Benson Custodian Corporation v. Situ et al.

[Indexed as: Benson Custodian Corp. v. Situ]

Ontario Reports Ontario Superior Court of Justice Schabas J. May 21, 2019 146 O.R. (3d) 261 | 2019 ONSC 3077

Case Summary

Mortgages — Interest — Mortgagor not permitted to rely on s. 17 of Mortgages Act to resist mortgagee's claim of additional three months' interest on top of principal and interest owing under matured mortgage — Payment of additional three months' interest barred by s. 8 of Interest Act as it constituted fine or penalty — Payment of administrative charges and legal fees associated with enforcement of mortgage not constituting fine or penalty and not barred by s. 8 of Interest Act — Interest Act, R.S.C. 1985, c. I-15, s. 8 — Mortgages Act, R.S.O. 1990, c. M.40, s. 17.

The defendant mortgagors were in default under a matured mortgage. The plaintiff mortgagee brought a motion for summary judgment on the mortgage, seeking judgment for the principal and interest owing, an additional three months' interest, administrative charges and legal fees. The additional interest, administrative charges and legal fees were provided for in the mortgage.

Held, the motion should be granted in part.

The mortgagors could not rely on s. 17 of the Mortgages Act to resist the payment of an additional three months' interest. Section 17 had no application in the circumstances of this case. However, the payment of an additional three months' interest was barred by s. 8 of the Interest Act as it constituted a fine or penalty. The payment of administrative charges and legal fees associated with the enforcement of the mortgage did not constitute a fine or penalty and was not barred by s. 8 of the Interest Act.

Cited Cases

Statutes and Rules

MOTION by the plaintiff for summary judgment in a mortgage action.

Counsel: Cary N. Schneider, for plaintiff. Richard Worsfold, for defendants.

SCHABAS J.: —

Overview

[1] This is a motion for summary judgment pursuant to Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 brought by the plaintiff/mortgagee seeking judgment on a mortgage in which the defendants/mortgagors are in default. The plaintiff seeks judgment for the principal and interest owing, as well as additional amounts specified in the mortgage, and possession of the property.

[2] The defendants concede that principal and interest are due and owing since the mortgage matured on November 1, 2018. However, the defendants take issue with the mortgagee's demand for payment of an additional three months of interest, administrative fees and legal fees. In short, the defendants raise both s. 17 of the Mortgages Act, R.S.O. 1990, c. M.40 and s. 8 of the Interest Act, R.S.C. 1985, c. I-15, in arguing that the provisions requiring those payments in the mortgage are not enforceable.

[3] For the reasons which follow, I have determined that the plaintiff/mortgagee is not entitled to the additional three months of interest, as it is prohibited under s. 8 of the Interest Act. As the administrative and legal fees are intended to reimburse the plaintiff for expenses incurred arising from the default, however, those are permissible. Accordingly, I grant summary judgment for the principal and interest owing, as well as certain fees in accordance with this judgment, together with an order for possession if the principal, interest and fees are not paid within 30 days of the release of this judgment.

Background

[4] On May 1, 2017, the defendants granted a mortgage to the plaintiff over a property at 20 Lewiston Road, Scarborough. The term was for six months, securing a principal amount of $725,000 with interest at 13.99 per cent per annum, calculated monthly. Only interest was payable. The mortgage was also secured against a second property owned by the defendant Yao Jun Situ at 20 Lathan Avenue, Scarborough.

[5] The mortgage was renewed on November 1, 2017 and again on May 1, 2018, the second renewal following a demand for full payment by the plaintiff which acquiesced to an extension provided that the principal was reduced. The principal on May 1, 2018 was $600,000 and the interest rate agreed to was 14.5 per cent. The monthly payments of interest were $7,250. Following the extension on May 1, 2018, the plaintiff contacted a representative of the defendants on July 11, July 15 and October 30, 2018 inquiring about the defendants' steps to refinance. On September 17, 2018, counsel for the plaintiff advised the defendants that the plaintiff was not willing to renew the mortgage and that they would be required to pay out the full amount on November 1, 2018.

[6] The mortgage balance was not paid on November 1, 2018, and is in default. While the defendants have been willing to pay the monthly interest, no payments have been accepted by the plaintiff. On November 29, 2018, a notice of sale under mortgage was commenced with a demand for payment on or before January 9, 2019, failing which the plaintiff would take steps to sell the property. This action was commenced on November 26, 2018.

