COURT FILE NO.: CV-20-636740

DATE: 2020-12-18

Ontario Superior Court of Justice

BETWEEN:

2495940 Ontario Inc. Applicant

– and –

263346 Ontario Inc. Respondent

COUNSEL: Behrouz Amouzgar and Stefanija Savic, for the Applicant Scott Turton, for the Respondent

HEARD: August 21, 2020

BEFORE: Justice Vella

Reasons for Decision

[1] The Applicant, 2495940 Ontario Inc., the (former) second mortgagee (the “Second Mortgagee”), seeks a judicial determination of certain charges claimed by the Respondent, 263346 Ontario Inc., the (former) first mortgagee by assignment, under the Respondent’s mortgage, and an order allocating the sum currently held in court to the credit of this Application. This Application is brought under Rules 14.05(3)(e) and (3)(f) of the Rules of Civil Procedure, R.S.O. 1990, Reg. 194, and ss. 12(3) and 12(6) of the Mortgages Act, R.S.O. 1990, c. M. 40.

Chronology of material events

[2] On December 8, 2016, a first mortgage (the “Original First Mortgage”) was registered in favour of the following parties: Shalby Investments Inc., Alaimo Calogero, Maria Del Carmen Alaimo, Diego Alaimo, Anna Maria Alaimo, the Lavi Family Trust, 1440194 Ontario Inc., Alexander Terner, Joyce Terner and Dominic Renda Holdings Ltd. (collectively, the “Original First Mortgagees). The Original First Mortgage was registered on title under the Land Titles Act, R.S.O. 1990, c. L.5 “Land Titles Act”), and referenced Standard Charge Terms 200033 (filed by Dye and Durham in the Registry offices).

[3] The Original First Mortgage secured the principal amount of $2,300,000.00 CAD, and bore an interest rate of 8% calculated annually, not in advance, against the property municipally known as 23 Thornridge Drive, Vaughan (the “Property”).

[4] The Original First Mortgage’s maturity date was January 1, 2018 and was subject to renewal.

[5] The mortgagor’s name is Mr. Alijanpour (“Alijanpour”).

[6] On the same day, but subsequent to the Original First Mortgage, a second mortgage against the Property was registered in favour of the Applicant Second Mortgagee as Instrument No. YR2593234 (the “Second Mortgage”). It secured the sum of $850,000.00 as principal, and bore an interest rate of 11% calculated annually, not in advance. It also incorporated by reference Standard Charge Terms 200033.

[7] The mortgages were registered under the Land Titles Act.

[8] Alijanpour went into default under the Original First Mortgage. The Original First Mortgagees commenced an action for payment of the outstanding indebtedness under the Original First Mortgage and a writ of possession of the Property against Alijanpour.

[9] On January 8, 2018, default judgment was granted in favour of the Original First Mortgagees against Alijanpour in the sum of $2,415,722.78 plus costs of $951.00 from Andre J. (“Andre Default Judgment”). Post judgment interest was fixed at the rate of 8% per year on the judgment debt from the date of the default judgment, together with an order requiring Alijanpour to deliver up possession of the Property. A writ of possession was issued in favour of the Original First Mortgagees on January 29, 2018.

[10] By this time, the term of the Original First Mortgage had expired.

[11] However, before the Property was taken into possession, the Original First Mortgagees and the Respondent, 263346 Ontario Inc., entered into an assignment in or around May 1, 2018. The Respondent took an assignment of the Original First Mortgage and paid the sum of $2,594,141.59 in consideration, reflecting the outstanding indebtedness claimed owing under the Original First Mortgage at that time (and satisfying the Andre Default Judgment).

[12] Alijanpour entered into an agreement, dated May 2, 2018, with the Respondent to renew and amend certain terms of the Original First Mortgage (the “Renewed First Mortgage”). The agreement amended the following terms of particular relevance to this Application:

(a) The principal amount owing under the mortgage as of May 1, 2018 was $2,594,141.59;

(b) The mortgage was renewed extending the maturity date to May 1, 2019;

(c) The interest rate under the mortgage was increased to 11.5% (from 8%) per annum, calculated monthly commencing May 2018;

(d) The Respondent acquired the option to direct repayment of any or all of the principal outstanding under the charge in US dollars at the exchange rate of 1.2841, rather than Canadian currency.

