Grand Ridge Estates Limited v. Breadner Holdings Inc., 2018 ONSC 655

COURT FILES NO.: C-375-16 and C-259-16

DATE: 2018/01/30

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: GRAND RIDGE ESTATES LIMITED, PRIMELAND DEVELOPMENTS (2003) LIMITED and 1291105 ONTARIO LIMITED, Applicants

AND:

BREADNER HOLDINGS INC. and BREADNER TRAILER SALES AMALGAMATED LIMTED, Respondents

AND RE: BREADNER HOLDINGS INC., Applicant

AND:

GRAND RIDGE ESTATES LIMITED, Respondent

BEFORE: The Honourable Justice D.A. Broad

COUNSEL: Sherry A. Kettle and Stephen R. Cameron, for GRAND RIDGE ESTATES LIMITED, PRIMELAND DEVELOPMENTS (2003) LIMITED and 1291105 ONTARIO LIMITED

E. Patrick Shea, for BREADNER HOLDINGS INC. and BREADNER TRAILER SALES AMALGAMATED LIMTED

HEARD: December 18 and 19, 2017 and January 2, 2018

REASONS FOR JUDGMENT

Background

[1] Grand Ridge Estates Limited (“GREL”), Primeland Developments (2003) Limited (“Primeland”) and 1291105 Ontario Limited (“1291105”) (together the “Freure Companies”) are controlled by Harold Freure (“Harold”). Breadner Holdings Inc. (“BHI”) and Breadner Trailer Sales Amalgamated Limited (“BTSAL”) (together the “Breadner Companies”) are controlled by Robert Breadner (“Robert”).

[2] Robert is Harold’s son-in-law, being married to Harold’s daughter.

[3] The dispute between the parties involves a collateral mortgage (the “BHI Charge”) granted by GREL to what is now BHI.

[4] The BHI Charge secured two obligations.

[5] The first obligation was a debt obligation based on monies advanced by the Breadner Companies between 1995 and 2008 in respect of a real estate development project known as “Brant’s Landing” being developed by Freure Brant’s Landing East Limited (“FBLEL”). The second obligation was in respect of a “Participation Amount” to be paid by the Freure Companies to the Breadner Companies first arising by virtue of a mortgage amending agreement dated November 30, 2009.

[6] Harold was the principal of FBLEL. Robert, or companies controlled by him, advanced moneys in 1995 to FBLEL, when the bank providing financing for the “Brant’s Landing” project being developed by FBLEL called its loan. The advances by the Breadner Companies (the “Breadner advances”) were intended to permit FBLEL to complete the project. When the Brant’s Landing project was completed in 2008 there were insufficient funds remaining to repay the Breadner advances. This resulted in FBLEL defaulting on its obligations to the Breadner Companies.

[7] Harold proposed to Robert that the Breadner advances in respect of the Brant’s Landing project be repaid from the development of a property owned by GREL in Cambridge, Ontario (the “GREL Property”). To that end, GREL executed a demand guarantee (the “BHI Guarantee”) in favour of what is now BHI guaranteeing payment of all amounts owing by FBLEL. The BHI Guarantee provided that BHI would not be required to exhaust its recourse against FBLEL before pursuing payment from GREL, GREL’s obligation to pay could be triggered on demand, and interest would be payable by GREL at 34% per annum from and after demand.

[8] The BHI Charge was registered against the GREL Property as collateral security for the BHI Guarantee. The BHI Charge was subordinate in priority in respect of the GREL Property to security held by Laurentian Bank which had agreed to provide financing to GREL for development of the GREL Property.

[9] On May 8, 2009 and again on August 20, 2009 BHI made demand for payment on the BHI Guarantee and commenced power of sale proceedings under the BHI Charge. The amount claimed on August 20, 2009 was the sum of approximately $5.8 million.

[10] BHI and GREL entered into a document entitled “Terms of Agreement Amending Charge/Mortgage” on November 30, 2009 (the “2009 Amendment”). In the recitals to the 2009 Amendment it was acknowledged that the amount demanded by BHI, being the sum of approximately $5.8 million (the “Demanded Amount”), was due and owing, and that GREL was desirous of BHI deferring its power of sale proceeding.

[11] The 2009 Amendment stated that the principal amount secured by the mortgage was the Demanded Amount, plus accrued interest, and a “Participation Amount” comprising 50% of the net profits to be realized by GREL in developing the GREL Property, as defined in the agreement. The Participation Amount was stated to constitute a collateral advantage and not principal or interest. Interim payments in respect of the Participation Amount were to be paid and GREL was required to sell a minimum number of lots in each year until December 31, 2015 to pay down the demanded amount (the “Cumulative Annual Lots Sales Targets”). The interest rate on the Demanded Amount was reduced from 34% to 11%. No interest was payable on the Participation Amount. GREL was given until November 1, 2020 to pay the amounts owing to BHI, provided there was no default(s) in the interim.

[12] Under the 2009 Amendment, the Participation Amount was only recoverable under the BHI Charge as against the GREL Property.

[13] Coincidentally with the 2009 Amendment, Primeland Development (2003) Limited and 1291105 Ontario Limited each guaranteed all indebtedness of GREL to BHI from time to time and each of them granted to BHI collateral mortgage security over lands owned by them in the City of Kitchener. Harold also executed a personal guarantee in favour of BHI in respect of all indebtedness of GREL to BHI from time to time. Harold’s guarantee was unsecured.

[14] By the spring of 2011 GREL had defaulted under the BHI Charge, as amended by the 2009 Amendment. In consideration of BHI deferring enforcement, the parties entered into a document entitled “Terms of Agreement Further Amending Charge/Mortgage” dated June 1, 2011 (the “2011 Amendment”).

[15] Pursuant to the 2011 Amendment the “Aggregate Estimated Participation Amount” in the 2009 Amendment was amended to mean the sum of $4.5 million, thereby converting the Participation Amount from a percentage of profits to be realized from the development to a fixed amount. Interest on the Participation Amount was fixed at 8% per annum commencing December 31, 2015. The principal amount secured under the BHI Charge, as amended, was stated to be the aggregate of the Demanded Amount and accrued interest thereon, and also the Participation Amount. Harold personally guaranteed the obligations owing to BHI including the Participation Amount. The Cumulative Annual Lots Sales Targets were reduced substantially. The stipulation that BHI could recover the Participation Amount only from the GREL Property was also eliminated.

[16] By Mortgage Amending Agreement made as of January 1, 2015 among GREL and the Breadner Companies (the “2015 Amendment”) the BHI Charge was further amended. Pursuant to the 2015 Amendment GREL agreed to enter into agreements to sell certain lots in the GREL Property to Eastforest Homes (“Eastforest”) and to pay to the Breadner Companies a minimum of $100,000 per month, whether or not lots in the GREL Property were sold in any given month. The Breadner Companies agreed to “stand still” on sales of lots, provided certain provisions were satisfied including (a) that GREL did not default in the performance of any obligation under the charges in favour of BTSAL or the BHI Charge or the 2015 Amendment, and (b) BHI did not become entitled to declare the BHI Charge in default, whether or not such declaration was made.

[17] It is noted that FBLEL and GREL became amalgamated under the GREL name, and accordingly all outstanding obligations of FBLEL to BHI became direct obligations of GREL, and were no longer founded on the GREL guarantee.

