Court File and Parties

Barrie Court File Nos.: CV-17-1000/17-1087/17-1430 Date: 20181127 Ontario Superior Court of Justice

Between: 1605041 Ontario Limited, Applicant And: 2424033 Ontario Ltd., Respondent

Counsel: R.C.M. Belsito, for the Applicant E. Bisceglia and S. Turajlich, for the Respondent

Heard: May 15 and 16, 2018

Reasons for Decision

MULLIGAN J.:

[1] 1605041 Ontario Limited (160) and 2424033 Ontario Ltd. (242) seek a judicial determination of a dispute between them concerning property known as 10477 Islington Avenue, Kleinberg, more particularly described on Schedule “A” hereto. 160 is the registered owner of the property. 242 is the second mortgagee. This second mortgage arose at the time of 160’s purchase of the property for development purposes. At the same time, the parties entered into an agreement which they hoped would lead to a successful development of the property.

[2] As a result of a disagreement between the parties, 160 brought an application July 7, 2017, seeking a discharge of 242’s second mortgage. 242 then commenced a counter-application seeking a declaration that it had exercised its right of first refusal and sought specific performance, as well as a determination of the amount owing to 242 under the terms of the mortgage.

[3] The matters came forward before a motion judge, but ultimately, on January 23, 2018, Justice DiTomaso ordered a trial of the issues. The trial proceeded before me on May 15 and 16, 2018. Thereafter, the parties were given a time period to submit Requests to Admit and Read-ins and thereafter, a period of time to make final written submissions and reply. All submissions and replies have now been received.

[4] The issues to be tried pursuant to the January 23, 2018 order of Justice DiTomaso are as follows:

(a) Whether 160 should be allowed to exercise its statutory right to discharge 242’s Mortgage by paying funds into Court; and, if so, what is the amount necessary to discharge 242’s Mortgage; and, whether the fees and penalties claimed by 242 run contrary to the Interest Act. (b) Whether 160 and 242 are entitled to costs of their Applications. (c) Whether 242 properly exercised its right of first refusal to purchase the Property in a timely manner and whether 242 matched the offer of Nat Levy in order to satisfy the requirements of the right of first refusal; and whether 242 is entitled to Specific Performance. (d) Whether the JVA is at an end upon the discharge of the 242 Mortgage. (e) Whether 242 ought to be granted leave to register a Certificate of Pending Litigation; and, (f) What amounts, if any, are owed to 242 under the JVA?

The Subject Property

[5] The subject property consisted of an older, vacant building with a small portion of land surrounding it within the Village of Kleinberg. The two companies had no previous relationship with each other, but got together through a mortgage broker known to both of them, Cosimo Caccamo. With the assistance of a second mortgage from 242, 160 purchased the property for $1,185,000, with a closing of June 25, 2014. As part of the financing package, 160 arranged a first mortgage for $888,750 from Presidential Financial Corporation. At the time of closing, a second mortgage was registered with a face value of $400,000, but the parties acknowledged that only $300,000 was advanced at the time of closing. The first mortgage contained a schedule of terms regarding administrative fees, renewal fees, default and other fees. This same schedule was used and formed part of the second mortgage between 160 and 242. On the same day, the parties entered into an agreement. I will have more to say about this agreement later in these reasons. The parties were assisted by counsel throughout the purchase and much of their subsequent dealings with the principals of each company.

Trial Evidence

[6] As part of their Applications, both parties prepared detailed affidavits. The principal of 160, Giorgio Marchi, was cross-examined at trial. Luigi Liberta and Michele Minicucci, officers of 242, were also cross-examined. In addition, the mortgage broker, Cosimo Caccamo, also gave evidence. Although there was a great deal of correspondence between the parties or their counsel prior to the Applications being brought, the following key dates are not in dispute and will provide context for the discussion that follows:

