Court File and Parties
ONTARIO SUPERIOR COURT OF JUSTICE
RE: BMMB INVESTMENTS LIMITED, Plaintiff
-and-
FARINOSH NAIMIAN, Defendant
BEFORE: F.L. Myers
COUNSEL: Doug Bourassa, for the Plaintiff
M. Yailaqi agent for Hossein Niroomand, for the Defendant
HEARD: December 17, 2020
ENDORSEMENT
Motion and Outcome
1This is a motion for summary judgment to enforce a mortgage with a principal debt of $1,600,000.
2For the reasons set out below, judgment is granted to the plaintiff on the mortgage debt, accrued interest, costs, and for possession of the mortgaged premises. The claims for various contractual fees and reimbursement for third party costs are dismissed.
Last Minute Adjournment Request Denied
3At the commencement of the motion hearing, Mr. Yailaqi advised that he attended as agent for the lawyer of record Mr. Niroomand. He advised that on December 14, 2020 (the Monday of the week of the return of this motion for judgment) Mr. Niroomand delivered a motion to be removed as the defendant’s lawyer of record. On that basis, Mr. Yailaqi requested an adjournment.
4In addition, a lawyer named Ms. Hosseini appeared. She advised that she had been consulted by the defendant the evening before the motion. She asked for an adjournment to allow her to get up to speed. However, she did not commit to become counsel of record.
5The mortgage that is the subject of this action matured in March, 2019. The defendant stopped paying in October, 2018.
6The plaintiff delivered its motion record in February, 2020. Counsel attended Civil Practice Court and obtained an order setting a schedule for the procedural steps in the motion and setting a hearing date returnable last May.
7The hearing was adjourned due to the pandemic.
8On October 21, 2020, in Civil Practice Court, I granted an order setting a new schedule and return date. The defendant was required to delivered respond evidence by November 13, 2020. His factum was due December 11, 2020.
9Mr. Naimian has not delivered any evidence or a factum.
10In his statement of defence, Mr. Naimian denies missing installment payments on the mortgage and pleads that the plaintiff could have taken monthly payments from his account. He makes no reference to the fact that the mortgage matured in March, 2019 and is due regardless of any prior defaults. He provides no defence to the claim for enforcement of the mortgage debt in full after the due date. He does request a full accounting for all amounts claimed by the plaintiff.
11Section B (7) of the Consolidated Practice Direction for Civil Actions, Applications, Motions and Procedural Matters in the Toronto Region deals with last minute adjournment requests.
- No Adjournments 2 Days Prior to Hearing. No adjournment for any motion before a judge or master will be granted within 2 days of the scheduled hearing date, except in extenuating and exceptional circumstances.
12This provision limits last minute adjournments. It was implemented as part of a number of reforms, including the creation of Civil Practice Court, to decrease the backlog of civil cases in Toronto and to address the need for civil cases to be decided more efficiently and affordably.
13Parties seeking to adjourn a scheduled motion have ready access to Civil Practice Court to review the schedule with a judge. That was not done here.
14Mr. Yailaqi was not able to advise why Mr. Niroomand had not come to Civil Practice Court when he was faced with the deadline of November 13, 2020 for delivering his client’s evidence. Mr. Yailaqi was not able to advise me when issues developed between Mr. Niroomand and the defendant.
15Mr. Yailaqi was not able to assist me on a basis that Mr. Niroomand might have been entitled to move to get off the record just three days before a motion for judgment was scheduled to be heard.
16Mr. Yailaqi did not suggest that Mr. Niroomand was unavailable or had any acceptable reason to fail to attend court. He remains lawyer of record.
17I inquired of both Ms. Hosseini and Mr. Yailaqi whether they had any basis to assert the existence of any “extenuating and exceptional circumstances” to support a last minute adjournment. Neither had any arguments to make apart from Mr. Yailaqi advising, without evidence, that a breakdown had occurred in the relationship between the defendant and Mr. Niroomand– but he did not know when.