[18] By letter dated February 1, 2016 from its counsel, BHI communicated to GREL’s counsel that BHI was exercising its option pursuant to section 7.01 of the 2009 Amendment to declare the BHI Charge in default for failure to meet the Cumulative Annual Lot Sales Targets by December 31, 2015, and rendering the entire principal, together with interest and costs, due and owing. The letter demanded payment of the sum of $11,128,636 inclusive of interest to January 31, 2016, but exclusive of costs.

[19] On March 8, 2016 BHI commenced an Application in file No. C-259-16 for the appointment of a receiver over the GREL Property. GREL opposed the BHI Application on the basis that there had been no default under the BHI Charge. GREL, Primeland and 1291105 brought an application in file no. C-375-16 seeking an order permitting them to redeem the BHI Charge together with the collateral charges granted by Primeland and 1291105 upon payment of a fixed amount that did not include the Participation Amount or, in the alternative, to permit them to pay an amount into court to secure the discharge of the said charges pending an adjudication of the amount required to be paid by GREL to BHI.

[20] In early May, 2016 the parties entered into an agreement (the “Settlement Agreement”) which called for an order to be taken out on consent providing for GREL, Primeland and 1291105 to pay the undisputed amount owing under the BHI Charge to BHI and the sum of $4,365,952.79, together with the sum of $300,000 comprising estimated future interest on the Participation Amount in the sum of $100,000 plus estimated current and future legal costs of the Breadner Companies in the sum of $200,000 (together the “ Disputed Amount”) into court.

[21] An order was made, on consent, by Justice Gordon on May 5, 2016 (the “Settlement Order”) implementing the Settlement Agreement. The Settlement Order provided that, upon payment of the undisputed amount to the Breadner Companies and upon payment of the Disputed Amount into court, the three charges would be discharged and:

“the Disputed Amount will stand in the place of the security held by [the Breadner Companies] over the real property subject to the mortgages such that the claims of [the Breadner Companies] as against [the Freure Companies] will, subject to such claims being determined to be valid, be recoverable as against and paid from the cash representing the Disputed Amount.” (underlining added)

[22] By subsequent order made by me on September 27, 2016 the amount paid into court in respect of future interest and costs was increased by $106,500, to account for additional anticipated costs of the Breadner Companies and additional interest by reason of delay in the proceedings.

[23] The Settlement Agreement effectively resolved the BHI Application in file C-259-16 subject to determination of the question of costs of that application, leaving the GREL application to be decided.

[24] The issue to be decided, pursuant to the terms of the Settlement Order, is whether the claim of the Breadner Companies against the Freure Companies in respect of the Participation Amount, and secured by the monies in court, is valid.

Issues Raised by GREL re: Validity of BHI Claims

[25] GREL argues that:

(a) there was no default under the standstill agreement in the 2015 Amendment, and accordingly, BHI was not entitled to declare the BHI Charge in default and to demand payment of the Participation Amount;

(b) the Participation Amount fixed in the sum of $4,250,000 is invalid, unenforceable and void on what GREL’s counsel characterized as equitable and statutory bases, as follows:

(i) it constitutes a clog on the equity of redemption;

(ii) it contravenes section 8 of the Interest Act;

(iii) it contravenes section 347 of the Criminal Code of Canada;

(iv) it contravenes the Unconscionable Transactions Relief Act; and/or

(v) it is a penalty and not liquidated damages.

[26] GREL also advanced an argument in oral submissions, but not in its Factum, that pursuant to an interpretation of the 2009 and 2011 Amendments, payments made by it on the BHI Charge from the net proceeds of lot sales should be credited against both the Demand Amount and the Participation Amount, such that the amount outstanding in respect of the Participation Amount has been substantially reduced.

[27] I propose to deal with the five (5) bases by which GREL submits the Participation Amount is invalid, unenforceable and void on equitable or statutory grounds before considering whether GREL was in default under the standstill agreement and whether payments should be credited against both the Demand Amount and the Participation Amount.

Did the Participation Amount constitute a clog on the equity of redemption?

[28] GREL relies upon the equitable doctrine prohibiting “clogs” on a mortgagor’s equity of redemption. It points to the case of Dical Investments Ltd. v Morrison, [1990] O.J. No. 2160 (C.A.) where McKinlay, J.A, in dissent, summarized the principle at para. 41, quoting from the case of Samuel v. Jarrah Timber & Wood Paving Corp., [1904] A.C. 323 (H.L.) at p.[1904] A.C. 323 (H.L.) at p.329, as follows:

The doctrine 'once a mortgage always a mortgage' means that no contract between a mortgagor and a mortgagee made at the time of the mortgage and as part of the mortgage transaction, or, in other words, as one of the terms of the loan, can be valid if it prevents the mortgagor from getting back his property on paying off what is due on his security. Any bargain which has that effect is invalid, and is inconsistent with the transaction being a mortgage.

[29] Lacourciere, J.A., writing for the majority in Dical and citing the case of Kreglinger v. New Patagonia Meat & Cold Storgae Co., [1914] A.C. 25 (H.L.), stated the principle more positively as follows at paras. 16-17:

It was held in Kreglinger, supra, that a collateral stipulation is valid, provided that it is not "(1) unfair and unconscionable, or (2) in the nature of a penalty clogging the equity of redemption, or (3) inconsistent with or repugnant to the contractual and equitable right to redeem" (at p. 61).

In determining whether the transaction contravened the mortgagor's right to redeem, the Court must look at the substance of the transaction, the "real bargain" intended by the parties [Kreglinger, supra, at p. 61, per Lord Parker].

[30] GREL argues that the Participation Amount was a collateral advantage that became an impermissible “clog” on the equity of redemption when it was fixed at $4.25 million in the 2011 Amendment. In oral submissions it also argued that it constituted a “clog” on the equity because it was included in the mortgage and not in a separate agreement. In support of the latter proposition, GLEL points to the following passage from Traub, Falconbridge on Mortgages (5^th ed.) at p. 3-12:

Since the Keglinger case it has been necessary to consider whether a collateral advantage was intended to be a term of the mortgage or whether it was the subject of an independent bargain which was connected with a mortgage as part of a larger transaction. If it is a term of the mortgage then it will be void if it is to endure after redemption. If it is the subject of an independent bargain then it may survive after redemption.

[31] I am unable to accept these submissions.

[32] No authority was offered in support of the submission that when the Participation Amount became a fixed amount rather than a percentage of future profit it was transformed from a permissible collateral advantage to an impermissible “clog” on the equity of redemption. I see no reason in principle why this should follow. On the authorities a “clog” is a stipulation which has the effect of preventing the mortgagor from getting back its property on paying off what is due on the security. In this case the BHI Charge was discharged upon payment by GREL of the Demand Amount to BHI and the fixed Participation Amount into court. GREL was not prevented from “getting back its property” upon paying off the amounts secured by the BHI Charge.

[33] With respect of the submission that the claim for the Participation Amount is void because it was included in the mortgage document and not in a separate agreement, it is noted that the statement in Falconbridge on Mortgages that “if [the collateral advantage] is a term of the mortgage then it will be void” is qualified by the phrase “if it is to endure after redemption.” GREL was entitled to redeem the BHI Charge upon payment of the Demand Amount and the Participation Amount. Once those amounts were paid there was no obligation which would “endure after redemption”. Moreover, in the very next paragraph, following the passage in Falconbridge on Mortgages upon which GREL relies, it is stated:

It is the substance of the transaction and not merely the form which must be examined. It is necessary to ascertain the object and purpose with which the documents were entered into.