• June 25, 2014: 160 purchased the property for $1,185,000, by way of a first mortgage for $888,750, and a second mortgage from 242, registered for $400,000, with $300,000 being advanced on closing, and an agreement was entered into between these parties.
• December 12, 2014: 160 enters into a lease with a commercial tenant, Inklein, to lease the property for 15 years.
• March 2, 2017: 160 enters into an agreement with Nat Levy, the principal of its tenant, to sell the property for $1,560,000. A second Agreement of Purchase and Sale was subsequently entered into on essentially the same terms.
• June 7, 2017: 160 requests a discharge statement from 242.
• July 5, 2017: The first mortgagee commences power of sale proceedings which are subsequently withdrawn when the mortgage is assigned to Quality & Company Inc., a company owned by Mr. Levy’s step-father.
• July 7, 2017: 160 brings its application.
• July 7, 2017: 242 provides notice, purporting to exercise its first right of refusal.
• July 20, 2017: 242 brings its counter-application.

The Agreement

[7] On June 25, 2014, the date of the purchase by 160, the parties entered into what was described in the preamble of the agreement as “a joint venture for the limited purpose of developing the property…” In the agreement, 160 was described as the owner, and 242 as the lender. As such, 242 agreed to lend the balance of the purchase price, $300,000, to supplement the owner’s first mortgage of $888,750 with Presidential Financial Corporation. The agreement set out the obligations of the owner to diligently and expeditiously undertake the development of the property. The agreement further provided for a profit-sharing formula after the property had been developed and marketed.

[8] I am satisfied based on the clear wording of the agreement that this was a joint venture agreement. 160 was to proceed to develop the property. 242 provided the financing enabling 160 to purchase the property with no money down.

[9] Significantly, the Joint Venture Agreement contained a first right of refusal. As para. 22 stipulates, “If the development does not proceed as per the Agreement and the property is put up for sale, the lender shall hold the right to purchase the property at the best price offered, hereinafter a right of first refusal.” No deadline was provided in that paragraph as to when 242 was required to exercise its first right of refusal.

[10] The second mortgage entered into between the parties, registered June 25, 2014, also contained a first right of refusal, in the event that 160 desired to list the property for sale within two years of the last renewal date.

[11] Several months later, 160 entered into a commercial lease with Inklein on December 12, 2014. The Joint Venture Agreement between the parties contemplated that the commercial component of the subject property could be rented out. As para. 16 provides, “The owner further agrees to lease the commercial component at fair market value and the lender shall be entitled to a proportionate share of all net profits derived from said lease, in accordance with this Agreement.” It is clear from the provisions of the lease that the tenant leased the entire property and not just the commercial component. The lease was for 15 years and provided a six-month rent-free period, anticipating certain improvements to the property by the tenant. Schedule “A” of the lease provided as follows:

If said property is to be sold on or before the five-year anniversary of the commencement of said lease, dated the 12 th day of December 2014 to a third party, the third party agrees to pay the tenant or its related company, or person, an amount of $285,000 for the initial construction cost (Leasehold Improvements) made to said property. If landlord is to sell said property to said tenant or its related company or person, the $285,000 initial construction cost (Leasehold Improvements) for reimbursement shall be waived.

[12] The Joint Venture Agreement between the parties spoke to the issue of cooperation at para. 18:

The parties hereto agree to cooperate and coordinate all efforts in respect to both the acquisition and the sale of the property, with a view to maximizing benefits accruing to each, while keeping in mind that a delay in the timing of any sale will ultimately incur additional costs to the detriment of all parties and will, where appropriate, seek expert advice from third parties in terms of pricing and sale procedures.

[13] Notwithstanding the Joint Venture Agreement and the cooperation contemplated, 160 did not discuss the terms of the proposed lease or provide a copy of the lease to 242 when it was entered into. 242 did not sign the lease as a third party. I am therefore satisfied that 242 is not bound to reimburse 160 for improvements done without the consent or knowledge of 242. Those issues are contractual issues between the tenant and 160 as landlord.