[13] The Transfer of Charge was registered against the Property with the Land Titles office on or around May 3, 2018 but the details of the amending and extension agreement were not registered on title.

[14] Alijanpour defaulted under the Second Mortgage in or around the same time as he fell into default under the Original First Mortgage. The Second Mortgagee, having been advised that the Original First Mortgage had been assigned, obtained judgment on consent against Alijanpour and a writ of possession for the Property on January 18, 2019 from Sossin J. (as he was then) in the amount of $1,125,000.00 plus post judgment interest at the rate of 11.0% (consistent with the rate stipulated in the Second Mortgage) (the “Sossin Judgment”).

[15] The Applicant, Second Mortgagee, was aware that a Transfer of Charge reflecting the Renewed First Mortgage and assignment, had been registered on title by the time of the Sossin Judgment.

[16] The Applicant entered into an Agreement of Purchase and Sale to sell the Property, under Power of Sale, on September 13, 2019 with a closing date of October 31, 2019.

[17] It was the intent of the Applicant to pay out and discharge the renewed First Mortgage from the proceeds of the sale of the Property. However, Alijanpour also fell into default under the Renewed First Mortgage.

[18] The Respondent, under the Renewed First Mortgage, subsequently obtained summary judgment against Alijanpour, on consent, on November 22, 2019 from Di Luca J. (the “Di Luca Judgment”). Judgment was granted in favour of the Respondent in the sum of $3,261,290.58 as damages and accrued interest. Post judgment interest fixed at 11.5% per year from the date of judgment (consistent with the rate stipulated in the Renewed First Mortgage), and His Honour fixed costs of the action at $30,000.00 all inclusive.

[19] In the interim, the Applicant issued this application on October 17, 2019.

[20] In order to complete the sale of the Property, the Applicant required the Renewed First Mortgage to be discharged by the Respondent. Despite many requests, a discharge statement was not provided. However, on July 31, 2019, the Respondent advised the Applicant that the amount due under the Renewed First Mortgage was $3,104,065.00 as of June 7, 2019, and that interest continued to accrue at the rate of 11.5% under the terms of the Renewed First Mortgage.

[21] In order to facilitate the sale of the Property, the Applicant and Respondent entered into an agreement with respect to the proceeds of sale, the terms of which were reflected in a consent order granted by Lavine J. on October 29, 2019 (the “Lavine Order”) as follows:

(a) Upon satisfaction of the monetary terms, a cessation of the Renewed First Mortgage, and any related documents, registered in the Land Registry Office for the Land Titles Division of York Region No. 65, on December 8, 2016 as Instrument No. YR2593233 would be registered;

(b) Payment of $2,750,000 would be made to the Respondent First Mortgagee;

(c) Payment of $600,000 would be paid into court to the credit of the application;

(d) The registration of the cessation of the Renewed First Mortgage would not impair the enforceability of this mortgage save that it would no longer be enforceable against the Property;

(e) The referenced sum of $600,000 is to stand in place of the Property as security under the Renewed First Mortgage.

There were other related terms not material to this Application.

[22] The Property was sold for price of $4,350,000.00.

Issues to be Resolved

[23] The Applicant disputes the legitimacy and enforceability of certain of the charges alleged to be in priority over the Second Mortgage and/or claimed by the Respondent as properly owing under the Renewed First Mortgage.

[24] There are three main issues that must be determined:

(i) Are the “disputed charges” (as hereinafter defined) legitimately claimed under the Renewed First Mortgage?

(ii) Do the provisions reflected in the Renewed First Mortgage increasing the interest rate payable to 11.5%, from the previously fixed 8% rate, and providing the Respondent with the option to require payment of principal in US funds at a prescribed exchange rate, take priority over payment of the sums due under the Second Mortgage?

In the alternative,

(iii) Did the Di Luca Judgment finally determine the total funds payable under the Renewed First Mortgage to the Respondent rendering the current application an impermissible collateral attack on that judgment? A further related issue, not articulated by the parties, is whether the Di Luca Judgment determined the matter of priorities as between the Renewed First Mortgage and the Second Mortgage.

Preliminary Issue

[25] The issue relating to the Di Luca Judgment and its legal effect on the current application was raised by the Respondent through its Factum. The Applicant then filed a Reply Factum alleging that the circumstances underlying the Original First Mortgage and its assignment to the Respondent were suspicious. The Applicant has raised the allegation that there has been fraudulent activity. The outcome of this discreet issue could have a material impact on the enforceability and/or priority of the disputed charges and terms of the Renewed First Mortgage as against the Second Mortgage.

