discharge statement in anticipation of the closing of the sale. The Mortgagors disputed the applicability of the higher interest rate beginning on the 7th month of the term (February 2020). They brought a motion under s. 12 of the Mortgages Act R.S.O 1990, c. M. 40 to determine the amount due under the mortgage.

Appellant’s Position

[14] The Appellant’s grounds of appeal are:

i. The motion judge erred in finding that the interest rate provision contained in the mortgage commitment was in breach of section 8 of the Interest Act R.S.C., 1985, c. 1-15 (the Interest Act) and therefore unenforceable; and

ii. in the alternative, if the motion judge did not err in finding that the interest rate provision cited in the Decision is in breach of section 8 of the Interest Act, he nevertheless erred by failing to address the subsequent interest rate provision contained in the mortgage commitment and how it would operate to preserve the intention of the parties if the interest rate provision cited in the Decision is struck out or varied.

This Court’s Jurisdiction and the Standard of Review

[15] The Divisional Court has jurisdiction to hear this appeal pursuant to s. 12(10) of the Mortgages Act, R.S.O. 1990, c. M.40.

[16] The appellate standards of review from Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 apply. The issues of contractual interpretation are questions of mixed fact and law, involving applying the principles of contractual interpretation to the words of the written contract in the context of the surrounding facts of the case. Questions of mixed fact and law are evaluated on the palpable and overriding error standard, unless the trial judge made an extricable error of principle, which may amount to a question of law reviewable on the correctness standard.

Analysis

[17] We find that the motion judge erred in finding that the interest rate provision in the mortgage commitment breached s. 8 of the Interest Act.

[18] Section 8 of the Interest Act provides:

8(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.

[19] For mortgages and other loans secured by real property, “default rates” of interest, whereby a higher rate of interest is triggered by default, effectively reserving a higher charge on arrears than that imposed on principal money not in arrears, are prohibited by section 8 of the Interest Act.

[20] The motion judge found that the First Interest Rate Provision – which provided that the interest rate is 8.25% for the first six months, and 18% per annum thereafter, unless the mortgage is renewed or discharged, or after the second renewal term has expired – breached s. 8 of the Interest Act, R.S.C. 1985, c. I-15. He said the following:

In accordance with the [First Interest Rate Provision], interest will be payable at 8.25% for the first six (6) months and will increase to 18.00% for the seventh (7th) month, unless the mortgage is renewed or discharged at the end of that month. If it is renewed so that the principal does not come due, then the interest will remain at 8.25%. But if it was neither renewed or if it was not paid on the date of maturity, then interest will go to 18.00%. If it was renewed and at the end of the second renewal not paid on the date of maturity, again the interest would increase to 18.00%.

[21] Although he acknowledged that the Supreme Court, in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, [2016] 1 S.C.R. 273 found that an interest rate will not breach s. 8 of the Interest Act if the interest increases with time, and not with default, the motion judge went on to say the following:

Here, however, just like in the case of Lee v. He, with a bit more verbiage perhaps in this case, in all circumstances, if the mortgagor pays the principal on time, then its interest rate is 8 percent. And if it defaults in repaying principal when it falls due, the interest rate becomes 18 percent. In my view, it is a plain breach of section 8 for interest to increase simply because money was not paid on the due date, and therefore the clause in this case cannot stand. Interest is chargeable at 8.25 percent, therefore, throughout the mortgage.

[22] In Krayzel, the Supreme Court considered two different loan agreements. The first agreement established one rate of interest (prime plus 3.125% per annum), that applied for most of the term of the loan, and a second higher rate (25.00%) that became effective in the final month of the term. These are the facts of this case.

[23] At paragraph 25 of the decision, the Court unanimously agreed that the First Renewal Agreement was not a violation of section 8 of the Interest Act because interest rate increases triggered by the mere passage of time, and not default, are permissible under the Act. That is, a scheduled increase (not tied to the occurrence of a default) would be a legitimate way for lenders to obtain a higher rate of interest without the risk of contravening section 8 so long as the effect of the provision does not impose a higher rate on arrears than on money not in arrears.

[24] The second agreement charged a single rate of interest (25.00%) throughout the term of the loan, but then forgave a portion of the interest (or applied it to reduce the principal amount of the loan) at maturity if the borrower made all of its payments when due. In that case, the interest rate would decrease from 25.00% to the greater of 7.5% or prime plus 5.25% if the mortgagor made prompt monthly payments. These are not the terms of the Commitment in this case.

[25] The Court found (at paragraph 38) that the Second Renewal Agreement did infringe section 8 of the Interest Act as the increased interest rate was triggered by the mortgagor’s default. Brown J. held that section 8 of the Act applies with equal force to mortgage terms imposing, by way of penalty, a higher rate in the default and reserving, by way of discount, a lower rate in the event of no default.

[26] Instead of finding the facts of this case were analogous to the First Renewal Agreement in Krayzel, the motion judge found the facts in this case were analogous to the facts in the case of Lee v. He, 2018 ONSC 5932. They are not.