The Development Potential

[14] It is clear from the affidavits filed as part of this proceeding that both parties shared some optimism about the development possibilities for this property. As Luigi Liberta, a director of 242, stated in his affidavit at para. 4:

During those discussions, Cosimo advised my partner, Michele Minicucci (“Mike”), and I, that 160 had various possibilities of development including, but not limited to, leaving the front of the Property as is and putting up rows of townhouses at the bottom with all residential or commercial on bottom and residential on top. In addition, 160 was going to approach neighbours in an effort to get everyone together and with agreement of all property owners, do a development all across the back of the properties. Cosimo represented to us that there was potential to develop the back in this fashion. In fact, Cosimo also advised us at the time that Giorgio Marchi had a contact was with the City of Vaughan and he thought with the help of his brother they would get this all done.

[15] Giorgio Marchi, the director of 160, shared this optimism at first, but development did not proceed. As he stated in his affidavit at para. 11:

At the time 160 purchased the Property, it seemed that the proposed future development in the rear could be profitable. I was aware that any rezoning and site plan approval process for any development would be onerous and time consuming. The development also started to become quite costly due to various stringent policy restrictions imposed by virtue of the heritage building in the front. The final straw was the opposition we faced from the Kleinberg Area Residents Association, a very active powerful community based organization in the area. After spending approximately $50,000.00 on consultants and development expenses, I decided that the profit margin was simply too thin and to sell the Property and move on.

Net Profits from the Commercial Lease

[16] The Joint Venture Agreement enabled 160 to lease the commercial component of the property. As para. 16 states:

The owner further agrees to lease the commercial component at fair market value and the lender shall be entitled to a proportionate share of all net profits derived from said lease in accordance with this agreement.

Para. 17(h) further provided:

Any commercial component of the property which remains vested within the shareholder’s holdings or transferred to an affiliate owner, shall pay a 25% net profit to the lender.

[17] I pause to note that the term “net profit” is not defined in the Joint Venture Agreement.

[18] 242 claims that its total share of net profits of rental income is $37,431.50. Setting out in its submissions at para. 106, “242’s position is that ‘net profits’ is calculated by deducting only any taxes, maintenance and insurance (TMI) paid by 160 in relation to the lease – nothing else.” After considering the rent received by 160 for the period in question, minus taxes and insurance paid, 242 submits that its 25% share of net profit is $37,431.50.

[19] In its written submissions, 160 denies that there were any net profits from the lease to which 242 is entitled, pointing out specific provisions in para. 17 of the Joint Venture Agreement, which addressed the issue of net profit as follows:

17. Upon completion of the sale of either the entire project property or on the sale of each individual unit, the following amounts shall be paid out of the proceeds thereof in order of priority, namely, (a) All costs of the sale… (b) The acquisition costs and the carrying costs . [Emphasis added.]

[20] I am satisfied that 160 is entitled to deduct its carrying costs in connection with any calculation of net profits from the lease. I find support in the wording of para. 17(b) above noted, and the fact that the parties did not define the term “net” in the Joint Venture Agreement. 160 had substantial carrying costs with respect to its first mortgage to Presidential and its second mortgage to 242. It is plain and obvious from the record before me that there was no net profit from the lease to which 242 is entitled.

The Agreement of Purchase and Sale with Nat Levy

[21] Nat Levy is the principal of 160’s tenant, Inklein. On March 2, 2017, 160 entered into an Agreement of Purchase and Sale with Nat Levy to sell the property for $1,560,000. That agreement provided that the closing date was May 2, 2018. 160 submits that that was a typographical error as to the date of closing. A second Agreement of Purchase and Sale was entered into on the same terms on May 2, 2017, with a closing date of June 19, 2017. There is no evidence that Mr. Levy was made aware of the first right of refusal that existed between 160 and 242.

[22] On June 7, 2017, 160’s solicitor wrote to 242’s solicitor requesting a discharge statement. This request came about three months after the first Agreement of Purchase and Sale, and about one month after the second Agreement of Purchase and Sale. Nothing in the discharge request indicated that the property had been sold to the principal of 160’s tenant.