18I asked Ms. Hosseini what the point of an adjournment would be. The defendant does not deny the mortgage debt in his statement of defence. It is a matured mortgage. The defendant has already missed the deadline for his evidence. Ms. Hosseini responded simply that she had not seen any accounting.
19Mr. Yailaqi submitted that since the plaintiff has attorned rents at the mortgaged premises there would be no prejudice caused to the plaintiff by a short adjournment. However, he was not able to say that the rents attorned exceeded the value of accruing interest and costs. He had no information on the amounts in issue. He was unable to advise if the defendant has any equity in the property to secure any ongoing interest and costs accruing between now and the return date. He would not provide an undertaking to hold the plaintiff harmless for any financial prejudice that might accrue in the interim. I did not expect him to do so. But it demonstrated the lack of any substance behind his submission that there was no prejudice to be suffered by the mortgagee during the period of an adjournment.
20This last minute request for an adjournment has the earmarkings of a stall. Mr. Naimian has had since February to deliver evidence if he has any defence to the mortgage debt. There is no evidence before the court of some unanticipated emergency or any extenuating circumstance to justify the failure of Mr. Naimian and Mr. Niroomand to notify counsel for the plaintiff of a request for an adjournment and to attend Civil Practice Court in good faith.
21Mr. Naimian has had two years to arrange to repay or refinance his mortgage. His right to do so will survive until the property is sold. But even mortgagees are entitled to their day in court.
22With no undertaking by Ms. Hosseini to go on the record, no offer of a fixed and early return date, no offer of payment of costs thrown away, no assurance of a lack of prejudice to the plaintiff, no hint of a defence, no evidence supporting one, and no evidence to support a finding of extenuating or exceptional circumstances, I determined that the interests of justice required that the request for an adjournment be denied.
Judgment on the Merits
23Amounts discussed below are as set out in the Loan Balance and Payout Statement attached as Exhibit “A” to the affidavit of updated indebtedness of Darren Marr sworn December 16, 2020.
24There is no serious issue that the mortgage debt is due with interest at the rate set out in the mortgage documents. I have reviewed the legal fees claimed and find them reasonable, due, and owing under the mortgage.
Fees, Costs, and Penalties
(i) Claims for Reimbursement of Expenditures
25The plaintiff claims reimbursement from the defendant for the following disbursements that the plaintiff allegedly incurred in enforcing this mortgage:
Property Maintenance and Management Fees and Disbursements $9,500.00;
Appraisal – Crosstown Appraisals $847.50;
Corp Search – Cyberbahn – subsequent lender $54.22;
PPSA Renewal Cyberbahn – Farinosh Naimian $240.87;
Second Appraisal – Crosstown Appraisals $473.22;
HST Re Management and Administration Fees $2,290.06;
26None of these alleged disbursements is proven by an invoice. There is no basis in the evidence to determine that the costs were incurred at the amounts claimed let alone to assess the reasonableness of the alleged expenditures. Mr. Bourassa advised that he was not seeking to adduce further evidence of these costs.
27I have no basis to form any conclusion about the expenditures for which reimbursement is claimed in this case. Claims for costs reimbursement in mortgage enforcement are susceptible of abuse. Service providers who know that their lender clients will pass on their invoices to their borrowers may be incentivized to charge above-market rates. I understand that to bring some discipline to the marketplace, CMHC imposes limits on amounts it will pay for services provided to mortgage lenders. None of this is in evidence in this case. My point is that there are good market-based reasons to ensure that there is evidence supporting all amounts that the lender seeks to pass on to its borrower.
28It does no injustice to any plaintiff to require it to adduce evidence to support disbursements for which it claims reimbursement. As no evidence is adduced by the plaintiff to support any of the costs for which it claims reimbursement, none is allowed.