[27] In Lee, the interest rate increase was not triggered by the passage of time, but by default on maturity and was found to violate s. 8 of the Interest Act. The interest provision specifically referred to “past due” amounts and was intended to operate as an interest penalty on arrears. The mortgage generally bore interest at the rate of 12.99%, but also included, at paragraph 10 of the decision, the following provision regarding a bump in that rate:

A. 12 INTEREST ON PAST DUE: The Borrowers hereby agree that upon maturity of this mortgage and in the event the outstanding principal and accrued interest is not repaid on the balance due date, interest at that rate of 20% per annum will be charged from the maturity date until repayment in full, unless otherwise agreed upon.

[28] At paragraphs 20 to 21, the Court found that term (A. 12) of the agreement was designed as a penalty to impose an increased rate of interest if the mortgage was not repaid in full on maturity. The Court noted that the provision specifically refers to interest on “past due” amounts or interest on arrears. The term specifically set out that interest on arrears would be 20.00% and charged from the maturity date forward. The rate of 12.99% was charged before maturity on principal, but not in arrears. The Court determined that the provision had the effect of charging an increased rate on arrears and therefore violated the Interest Act.

[29] The same cannot be said in this case. First, the First Interest Rate Provision does not specifically refer to interest on arrears. Second, the increased interest rate is not triggered if the Mortgagors default in repaying the principal when it falls due. The increased rate of interest is triggered by the passage of time at the end of the sixth (6th) month of the term if the Mortgagors do not renew or discharge the Mortgage before the final month of the term.

[30] The motion judge found here that, just like in the case of Lee, “in all circumstances, if the Mortgagor pays the principal on time, then its interest rate is 8.25%, and if the Mortgagor defaults in repaying the principal when it falls due, the interest rate becomes 18.00%”. He went on to say that it was a plain breach of section 8 for interest to increase simply because the principal was not paid on the due date, therefore the First Interest Rate Provision could not stand.

[31] The motion judge erred when interpreting the words of the Commitment to mean that the increase in the interest payment in the seventh month was triggered by the default and was, therefore, in breach of the Interest Act and unenforceable. The increased interest rate was triggered on February 8, 2020, merely by the passage of time, and not due to the Mortgagors’ default in repaying the principal when it came due. The interest rate before and after default were the same.

[32] Having found that the motion judge did err in finding that the interest rate provision in the mortgage commitment breached s. 8 of the Interest Act, we will add only the following regarding the Appellant’s alternative ground of appeal.

[33] When the Commitment is read as a whole, the motion judge’s reasoning is also not supported by the language of the Commitment and the intention of the parties.

[34] The primary goal in contractual interpretation is determining the parties’ intention by looking at the words they have used read in the context of the agreement as a whole and the surrounding circumstances reasonably known to the parties at the time the contract was made. Reading the First Interest Rate Provision together with the rest of the Commitment, the parties’ intention was that the Mortgagors would have to renew or discharge the mortgage before the final month to avoid paying the 18% interest.

[35] First, with respect to the context of the Commitment, the Renewal Provision provided that if the Mortgagors did not elect on or before January 8, 2020 to renew the mortgage on February 8, 2020, then the interest rate would increase to 18% for the 7th month. The interest increase would not be triggered by the default, but rather by the operation of both the interest provisions and the Renewal Provision. If the Mortgagors did renew the Mortgage on or before January 8, 2020, then the first (1st) month of the second (2nd) term would be the final month of the first (1st) term, with interest increasing from 8.25% to 8.99%. New post-dated cheques for interest at 8.99% would be provided and the final post-dated cheque for interest at 18.00% for the first term would be returned.

[36] In this case, the Mortgagors did not renew the mortgage on January 8, 2020, so the increased interest rate was triggered automatically by the passage of time, not by the default. This scheme was affirmed in the Subsequent Interest Provision, which also sets out that the interest would increase in the seventh month.

[37] Second, the parties’ actions also support inferences about their intentions. The Mortgagors provided a cheque for 18% for the final month and initialled next to the First Interest Rate Provision, indicating that they understood the provision and intended for it to apply.

[38] If the Mortgagors failed to discharge the Mortgage at the March 8, 2020 maturity date, the interest rate before default and after default were the same. There is no higher rate of interest imposed on arrears than imposed on principal money not in arrears.

Disposition

[42] For these reasons, the appeal is granted. The Appellant shall have judgment in an amount that accounts for interest at the rate of 8.25% for the first six (6) months of the Mortgage term and 18.00% for the seventh (7) month, and thereafter.

Costs

[43] The Appellant asks for costs of the appeal plus HST in the amount of $31,543.50. The appellant argues that the amount of the mortgage dispute is significant - $700,000. The Appellant also argues that the matter could have been shortened if the Respondents had notified them that they would not be taking part in the appeal. As a result of not doing so, the Respondent prevented an earlier date being set for the appeal as time set aside for the Respondent to file materials was wasted time.

[44] In the circumstances, costs of $31,543.50 are reasonable and the Respondents are to pay this amount to the Appellants forthwith.

McWatt A.C.J.S.C.J.

Sachs J.

Penny J.

Released: August 23, 2021

CITATION: Alleghe Mortgage Fund Ltd. v. 1988758 Ontario Inc., 2021 ONSC 4887

DIVISIONAL COURT FILE NO.: DC 21 174-00

DATE: 20210823

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

McWatt A.C.J.S.C.J. and Sachs and Penny JJ.

BETWEEN:

ALLEGHE MORTGAGE FUND LTD.

Appellant

– and –

1988758 ONTARIO INC.

Respondent

REASONS FOR JUDGMENT

Released: August 23, 2021