[7] The defendants have now arranged for refinancing sufficient to pay out the principal as well as interest at 14.5 per cent since November 1, 2018, but object to paying additional amounts demanded by the plaintiff who will not discharge the mortgage without those payments.

[8] Paragraph 16 of the mortgage is entitled "Default of Payment and Issuing of Notice of Sale and Statement of Claim." Among other things, it provides as follows,

For each Notice of Sale under Mortgage issued by the Mortgagee(s) there shall be an administration charge of Fifteen Hundred Dollar ($1,500.00) payable by the Mortgagor(s) to the Mortgagee(s). In addition of each Statement of Claim under Mortgage issued by the Mortgagee(s) there shall be an additional administration charge of Fifteen Hundred Dollar ($1,500.00) payable by the Mortgagor(s) to the Mortgagee(s). In addition, on the issuing of a Notice of Sale or filing a Statement of Claim, the Mortgagee(s) shall be entitled to collect as liquidated damages from the Mortgagor(s) a sum equal to the payment of three (3) months' interest on the principal amount outstanding. The Mortgagee(s) shall also be entitled to charge a monthly charge equal to any late payment charge provided for in this mortgage from the date of default until the date that the Mortgagor(s) otherwise redeems the mortgage or the date that the property is solder under Power of Sale.

In addition, for each Notice of Sale under Mortgage issued by the Mortgagee(s) there shall be a charge of Fifteen Hundred Dollar ($1,500.00) plus GST/HST & Disbursements payable by the Mortgagor(s) to the Mortgagee(s)'s lawyer for the preparation and issuing of the Notice of Sale under Mortgage. For each Statement of Claim under Mortgage issued by the Mortgagee(s) there shall be a charge of Fifteen Hundred Dollar ($1,500.00) plus GST/HST & Disbursements payable by the Mortgagor(s) to the Mortgagee(s)'s lawyer for the preparation and issuing of the Statement of Claim under Mortgage. These fees shall be in addition to any legal fees or other costs associated with the Mortgagee(s) herein asserting its rights under this mortgage upon any default of the Mortgagor(s). The Mortgagor(s) shall also be liable for the Mortgagee(s)'s legal fees, disbursements and HST/HST on a solicitor-client basis for any steps taken after the issuing of the Notice of sale including but not limited to any negotiations, court applications, eviction proceedings, listing and sale of the property.

(Emphasis added)

[9] Pursuant to this clause, the plaintiff seeks $3,000 for the administrative charges arising from the notice of sale ($1,500) and the filing of a statement of claim ($1,500), and $21,750 as a sum equalling three months interest on the principal outstanding. The plaintiff also seeks various amounts in costs, including prior legal fees owing, and costs associated with the enforcement of the mortgage since November 1, 2018 on a solicitor and client basis.

Analysis

[10] The issue in dispute is whether the plaintiff is entitled to the additional amounts contained in para. 16 of the mortgage, summarized above, or just the principal and interest owing to date. This is a question of law and can be determined on this motion as no trial is required to resolve the issue. Indeed, the defendants concede that summary judgment should issue in favour of the plaintiff for principal and interest, which they will then pay in order to have the mortgage discharged to facilitate refinancing, but object to paying the additional amounts.

The three months' interest provision and section 17 of the Mortgages Act

[11] The defendants rely first on s. 17 of the Mortgages Act, which provides that a mortgagor in default can pay three months interest on the principal in order to be discharged. However, if the mortgagee takes steps to realize on the mortgage, the mortgagee is only entitled to interest actually owing on the principal and not an additional three months as set out in s. 17: Ialongo v. Serm Investments Ltd., [2007] O.J. No. 789, 54 R.P.R. (4th) 310, at para. 30; 58 Cardill Inc. v. Rathcliffe Holdings Ltd., [2018] O.J. No. 4108, 2018 ONCA 672, at para. 6, affg [2017] O.J. No. 5900, 2017 ONSC 6828 (S.C.J.)](https://www.canlii.org/en/on/onsc/doc/2017/2017onsc6828/2017onsc6828.html).

[12] In my view, s. 17 has no impact to this case. In 58 Cardill Inc., Sanfilippo J. notes at para. 20 that s. 17 exists as a protection and benefit to mortgagors, that it "operates as a shield to the mortgagor to allow for payment of arrears without imposition of three months' interest when three months' notice is provided", and observes that this also provides a benefit to a mortgagee who benefits from notice to "plan the reinvestment of the funds that it anticipates receiving on repayment, or receive a lump sum of three months' interest in lieu thereof" [citations omitted].