[26] At the hearing, the Applicant confirmed that it was pursuing the allegations of fraud it raised in its Reply Factum. The evidentiary record before this court contains some evidence that could arguably lead to a finding of fraud. However, the evidentiary record is incomplete, and the Respondent has had no opportunity to respond to these allegations. If the Di Luca Judgment is undermined due to fraudulent circumstances, that finding could affect my determination regarding the disputed charges and terms.

[27] Nonetheless I was urged by both parties to proceed with the hearing of the Application. I concluded the only way I could do so was to order a trial of an issue on the discreet issue of the legal effect of the Di Luca Judgment, so as to allow the allegations of fraud to be properly explored.

[28] Accordingly, I determined that I would provide a ruling regarding issues (i) and (ii) as I have a sufficient evidentiary basis to do so, and will adjourn the balance of the application to a trial of an issue which will be heard before me, on an expedited basis. I will convene a case conference to establish a hearing date and a timetable. Any rulings I make will be subject to the outcome of the trial of an issue.

Analysis

[29] The Respondent claims that the sum of $3,261,290.58 plus fees of $30,000 (all of which it says is consistent with the Di Luca Judgment) is due, together with interest on those sums accruing at the rate of 11.5% per year since November 22, 2019 (the granting of the Di Luca Judgment) under the terms of the Renewed First Mortgage. The Respondent also says that this sum is in priority to the outstanding indebtedness due under the Second Mortgage.

[30] The Applicant claims that the approximate sum of $2,780,614.96 is properly due and owing under the Renewed First Mortgage. The Applicant disputes the sum of $323,405.34. The Applicant listed in its Factum the specific charges it takes issue with. For ease of reference I have broken the disputed charges into two categories. The first relate to the sums charged by the Original First Mortgagees on default by Alijanpour and listed in the discharge statement provided by Alijanpour’s lawyer dated April 30, 2018 (the “Krikunez discharge statement”). The second category relates to the amounts charged as a result of the subsequent default by Alijanpour under the Renewed First Mortgage. The two categories are summarized below:

The Disputed Charges from the Krikunez 2018 Discharge Statement (and reflected in the Andre Default Judgment):

(i) 3 months of “bonus interest” in the sum of $46,000.00;

(ii) Default proceedings fees in the sum of $2,000.00;

(iii) Insurance premium (on the Property after default of the Original First Mortgage) in the sum of $10,907.00;

(iv) Property Management fee in the sum of $7,485.06;

(v) Holdback for agent invoices in the sum of $10,000.00;

(vi) Electrical account arrears in the amount of $6,020.72;

(vii) Advertising and marketing fees in the sum of $9,768.85; and

(viii) Estimated legal fees and disbursements in the sum of $46,608.97 (relating to the costs claimed for the default judgment proceedings).

Subtotal: $138,790.60

The Disputed Charges by the Applicant relating to amounts claimed in relation to Alijanpour’s Default under the Renewed First Mortgage:

(ix) Default fee in the sum of $2,000.00;

(x) Preparation of Notice of sale fee in the sum of $3,500.00;

(xi) Late payment fee in the sum of $2,250.00;

(xii) Legal fees for a letter in the sum of $500.00;

(xiii) Inspection fee of $500.00;

(xiv) Insurance fee in the sum of $500.00;

(xv) The premium for the Property’s insurance coverage in the sum of $1,967.00;

(xvi) The difference between the sum of $2,565,963.90 (reflected on the Krikunez 2018 discharge statement as the total indebtedness then owed under the Original First Mortgage) and the sum of $2,594,141.59 (the amount paid to the Original First Mortgagees by the Respondent) being $28,177.69.

Cumulative total: $178,185.29

These sums will be collectively referred to as the “disputed charges”.

[31] The Applicant also claims the amounts payable as interest in excess of the original 8% annual rate stipulated in the Original First Mortgage do not take priority over the sums due under the Second Mortgage (being the difference between 11.5% and 8.0%) as follows:

(i) May 1, 2018 to April 30, 2019: $66,178.37;

(ii) June 8 to June 30, 2019: $9,179.62;

(iii) July 1 – July 31, 2019: $12,001.73;

(iv) August 1 – August 31, 2019: $12,288.05;

(v) September 1 – September 30, 2019: $13,172.97; and

(vi) October 1 – October 31, 2019: $12,868.96.

