COURT FILE NO.: 72179/11

DATE: 2012-12-17

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN

ELLE MORTGAGE CORPORATION

Plaintiff

— and —

KULDIP ADALATH, NORA JOYCELYN ADALATH, THE TORONTO-DOMINION BANK and 2084767 ONTARIO INC.

Defendants

COUNSEL:

Glenn E. Cohen for the Plaintiff

James M. Butson for the Defendant The Toronto-Dominion Bank

John G. Howes for the Defendant 2084767 Ontario Inc.

HEARD: August 7, 2012

Sosna J.

RULING ON REFERENCE

[1] This is a mortgage foreclosure action converted into a sale action. The sale of the property was ordered by judgment dated February 17, 2012. The approved sale closed with net proceeds of sale in the sum of $726,447.34 being paid into court. This is a reference pursuant to the judgment to determine what is to be paid out.

[2] On August 7, 2012, oral submissions were made on the reference. The matter was adjourned for written submissions from the plaintiff, Elle Mortgage Corporation (“Elle”) and the defendant, the The Toronto-Dominion Bank (“TD”). In the interim, on consent, the following funds held in trust were paid out to the parties; to Elle $450,000 and to the second mortgagee TD $100,000.

[3] The remaining issue on this reference is to determine the distribution of the remaining funds. Elle is seeking a final sum of $595,441.48, plus interest as of March 21, 2012 in fees and its costs. TD opposes the amount sought arguing Elle is not entitled to increased fees, disbursements, and costs it seeks.

BACKGROUND HISTORY

[4] Kuldip and Nora Adalath were the registered owners of 104 Elizabeth Street, Ajax, Ontario, a residential property. Elle was assigned the first mortgage on 104 Elizabeth Street from Home Trust Company (“Home Trust Mortgage”) on or about March 4, 2010 when the mortgage was in default. Elle paid out the principle, interest, costs and expenses claimed by Home Trust Mortgage in the amount of $451,836.52 with an interest rate of 6.8%. The Home Trust Mortgage and its terms including the provisions for amending agreements were registered in Land Titles.

[5] On October 20, 2006 the Adalaths secured a line of credit with TD. The line of credit was secured by a mortgage registered the same day. The TD mortgage was second in priority behind the Home Trust Company mortgage as it then existed.

[6] In March 2010 the Adalaths had defaulted on their mortgage and required funds to either refinance or to sell the property. On March 11 of that year they entered into a one year mortgage accommodation and amendment agreement with Elle extending their mortgage payments for that period and giving them time to refinance or sell the property.

[7] Pursuant to the amendment agreement, the Adalaths agreed in writing to increase the interest to 7.99% per annum together with increased monthly payments. They also agreed that the principal amount would be increased by $12,000 representing an accommodation fee, mortgage brokerage fee, legal fees, and to cover $8,478.85 paid by Elle for tax arrears owed by the Adalaths to the Town of Ajax.

[8] On March 4, 2011 the mortgage was automatically renewed for an additional six months. Elle imposed a renewal fee by letter to the Adalaths in the amount of $23,706.08. This renewal fee represents a 5% renewal charge to the balance as set out in the mortgage accommodation and amendment agreement signed one year earlier.

[9] The Adalaths made no payments on the renewed six month mortgage and also defaulted on TD’s charge. Elle commenced a foreclosure action and TD filed a Request for Sale. On October 20, 2011, a judgment was issued in TD’s action, ordering Nora Adalath to pay TD $258,173.55 plus interest and costs, and ordering the Adalaths to deliver up possession of the property to TD. At that time and continuing thereafter the Adalaths were attempting to sell the property.

[10] On December 6, 2011, TD secured vacant possession of the property after the writ of possession was enforced by the Sheriff. On December 20, 2011, the Adalaths advised Elle that although they had been evicted they were expecting to receive an offer of $780,000 from a third party interested in their property.