[23] At some meetings in June, the principals of 242 met with the mortgage broker and learned that the property was to be sold. There is a dispute about what happened at this meeting, but clearly, through March, April and May, the principals of 242 were not made aware that the property was to be sold to Nat Levy. Nor did 160 indicate that it was going to “put up for sale” the property which was subject to the Joint Venture Agreement.

[24] On June 15, 2017, the solicitor for 160 provided a copy of the Agreement of Purchase and Sale to the solicitor for 242. 242 was provided with the lease at this time, a lease that had been entered into several years earlier.

[25] In response to these developments, the solicitor for 242 wrote to the solicitor for 160 indicating his client was doing its due diligence and considering its rights under the joint venture agreement. That e-mail provided:

On June 15, 2017, you disclosed the sale terms. Also included was a lease with very odd terms. Our client has a reasonable period of time to determine their rights under the joint venture agreement, namely, 30 days. We will respond before July 15, 2017.

[26] 160 then commenced its application on July 7, 2017 for a discharge of the second mortgage. On the same day, 242 formally exercised its right of first refusal, stating in correspondence from counsel:

Please treat this letter as a Notice of Election under Article 22 to purchase the property municipally known as 10477 Islington Avenue, Vaughan, Ontario (the property) on the same terms and conditions as outlined in the Agreement of Purchase and Sale made as of March 2, 2017…

[27] A closing date was suggested for the same month. 242’s offer to purchase the property matching Nat Levy’s offer in accordance with the right of first refusal in the Joint Venture Agreement was not accepted by 160.

[28] 160 and Mr. Levy subsequently terminated the proposed agreement and mutual releases were signed.

Joint Venture Agreement

[29] 160 takes the position that the agreement is a development agreement which is unenforceable because there was no valuable consideration provided by 242. Alternatively, 160 states in its written submissions at paras. 1. (v) and (vi):

1. (v) In the event the development agreement (JVA) is found to be enforceable, the only rights which enure to 242 and crystalize in the absence of a development proceeding is the right of first refusal and a portion of the net income from 160’s lease with Inklein. (vi) 242 failed to exercise its right of first refusal in a timely manner and in fact, failed to match the offer by Nat Levy by refusing to include the $285,000 reimbursement provision in the lease in its purported offer to purchase the property…

[30] A plain reading of the agreement between the parties makes it clear that it is a Joint Venture Agreement and that consideration passed between the parties. As the third preamble to the agreement makes plain:

And whereas the parties hereto wish to enter into this agreement for the purpose of setting forth their respective obligations and the benefits to be derived in connection with the purchase, construction and redevelopment of the property. The parties wish to enter into a joint venture for the limited purpose of developing the property and in such other businesses as the partners may agree upon in writing. [Emphasis added.]

[31] Clearly, there was consideration that passed as part of this agreement. 242’s agreement to assist with the funding of the purchase, as para. 3 stipulates:

The remainder of funds being $300,000, would be loaned to the owner (160) by the lender (242) in accordance with the mortgage commitment dated June 25, 2014, more particularly described in Schedule “D” hereto.

[32] After the completion of the purchase, 160 does not dispute that it had difficulty making timely mortgage payments to 242. About six months after purchase, it entered into a lease with Inklein to achieve commercial rental income from a property that was not otherwise producing income. 160 was faced with mortgage obligations to its first mortgagee and to its second mortgagee, 242.

[33] 242 filed a Request to Admit with respect to a number of topics. Within that Request to Admit, 162 admitted the following:

[84] Giorgio (the principal of 160) did not inform Nat (Nat Levy, the proposed purchaser) of 242’s right of first refusal at the time 160 entered into either Agreement of Purchase and Sale with Levy. [85] Giorgio did not advise Nat of the JVA between 160 and 242 at the time 160 entered into either Agreement of Purchase and Sale with Levy.

[34] The Joint Venture Agreement enabled 160 as owner, to lease the commercial component at fair market value. As para. 16 provides:

The owner further agrees to lease the commercial component at fair market value and the lender shall be entitled to a proportionate share of all net profits derived from said lease in accordance with this agreement.