(ii) Claims for Fees
29Fees claimed in mortgage enforcement cases raise three concerns. First, as a matter of contract enforcement, there should be evidence of the occurrence of the event for which the contract allows a fee to be charged. Second, there is a concern that the fees charged may be unrelated to a genuine pre-estimate of damages to be incurred by the lender on the occurrence of the specified event. If that is the case, the fee may be an unenforceable “penalty” at common law. Third, excessive fees can mask increased interest charged on a mortgage default in violation of the prohibition in s. 8 of the Interest Act, RSC 1985, c. I-15
30In this case, the plaintiff claims the following fees under the mortgage:
Stopped Payment Processing fees $150.00;
Default Processing fees $600.00;
Discharge fees $150.00;
Late Fees $4,800.00;
31The mortgage provides for the lender to charge a fee for NSF cheques and missed payments of a minimum of $250 or an amount set out in the commitment letter. The commitment letter is not before me. There is evidence that the defendant stopped his November 1, 2018 payment cheque. There is no evidence of a fee charged to the mortgagee by its bank. There is no evidence that the plaintiff incurred any additional administrative costs due to the stopped cheque.
32The mortgage allows the mortgagee to charge a fee of $650 for preparation of the file for legal enforcement. There is no evidence of any steps taken by the lender to prepare this file for enforcement. Was it more than sending the computer generated loan statement to a lawyer by a single email?
33The mortgage also allows a fee of $250 or as set out in the commitment letter for processing a discharge. The plaintiff has not granted a discharge yet. Moreover this case is proceeding under a power of sale. It is not clear that a discharge will ever be required or that the lawyer preparing a discharge (for which he will charge a fee) causes any administrative costs for the plaintiff.
34The plaintiff also seeks payment of late fees of $4,800. As noted above, the mortgage provides a missed payment fee of $250. It does not say that the fee is “per occurrence.” Five payments were missed from November, 2018 to March, 2019. It is not clear to me how a mortgagee incurs any cost on discovering that a mortgagor who is already in default has continued to miss payments. Moreover, even at $250 for each missed payment, if allowed, the fee would be $1,250. To get to $4,800 the plaintiff must be charging a fee for months that the mortgage principal remained outstanding after the mortgage matured.
35Section 8 of the Interest Act prevents additional charges from being added to mortgages that are in arrears.
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.
36Case law has consistently held that lenders may lawfully recoup from mortgagors who are in default of their payment obligations the administrative costs incurred by the lenders caused by the defaults. The common law recognizes that for good business reasons such costs can be estimated in advance and fixed in a contract. But fees and charges levied on a mortgage default that are not genuine pre-estimates of costs actually incurred by a lender are penalties that can be void at common law and may violate the statute.
37In P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331, the Court of Appeal held:
96In 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: see for example, Chong v. Kaur, 2013 ONSC 6252, at paras. 54 – 56; Bhanwadia v. Clarity Financial Corp., 2012 ONSC 6393, at paras. 43 – 46; NBY Enterprises Inc., at para. 29; 2088300 Ontario Ltd. v. 2184592, 2011 ONSC 2986, at paras. 22 – 23 (Mast.); Nesci v. Ramrattan, 2009 CanLII 5153 (Ont. S.C.), at para. 28.
38Mr. Bourassa argues that before evidence is required to support a fee that is set out in a contract, the contract provision must first be found to be an unenforceable penalty. He submits that in 1539339 Ontario Inc. v. First Source Financial Management Inc., 2020 ONSC 5082 Miller J. recognized that a defendant who asserts that a clause in a contract is an unenforceable penalty bears a preliminary burden of proof. Until declared unenforceable at the instance of the mortgagor borrower, the contract provision must govern.
39In 1539339 Ontario Inc., the mortgage expressly included an agreement by the parties that the fees charged were genuine pre-estimates of the losses to be suffered by the mortgagee on the occurrence of the relevant events. Miller J. considered that agreement, the amounts being sought as fees, and held that they were not penalties on the facts before her. However, she held that the “Late Charges” of $7,350 claimed were properly found to be penalties in the absence of any evidence that the lender suffered any actual losses as a result of late payments.