[34] No authority was cited in support of a blanket prohibition on the inclusion of a collateral advantage in a mortgage document in favour of a requirement that it be provided for in a separate instrument, regardless of whether it was to endure after redemption. Indeed, the authority is to the contrary.

[35] In the case of Niagara Resorts Inc. v 1086868 Ontario Ltd. (1999), 24 R.P.R. (3d) 138 (Ont. Ct., Gen Div [Commercial List]) Greer, J. made reference at para. 31 to the head note in Kreglinger as summarizing the law as follows:

There is now no rule in equity which precludes a mortgagee, whether the mortgage be made upon the occasion of a loan or otherwise, from stipulating for any collateral advantage at the time and as a term of the advance, and in the same document as constitutes the security, provided that such collateral advantage is independent of the mortgage, that the mortgagee has not acted unfairly, oppressively, or unconscionably, that the bargain does not restrict or clog the equity of redemption, and that it is not inconsistent with or repugnant to the contractual and equitable right to redeem.

(underlining added)

[36] Justice Greer added the following observations, in reference to the case before her:

“In my view, this quote aptly summarizes the DiCenzio/Cogan deal. Both are extremely experienced land assemblers and persons experienced in making deals. They are both risk-takers and each knows that money is not lent without tight security to protect the rights of the lender. Borrowers are always in a vulnerable position when the ordinary lending institutions are not on the scene to provide the usual mortgage loans. The land in question is vacant, it has a certain speculative quality given the zoning which applies to it, and is not a property that would be in the purview of that lender probably now known as ‘the person on the Clapham omnibus’, who was interested in making a secure investment without complications. The argument therefore does not stand that there is a clog on the equity of redemption that no one thought of when the deal was made.”

[37] These observations have application to the case at bar. Robert and Harold were experienced businesspersons and were, from all appearances, represented by experienced commercial counsel in relation of all of agreements under consideration. I see no basis for a finding that the Participation Amount, whether based on a percentage of profits or a fixed amount, or whether included in the mortgage document or in a separate agreement, represented a “clog” on the equity of redemption.

Did the Participation Amount contravene s. 8 of the Interest Act?

[38] S. 8 of the Interest Act, R.S.C. 1985, c. I-15 provides as follows:

8(1) No fine, etc., allowed on payments in arrears

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.

8(2) Interest on arrears

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.

[39] In the case of P.A.R.C.E.L. Inc. v. Acquaviva, 2014 ONCA 331 the Court of Appeal considered the purpose of the prohibition contained in s. 8 at paras. 50-51, referencing the case of Reliant Capital Ltd. v. Silverdale Development Corp., 2006 BCCA 226 (B.C. C.A.), leave to appeal to S.C.C. refused, [2006] S.C.C.A. No. 265 (S.C.C.). The Court observed that sections 6 to 10 of the Interest Act relate exclusively to interest charges on loans secured by mortgages on real property, and that section 8 is intended to protect property owners against abusive lending practices, while recognizing that, generally speaking, parties are entitled to freedom of contract. Section 8 prohibits lenders from levying fines, penalties or rates of interest on any arrears of principal or interest that are secured by a mortgage on real property.

[40] The Court of Appeal in P.A.R.C.E.L. confirmed, at paras. 53-56, that there are several prerequisites to the application of s. 8 of the Interest Act, as follows:

(a) there must be 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;

(b) the “fine”, “penalty” or “rate of interest” must relate to “any arrears of principal or interest secured by the mortgage on real property” (emphasis in the original). The arrears may arise on default occurring before or after maturity of the relevant debt instrument;

(c) 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”; and

(d) the arrears of principal or interest must be “secured by mortgage on real property.”

[41] GREL submits that the Participation Amount was a condition imposed by BHI to defer power of sale proceedings in 2009. When it became fixed at $4.25 million it was not contingent upon whether profits would actually be realized in the future and therefore it cannot be properly described as a profit-sharing arrangement. GREL says that acceleration of the Participation Amount resulted in a “fine”, “penalty” or “rate of interest” that increased the charge on the arrears beyond the rate of interest payable on the principal not in arrears, and also that the declaration of default and demand for payment effectively caused the post-default amount required to redeem the property and discharge the BHI Charge to “balloon”.

[42] GREL submits further that BHI refused to discharge the BHI Charge unless the Participation Amount was immediately paid as result of the alleged default and the Participation Amount therefore had the effect of increasing the charge on arrears beyond the rate of interest payable on principal money not in arrears.

[43] I do not accept these arguments.

[44] The Participation Amount is a fixed obligation and is payable on maturity even without default. The Participation Amount does not have the effect of causing the interest rate on the Demand Amount to be increased beyond 11%.

[45] The Court of Appeal in Mastercraft Properties Ltd. v. El Ef Investments Inc. (1993), 14 O.R. (3d) 519 (C.A.) leave to appeal to S.C.C. refused at 108 D.L.R. (4th) vii (note), stated, at para. 4, that a "fine" or "penalty" are interchangeable terms in the context of s. 8 and that each constitutes a form of monetary punishment for breach of the repayment terms of the mortgage contract. As indicated, the Participation Amount is payable regardless of any default by GREL. Accordingly, it cannot be considered a form of monetary punishment for breach.

[46] The Participation Amount was agreed to by GREL in exchange for BHI deferring enforcement of the Demand Amount and agreeing to reduce the interest rate payable on the Demand Amount.

[47] In First Island Financial Services Ltd. v. 557596 B.C. Ltd. et al, 2002 BCSC 1348 (B.C.S.C.) it was held, at para. 42, that a fee payable for an extension of a loan is not caught by s. 8 of the Interest Act. In that case, as in the case at bar, the extension amount was agreed to by the mortgagor for consideration, namely, a renewal of the loan agreement, and it was not triggered by default. Moreover, as observed by Smith J. in First Island, there was a valid commercial reason for the extension fees in that case: they purchased more time for the mortgagors to attempt to develop the property. This was also the situation in the case at bar in reference to the 2009 Amendment.

[48] Madam Justice Smith in First Island stated, at para. 42, that the question is not whether a provision increases the cost of borrowing but whether the mortgage provides for a fine, penalty or increase of interest on default. The Participation Amount is not a fine or penalty as observed above, and neither can it be regarded as a “rate of interest.” In short, the fact that the Participation Amount is payable regardless of any default by GREL is fatal to its argument that it offends s. 8 of the Interest Act.

[49] In oral submissions, counsel for GREL argued that acceleration of the Participation Amount on default, resulting in an amount becoming payable which was greater than the then present value of the Participation Amount on maturity resulted in it offending s. 8. I disagree. The fact that the Participation Amount was accelerated did not have the effect of transforming that which was not a “fine” or “penalty” into a fine or penalty. Moreover, any benefit that BHI may have derived from an early payment of the full Participation Amount was offset by the foregone interest that it suffered on the Participation Amount at 8% per annum commencing December 31, 2015 until the maturity date of November 1, 2020.

[50] The claim of BHI for payment of the Participation Amount therefore does not offend s. 8 of the Interest Act.