[35] 160 did not consult with 242 before entering into the lease nor prove that the lease represented fair market value, notwithstanding the agreement to cooperate contained in the Joint Venture Agreement.

[36] The lease contained an unusual provision at Schedule “A”, requiring that if the property was sold to a third party, the third party agrees to pay the tenant $285,000 for the tenant’s leasehold improvements. It is clear from the evidence that 160 did not provide a copy of the lease to 242, or seek its consent to the third party provision in that lease. This issue was further complicated by 160’s failure to tell its tenant about the existence of the first right of refusal in the Joint Venture Agreement and in the second mortgage.

Conclusion on First Right of Refusal

[37] I am satisfied that 242 had a valid and enforceable first right of refusal, both under the mortgage which had been renewed from time to time, and the joint venture agreement. Although the notification of the first right of refusal was not within the three-day period specified in the second mortgage, I am satisfied that notification was given on a commercially reasonable and timely basis, given the absence of any deadline in the Joint Venture Agreement between the parties. The following facts assist me in making that decision:

(a) 160 entered into an agreement to sell the property in March 2017, with its tenant. The tenant was not aware of the right of first refusal. (b) The solicitor for 160 did not request a formal discharge statement of the mortgage until June 7, 2017. That letter made no reference to the sale of the property or the Joint Venture Agreement between the parties. The letter made no reference to a deadline as to when the discharge statement would be required. (c) On June 15, 2017, the solicitor for 160 repeated its request for a discharge statement and enclosed what it described as “the most recent Agreement of Purchase and Sale” and suggested the closing date was June 19, 2017. (d) On June 20, 2017, the solicitors for 160 repeated the request for a discharge statement, suggesting the closing date had been extended and requiring the discharge by June 21, 2017. (e) On June 21, 2017, counsel for 242 replied “Our client has a reasonable period of time to determine their rights under the joint venture agreement, namely, 30 days. We will respond before July 15, 2017.” (f) By June 26, 2017, 160 had retained litigation counsel, stating in part:

I am advised that your clients have been offered the opportunity to purchase the property pursuant to their right of first refusal stipulated at paragraph 22 of the agreement. In order to exercise this right, your client would be obligated to pay 160 the purchase price of $1,560,000 and pay Inklein the $285,000 for a total purchase price of $1,845,000. I am advised that your client has no interest in exercising this option and as such, my clients are confused as to why a discharge statement with respect to their mortgage has not been forthcoming.

(g) On July 7, 2017, and well within the 30 days set out in previous correspondence, counsel for 242 replied:

Further to your various letters, our client has now had an opportunity to consider his position, and in particular, whether or not to exercise his rights under the Joint Venture Agreement and in particular, Article 22.

Please treat this letter as a Notice of Election under Article 22 to purchase the property municipally known as 10477 Islington Avenue, Vaughan, Ontario, on the same terms and conditions as outlined in the Agreement of Purchase and Sale made as of March 2, 2017.

(h) At no time did 160 list the property for sale, or advise 242 its joint venture partner, of its desire to sell the property to its tenant.

[38] I pause to note that as set out in correspondence from 160’s counsel, 160 was prepared to honour the first right of refusal upon payment of the amount offered by Net Levy, $1,560,000 plus the $285,000 representing the tenant improvements of Mr. Levy’s company. I see no basis for 160 attempting to extract another $285,000 for the following reasons:

(i) Nat Levy was purchasing property tenanted by his own company, which was renting the commercial property. Nothing in the Agreement of Purchase and Sale indicates that he was to be given credit for tenant improvements; (ii) 160 never advised 242 that they intended to sell the property, never shared any appraisal information they may have had and never advised that they were in negotiations with Mr. Levy, culminating an Agreement of Purchase and Sale; (iii) 242 did not receive timely notification of the lease and was not a party to the lease, specifically with respect to the obligations on the third party; (iv) 242’s mortgage containing a first right of refusal was registered in priority to the lease; and (v) 242’s Joint Venture Agreement with 160 pre-dated 160’s lease with Mr. Levy’s company.