The total alleged excessive interest claim for this period totals $125,689.70, and continues to accrue on the outstanding amount of indebtedness under the Renewed First Mortgage.

[32] The Applicant also claims that the Respondent has included in its claim its estimated legal fees (as at September 9, 2019) in the range of $60,000 to $70,000, rather than the $30,000.00 fixed by the Di Luca Judgment.

[33] These amounts approximate the sum that the Applicant claims is both excessive and/or do not rank in priority over the indebtedness it claims is due under its Second Mortgage.

[34] The Applicant claims that the Respondent is only entitled to $2,780.614.96 and that, as the sum of $2,750,000 was already remitted to the Respondent pursuant to the Lavine Order, the Respondent should only receive $30,614.96 from the proceeds paid into court. This would leave the remaining sum of $569,385.05 to be paid to the Applicant to reduce the outstanding indebtedness owed to it under the Second Mortgage.

[35] Based on the evidentiary record, I find that all of the disputed charges derived from the Krikunez 2018 discharge statement, including legal fees associated with the Andre Default Judgment but at the reduced amount of $4,651.00, were reflected in the Andre Default Judgment, and in turn reflected in the Di Luca Judgment. These disputed charges were included in the sum paid by the Respondent to the Original First Mortgagees as part of the consideration it paid upon assignment and transfer of the Original First Mortgage.

[36] I also find, based on the evidentiary record, that the majority of the disputed charges in the second category were all withdrawn by the Respondent and not claimed before Di Luca J. save for the following:

(i) Insurance fee of $500.00 (which was a fixed fee in the Original First Mortgage Schedule and attested to in the Affidavit of Ivan Terziev);

(ii) Half the insurance premium incurred for the Property after default, in the sum of $1,967.00 (which was agreed to by the Applicant who paid the other half, and is supported by the invoice and cheque evidencing payment attached as exhibits to the Turton second affidavit).

[37] The following sums were reflected in the Di Luca Judgment:

(a) The sum of $2,594,141.59 representing the amount paid by the Respondent to the Original First Mortgagees, and stipulated as the principal sum of the Renewed First Mortgage in the amending and extension agreement signed by Alijanpour;

(b) Interest at the rate of 11.5% per year calculated monthly for payments not made from May 2018 through approximately November 22, 2019;

(c) The Respondent’s 50% share of the cost of insuring the Property in the sum of $1,967.00;

(d) Insurance fee in the sum of $500.00; and

(e) The Respondent’s legal fees relating to the motion for summary judgment, fixed by Justice Di Luca in the sum of $30,000 all inclusive.

[38] The Applicant argues that the disputed charges (leaving aside the interest rate increase, and the US dollar conversion rate as I will deal with those items separately), cannot be enforced in priority to the Second Mortgage unless they were actual costs incurred. If they do not reflect actual costs incurred, then they may offend section 8 of the Interest Act as prohibited fines or penalties. The burden of proof lies on the claimant, in this case the Respondent, to prove that the claimed charges were actually incurred by it: P.A.R.C.E.L. v. Acquaviva, 2015 ONCA 331, 126 O.R. (3d) 108 (“P.A.R.C.E.L. v. Acquaviva”).

[39] The Respondent submits that, with respect to the first category of disputed charges, it incurred all of the charges disputed and points to the sum paid by it to the Original First Mortgagees as consideration for the assignment of the Original First Mortgage, as well as the fact that these sums were enshrined in the Andre Default Judgment obtained by the Original First Mortgagee.

[40] With respect to the second category of charges, the Respondent claims that all of these disputed charges were withdrawn by it and not placed before Di Luca J., except for the one half payment of the insurance premium and the insurance placement fee. The Respondent has produced evidence that its share of the insurance premium was actually paid by it, and the Applicant agreed to pay the remaining half. The Respondent has also produced evidence that the $500.00 insurance fee reflects the time incurred by the Respondent in locating appropriate replacement insurance for the Property after Alijanpour defaulted under the Renewed First Mortgage and the Second Mortgage. The Applicant has not produced any evidence to suggest that a search for a replacement policy was not necessary and did not cross examine Mr. Terziev on his affidavit.