40I do not read 1539339 Ontario Inc., as changing the common law test for penalty clauses or the test for s. 8 of the Interest Act set out by the Court of Appeal in P.A.R.C.E.L. To say, as Miller J. did, that there is a finding required that a particular fee is a penalty, is simply reciting the common law alternative for challenging contractual fees. There is no additional test or burden on the borrower as none was applied by Miller J. when she disallowed the Late Fees before her. The test at common law is whether a fee is a genuine pre-estimate of damages incurred by the lender. The test under s. 8 of the Interest Act is as set out above in P.A.R.C.E.L. Both apply and satisfying either will invalidate a fee.
41Here, the charge of $4,800 cannot stand first because it is not in any way referable to the fee allowed in the contract. The mortgage became due in full when its matured. There is no basis for a fee for late payments of monthly instalments of blended principal and interest after the mortgage matured.
42In addition, while I understand a fee for administering NSF cheques, I do not understand the nature of administrative charges claimed when a mortgagor has stopped paying and each month the status quo continues. “He’s still in default” is a pretty simple administrative determination. Absent evidence of administrative costs, the $4,800 fee as applied in this case is a penalty that will not be enforced both at common law and because it conflicts with s. 8 of the Interest Act as discussed in P.A.R.C.E.L.
43An approach that regards mortgage fees with suspicion works no hardship on lenders. The common law has done so for centuries to protect the weaker party from fees that over-compensate the stronger party on a claim of breach of contract. Should it not be assumed that in setting its interest rate and other terms under the mortgage, the lender has included in its calculus its cost of doing business? A lender’s ability to hive off from the daily work of its account clerks the specific increased burden caused by an individual mortgagor’s default is a dubious proposition at best. I can understand that a lender who wishes to compete may want to reduce its interest rate by excluding some of its extraordinary costs and then charge those costs specifically only to those borrowers whose defaults cause those costs to be incurred. That is perfectly legitimate. But in that case, it behooves the lender to be able to prove with evidence that it incurred the costs that it seeks to charge to the individual borrowers. Absent proof of specific costs being incurred, the costs are rightly subsumed in its ordinary costs of doing business.
44In view of the absence of evidence that any of the fees is either a genuine pre-estimate of damages suffered by the lender or “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” to borrow the words of P.A.R.C.E.L., none of the fees claimed in this case can be allowed.
(ii) The Three Month Interest Penalty is a Penalty
45Finally, I do not allow the charge of three months’ interest at $41,000 as claimed. The lender seeks to charge $41,000 because payment of the mortgage was not made on its date due.
46There seems to be some confusion of the effect of s. 17 of the Mortgages Act, RSO 1990 c M.40. The section allows a borrower who is in default to repay the principal of the mortgage despite any terms of the mortgage that may provide otherwise. This is a special provision designed to help defaulting mortgagors. The mortgagor is entitled to take advantage of an opportunity to repay the principal on giving three months’ notice to the lender or paying three months’ interest in lieu of notice.
47The statute allows the lender a three month notice period so it can arrange other uses for its funds once they are repaid. The lender ought to have been ready to redeploy its capital if repaid on the due date. But once the mortgagor defaults, the lender has no way to know when it will be paid to allow it to arrange an alternative investment. Therefore s. 17 allows the mortgagor to repay at will but ensures that it gives the mortgagee lead time or payment in lieu.
48Section 17 of the Mortgages Act does not allow a mortgagee to levy an interest penalty when enforcing payment of principal on a matured mortgage. In fact, subsection 17 (3) makes clear that the section has no affect on lenders’ rights at all:
(3) Nothing in this section affects or limits the right of the mortgagee to recover by action or otherwise the principal money so in arrear after default has been made.
49The plaintiff relies on a pre-payment provision of the mortgage that says:
PREPAYMENT PROVISIONS
(c) If the Indebtedness and any of the other sums which may be due hereunder or under the Security Documents are not repaid on or before the Balance Due Date, then the Chargor agrees to pay the Chargee in addition to the amounts required to obtain a discharge, three months interest at the rate of interest chargeable hereunder on the principal amount outstanding on the Balance Due Date
50I note first the rather obvious point that this case does not involve a prepayment of the mortgage.