[39] 242 submits that 160 has breached a duty of good faith that ought to have existed between the parties and relies on the Supreme Court of Canada’s decision in Bhasin v. Hrynew, 2014 SCC 71. As Cromwell J. stated at para. 33:

The first step is to acknowledge that good faith contractual performance is a general organizing principle of common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognize the obligations of good faith contractual performances. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.

[40] The right of first refusal was addressed by T. Ducharme J. in 2056668 Ontario Inc. v. Fernbrook Homes (Majormac North) Ltd., [2007] O.J. No. 2755 at paras. 12-13:

[12] The principal ingredient of a right of first offer (also known as a right of first refusal) is a commitment by the grantor to give the grantee the first chance to purchase, should the grantor decide to sell. To become operational, the right depends upon the decision, conduct or status of the owner of the land. The grantor agrees that, if at some time he becomes prepared to accept an offer to buy his property, then at such time the grantee has a time-limited offer to purchase on the same terms. A right of first offer is a contractual right and as such is governed by the wording of the contract. The exercise of a right of first offer must accord strictly with the terms set out in the agreement. A right of first offer is not to be construed liberally.

[13] In order to trigger a right of first offer, an actual present intention in a seller to sell its interest is necessary. A vendor does not breach a right of first refusal by entering into a conditional agreement to sell to a third party if the condition is that the right of first refusal is not exercised. It is only at the moment before the grantor enters into an agreement to sell to a third party that the right of first offer crystallizes into an option to be exercised by the grantee.

[41] In Harris v. McNeely, [2000] O.J. No. 472, the Ontario Court of Appeal provided the following guidance with respect to first rights of refusal at para. 12:

[12] The analysis turns on the legal status and effect of a right of first refusal. Two decisions from the Supreme Court of Canada and one from this court have established the following propositions: (i) A right of first refusal is a personal right which does not run with the land. (ii) At the point in time when the grantor of the right receives an offer to purchase the grantor's interest which the grantor is prepared to accept, the grantee's right of first refusal is converted into an option to purchase which is an equitable interest in the land…

[42] 160 submits that specific performance is not available based on the Supreme Court of Canada’s decision in Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51. Unlike the case at bar, that case dealt with an Agreement of Purchase and Sale involving real estate developers. At para. 4, the Court defined the issue before it in that case as follows:

The issue raised in this appeal is whether a single purpose corporation is excused from mitigating its losses when the vendor breaches the Agreement of Purchase and Sale, and particularly when it has promptly brought an action for specific performance.

[43] The Court found as a fact that Southcott was a single purpose company incorporated solely for the purpose of developing the property and had no assets. Further, the Court found that the property was not unique, setting out in para. 12:

The [defendant] led expert evidence that 81 parcels of vacant developmental land in the GTA were sold between the date of breach and the date of trial. The land was suitable for residential development and within the parameters of size and price of other lands purchased by the Ballantry Group.

[44] The Court declined to order specific performance in circumstances where the purchaser failed to take any steps to mitigate its damages for property that was not unique. In my view, the guidance of the Supreme Court of Canada with respect to specific performance is of no assistance with respect to the case at bar. I say so based on the following points:

(i) 160 and 242 were not vendors and purchasers pursuant to an Agreement of Purchase and Sale; (ii) 160 and 242 had a Joint Venture Agreement, specifically obligating 160 to provide 242 with a first right of refusal to acquire this property; (iii) 160, contrary to the joint venture agreement, gave no notice to 242 that it intended to sell the property and no notice that it intended to enter into an Agreement of Purchase and Sale with its tenant.

Conclusion on the Joint Venture Agreement

[45] I am satisfied that 242 had a contractual right to a first right of refusal to purchase the property upon the same terms as the agreement that 242 entered into with Nat Levy. The purchase price was set out in the Levy agreement at $1,560,000. There were no conditions in the agreement, which provided on Schedule “A”: “The buyer agrees to pay the balance of the purchase price, subject to adjustments, in cash or by certified cheque, to the seller on the completion of this transaction”. The lease agreement was attached as Schedule “B” to the Agreement of Purchase and Sale.

