First National Financial GP Corporation v. Bon-Star Inc.

COURT FILE NO.: CV-20-0064330-00CL

DATE: 20211103

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: First National Financial GP Corporation, Applicant

AND:

Bon-Star Inc., Respondent

BEFORE: C. Gilmore, J.

COUNSEL: David P. Preger and David Z. Seifer, Counsel for the Applicant

Robert Nikolic in his personal capacity for the Respondent

HEARD: November 1, 2021

judgment on application

INTRODUCTION

[1] The Applicant applies for a declaration that the mortgage in the principal amount of $6,158,450 registered against the property at 1016 Arthur Street, Sudbury, Ontario (“the Property”) is a closed mortgage with no prepayment privilege. If the mortgage is prepaid on consent, the Applicant seeks a declaration that it is owed all lost interest to maturity. Finally, the Applicant seeks a declaration that the forced insurance coverage it has placed on the Property is a proper expense recoverable under the mortgage.

BACKGROUND FACTS

[2] The Property is a 112-unit apartment building in Sudbury. The mortgage held by the Applicant expires on June 1, 2024.

[3] Interest under the mortgage is fixed at 3.88% per annum, with monthly payments of $31,996. The mortgage payments are current.

[4] Section 7 of the mortgage commitment stipulates that, “the Chargor shall have no privilege of prepaying this Charge.”

[5] The mortgage loan is insured by CMHC which resulted in special conditions being attached to the mortgage including the usual prepayment rights under the Standard Charge Terms being overridden by Schedules to the Standard Charge Terms.

[6] Schedule A of the Standard Charge Terms specifies that upon a sale of the property without the consent of the Applicant:

…the Chargee, may at its option, declare forthwith due and payable the entire balance of the unpaid Principal Amount together with any accrued and unpaid interest thereon. The decision to accelerate the Principal Amount shall be at the sole option of the Chargee. Consent to one such transaction shall not be deemed to be a waiver of the right to require consent to future or successive transactions.

The Chargor will provide reasonable notice to the Chargee of any anticipated or impending transaction which would require consent of the Chargee under this section together with such reasonable information as the Lender may require to determine whether or not to grant its consent thereto.

[7] Section 33 of Schedule A to the Charge provides:

The term of this Mortgage is stipulated for the benefit of the Mortgagee, and the Mortgagor shall not be entitled to prepay this Mortgage before maturity.

[8] The Respondent ceased paying insurance for the Property in July 2019. The Applicant has had to arrange for and pay insurance premiums in accordance with its obligations under the Standard Charge Terms to keep the Property insured. Mr. Nikolic complained that the costs of the insurance was too high and requested to pay out the mortgage. Mr. Nikolic was advised by the Applicant that the mortgage was closed and could not be paid out. The Applicant seeks recovery of the insurance costs with interest on the basis it is a proper protective expense.

[9] In early March 2020 the Respondent made overtures that it had sold the Property with an imminent closing and demanded that the Applicant accept early prepayment. The Applicant took the position that there was no early right of prepayment except with the approval of CMHC and upon receiving a prepayment charge to ensure any damages suffered by the prepayment would be mitigated. The Respondent continued to insist it had a right to early prepayment without penalty and would litigate the issue as the payment of all interest to maturity would be a “windfall” to the Applicant.

[10] Given the parties’ dispute about whether the Applicant was entitled to all interest to maturity on an early repayment, the Respondent hired counsel in June 2020. The Respondent insisted the Property had sold, a closing was imminent, and it needed clarity on the payout issue. It then threatened to commence an Application. Given that the Applicant had never received a copy of the Agreement of Purchase of Sale and had no details about it, the Applicant commenced the within Application on July 2, 2020 in order to avoid an urgent motion by the Respondent.

THE ADJOURNMENTS

[11] On May 26, 2021 this matter was scheduled for a two-hour hearing on September 2, 2021. When the matter came before me on September 2, 2021, no responding material had been filed by the Respondent despite continuing requests from the Applicant’s counsel to provide a litigation timetable. An adjournment was sought. Given that the mortgage payments were in good standing, I found there was minimal prejudice to the Applicant in granting an adjournment to October 18, 2021.