Did the Participation Amount contravene section 347 of the Criminal Code of Canada?

[51] The pertinent provisions of s. 347 of the Criminal Code are as follows:

347(1) Criminal interest rate

Despite any other Act of Parliament, everyone who enters into an agreement or arrangement to receive interest at a criminal rate, or receives a payment or partial payment of interest at a criminal rate, is

(a) guilty of an indictable offence and liable to imprisonment for a term not exceeding five years; or

(b) guilty of an offence punishable on summary conviction and liable to a fine not exceeding $25,000 or to imprisonment for a term not exceeding six months or to both.

347(2) Definitions In this section,

"credit advanced" means the aggregate of the money and the monetary value of any goods, services or benefits actually advanced or to be advanced under an agreement or arrangement minus the aggregate of any required deposit balance and any fee, fine, penalty, commission and other similar charge or expense directly or indirectly incurred under the original or any collateral agreement or arrangement;

"criminal rate" means an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds sixty per cent on the credit advanced under an agreement or arrangement;

"interest" means the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit under an agreement or arrangement, by or on behalf of the person to whom the credit is or is to be advanced, irrespective of the person to whom any such charges and expenses are or are to be paid or payable, but does not include any repayment of credit advanced or any insurance charge, official fee, overdraft charge, required deposit balance or, in the case of a mortgage transaction, any amount required to be paid on account of property taxes;

[52] The Supreme Court of Canada observed in [Garland v. Consumers Gas Co., [1998] 3 S.C.R. 112 at para. 25:

Although s. 347 is a criminal provision, the great majority of cases in which it arises are not criminal prosecutions. Rather, like the case at bar, they are civil actions in which a borrower has asserted the common-law doctrine of illegality in an effort to avoid or recover an interest payment, or to render an agreement unenforceable.

[53] The broad definition of “interest” in s. 347(2) has the effect of capturing within the section’s ambit a charge or expense in any form payable under an agreement for the advancement of credit, however it may be described (see 677950 Ontario Ltd. v. Artell Developments Ltd. (1992) O.A.C. 189 (C.A.) at para. 25).

[54] There are two branches to the offence created by s. 347(1). The first branch applies to “everyone who enters into an agreement or arrangement to receive interest at a criminal rate” while the second branch applies to “everyone who…receives a payment or partial payment of interest at a criminal rate.”

[55] The Supreme Court of Canada in [Degelder Construction v. Dancorp Developments Ltd., [1998] 3 S.C.R. 90 stated at para. 29 that the first branch is violated “if the credit agreement expressly imposes an annual rate of interest above 60 per cent, or if the agreement requires payment of interest charges over a period which necessarily gives rise to an annual rate exceeding the legal limit.”

[56] The court went on to state that it is the function of the second branch of the section to catch violations where there is merely a possibility that the rate of interest could become illegal under the agreement, for instance, where the period of repayment is subject to change, or where a substantial interest charge is payable on demand or upon the occurrence of a named event. The relevant time frame for calculating the interest rate for the purpose of the second branch is the period over which credit is actually repaid.

[57] At paragraph 32 the Court went on to state that, where a time factor is present, it is not possible to calculate a “criminal rate” of interest under the second branch until the lender has been fully repaid and the actual term of the loan has been defined. If a loan agreement permits, but does not require, the payment of illegal interest, there is no breach of the first branch and the analysis shifts to whether the payment of illegal interest was in fact received by the lender. Liability under the second branch may arise during the course of the loan, so long as it does not result from the voluntary act of the borrower. However, the lender incurs no liability where a charge has been paid over such a long period of time that the resulting interest rate does not exceed the criminal limit.

[58] GREL does not argue in the present case that BHI entered into an agreement to receive interest at a criminal rate, thereby engaging the first branch of s. 347(1). The issue is therefore whether the payment of the Participation Amount will result in BHI recovering interest at a criminal rate under the second branch.

[59] BHI acknowledges that the Participation Amount was agreed to by GREL as part of the 2009 Amendment to secure an agreement by BHI to defer enforcement proceedings in respect of the Demand Amount. It also acknowledges that the definition of “interest” in s. 347(2) is broad enough to capture an obligation agreed to in order to secure a deferral or forbearance of the payment of a debt obligation (see Garland, Artell and 360305 British Columbia Ltd. v. Pay Less Gas Co.(1972) Ltd., [1994] B.C.J. No. 1902 (B.C.S.C.))

[60] GREL retained an expert, Brian Jenkins FSA, FCIA, (the “Expert”) to calculate the effective rate of interest that would be recovered by BHI based on various scenarios related to potential dates for the “advance of credit” by BHI to GREL and potential “payment dates”.

[61] Mr. Jenkins’ Expert Report dated June 22, 2016, his C.V. and signed Acknowledgement of Expert’s Duty were filed as an exhibit in the proceeding.

[62] On instructions from counsel for GREL, the Expert calculated the effective annual rate of interest based on two potential dates for the “advance of credit”:

(a) November 30, 2009, being the date of the 2009 Amendment; and

(b) January 1, 2015, being the date of the 2015 Amendment.

[63] The Expert ran calculations based on six potential “payment dates” provided to him by counsel for GREL:

(a) October 1, 2015, being the date of BHI’s declaration of default of the BHI Charge for failure to enter into agreements to sell two lots to Eastforest;

(b) January 1, 2016, being the date upon which BHI asserted in its demand letter of February 1, 2016 that GREL was in breach of the BHI Charge ;

(c) February 1, 2016, being the date BHI made formal demand for payment on GREL;

(d) May 13, 2016, being the date that the court ordered that GREL pay the undisputed amount to BHI and pay the Participation Amount into court;

(e) July 1, 2017, being the end of the “stand still” period under the 2015 Amendment on townhouses; and

(f) January 1, 2019, being the end of the “stand still” period under the 2015 Amendment on single family homes.

[64] The parties agree, based upon the calculations carried out by the Expert, that a finding that s. 347 of the Criminal Code was breached by BHI receiving a criminal rate of interest would require that GREL establish that:

(a) the “advance of credit” for the purpose of the section occurred on January 1, 2015; and

(b) payment of the amount owing under the BHI Charge was made on or prior to February 1, 2016.

[65] Accordingly, if the “advance of credit” occurred on November 30, 2009, or if BHI received payment on any of the selected dates after February 1, 2016, s. 347 of the Criminal Code would not be engaged.

[66] In support of its position that the “advance of credit” occurred on January 1, 2015, GREL points to the Pay Less Gas case.

[67] In Pay Less Gas two companies borrowed from the lender approximately $3 million at bank prime plus 1 percent interest. The loan was for three years and was secured by land mortgages. On the due date the borrowers owed the lender approximately $1 million. The borrowers and the lender reached an agreement to extend the term of the mortgages for four months for an extension fee of $250,000 and an increased interest rate of 9.25 percent. The issue for determination was whether the agreement to pay the extension fee of $250,000 and interest at the increased rate violated s. 347 of the Criminal Code.

[68] At para. 31-39 Sigurdson, J. held that the extension of time to repay the principal amount of the loan was an “advance of credit” within the meaning of s. 347, notwithstanding that no new monies were advanced. He found that the $250,000 was payment for the extension of time and had nothing to do with the original advance of credit. Accordingly, to consider it part of the cost of borrowing the money from the outset and to calculate interest from that time in order to determine the effective rate for the credit advanced was artificial.