[46] I am satisfied that a reasonable closing date for the completion of this transaction under the first right of refusal is 60 days from the date of the release of this judgment or such other date as the parties may reasonably agree.

[47] In accordance with the vendor’s standard obligations, 160 is required to provide a discharge statement with respect to the existing first mortgage in order that a clear title can be provided on the closing date.

[48] In addition, the second mortgage in favour of 242, must also be discharged. The parties disagree on the amount required to discharge that mortgage.

Amount Owing Under the Second Mortgage

[49] There is no dispute that $300,000 was advanced at the time of 160’s purchase of the property. The mortgage was registered for $400,000.

[50] The parties do not agree on the amount required to discharge the mortgage as of the trial date. 242 submits that when principal, interest and other charges are calculated, the amount required to discharge the mortgage is $498,458.33. 160 takes a different position, submitting that the amount required to discharge the mortgage is $336,700, less set-offs of $208,813.90, leaving a balance of $127,886.10.

[51] Attached hereto as Schedule “B” is a Mortgage Discharge Summary updated to November 2018, as prepared by 160, setting out the respective position of each party with respect to the principal and various other charges sought to be imposed by 242. I take as a starting point, the amount owing as $336,700. 160 admits this amount which includes the principal of $300,00, together with automatic renewal provisions of $18,000, five missed payments of $3,250 each, totalling $16,250, dishonoured cheque and collection letters for $1,600, mortgage fee of $375, and mortgage discharge fee of $475. To this I would add six further non-payments at $3,250 per month, equalling $19,500 for a total of $356,200.

[52] This leaves a number of additional charges which 242 seeks to impose. 242 submits that these additional charges flow from the mortgage and standard charge terms agreed to by the parties. 242 submits that these charges do not contravene the Interest Act and further, 242 is not required to give Notice of Demand in advance of the mortgage discharge statement.

[53] In reviewing these various charges, 160 relies on the decision of Perell J. in Mishev v. Shah, 2011 ONSC 1672. As Perell J. stated at para. 37:

Section 12 is remedial legislation and should be given a liberal interpretation. The statute was intended to be in relief of mortgagors who were in difficulty as to paying their mortgage-money and receiving a discharge, and I think it should be given a liberal construction.

[54] 160 further sets out in its closing written submissions:

[72] Furthermore, 160 was never given formal notice that 242 intended to exercise any of these provisions in the mortgage. 160 was never given notice of any defaults of these provisions and was accordingly, never provided with an opportunity to rectify said defaults… 160 was never able to cure these defaults because it was never aware they were being claimed.

[55] 160 also relies on the Court of Appeal’s decision in P.A.R.C.E.L. Inc. v. Aquavina, 2015 ONCA 331. In P.A.R.C.E.L., Justice Cronk, speaking for the Panel, reviewed the requirements of s. 8 of the Interest Act and provided the following guidance at para. 96:

In the absence of evidence that the charges in question reflect real costs legitimately incurred by the respondents for the recovery of the debt, in the form of actual administrative costs or otherwise, the only reason for the charges was to impose an additional penalty or fine, apart from the interest otherwise payable under the mortgage, thereby increasing the burden on the appellants beyond the rate of interest agreed upon in the mortgage. The courts have not hesitated to disallow similar charges on the basis that they offend s. 8 of the Interest Act. [Citations omitted.]

[56] Based on the guidance of the Court of Appeal in P.A.R.C.E.L., I therefore reduce to zero, 242’s claim for the following, which I consider to be penalties or fines:

(i) Proof of property tax; (ii) Annual audited statement; (iii) Inspection fee; (iv) Appraisal administration fee; (v) Default proceeding fee; (vi) Default interest bonus; and (vii) Late payment default fee.