51As I read clause (c), it says that if the mortgage is not prepaid and if the borrower does not repay the mortgage in full on the Balance Due Date (defined as March 31, 2019 on the face of the mortgage), then the borrower must pay three months’ interest in addition to the principal, interest, and costs required.
52In other words, on default of payment on the due date, the mortgagor is required to pay an extra three months’ interest. This is a clear violation of s. 8 of the Interest Act as described by the Supreme Court of Canada in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18. This is not an increase in interest caused by the effluxion of time. It is a straight-out addition of an amount to be paid after maturity due to a payment default without any reference to any additional costs or losses suffered by the mortgagee
53Moreover, it arises in this case on the mortgagee enforcing the mortgage. It is not a prepayment or a voluntary payment by the borrower.
54The lender relies upon Gullett v. Income Trust Co. (1985), 37 R.P.R. 123, 11 O.A.C. 178. However, subsequent case law has clarified that Gullett was decided without reference to s. 8 of the Interest Act.
55Eight years later, in Mastercraft Properties Ltd. v. El Ef Investments Inc., 1993 CanLII 8545 (ON CA), the Court of Appeal distinguished between cases where a mortgagor asks to pay the mortgage off and cases where a mortgagee is enforcing an overdue mortgage.
56In Mastercraft, the Court of Appeal reiterated that clauses requiring payment of three months’ interest are valid only when the borrower seeks a pay-out without notice and not when the mortgagee seeks to enforce the mortgage. At para. 35 of the decision, the Court of Appeal held:
The Three-Month Interest Provision, while distinct from s. 17 of the Mortgages Act, nonetheless shares the characteristic that it is mortgagor-centric. That is, both are intended to embody a right available to the mortgagor. Their purpose is not to constitute a basis for a claim by a mortgagee unless first the mortgagor seeks a pay-out.
57The decision of Miller J. referred to above in 1539339 Ontario Inc. was a case in which a mortgagor was in default and sought to repay the mortgage. Miller J. held that the mortgage validly required the mortgagor to give three months’ notice of its proposed payment or to pay three months’ interest in lieu of notice.
58Clause (c) in the mortgage before the court in this case is not mortgagor-centric. It does not create any right for the mortgagor. To the contrary, it adds an obligation to pay three months’ interest if the mortgagor fails to repay the mortgage debt in full on the due date. It is not limited to circumstances of a prepayment or repayment proposed by a defaulting mortgagor. It is not a payment in lieu of notice. As claimed in this case, the plaintiff says that it simply became entitled to charge three months’ interest when the borrower defaulted on his payment obligation. There is no suggestion that the charge has any relationship to any costs incurred by the mortgagee. It is just a fine levied by the mortgagee on the mortgagor for defaulting buried in the prepayment section and couched in language designed to mimic the sound of s. 17 of the Mortgages Act.
59In addition, if, as the plaintiff mortgagee contends, clause (c) adds a three month charge to the mortgagor’s payment obligation whenever the mortgage is not paid on its due date, the effect is, to once again borrow the words of P.A.R.C.E.L. 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”.
60In my view therefore, prepayment clause (c) as claimed in this case creates an unenforceable penalty and runs afoul of the s. 8 of the Interest Act. The claim for $41,000 under this clause is denied.
Outcome
61The motion is granted. Judgment shall issue for the principal, interest, and costs claimed. Post-judgment interest is allowed at the interest rate stipulated in the mortgage.
62Mr. Bourassa shall send the draft judgment to Mr. Niroomand for approval as to form and content. Mr. Niroomand is reminded of his ethical duty to the court to conduct the administrative act of approving an order as to form and content. See: Chrysler Credit Canada Ltd. v. 734925 Ontario Ltd. (1991), 1991 CanLII 7311 (ON SC), 5 OR (3d) 65 (MC).
F.L. Myers J.
Date: December 21, 2020