[69] It is noted that in Pay Less Gas the agreement by the borrowers to pay the extension fee was made at the time of the agreement to extend the term of the mortgage which constituted the “advance of credit.”

[70] I do not read Pay Less Gas as standing for the proposition that an agreement, entered into on an earlier occasion, to pay an amount in exchange for an extension of time to pay, engages s. 347 when the lender enters into a new agreement to grant a further extension of time on a later date.

[71] I agree with BHI’s submission that the Participation Agreement was agreed to pursuant to the 2009 Amendment to secure a deferral or forbearance by BHI.

[72] Pursuant to the 2015 Amendment GREL gave various covenants in exchange for BHI’s agreement to “stand still” provided certain provisions were satisfied. The covenants agreed to by GREL included pledges to enter into agreements to sell certain lots to Eastforest and to pay to the Breadner Companies a minimum of $100,000 per month. The Breadner Companies agreed to “stand still” on sales of lots, provided certain specified conditions were satisfied. The promise to pay the Participation Amount was not given by GREL in the 2015 Amendment, but rather was given in the 2009 Amendment.

[73] The agreement between the parties to fix the Participation Amount at $4.25 million was made in the 2011 Amendment entered into June 1, 2011. GREL acknowledges that the selection of June 1, 2011 as the date of the “advance of credit” would, similarly to the 2009 Amendment, not result in a criminal rate of interest, regardless of which “payment date” is selected.

[74] In my view, there was no link between the “standstill” or forbearance agreed to by BHI in the 2015 Amendment and the Participation Amount. Accordingly, the Participation Amount did not constitute “interest” on a “credit advance” made by BHI to GREL on January 1, 2015.

[75] This is sufficient to dispose of the submission of GREL that the agreement by BHI to receive the Participation Amount breached s. 347 of the Criminal Code. However, in the event that I am wrong with respect to the date of the “advance of credit,” it is useful to determine when the “payment date” was in respect of the Participation Amount for the purpose of the section.

[76] GREL argues that there does not have to be an actual payment for there to be a “payment date” for the purpose of s. 347, but rather a date upon which default is declared by the lender can constitute a “payment date.” In this respect it submits that there are three dates which could be “payment dates” namely October 1, 2015, January 1, 2016 or February 1, 2016. It again relies upon Pay Less Gas, pointing to para. 16 of that decision. At that paragraph Sigurdson, J. noted that the borrowers, on a particular date, paid the principal under the mortgages, plus interest calculated to the date of payment at the rate of interest pursuant to the mortgages as originally agreed, rather than the increased rate as agreed to in the extension agreement, and did not pay the extension fee.

[77] As indicated above, the extension agreement in Pay Less Gas was for a fixed term, namely four months. At para. 29 Sigurdson, J. held that the agreement to pay an extension fee of $250,000 and interest at 9.25% during the term of the extension agreement violated and was prohibited by s. 347 of the Criminal Code.

[78] Pay Less Gas did not address the question of the period of time over which interest should be calculated where there is merely a possibility that the rate of interest could become illegal under the agreement, for instance, where the period of repayment is subject to change.

[79] It is noted that the 2015 Amendment, upon which GREL relies in constituting the “advance of credit,” did not alter the payment term of the BHI Charge. The maturity date remained as November 1, 2020. The agreement simply had the effect of requiring BHI to “standstill” provided certain conditions were satisfied. GREL argues that the time for repayment changed by virtue of BHI’s declaration of default on February 1, 2016.

[80] In Degelder, at para. 30, the Supreme Court of Canada made it clear that, where a time factor is present, is not possible to calculate a “criminal rate” of interest under the second branch of the section until the lender has been fully repaid. GREL has not provided any authority for the proposition that a declaration of default or demand for payment is sufficient to constitute the “payment date” for such a calculation.

[81] To hold that a declaration of default or demand for payment may be treated as the “payment date” could result in the anomalous situation whereby a borrower could delay payment of the principal indefinitely following a declaration of default or demand by the lender, thereby retaining the use of the money owed to the lender, while arguing that the lender is in default of s. 347, even though, if calculated over the period during which the borrower enjoyed the credit, the interest would not be at a criminal rate.

[82] The Supreme Court of Canada in Degelder adopted the reasoning of Newbury, J.A. in the Court of Appeal that, since the essence of the second branch of the section is the receipt of interest - a matter of fact - it would not be sensible to employ, in calculating the interest rate, a period that was not in fact the period during which the credit was outstanding (emphasis in the original).

[83] I find that payment of the amount owing under the BHI Charge was not made on or prior to February 1, 2016. Accordingly, there was no breach of s. 347 of the Criminal Code.

[84] It is not necessary for me to determine whether the “payment date” should be considered to be the date that GREL paid the Demand Amount to BHI and the Disputed Amount into court, or a future date when BHI actually receives payment of the Participation Amount.

Did the Participation Amount contravene the Unconscionable Transactions Relief Act?

[85] The pertinent sections of the Unconscionable Transactions Relief Act, R.S.O. 1990, c. U.2 (UTRA) are as follows:

Definitions

1 In this Act,

“cost of the loan” means the whole cost to the debtor of money lent and includes interest, discount, subscription, premium, dues, bonus, commission, brokerage fees and charges, but not actual lawful and necessary disbursements made to a land registrar, a local registrar of the Superior Court of Justice, a sheriff or a treasurer of a municipality; (“coût de l’emprunt”)

“court” means a court having jurisdiction in an action for the recovery of a debt or money demand to the amount claimed by a creditor in respect of money lent; (“tribunal”)

“creditor” includes the person advancing money lent and the assignee of any claim arising or security given in respect of money lent; (“créancier”)

“debtor” means a person to whom or on whose account money lent is advanced and includes every surety and endorser or other person liable for the repayment of money lent or upon any agreement or collateral or other security given in respect thereof; (“débiteur”)

“money lent” includes money advanced on account of any person in any transaction that, whatever its form may be, is substantially one of money-lending or securing the repayment of money so advanced and includes and has always included a mortgage within the meaning of the Mortgages Act. (“prêt d’argent”) R.S.O. 1990, c. U.2, s. 1; 2006, c. 19, Sched. C, s. 1 (1).

The court may,

2 Where, in respect of money lent, the court finds that, having regard to the risk and to all the circumstances, the cost of the loan is excessive and that the transaction is harsh and unconscionable, the court may,

reopen transaction and take account

(a) reopen the transaction and take an account between the creditor and the debtor;

reopen former settlements

(b) despite any statement or settlement of account or any agreement purporting to close previous dealings and create a new obligation, reopen any account already taken and relieve the debtor from payment of any sum in excess of the sum adjudged by the court to be fairly due in respect of the principal and the cost of the loan;

order repayment of excess

(c) order the creditor to repay any such excess if the same has been paid or allowed on account by the debtor;

set aside or revise contract

(d) set aside either wholly or in part or revise or alter any security given or agreement made in respect of the money lent, and, if the creditor has parted with the security, order the creditor to indemnify the debtor. R.S.O. 1990, c. U.2, s. 2.

[86] GREL argues that the cost of the BHI Charge is excessive and the transaction which included an amendment to add the $4.25 million Participation Amount to a mortgage debt in the amount of approximately $6 million, in the absence of any advance of monies, was harsh and unconscionable.