[11] On December 22, 2011, while TD was awaiting its appraisals on the property, Elle contacted TD and advised them that they and the Adalaths had negotiated and signed a further amendment agreement for $20,000 permitting the Adalaths occupancy on terms.

[12] Possession of the property by the Adalaths was taken without the consent or knowledge of TD absent a court order and despite TD’s earlier judgment, writ of possession, and the eviction enforced by the Sheriff. Ultimately the Adalaths sold the property for $770,000. Elle applied to this Court for a judgment for sale, and for immediate approval of the sale based on the appraisal evidence. Although TD opposed the motion the matter was adjourned to allow TD the opportunity to review the sale agreement with its appraisal of valuations. TD agreed to the sale and a consent judgment along with a vesting order was issued for the sale of the property on February 17, 2012.

ELLE’S POSITION RE: DISTRIBUTION OF REMAINING FUNDS

[13] Elle agrees that the legal fees charged to the mortgage account from time to time are to be assessed or fixed by this court as the judgment directing this reference provides, even though the right to charge and secure legal fees is provided for in the HTSCT.

[14] Elle submits that it is entitled to add to the mortgage account the increased interest rate upon renewal, amending fees, and various administrative fees against the property, as set out in Exhibit “J” to the affidavit of Terry Michael Walman in priority to the second mortgagee TD. Elle argues the authority for charging such fees, and the mortgagor’s obligation to pay them, is specifically provided under the Home Trust Company Standard Charge Terms, (“HTSCT”) assigned to them and registered on title.

[15] Elle submits when TD went on title as the second mortgagee, by virtue of the provisions of the Land Titles Act, TD was deemed to have notice of the nature and intent of the terms as set out in the Home Trust Company Mortgage registered in priority on title. Elle argues it is entitled in priority to TD to the increased charges as set out in Exhibit “J” to the affidavit of Terry Michael Walman which sets out the increased costs incurred pursuant to the accommodation and amendment agreements under the Home Trust Mortgage which was assigned to them.

TD’S POSITION RE: DISTRIBUTION OF REMAING FUNDS

[16] TD submits that when the Home Trust Company Mortgage was assigned to Elle in April 2010, the sum outstanding was $451,836.52 bearing an interest rate of 6.80% per annum. Despite payments by the Adalaths in the amount of $48,411.74 over the next 20 months from the time of the assignment, Elle is claiming $595,441.48 in addition to those payments with an interest rate of 10.99% per annum. Therefore Elle is claiming an increased amount of $143,604.96 in addition to the sum of $48,411.74 already received.

[17] TD submits that the increased expenses sought by Elle are not set out in the Home Trust Mortgage and are in fact contained in the various amending and/or renewal agreements entered into between Elle and the borrowers, the Adalaths, without notice to or consent of TD. While such increased expenses may be a valid claim as between Elle and the Adalaths, they are not a charge against the land in priority to subsequent encumbrancers and rank behind TD's security interest in the property.

[18] TD submits that the increased expenses as set out in Exhibit “J” to the Affidavit of Terry Michael Walman should be deducted from Elle’s mortgage account since they are the product of the amending and/or renewal agreements entered into between Elle and the Adalaths without notice to or the consent of TD and therefore are not attributable to the original terms of the Home Trust Company Mortgage.

[19] TD further submits that Elle’s newest cost outline seeking an additional $31,767.50 lacks evidentiary foundation. Elle on the other hand submits those costs should be included in the distribution of the remaining funds held in trust.

FINDINGS

[20] I reject Elle’s position that the increased expenses as set out in Exhibit “J” to the affidavit of Terry Michael Waldman be deducted from Elle’s mortgage account as it relates to what it is owed in priority to TD. My reasons are as follows.