[13] Justice Sanfilippo's approach follows that of Brown J., as he then was, in Ialongo who, after reviewing the jurisprudence, concluded that at para. 30:

. . . the rights afforded by section 17 are options made available to the mortgagor on default: it can give notice or pay the bonus prior to the expiry of the notice period. Once, however, the mortgagee takes steps to realize on its security, such as by issuing a notice of sale (see: Re Shankman and Mutual Life Assurance Co. of Canada (1985), 52 O.R. (2d) 65 (C.A.)), it cannot convert the rights of the mortgagor under section 17 into obligations of the mortgagor upon the realization of the security. The amounts a mortgagee may demand from a mortgagor upon realization are those spelled out in the mortgage contract, not in section 17 of the Mortgages Act.

[14] Consequently, as Sanfilippo J. concluded, s. 17 (at paras. 22 and 23) "cannot be used to establish entitlement to three months' interest in the circumstances of a mortgage realization through appointment of a private receiver. . . . The respondent must thereby establish entitlement for the three months' interest payment sought on a term of the Mortgage". As Sanfilippo J. states, therefore [at para. 24]:

The ready solution for a mortgagee seeking an entitlement to impose a three-month interest charge upon realization of the secured property through the commencement of an enforcement proceeding, including the private appointment of a receiver, is to draft into the mortgage terms or the commitment agreement a clause that provides for this entitlement.

[15] In this case, the mortgagee has done as Sanfilippo J. has suggested. Unlike the case before Sanfilippo J., but like the cases of 1746534 Ontario Inc. v. Phillips, [2015] O.J. No. 1781, 2015 ONSC 2232 (S.C.J.) and Piesok v. Chessell, [2016] O.J. No. 1335, 2016 ONSC 1647 (S.C.J.), the mortgage in this case contains a specific provision on default that a mortgagee has the right to seek an additional three months' interest on default by the mortgagee as "liquidated damages" arising from the default. Paragraph 16 is not a clause that provides protections for the mortgagor but, rather, is a contractual provision agreed to by the parties and available to the mortgagee, "figuratively a sword, for use in the event of realization": 58 Cardill, (S.C.J.), supra, at para 29.

[16] I note that Sanfilippo J.'s approach is also consistent with the conclusion of Lauwers J., as he then was in Piesok v. Johnson, [2010] O.J. No. 900, 2010 ONSC 1284 (S.C.J.), who did not apply s. 17 to a mortgage that specifically provided for a three-month interest payment, noting, at para. 29, that "[t]o do so would allow that mortgagor to purposefully go into default and force a mortgagee to take steps to realize on its redemption, thus allowing the mortgagor to avoid the prepayment clause".

Section 8 of the Interest Act

[17] The defendants also submit that the payment of three months' interest is barred by s. 8 of the Interest Act, which provides:

8(1) No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

(2) 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.

(Emphasis added)

[18] The plaintiff submits that the three months' interest payment in issue is not so egregious as to be a fine or penalty. However, the application of s. 8 does not turn on the size of the fine, penalty or rate of interest. The plaintiff also submits that the case is governed by decisions of Lauwers J., as he then was, in Piesok v. Johnson, supra, and Diamond J. in Piesok v. Chessell, supra, who both found that a three months' interest payment to retire a mortgage did not constitute a "fine", "penalty" or a "rate of interest" charged on arrears, but was simply a payment the mortgagor was required to make under the contract [Piesok v. Chessell, at para. 17] "for the privilege of retiring the mortgage without providing three months' notice".

[19] However, those cases are distinguishable from the facts before me. Here, the mortgagor is not seeking to retire the mortgage early and paying for that privilege, as was the case before Justices Lauwers and Diamond. Here, the defendants are in default of paying the principal back (although, as noted, the defendants have attempted to make payments), and the plaintiff is relying on a provision that "has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears" (emphasis added).

[20] The Court of Appeal has addressed this directly. In Mastercraft Properties Ltd. v. EL Ef Investments Inc. (1993), 14 O.R. (3d) 519, [1993] O.J. No. 1704 (C.A.), McKinlay J.A. distinguished cases in which there was notice of early retirement and cases of "default occurring at maturity of the mortgage where the mortgagee claimed or attempted to enforce a covenant to pay three months' interest in addition to payment of interest in full up to the time of repayment of principal". In the latter cases, McKinlay J.A. stated, "the amount claimed would clearly constitute a penalty for default, and would result in increasing the interest on the arrears beyond the mortgage rate, thus contravening the provisions of s. 8".