[87] GREL argues further that there was an inequality of bargaining power. It says that BHI was fully aware that there would be no cash flow to pay the Participation Amount until the project lender and all development costs were paid in full, which was anticipated to be in November, 2020. It says that, by stipulating for a Participation Amount fixed in the sum of $4.25 million payable upon default and without any monies being advanced, BHI took undue advantage of GREL and attempted to obtain an excessive and unconscionable bargain.

[88] In the case of Ekstein v. Jones, [2005] O.J. 3775 (S.C.J.) D.S. Ferguson, J. stated the purpose of the UTRA, as established by the Supreme Court of Canada and the Ontario Court of Appeal, is “to relieve a party to a contract from his obligations with the contract was made absent his informed consent or in circumstances of unequal bargaining power.”

[89] In the recent case of McPherson v. Napior, 2017 ONSC 5934 (S.C.J.) Hackland, J., at para. 9, summarized the effect of Ekstein v. Jones in clarifying what is required to satisfy s. 2 of the UTRA as follows:

1. To establish that the loan is excessive:

(i) The debtor must show that the cost constitutes a criminal rate of interest; or

(ii) The debtor must show that the cost of the loan is excessive having regard to the risk and all of the circumstances.

2. To establish that the transaction is harsh and unconscionable:

(i) The debtor must show that either the terms are very unfair or that the consideration is grossly inadequate; or

(ii) The debtor must show that there was an inequality of bargaining power between the parties and that one of the parties took advantage of this.

[90] In the case of Titus v. William F. Cooke Enterprises Inc., 2007 ONCA 573 the Court of Appeal stated, at para. 36, that “a party relying on the doctrine of unconscionability to set aside a transaction faces a high hurdle. A transaction may, in the eyes of one party, turn out to be foolhardy, burdensome, undesirable or improvident; however, this is not enough to cast the mantle of unconscionability over the shoulders of the other party.”

[91] At para. 37 the Court quoted Black v. Wilcox (1976), [12 O.R. (2d) 759 (Ont. C.A.)] at 762 as follows:

In order to set aside the transaction between the parties, the Court must find that the inadequacy of the consideration is so gross or that the relative positions of the parties are so out of balance in the sense of gross inequality of bargaining power or that the age or disability of one of the controlling parties places him at such a decided disadvantage that equity must intervene to protect the party of whom undue advantage has been taken.

[92] At para. 38 the Court adopted the following statement of the four elements necessary for unconscionability from Cain v. Clarica Life Insurance Co., 2005 ABCA 437, 263 D.L.R. (4^th) 368 (Alta. C.A.) at para. 32:

1. a grossly unfair and improvident transaction; and

2. victim's lack of independent legal advice or other suitable advice; and

3. overwhelming imbalance in bargaining power caused by victim's ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and

4. other party's knowingly taking advantage of this vulnerability.

[93] In Century 21 Campbell Munro Ltd. v. S & G Estates Ltd. (Div. Ct.) it was held, at paras. 7-13, that an agreement between experienced businesspeople cannot be set aside on the ground of unconscionability in the absence of a finding of fraud, duress, undue influence, or misrepresentation, and that economic pressure does not amount to duress unless there is a coercion of will to the point that the payment or contract was not a voluntary act.

[94] In applying the principles derived from Ekstein v. Jones I find that GREL has failed to establish that the Participation Amount was excessive and has also failed to establish that the transaction is harsh and unconscionable.

[95] For the reasons set forth above, the agreement for payment of the Participation Amount did not constitute a criminal rate of interest. Moreover, the cost of the loan was not excessive having regard to the risk and all of the circumstances.

[96] At the time when the Participation Amount was first agreed to in the 2009 Amendment, at least a portion of the Demand Amount, being monies advanced for the Brant’s Landing project, had been outstanding for 14 years, dating back to 1995. The high risk was manifested by the fact that the Brant’s Landing project failed in that there were insufficient funds available on completion to repay the Breadner advances. The BHI Charge was in default on May 8, 2009 and again on August 20, 2009 such that BHI commenced enforcement proceedings. GREL and Harold evidently lacked the resources to secure financing from other sources to pay out the BHI Charge.

[97] GREL has not shown that either the terms of the 2009 Amendment were very unfair or that the consideration was grossly inadequate.

[98] BHI agreed, as part of the 2009 Amendment, to (i) defer enforcement proceedings in respect of the Demand Amount, to permit GREL to develop the GREL Property in order to generate a substantial profit, (ii) reduce the interest rate on the $6 million owing by GREL to BHI from 34% to 11%, representing a reduction of approximately $1.38 million per year; and (iii) convert GREL’s obligations from “demand” to “default” and provide GREL until 2020 (11 years) to pay.

[99] GREL has not shown that the conversion of the Participation Amount from profit-sharing to a fixed amount in the 2011 Amendment was anything other than an agreed-upon pre-estimate of BHI’s anticipated share of net profits at that time pursuant to the 2009 Amendment. Indeed, although it is not necessary for me to decide this issue, the evidence suggests that $4.25 million represented a discounted estimate at that time.

[100] As indicated above, Harold was a sophisticated business person and an experienced land developer. Both sides were represented by experienced commercial lawyers in relation to all of the agreements under consideration. Indeed, counsel for GREL was unable to point to any decided case in which the UTRA has been applied to grant relief in a situation involving a transaction between sophisticated business persons represented by experienced commercial counsel. Such a situation does not fit the purpose for which the UTRA was enacted.

[101] In short, there is no evidence that the agreements in issue were entered into by Harold and his corporations without his informed consent or that there were circumstances of unequal bargaining power.

[102] The agreements for the Participation Amount, whether structured as profit-sharing or as a fixed amount, did not contravene the Unconscionable Transactions Relief Act.

Did the Participation Amount constitute a penalty, thereby rendering it unenforceable?

[103] The traditional starting point for analysis of penalty clauses is the case of Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] A.C. 79 (H.L.). The House of Lords in that case laid down a number rules relating to penalty clauses at pp. 87-88. It stated that the essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage. “In terrorem” is in this context connotes a threat to induce a party to a contract not to breach.

[104] Dunlop set out various tests to assist the court in the task of construction, as noted Paul-Erik Veel in “Penalty Clauses in Canadian Contract Law” 66 U.T. Fac. L. Rev. 229 at p. 234, including the following two tests:

(i) A clause will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach; and

(ii) A clause will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. This, though one of the most ancient instances, is truly a corollary to the previous test in (i) above.

[105] GREL relies upon the case of [HF Clarke Ltd. v. Thermidaire Corp., [[1976] 1 S.C.R. 319]](https://www.canlii.org/en/ca/scc/doc/1974/1974canlii30/1974canlii30.html). That case involved an alleged breach by the distributor of industrial products, under an exclusive distributorship contract with the manufacturer, of a covenant against competition for three years after the lawful termination of the contract. The contract provided for damages to be paid for breach of the non-competition covenant according to a formula relating to the gross trading profits derived from the sale of competing products rather than the actual net profits. Laskin, C.J., writing for the majority, applied the following doctrine, from Snell’s Principles of Equity (27^th ed. 1973) that “the sum will be held to be a penalty if it is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.”