1. NOTICE AND PRIORITY

[21] Registration of Standard Charge Terms is provided for by s. 8, 9, and 10 of the Land Registration Reform Act, RSO 1990 c. L.4. Upon being accepted for registration, they are transmitted to all Land Registry Offices, electronically registered, and available for public inspection. Their terms are deemed incorporated into registered mortgages that reference them pursuant to S.78(4) of the Land Titles Act which states:

When registered, an instrument shall be deemed to be embodied in the register and to be effective according to its nature and intent, and to create, transfer, charge or discharge, as the case requires, the land or estate or interest therein mentioned in the register.

[22] When Elle took assignment of the Home Trust Mortgage in March 2006, the mortgage terms including the provisions for amending agreements were registered in Land Titles. When TD registered their charge against title in October 2006 they did so aware that the Home Trust Mortgage stood in priority over them and as provided in S.78(4) are deemed to have notice of the registered terms in the Home Trust Mortgage.

[23] Those terms amongst others include the following:

Clauses 1 and 2, defining principal and interest to include amendment, extension or renewal of the mortgage and additional amounts secured by the mortgage;

… phrases beginning with capitals such as Principal Amount, Balance Due and Interest Rate refer to the applicable information set forth beside those phrases in the form to Mortgage Charge/ Mortgage of Land …. and any amendment of the applicable information on renewable or otherwise from time to time… You charge the property to secure and you covenant to pay to us the principal amount, interest and all fees and costs on the terms set out in this Charge or in any amendment, extension or renewal of the Charge, and any additional amounts secured by this Charge, on the terms elsewhere provided…

[24] Clause 9 providing for renewal and the right to automatically renew;

…you will be deemed to have accepted a renewal for a one-year term on the terms set out in the Notice of Renewal. On any renewal the amount of the payments being made … will be adjusted accordingly. Renewal fees not paid … will be added to the balance outstanding on the charge and bear interest… It shall not be necessary to register a notice of any such renewal or obtain any consent or acknowledgments in order to retain priority for this charge so altered over any subsequent encumbrance…

[25] Clause 10 creating a general and continuing security for future liabilities:

… this Charge will secure all your indebtedness and liabilities from time to time to us. The Charge is a general and continuing security… for all other present and future debts you may have with us… and interest thereon and charges, fees and expenses incurred with respect thereto.

[26] Clauses 34, 35, and 36, providing for servicing fees and costs to be payable by the mortgagor, and to be secured by the charge, with interest for:

… renewal, restructuring or other amendment of the Charge or amounts secured by the Charge… and each amendment, extension or renewal thereof…

[27] I agree that decision in Reynolds Extrusion Co. Ltd. v. Cooper (1978) 1978 CanLII 1671 (ON SC), 21 O.R. (2d) 416 (HCJ) cited by both Elle and TD provides guidance on the issues raised in this reference. The Court held at p. 6:

I think the proper way to approach the matter is to consider the position of the second mortgagee. He is bound by the terms of the prior encumbrancer as known to him when he entered into his contract with the mortgagor. If that prior mortgage contains a clause entitling the mortgagee to charge greater interest or the mortgagor to an extension then the subsequent mortgagee must accept the amendments when they are made. If the mortgage does not contain such terms the subsequent mortgagee cannot be bound by the subsequent agreement. … The mortgage must continue to have priority to the extent of the original contract of which the subsequent mortgagee had notice.

[28] The Court further cited with approval the following excerpt from Fisher and Lightwood’s “Law of Mortgages”, 9th ed. (1977) pp.43-44:

Where the prior mortgage provided for variation (eg being security for such sum as shall be owing from time to time, or providing for an increase in the rate of interest) a subsequent incumbrancer takes subject to those terms and the first mortgagee has priority consistent with such terms.

[29] Although Reynolds Extrusion supra did not deal with registration under the Land Titles Act as in the present matter, I find its ratio nevertheless applicable.

[30] I further find that Reynolds Extrusion supra does not support Elle’s proposition that taken to its logical and final conclusion, a first mortgagee can make amendments to its mortgage and either decrease or wipe out any interest of the subsequent encumbrancer. To give effect to Elle's proposition would cause potential lenders to be unable to have any certainty concerning the present or future value of security given to the potential lender. It would be almost no point in taking that security.