[41] Furthermore, while the Respondent estimated its fees with respect to enforcement of its charge through the summary judgment proceedings before De Luca J. at between $60,000 and $70,000, Di Luca J. fixed those costs at $30,000 all inclusive (after the requested costs were contested by Alijanpour) and only those reduced costs have been advanced in this Application.

[42] I note that the Andre Default Judgment obtained by the Original First Mortgagees has not been challenged by the Applicant by way of a motion to set aside or vary it. Nor has the Applicant asked this court to vary or set aside the default judgment. Under these circumstances, I am not prepared to go behind the default judgment to assess the legitimacy of the applicable disputed charges (from the Krikunez 2018 Discharge Statement). As a practical matter, I do not see how the Respondent would be in a position to prove that those charges were actually incurred by the Original First Mortgagees. In any event, I am satisfied that these disputed charges were actually paid by the Respondent in order to satisfy the total indebtedness due to the Original First Mortgage and reflected in the Andre Default Judgment.

[43] I am satisfied that the remaining two disputed charges from the second category were costs actually incurred based on the evidentiary record before me. I am also satisfied based on the evidence that the Respondent’s assessed costs of $30,000 all-inclusive are the costs that have been advanced as part of its claim in this Application, and not the former estimate provided by the Respondent’s lawyers prior to the motion for summary judgment before Di Luca J.

[44] In terms of the difference between the amount shown on the Krikunez 2018 discharge statement and the amount actually paid by the Respondent as consideration to the Original First Mortgagees for the assignment, I am satisfied on the evidence that the difference is accounted for through the additional interest that accrued.

US Dollar Conversion of Principal Clause

[45] The Applicant argues that the US dollar conversion repayment option of the principal does not take priority as against the outstanding indebtedness payable under the Second Mortgage.

[46] The Applicant did not raise in its factum or reply factum any issue regarding the increased sum due under the US dollar conversion clause. Rather, it raised this argument during the course of oral submissions.

[47] It appears from Mr. Terziev’s May 2019 affidavit that the Respondent did invoke that clause and that conversion resulted in an increase in the principal outstanding as at June 7, 2019. This increase appears to be reflected in the Di Luca Judgment.

[48] The Respondent objected to the Applicant’s late challenge to the enforceability of the US dollar conversion clause. I agree with the Respondent. If the Applicant had intended to challenge this clause, it should have raised the challenge in its Application Record or, at the latest, in its factum. Accordingly, I decline to rule on this issue as it was not properly before the court.

Increased Interest Rate under the Renewed First Mortgage as against the Second Mortgage Indebtedness

[49] The next issue raises the important question of whether, and under what circumstances, a term increasing the interest rate in a renewed mortgage and increases the amount of indebtedness owing under the mortgage on discharge takes priority over a subsequent mortgage which is registered before the date of the renewed first mortgage.

[50] The Second Mortgagee did not have actual notice of the increased interest rate until after it registered its own charge. This is important as the changed term in this case has the effect of prejudicing the Applicant by reducing the value of the remaining proceeds of sale to below the outstanding indebtedness accrued under the Second Mortgage.

[51] There is a paucity of law on this specific issue under the Land Titles regime in Ontario. Furthermore, neither party could provide me with authority as to the impact of the standard charge term at issue here as it relates to determining priority over altered terms of a renewed mortgage terms over encumbrancers whose instruments are registered subsequent to the original mortgage, but prior to the altered renewed mortgage.

[52] The Applicant made three arguments in support of its position that the increased interest rate does not take priority over its Second Mortgage which I will deal with each in turn.

[53] First, the Applicant submits that it was inappropriate for the Respondent to refuse to provide a discharge statement during the course of the various proceedings. It relies on ss. 22(2) and 22(3) of the Mortgages Act. Section 22 states,

Relief before action

22(1) Despite any agreement to the contrary, where default has occurred in making any payment of principal or interest due under a mortgage or in the observance of any covenant in a mortgage and under the terms of the mortgage, by reason of such default, the whole principal and interest secured thereby has become due and payable,

(a) At any time before sale under the mortgage; or

(b) Before the commencement of an action for the enforcement of the rights of the mortgagee or of any person claiming through or under the mortgagee,

the mortgagor may perform such covenant or pay the amount due under the mortgage, exclusive of the money not payable by reason merely of lapse of time, and pay any expenses necessarily incurred by the mortgagee, and thereupon the mortgagor is relieved from the consequences of such default.