[57] 242 claims renewal fees at five percent, for a total of $60,000. 160 submits that the renewal fees ought to be capped at $18,000. As 160 sets out in its submissions at para. 76:

It is submitted that 160 and 242 agreed that any renewals would be charged at the rate of three percent for a total of $9,000 per renewal. 160 has acknowledged two outstanding renewal fees in this discharge statement, for a total outstanding of $18,000…160 was never provided with notice that 242 intended to enforce the automatic renewal provisions prior to the commencement of the within litigation and submits that they are now estopped from doing so.

[58] I am satisfied with 160’s submissions that $18,000 is the appropriate fee. The higher amount sought by 242 amounts to fees and penalties contrary to s.8 of the Interest Act.

[59] The balance of items to be determined are the interest increases sought for the period June 2015 to June 2017, $45,000, and $3,333.33 for the period June 25, 2017 to July 11, 2017. There is no question that the mortgage was renewed from time to time. 160 continued to pay the original mortgage amount. 242 continued to receive that amount without notice or demand for a higher amount. 242 had options available to it. It could have commenced power of sale proceedings or sued on the covenant for the claimed shortages. It did neither. In my view, it acquiesced in receiving the payments without taking any action or demand. Therefore, I decline to exercise my discretion to impose the additional interest burden on 160. I do so, not just pursuant to the mortgage provisions, I do so in light of the mortgage purpose and the Joint Venture Agreement between the parties.

[60] I have summarized these findings and ruling on Schedule “A” attached. Therefor the amount required to discharge the mortgage is $356,200.

Set-offs

[61] 160 requests that the amount owing under the mortgage ought to be set-off in the amount of $208,813.90. 160 arrives at this figure by submitting that default proceedings against it by its first mortgagee totalled $133,813.90, together with its costs to-date of $75,000.

[62] I decline to award 160 anything for the set-off amounts as claimed. Any difficulties it had with its first mortgagee were not created by any actions of 242. 160 purchased the property entirely with mortgage funds. The property generated no income, at least in the initial period. They rented the property without notice to 242 and without establishing that the rent represented fair market value for the property. Further, it entered into an Agreement of Purchase and Sale and requested a mortgage discharge statement without giving 242 any notice of the proposed sale or any recognition of the right of first refusal contained in the Joint Venture Agreement and in the mortgage itself.

[63] I also decline to award any off-set for legal costs. The appropriate time to consider costs is after submissions have been received from both sides, after the release of this judgment.

Conclusion

[64] I am satisfied that 242 has a right of first refusal to purchase the property, matching the Agreement of Purchase and Sale entered into between 160 and Nat Levy for a purchase price of $1,560,000. Said transfer to take place within 60 days of the date of the release of this judgment. I see no principled basis for crediting 160 with the tenant improvements.

[65] I am satisfied that the amount required to discharge the second mortgage is $356,200 and this amount may be off-set against the purchase price.

[66] I am further satisfied that there were no “net” profits from 160’s lease to which 242 is entitled.

[67] The Joint Venture Agreement is therefore terminated upon completion of the transfer of the property to 242, and all of the covenants and obligations under the agreement are at an end.

[68] If the parties require an attendance before me to fix the terms of an order, they may arrange to do so by contacting the Trial Coordinator in Barrie.

Costs

[69] The parties are encouraged to resolve the issue of costs so that they can be addressed in a timely manner as part of the completion of the transfer of property. If the parties are unable to reach an agreement, I will receive written submissions from 242, not exceeding five pages, together with a Bill of Costs within 20 days of the release of this judgment. 160 will then have 10 days to provide responding submissions, not exceeding five pages, plus a Bill of Costs, if so advised, and 242 will have a further five days for brief reply, not exceeding two pages. Submissions are to be sent in care of my Judicial Assistant at Barrie.

MULLIGAN J.

Released: November 27, 2018

Schedule “A”

Legal Description

PIN: 30347-0144LT Description: LT4PL11; City of Vaughan Address: 10477 Islington Avenue, Vaughan