[106] It is noted that HF Clarke was not concerned with a breach consisting of a failure to pay a sum of money, but rather concerned a covenant not to compete, for which compensatory damages were sought for its breach.

[107] As indicated above, in the case of a breach consisting of a failure to pay a sum of money, a clause will be held to be a penalty only if the sum stipulated is greater than the sum which ought to have been paid under the contract. The case of Hav-A-Kar Leasing Ltd. v. Vekselshtein, 2012 ONCA 826 (C.A.) exemplifies this principle.

[108] Hav-A-Kar Leasing was concerned with the enforcement of the terms of an automobile lease. One issue was whether the accelerated rent provision of the lease constituted a penalty clause and was therefore unenforceable against the lessee. The Court of Appeal at para. 48, adopted the trial judge’s observation that:

“there is considerable contemporary precedent for the enforcement of contractual rent acceleration clauses upon default of automobile leases…[and that] this reflects the reluctance of the courts to interfere with freedom of contract, including the right of contracting parties to agree on the consequences of a contractual breach.”

[109] The Court of Appeal continued at para. 49:

The trial judge concluded in this case that the accelerated amount provided for in the challenged provision of the Lease, clause 16, "is not excessive or unconscionable" and that it "merely puts [the lessor] in the position it would have been in if [the lessee] had performed his obligations under the contract" (at para. 48). These findings accord with the standard measure for compensatory damages in contract, under which the plaintiff is entitled to the value of the promised performance of the contract. As held in the seminal case of Wertheim v. Chicoutimi Pulp Co. (1910), [1911] A.C. 301 (Quebec P.C.), at p. 307, the damages awarded to the plaintiff for breach of contract should place the plaintiff in the same position as if the contract had been performed.

[110] The Participation Amount was included in the sum required to be paid by GREL under the 2009 Amendment, as revised by the 2011 Amendment. Imposing an obligation on BHI to pay the Participation Amount would place BHI in the same position as if the contract had been performed. It does not therefore constitute a penalty.

Was there a default under the standstill agreement in the 2015 Amendment, and was BHI entitled to declare the BHI Charge in default and to demand payment of the Participation Amount?

[111] GREL argues that it did not default under the “standstill” agreement in the 2015 Amendment and therefore BHI was not entitled to declare the BHI Charge in default on February 1, 2016 and to demand payment of the Participation Amount. GREL bases this argument upon the following submissions:

(a) the “standstill” agreement in the 2015 Amendment replaced the Cumulative Annual Lot Sales Targets (CALST) in the previous amendment agreements with an agreement to sell all the lots and townhouse blocks by deadline dates of 48 months and 30 months, respectively, following which time BTSAL had the power to direct all sales as it deemed appropriate. This amendment gave business efficacy to the understanding of all parties and is reflective of how the business of land development and sale of lots occurs. The terms of the “standstill” agreement are to be considered in light of the factual matrix, including a chain of emails between Robert and Chris Drakos, the Chief Financial Officer of GREL leading up to the preparation of the standstill agreement;

(b) even if the CALST continued to apply, GREL has either complied or, in the alternative, has complied to the extent that it was able, given events beyond its control, including the delay caused by an appeal by third parties to the Ontario Municipal Board, and BHI interfering with its relationship with Laurentian Bank, causing project financing to be restricted;

(c) to the extent that ambiguity arises in the interpretation of the “standstill” agreement, it should be interpreted against BHI as it was responsible for drafting the document;

(d) BHI failed to act in good faith following the execution of the “standstill” agreement by:

(i) soliciting an offer to purchase the GREL Property;

(ii) issuing a letter on October 1, 2015 claiming that GREL was in default in respect of the sale of 2 lots to Eastforest and simultaneously notifying Laurentian Bank of the claim of default;

(iii) refusing to execute and deliver postponement agreements requested by Laurentian Bank; and

(iv) improperly issuing a claim of default on February 1, 2016 and bringing an Application in March, 2016 to appoint a receiver of the GREL Property

[112] GREL argues that subparagraph 2.1(iv) of the 2015 Amendment had the effect of relieving it from the obligations under the 2009 Amendment, as further amended by the 2011 Amendment, to adhere to the CALST. Subparagraph 2.1(iv) reads as follows:

“BTSAL and BHI will stand still in respect of Grand Ridge for 30 months from the date hereof on sales of the townhouse block and 48 months from the date hereof on the sale of the single-family homes. Any lot inventory remaining at that period will be sold off by Grand Ridge for cash at BTSAL’s discretion, and at BTSAL’s direction.”

[113] The recitals to the 2015 Amendment, while confirming the existence of the BTSAL Charge and the BHI Charge and the indebtedness of GREL to each of the Breadner Companies, do not set out the purpose of the agreement.

[114] Paragraph 2.1 sets forth the mutual covenants of the parties forming the subject matter of the agreement. Subparagraphs 2.1 (i), (ii) and (iii) impose obligations on GREL while subparagraph 2.1(iv) imposes the obligation set forth above on the Breadner Companies to “stand still” for 30 months “on sales of the townhouse block” and 48 months “on the sale of the single-family homes.” In my view, some meaning must be ascribed to this covenant.

[115] Robert, in his Responding/Reply Affidavit sworn April 6, 2016 deposed, in a conclusory manner, that the 2015 Amendment did not amend the provisions of the BHI Charge with respect to the Participation Amount or the CALST (see para. 71). He deposed further at para. 72 that Clause 4.5 of the 2015 amendment “provides specifically that, save and except as amended by this Agreement, all terms and conditions of the BHI Charge and any other security remain in full force and effect. Mr. Freure did not request that the Cumulative Annual Lots Sales Targets be reduced.”

[116] If subparagraph 2.1(iv) was not intended to affect GREL’s obligations to meet the CALST, the question remains what it was intended to do.

[117] The Supreme Court of Canada confirmed in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at paras. 46-47 that courts ought to “have regard for the surrounding circumstances of the contract - often referred to as the factual matrix - when interpreting a written contract” because “ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning.”

[118] As indicated above, GREL submits that the court should have regard to the chain of emails between Robert and Chris Drakos, the Chief Financial Officer of GREL, between November 26, 2014 and January 12, 2015, preceding the preparation of the 2015 Amendment, to provide the relevant factual matrix to assist in understanding it.

[119] BHI submits that the court should not have regard to these emails, as Chris Drakos did not provide an affidavit. The only affidavit material on behalf of GREL was given by Harold who acknowledged on cross-examination that he had no involvement in the negotiation of the 2015 Amendment.

[120] In my view, the chain of emails between Robert and Mr. Drakos provides very little assistance to interpretation of the 2015 Amendment. Although the emails refer to the mutual covenants which were incorporated in paragraph 2.1, they do not provide insight into what was intended by the inclusion of the covenant by the Breadner Companies to “stand still… on sales of the townhouse block and…on the sale of the single-family homes.”

[121] However, Robert’s Affidavit of April 6, 2016 does provide useful context. Robert deposed at paragraph 65 that, by the winter of 2014/15, GREL was in default under the BHI Charge, as amended by the 2009 and 2011 Mortgage Amendments. Harold wanted BHI to again defer enforcement proceedings to permit GREL further time to develop the GREL Property. Robert provided no explanation at paragraph 65 as to the nature of GREL’s default. However, context is provided at paragraph 63 where he deposed that GREL defaulted under the BHI Charge, as amended by the 2011 Amendment, by never complying with its obligations in respect of the Participation Amount and failing to meet the amended CALST.