[21] More recently, in P.A.R.C.E.L. Inc. v. Acquaviva (2015), 126 O.R. (3d) 108, [2015] O.J. No. 2388, 2015 ONCA 331, Cronk J.A. discussed s. 8, noting, at para. 51, that it "creates an exception to the general rule that lenders and borrowers are free to negotiate and agree on any rate of interest on a loan. Section 8 prohibits lenders from levying 'fine[s], penat[ies] or rates of interest' on 'any arrears of principal or interest' that are 'secured by mortgage on real property'". Justice Cronk quoted from the B.C.C.A. in Reliant Capital Ltd. v. Silverdale Development Corp., [2006] B.C.J. No. 1028, 2006 BCCA 226, leave to appeal to S.C.C. refused [2006] S.C.C.A. No. 265, as follows [at paras. 51-53]:

It is not uncommon now in the commercial world for loan contracts, other than mortgage loans, to require a substantially higher interest rate if the loan becomes in arrears. Common sense suggests that this is recognized as a legitimate and effective way to ensure the prompt or timely repayment of the loan.

The prohibition against extra charges on arrears remains in place for loans secured by a mortgage. Moreover, the additional charge on arrears is prohibited in mortgage loans whether that charge is expressed as such, or whether the interest provision simply has "the effect" of increasing the charge in respect of arrears.

Parliament has singled out mortgages on real estate for special treatment, or at least treatment that differs from loans that are not secured on real property. I infer that at least one legislative purpose was to protect the owners of real estate from interest or other charges that would make it impossible for owners to redeem, or to protect their equity. If an owner were already in default of payment under the interest rate charged on monies not in arrears, a still higher rate, or greater charge on the arrears would render foreclosure all but inevitable.

(Emphasis added by Cronk J.A.)

[22] Accordingly, Cronk J.A. concluded, [P.A.R.C.E.L.], supra, at para. 48:

In my view, on the facts of this case, the answer to this question is yes. I conclude that the arrears of principal and interest in question are "secured by [a] mortgage on real property" and that s. 8 of the Interest Act therefore applies to the debt instruments entered into by the parties, including the Note. It follows that, because the Interest Escalation Provision applies to arrears that are secured by a mortgage within the meaning of s. 8, and because it has the effect of increasing the rate of interest charged on the arrears beyond the pre-default interest rate payable on the principal amount of the Note, the Interest Escalation Provision violates the statutory prohibition in s. 8 of the Interest Act and is ineffective.

[23] I conclude, therefore, that s. 8 is applicable here and the three months' interest provision is invalid and unenforceable.

[24] With respect to the administrative and legal fees, I was not directed to any case that addressed this issue. The defendants simply objected to paying them where they had "been forced into default by the refusal of the plaintiff to accept ongoing interest payments". However, here the defendants are in default for failing to repay the principal when it came due on November 1, 2018, and the plaintiff was entitled to take steps to enforce thereafter. As these fees are unconnected to the principal amount, they are of a different character than the three months' interest. An agreement on a fixed fee arising from issuance of a notice of sale or the issuance of a statement of claim does not strike me as a fine or penalty, nor is it, of course, a rate of interest. Rather, these amounts, including the legal fees, address some of the costs anticipated by and associated with enforcing a mortgage that may be incurred in the event of default.

[25] Accordingly, the balance of the fees set out in the letter of May 10, 2019 summarizing the amount required to pay out the mortgage are valid charges.

Costs

[26] As success is divided, I make no order as to costs.

Motion granted in part.

End of Document

Benson Custodian Corporation v. Situ, 2019 ONSC 3077

Case Summary

Benson Custodian Corporation v. Situ et al.

[Indexed as: Benson Custodian Corp. v. Situ]

Case Summary

Cited Cases

Statutes and Rules

Overview

Background

Analysis

The three months' interest provision and section 17 of the Mortgages Act

Section 8 of the Interest Act

Costs

Cited By (2 cases)

Bemco Financial Services Ltd. v. 12425467 Canada Inc., 2025 ONSC 3987

2757043 Ontario Inc. v. Sansone, 2024 ONSC 2393

Judge

Counsel

Parties

Areas of Law