Nature of the Motions

[1] There are two motions for summary judgment pursuant to Rule 20 brought by the parties. Each motion seeks a determination of the issue in its favour.

[2] It is agreed by the parties that the nature of the issue raised is such that it may be determined on the current record by way of motion for summary judgment.

Issue

[3] The issue on this motion is whether section 17 of the Mortgages Act, R.S.O. 1990, c. M. 40 (the “Act”) entitles the Defendants to charge three months’ additional interest as claimed in a Notice of Sale in respect of a default by the Plaintiff on a mortgage that has matured.

Facts

[4] The parties have jointly provided an Agreed Statement of Facts that provides the evidentiary basis for determining the issue raised.

[5] On July 31 2015, the Defendants advanced a loan to the Plaintiff in the amount of $7,875,000.00. The loan was secured by a mortgage registered on title to the Plaintiff’s property.

[6] The mortgage provided for interest at a rate of 9.0% per annum compounded monthly. The Plaintiff was to make interest-only payments for a term of one year until July 31, 2016 at which time the Plaintiff was to repay the principal in full.

[7] The agreement between the parties dated June 26, 2015 provided for a possible extension of the mortgage on terms and at the option of the Defendants.

[8] The mortgage incorporated by reference Standard Charge Terms and the agreement. None of these documents contains any clause requiring the Plaintiff to pay three months’ additional interest in the event of default.

[9] The Plaintiff made the required monthly interest-only payments up to the maturity date. On the maturity date, the Plaintiff failed to repay the principal owing and consequently defaulted on the Mortgage.

[10] On August 16 2016, the Defendants commenced an action against the Plaintiff for possession of the property (the “2016 Action”).

[11] On August 23 2016, the Defendants issued a Notice of Sale in respect of the property. The Notice of Sale claimed a total sum owing of $8,100,348.46, consisting of the following:

(a) $7,875,000.00 for principal;

(b) $44,660.96 for regular monthly interest under the mortgage terms from July 31, 2016 to August 23, 2016;

(d) $3,500.00 for costs up to and including service of the Notice of Sale.

[12] On September 22 2016, the Plaintiff filed a Statement of Defence to the action which challenged the validity of the Notice of Sale.

[13] In November 2016, the Plaintiff obtained a commitment from a third party lender to refinance the property. In connection with the refinancing, the Defendants sent a mortgage discharge statement to the Plaintiff. The mortgage discharge statement included the amount of $8,100,348.46 charged in the Notice of Sale, as well as other amounts said to be owing.

[14] On December 23 2016 the Plaintiff paid the Defendants the amount claimed in the mortgage discharge statement, including the three months’ interest charged in the Notice of Sale, plus regular interest under the terms of the mortgage accrued up to that date.

[15] The Plaintiff made the payment expressly without admission of the validity of the three months’ interest charge and reserved all rights to an accounting and to claim back the three months’ interest.

[16] The refinancing transaction closed and the mortgage was discharged on December 23, 2016.

[17] On January 25 2017, the Plaintiff commenced this action for recovery of the disputed three months’ interest paid to the Defendants.

[18] On March 27 2017, the Defendants delivered a Statement of Defence which identified section 17 of the Act as the basis for their claim to entitlement to three months of additional interest in these circumstances.

[19] The only issue for determination is whether the Defendants are correct in their interpretation of s.17 of the Act.

Law and Discussion

[20] Section 17(1) of the Act provides:

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.

[21] The interpretation and effect of this provision has been the subject of disagreement in the applicable authorities and of debate among practitioners.

[22] Section 17 gives the mortgagor, when in default of payment of principal, an opportunity to repay the principal by either giving the mortgagee three months’ notice or interest in lieu thereof of his or her intention to make the payment (see: Mastercraft Properties Ltd. v. EL EF Investments Inc., 1993 CanLII 8545 (ON CA), 1993 CarswellOnt 614 (Ont.C.A.)).