Statement of arrears, expenses, etc.

(2) The mortgagor may, by a notice in writing, require the mortgagee to furnish the mortgagor with a statement in writing,

(a) of the amount of the principal or interest with respect to which the mortgagor is in default; or

(b) of the nature of the default or the non-observance of the covenant,

and the amount of any expenses necessarily incurred by the mortgagee.

Idem

(3) The mortgagee shall answer a notice given under subsection (2) within fifteen days after receiving it, and, if without reasonable excuse the mortgagee fails so to do or if the answer is incomplete or incorrect, any rights that the mortgagee may have to enforce the mortgage shall be suspended until the mortgagee has complied with subsection (2).

[54] However, upon a plain reading of s. 22, it is clear that the purpose of this provision is to permit a mortgagor, who is in default, to obtain a statement setting out the amount of the default, so that the mortgagor can put the mortgage back into good standing by paying the amount of the arrears only. The provision does not mention a discharge statement, nor does it give the right to demand an arrears statement to a subsequent mortgagee. Section 22 also applies only where the mortgage has not yet matured, but by reason of default the payment of the principal has accelerated and become due and payable.

[55] In the present application, the Original First Mortgage had already matured at the time of assignment and so the remaining principal became due by reason of maturity. Section 22 has no application to the Respondent or the Renewed First Mortgage. The Respondent is not disentitled from claiming the full amount due under the Renewed First Mortgage by reason of having declined to provide a discharge statement to the Applicant.

[56] Furthermore, the Applicant was provided with affidavit evidence from the Respondent in October 2019 that, in turn, provided the particulars of the sums due under the Renewed First Mortgage as of June 7, 2019; notably the Affidavit of Ivan Terziev sworn April 2019. These materials were provided to the Applicant by way of the responding record to the Applicant’s application seeking discharge of the Renewed First Mortgage before Lavine J. (to facilitate the eventual sale of the Property). Through the responding record, the Applicant also became aware of the Respondent’s motion for summary judgment before Di Luca J., but did not attend or seek to intervene at that motion.

[57] Next, the Applicant submits that the interest increased rate is illegal as contrary to s. 8 of the Interest Act, R.S.C. 1985, c. I-15. That section states:

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 the 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 the principal money not in arrears.

[58] The Applicant relies on P.A.R.C.E.L. Inc. v. Acquaviva for the proposition that charges that constitute a penalty are not enforceable, such as increased interest charged on arrears of principal or interest accrued by a mortgage on real property.

[59] However, the increased rate of interest charged under the Renewed First Mortgage applied to the principal and not as a penalty on any arrears. Therefore, the increase does not violate s. 8 of the Interest Act.

[60] Finally, the Applicant argues that as it had no actual notice of the increase in the interest rate from 8% (from the Original First Mortgage) to 11.5% (in the Renewal Mortgage) and the increased interest rate was not registered on title, the increased portion of the mortgage interest rate cannot take priority over the indebtedness due under the Second Mortgage.

[61] The Applicant relies on the decision of Cardinal Insurance Co. (Liquidator of) v. Standard Trust Co. (1991) 1991 CanLII 7374 (ON SC), 2 O.R. (3d) 525, 16 R.P.R. (2d) 161, at para. 40 (“Cardinal”), for the proposition that a first mortgagee cannot,

for their own benefit, and to the prejudice of others, … contract of out the Registry Act requirements for prior registration or for actual notice by agreeing that any modification they desire to make to the mortgage should be binding upon subsequent encumbrancers without registration or without any actual notice to the latter, I agree; and for the foregoing reasons, I hold that the plaintiff [a subsequent mortgagee] is not bound to pay the higher rate of interest stipulated in the renewal agreement in order to obtain a discharge of the first mortgage.

[62] At first blush, this would seem an entire answer to this issue. However, it is not. The Cardinal case considered the enforceability of an increased interest rate against subsequent mortgagors for a property registered under the Registry Act, R.S.O. 1990, c. R. 20 in a situation where no notice was registered on title and no actual notice of the increased interest rate was given to the subsequent mortgagor.

[63] As stated earlier, the subject mortgages are governed by the Land Titles system in Ontario.