[31] Further, our law of real property is to a large extent based on notice given by registration of documents, including mortgages/charges, standard charge terms, and other registered instruments. Elle’s proposition makes a sham out of notice.

[32] A potential lender is entitled to be able to ascertain the value of the proposed security by making reasonable inquiries and by relying on the Land Titles Register or the Land Registry abstract and instruments registered in either system. A potential subsequent encumbrancer is entitled to rely on a first mortgagee statement of the status of its first mortgage and other facts of which the potential subsequent encumbrancer has notice. Unless terms of prior encumbrance were or should have been known by a subsequent encumbrancer at the time of registration of its mortgage/charge, the subsequent encumbrancer cannot be prejudiced by such unknown terms. Otherwise, knowledge, reasonable due diligence and the importance of notice in our Land Registry and Land Titles systems becomes irrelevant.

[33] In the present case, when TD registered its mortgage/charge, the property register indicated the existence of the Elle mortgage/charge and its supporting standard charge terms some of which have been previously reviewed. Subsequent to TD registering its mortgage/charge, Elle and the property owner executed a series of amending agreements. Many of the fees/expenses now claimed by Elle arise out of the amending agreements. At the time of TD’s registration of its mortgage/charge, TD had no knowledge of the amending agreements or fees/expenses contained therein. Those fees/expenses have the effect of significantly reducing the value of TD's security. TD cannot be prejudiced in that manner.

[34] For those reasons, Elle cannot claim fees/expenses arising out of the amending agreements. Elle can only claim fees/expenses specifically set out in the registered mortgage/charge and a standard charge terms. The vague reference in the standard charge terms to the possibility of other fees/expenses that may arise out of subsequent amending agreements cannot prejudice a potential subsequent lender who, at the time of registering its subsequent encumbrance, could not possibly know or ascertain the nature and amount of such fees/expenses that might be included in future amending agreements in which the subsequent encumbrancer had no input and, as a result, no means of protecting its security in the property.

[35] Accordingly the following fees/expenses claimed by Elle as set out in Exhibit “J” to the affidavit of Terry Walman are disallowed as those fees/expenses arise solely out of the amending agreements and TD had no notice and no knowledge of the possibility of such fees/expenses at the time that TD registered its encumbrance:

March 4, 2010

• Renewal fees $9000

• Brokerage/consulting fee $2000

• Legal fees inclusive of disbursements $2000 (subject to amendment)

March 4, 2011

• Renewal fee as per agreement with mortgagor $23,706.08

• Servicing fee – repayment of realty taxes $400

Legal costs to December 19, 2011- $10,825 (subject to amendment)

Litigation counsel - Glenn Cohen $5650 (subject to amendment)

April 20, 2011

• N.S.F. non-payment administrative fee, $1,600

December 20, 2011

• Renewal fees $5000

• Legal fee – $3000 (subject to amendment)

• Property management costs – $1000

• Appraisal costs – $450

• Funds applied to costs - $20,000

Legal costs to February 24, 2012 - $4,825.00 (subject to amendment)

Litigation counsel - Glenn Cohen $13,728.68 (subject to amendment)

[36] The above legal fees claimed exceed $40,000. These fees are excessive and inflated for the work performed. The fees are therefore reduced to $20,000 plus HST and disbursements.

[37] Furthermore the interest rate of 6.80% per annum is to be applied as of March 4, 2010.

[38] The calculations of these sums are to be finalized by the parties.

COSTS OF THIS MOTION

[39] If the parties cannot agree on the costs for this reference, written submissions are to be filed in the Superior Court of Justice filing office, 150 Bond Street East, Oshawa, no later than January 31, 2013.

The Honourable Mr. Justice A. Sosna

DATE RELEASED: December 17, 2012