[23] The purpose of section 17 is to protect mortgagors by permitting payment of arrears without penalty, or by permitting early redemption at a price, while also protecting the mortgagee by giving him a three-month period during which to arrange for reinvestment of his principal, or monies to compensate for lack of that notice. The option to exercise rights under s. 17 is that of the mortgagor (Mastercraft Properties Ltd. v. EL EF Investments Inc., supra).

[24] Therefore, it is not up to the mortgagee to decide that the three months interest is due in addition to the principal, interest and costs under the mortgage and impose this requirement unilaterally on the mortgagor without regard to the circumstances.

[25] Support for the Plaintiff’s position may be found in the decision in Ialongo v. Serm Investments Ltd. (2007 CarswellOnt 1246 (S.C.J.)). That case dealt with a mortgagor who defaulted on a matured mortgage where the mortgagee had chosen to issue a Notice of Sale. Brown, J. ( as he then was) held that the mortgagee in such circumstances could not demand payment of three months’ interest under s.17 of the Act because:

… the rights afforded by section 17 are options made available to the mortgagor on default: it can give notice or pay the bonus prior to the expiry of the notice period. Once, however, the mortgagee takes steps to realize on its security, such as by issuing a notice of sale, it cannot convert the rights of the mortgagor under section 17 into obligations of the mortgagor upon the realization of the security. The amounts a mortgagee may demand from a mortgagor upon realization are those spelled out in the mortgage contract, not in s.17 of the Mortgages Act.

In the present case, once the respondent mortgagee issued its Notice of Sale, it was not entitled to demand payment of three months’ interest under section 17 of the Act. It stood in a fundamentally different position than it did on September 20, 2006 when it provided the applicants with a discharge statement at their request. Once the respondent issued the notice of sale, it was required to look to the terms of the Mortgage to ascertain what amounts it could require the mortgagor to pay in order to redeem the Mortgage. Accordingly, I conclude that once it issued the Notice of Sale the respondent was not entitled to require the applicants to make a payment under s.17 of the Act.

[26] Counsel for the Plaintiff has pointed out that the decision in Ialongo v. Serm Investments Ltd. is consistent with the traditional notion that if the mortgagee takes the decision out of the mortgagor’s hands by exercising recourse against the security the mortgagor can redeem immediately without any bonus whatsoever. By commencing a sale under power of sale the mortgagee takes the repayment decision out of the mortgagor’s hands. The mortgagee pays for this acceleration by losing its right to the three-month “bonus”.

[27] In the present case, and applying the approach taken in Ialongo v. Serm Investments Ltd., once the Defendants issued their Notice of Sale they could rely only on the remedies set out in the mortgage and not on any additional “bonus interest” said to be owing under s.17 of the Act.

[28] The reasoning in the decision in Ialongo was applied recently by me, sitting as a single judge of the Divisional Court (see: Hornstein v. Orbach, 2016 ONSC 1458 (Div.Ct.)). In that case, an appeal from three Small Claims Court decisions that permitted a mortgagee to charge three months’ interest for three properties pursuant to Notices of Sale and s. 17 of the Act, those decisions were reversed. It was held that the trial judge had erred in permitting the three-month interest charge because the mortgages at issue had already matured and were the subject of power of sale proceedings. It was further held that the provisions of s.17 upon which the trial judge relied apply only to the rights of a mortgagor where default in the payment of principal secured by a mortgage of freehold or leasehold property had occurred prior to maturity of the mortgage.

[29] It was further noted in Hornstein v. Orbach that much of the case law relied on by the Small Claims Court judge involved mortgage agreements which contained a specific provision providing for three-month bonus interest. This was not the case in the mortgages at issue in Hornstein v. Orbach. No such provision is present in this action either.

[30] In support of their position to the contrary, the Defendants rely on the decision of the Divisional Court in O’Shanter Development Co. v. Gentra Canada Investments Inc. (1995 CarswellOnt 339).

[31] In O’Shanter Development Co. v. Gentra Canada Investments Inc., a first mortgagee issued a Notice of Sale which contained no three-month interest charge. A second mortgagee issued its own Notice of Sale, sold the property, and sought to repay the first mortgagee. However, the first mortgagee demanded payment of three months’ interest on the basis that the mortgage agreement had a “prepayment” clause requiring three months’ interest to be prepaid if the default occurred prior to maturity.