[122] At paragraph 66 Robert deposed that “with a view to providing GREL with additional time to develop the GREL Property, a further amendment to the BHI Charge was negotiated. These amendments, which relate to the process by which GREL would sell lots and are intended to guarantee that Breadner will receive a $100,000 monthly payment against the debt relating to the funding of the Brant’s Landing project, are reflected in the 2015 Amendment” (underlining added).

[123] This factual matrix assists in discerning that the purpose of the covenant of the Breadner Companies to “stand still” was to provide relief to GREL from its obligation to meet the amended CALST, in exchange for certain concessions from GREL. The term “stand still”, in this context, means “to forebear” or to withhold taking action. The reference to standing still or forbearing “on sales of the townhouse block” and “on the sale of the single-family homes” must be a reference to granting relief to GREL from compliance with the CALST for 30 months and 48 months respectively. The Breadner Companies had no other contractual interest in sales of lots of GREL, except in reference to the CALST.

[124] The only ground given in the letter dated February 1, 2016 from counsel for BHI declaring the BHI Charge in default was the failure of GREL to meet the CALST by December 31, 2015. In my view, GREL was not in default on that ground by virtue of the “standstill” provision in the 2015 Amendment. Given this finding, is not necessary to consider the remaining grounds relied upon by GREL in support of its argument that it was not in default.

[125] However, the foregoing does not end the inquiry. The consequence of GREL having not been in default at the time of BHI’s demand on February 1, 2016 must be considered.

[126] The Settlement Order was taken out on May 5, 2016, which ordered GREL to pay the Undisputed Amount to BHI and the Disputed Amount, comprising the Participation Amount, per diem interest and an additional $300,000 in respect of estimated future interest and estimated current and future legal costs of BHI, into court. The Order specifically provided that the money in court would stand in the place of the security held by BHI over the real property subject to the mortgages, such that the claims of BHI against GREL would be recoverable as against and paid from the cash representing the Disputed Amount, subject to such claims being determined to be valid.

[127] The fact that GREL was not in default on February 1, 2016 did not relieve it of the obligation under the BHI Charge to pay the Participation Amount. It is clear from the Settlement Order that it was never intended that, so long as BHI’s claim to the Participation Amount was found to be valid, it would ever become unsecured. The cash in court simply replaced the BHI Charge as security for the Participation Amount. Accordingly, the finding that GREL was not in default does not entitle it to the return of the Disputed Amount out of court. GREL still has the obligation to pay the Participation Amount, and it remains secured by the monies in court.

[128] In my view, in the context of the Settlement Agreement, the phrase “subject to such claims being determined to be valid” in the Settlement Order means “subject to such claims being determined to be lawful,” that is, by not offending any of the equitable or statutory principles relied upon by GREL discussed above. The Settlement Order provided that if the claim to any part of the Disputed Amount is found to be “valid” (or “lawful”) it would be recoverable as against and paid from the cash in court.

[129] The purpose of the Settlement Agreement, as implemented by the Settlement Order, was to replace the security of the BHI Charge for the Participation Amount with cash security in court, and to permit the court to determine which party should be entitled to payment of the Disputed Amount out of court, based upon a finding of whether BHI’s claim to the Participation Amount is “valid.”

[130] Having found that BHI’s claim to the Participation Amount is “valid” (or lawful), BHI is entitled to payment out of court of the Participation Amount, plus accrued interest at the rate provided for in the BHI Charge.

[131] However, the finding that GREL was not in default is relevant to the question of costs in respect of BHI’s Application in file no. C-259-16 for the appointment of a receiver over the GREL Property. Since GREL was not in default, the receivership application was without justification.

Should GREL be entitled credited with payments from sales of lots against both the Demand Amount and the Participation Amount?

[132] GREL advanced in oral submissions an argument, of some complexity, based upon an interpretation of the 2009 Amendment and the 2011 Amendment that the sum of $4,010,048 paid by GREL from sales of lots and credited against the Demand Amount should also be credited against the Participation Amount, thereby reducing the Participation Amount to a balance of $239,952.

[133] This issue relating to an interpretation of the 2009 Amendment and 2011 Amendment which would entitle GREL to be credited for the same payments against both the Demand Amount and the Participation Amount was not raised in GREL’s Application and was not referred to in its Factum, but was first raised in oral submissions.

[134] In the case of [Rodaro v. Royal Bank of Canada, [[2002] O.J. No. 1365 (C.A.)]](https://www.canlii.org/en/on/onca/doc/2002/2002canlii41834/2002canlii41834.html) the Court of Appeal observed, at para. 60, that it is fundamental to the litigation process that the lawsuit be decided within the boundaries of the pleadings.

[135] In my view it was fundamentally unfair for GREL to advance a novel argument that the subject agreements should be interpreted in a manner resulting in payments made by it from lot sales to be credited twice against the amounts owing under the mortgage, without referring to the issue in its pleadings or in its Factum.

[136] Moreover, the Settlement Order provided for determination of the issue of the validity (or lawfulness) of the claim of BHI to the Participation Amount, not the quantum of the Participation Amount.

[137] For these reasons, I decline to accede to the argument of GREL that payments made by it from the lot sales should be credited against both the Demand Amount and the Participation Amount.

Disposition

[138] For the foregoing reasons, there shall be judgment as follows:

(a) the Application of Grand Ridge Estates Limited, Primeland Development (2003) Limited and 1291105 Ontario Limited is dismissed;

(b) the sum of $4,365,952.79 paid into court pursuant to paragraph 3(b) of the Order of Justice Gordon dated May 5, 2016 in Court file number C-375-16 be paid out of court to Breadner Holdings Inc.;

(c) a further sum equal to interest on the Participation Amount of $4,250,000 at the rate of 8% per annum calculated from the date of the payment into court pursuant to the said order be paid out of court to Breadner Holdings Inc. from the amounts paid into court pursuant to para. 3 of the Order of Justice Gordon and the Order of Justice Broad dated September 27, 2016; and

(d) in the event of a shortfall in the amount of money in court available to pay interest to Breadner Holdings Inc., as aforesaid, Grand Ridge Estates Limited, Primeland Development (2003) Limited and 1291105 Ontario Limited shall pay the amount of such shortfall to Breadner Holdings Inc..

Costs

[139] The parties are encouraged to agree upon costs in respect of files C-375-16 and C-259-16. If they are unable to agree upon costs in respect of the said files, Breadner Holdings Inc. may make written submissions as to costs within twenty-one (21) days of the release of these Reasons for Judgment. Grand Ridge Estates Limited, Primeland Development (2003) Limited and 1291105 Ontario Limited shall have fourteen (14) days after receipt of Breadner Holdings Inc.’s submissions to respond. Breadner Holdings Inc. has ten (10) days thereafter to deliver any Reply submissions. All such written submissions shall not exceed five (5) double-spaced pages, exclusive of Costs Outlines or Bills of Costs, Offers to Settle and Authorities, and are to be forwarded to me at my Chambers at 85 Frederick Street, 7th Floor, Kitchener, Ontario N2H 0A7. If no submissions are received within this timeframe, the parties will be deemed to have settled the issue of costs as between themselves.

D.A. Broad

Date: January 30, 2018.