[64] Unlike in Cardinal, the Original First Mortgage incorporated by reference, the Standard Charge Terms 200033 (as did the Second Mortgage). Those terms included s. 19:

19. No extension of time given by the Chargee to the Chargor or anyone claiming under him, or any other dealing by the Chargee with the owner of the land or of any part thereof, shall in any way affect or prejudice the rights of the Chargee against the Chargor or any other person liable for the payment of the money secured by the Charge, and the Charge may be renewed by an agreement in writing at maturity for any term with or without an increased rate of interest notwithstanding that there may be subsequent encumbrances. It shall not be necessary to deliver for registration any such agreement in order to retain priority for the Charge so altered over any instrument delivered for registration subsequent to the Charge. Provided that nothing contained in this paragraph shall confer any right of renewal upon the Chargor. (Emphasis added.)

[65] Pursuant to ss. 8, 9 and 10 of the Land Registration Reform Act, R.S.O. 1990, c. L.4 upon being accepted for registration, standard mortgage terms are transmitted to the Land Registry office and become available for public inspection. Those terms are then deemed incorporated into all registered mortgages that reference them, pursuant to s. 78(4) of the Land Titles Act:

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

[66] In such cases, under s. 78(5) of the Land Titles Act, the prior mortgage maintains its priority according to time of registration, notwithstanding changes to the original mortgage document made pursuant to the standard charge terms when incorporated by reference.

[67] As stated by the Ontario High Court in Reynolds Extrusion Co. Ltd. v. Cooper (1978), 1978 CanLII 1671 (ON SC), 21 O.R. (2d) 416, at p. 6:

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

[68] Reynolds also cited with approval the following excerpt from Fisher and Lightwood’s Law of Mortgages, 9th ed (1977) at 43-44:

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

[69] In Elle Mortgage Corp. v. Adalath, 2012 ONSC 7061, 28 R.P.R. (5th) 137, the court found the above passages applicable to registration under the Land Titles Act, and while that court held that an increased interest rate did not bind the subsequent encumbrancer it was dealing with different language in the subject mortgage instrument than what is in s. 19 of the Standard Charge Terms. The terms quoted in Elle, for example, did not address the issue of priority as against subsequent encumbrancers.

[70] It was the agreement renewing the mortgage that increased the rate of interest. However, the Standard Charge Terms were incorporated by express reference into the Original First Mortgage which was registered before the Second Mortgage. Therefore, the Second Mortgagee was deemed to have notice of s. 19 with the fact that the interest rate could be increased on renewal by the First Mortgagee while maintaining priority over all subsequent encumbrancers, including the Applicant when it registered its second mortgage. The Applicant was deemed to have notice that such an increase in the interest rate upon renewal would be binding on it without the need to deliver for registration the agreement increasing the rate of interest “in order to retain priority for the Charge so altered over any instrument delivered for registration subsequent to the Charge”. (s. 19, Standard Charge Terms 200033)

[71] I agree with the Respondent’s interpretation that it was not necessary to advise the Applicant in advance of the registration of the Second Mortgage of the increase in the Original First Mortgage’s interest rate (upon renewal) because the Applicant had notice of this possibility when it assumed a position subsequent to the First Mortgage, and decided to take the risk of that possibility manifesting (knowing, no doubt, that there would be limits to setting any subsequent increase, such as prescribed by the Interest Act).

[72] It is worth repeating that the Second Mortgage also incorporated these same Standard Charge Terms.

[73] A plain reading of the Standard Charge Terms 200033, incorporated by reference into the registered Original Mortgage document, combined with the relevant provisions of the Land Titles Act and Land Registration Reform Act, lead me to the conclusion that the deemed notice provided by way of the Standard Charge Terms has the effect, under the Land Titles regime, of preserving priority under the Renewed First Mortgage not only as to the terms of the original contract, but also the increased interest rate term under the Renewed First Mortgage.

Conclusion

[74] Accordingly, and subject the pending trial of an issue, I find that the disputed charges from, and the increased interest rate under, the Renewed First Mortgage are enforceable and have priority over the outstanding indebtedness under the Second Mortgage.

[75] I am not making any order with respect to the proper allocation of the monies paid into court at this time, and am adjourning the application to a trial of an issue.

[76] Costs will also be reserved to the trial of an issue.

COURT FILE NO.: CV-20-636740 DATE: 2020-12-18

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: 2495940 Ontario Inc.

• and – 263346 Ontario Inc.

REASONS FOR JUDGMENT

Justice S. Vella Released: December 18, 2020