[32] The Divisional Court held that, because the mortgage was not redeemed within the period set out in the first mortgagee’s Notice of Sale, the first mortgagee was no longer bound to accept only the amount claimed in its notice. It was instead entitled to three months’ notice for early redemption or payment of three months’ interest in lieu thereof, pursuant to the prepayment clause and section 17 of the Act. On the basis of the wording of the mortgage contract itself, and subject to the other issues, the first mortgagee was entitled to claim the prepayment amount (three months’ interest) in its Notice of Sale.

[33] Several subsequent cases have cited this Divisional Court decision as authority for allowing mortgagees to commence a power of sale, force the repayment of principal and also charge three months’ additional interest (see: SK Properties & Development Inc. v. Equitable Trust Co., 2003 CarswellOnt 2130, [2003] O.J. No. 2234; L.I.U.N.A, Local 837 v. 810322 Ontario Ltd., 2006 CarswellOnt 9295, [2006] O.J. No. 3260; Irwin Mintz, in trust v. Mademont Yonge Inc., 2010 ONSC 116).

[34] Commentators have criticized the decision and have argued that it was either wrongly decided, erroneously applied in subsequent case law, or has limited application. It has been argued that the main problem is that the approach taken converts what was a privilege in favour of the mortgagor under section 17 of the Act into a penalty against the mortgagor (see: Jeffrey Lem, “The ‘Final’ Word on Section 17’s Three Month Notice Bonus”, Practice Gems: Mortgage Enforcement Essentials (Law Society of Upper Canada, September 16, 2014); Steven I. Pearlstein, “The Three Month Mortgage Penalty: Understanding the Principles” (2008: 5th Annual Real Estate Law Summit)).

[35] Indeed, in O’Shanter Development Co. v. Gentra Canada Investments Inc., Rosenberg, J. dissented on that point. Relying on Shankman v. Mutual Life Assurance Co. of Canada (1985), 1985 CanLII 2196 (Ont. C.A.), Rosenberg, J. agreed with the principle that not only can a mortgagee not assert his option to prevent redemption but he cannot impose a penalty on redemption by contract. In his view, service of a Notice of Sale triggers the right to redeem without such a penalty.

[36] In this case, the Notice of Sale was served by the mortgagee to exercise recourse against the security after the mortgage had matured. In my view, a proper interpretation of s.17 of the Act does not permit the Defendants to tack on an extra three months’ interest to the other amounts owing under the mortgage. In my opinion, the Plaintiff’s arguments therefore should prevail.

Conclusion

[37] For these reasons, the Plaintiff is entitled to summary judgment against the Defendants in the amount equivalent to three months’ interest, as paid by it under protest, together with interest in accordance with the Courts of Justice Act, R.S.O. 1990.c.C. 43.

[38] In view of this determination, the argument based on s.8 of the Interest Act, R.S.C. 1985, c. I-15 need not be addressed.

Costs

[39] If the subject of costs cannot be agreed upon, written submissions may be delivered by the Plaintiff within 20 days of the date of this decision, and by the Defendants within 20 days thereafter.

STEWART J.

Released: August 11, 2017

CITATION: 2468390 Ontario Inc. v. 5F Investment Group Inc., 2017 ONSC 4641

COURT FILE NO.: CV-17-568310

DATE: 20170811

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

2468390 ONTARIO INC.

Plaintiff

– and –

5F INVESTMENT GROUP INC. and OTT FINANCIAL INC.

Defendants

REASONS FOR JUDGMENT

STEWART J.

Released: August 11, 2017

2468390 Ontario Inc. v. 5F Investment Group Inc., 2017 ONSC 4641

Case Summary

Nature of the Motions

Issue

Facts

Law and Discussion

Conclusion

Costs

Judge

Counsel

Parties

Areas of Law

Fact Patterns

Financial Outcomes

Issues

Statutory Provisions 2

Legislation 3