[12] In the September 2, 2021 endorsement, the Respondent was ordered to and subsequently paid $2,000 for costs thrown away and the October 18, 2021 appearance was made peremptory on the Respondent. A court ordered litigation timetable was also set for the delivery of all court materials.

[13] The parties appeared before me again on October 18, 2021 for the scheduled hearing. The Respondent was represented by Mr. Ted Laan. Responding material had been filed including a factum and Brief of Authorities. Mr. Bob Nikolic, the principal of the Respondent was upset claiming he had not received a copy of the factum or the Book of Authorities and that his lawyer was unethical and unprepared. Mr. Laan advised the Court that this was not at all the case. He had spent time preparing and reviewing all of the materials. In any event, Mr. Nikolic was well aware of what arguments were to be made and the position to be taken as he had sworn an affidavit on September 10, 2021 in support of his position.

[14] A break was taken during the hearing to allow Mr. Nikolic and Mr. Laan to work out their differences. After the break, Mr. Laan advised that, given the allegations being made by Mr. Nikolic, his firm would be seeking to be removed from the record. An Order removing the Keyser Mason Ball firm was made on October 20, 2021 after a review of the supporting affidavit material.

[15] In my endorsement of October 18, 2021, I indicated that on the return date of November 1, 2021 Mr. Nikolic had to either resolve his conflicts with Keyser Mason Ball or retain new counsel. Costs from the October 18, 2021 appearance were also to be considered in the decision resulting from the November 1, 2021 appearance. Special arrangements were made for court to commence early on November 1, 2021 to accommodate this hearing and the date was once again made peremptory on the Respondent.

[16] Mr. Nikolic appeared on November 1, 2021. He submitted he had attempted to obtain counsel from Goodmans and Blaney McMurtry but was unable to do so given the short time frame. He submitted that he thought he should have the full 30 days indicated in the Order removing his former counsel so that he could retain counsel on behalf of Bon-Star. He requested a further adjournment.

[17] Counsel for the Applicant was, not surprisingly, adamant that no further adjournments should be permitted. The matter has been outstanding since July 2020 and the Respondent was afforded two previous adjournments. The last two adjournments were peremptory on the Respondent.

[18] In my ruling on this issue, I gave leave to Mr. Nikolic to appear on behalf of Bon-Star as he is its principal. Further, his prior counsel filed responding material, a factum and a Brief of Authorities which were reviewed by the Court in preparation for the hearing on October 18, 2021 and again for this hearing.

[19] I also considered that fact that the meaning of the word “peremptory” would be gravely diluted if a third adjournment was permitted and made peremptory on the Respondent. Finally, there was no significant prejudice to the Respondent in proceeding on November 1, 2021. The mortgage payments are in good standing, the granting of the declarations sought by the Applicant would not have any impact on the day to day operations of the Respondent, and it was clear that Mr. Nikolic does not intend to deal with the insurance issue at any point in the near future.

ANALYSIS AND ARGUMENT

[20] Mr. Nikolic made several arguments both personally and in his factum as to why the declarations sought by the Applicant should not be granted as follows:

a. The mortgage documents do not reflect that the subject mortgage is closed. On a sale of the Property, the Respondent should be entitled to pay out the mortgage with expenses but including the payment of interest to maturity is simply wrong.

b. The documents registered on title are not the same documents that he approved and signed.

c. The amounts in the Due on Sale clause are unenforceable and would result in a windfall for the Applicant.

[21] Section 18(1) of the Mortgages Act, R.S.O.1990, c.M-40 allows borrowers with mortgages of five years or greater to redeem the mortgage after five years on payment of any arrears plus three years interest. Section 18(2) carves out an exception where the mortgagor is a corporate borrower. Such borrowers do not have a right to redeem the mortgage with only a three-month interest penalty.

[22] The mortgage documents are very clear with respect to the rights of the Applicant to receive interest to maturity on any prepayment as set out in the excerpts above. The fact that the Respondent may view this as “windfall”, or “simply wrong” does not align with the case law.

[23] In First National Financial GP Corporation v. Golden Dragon HO 10 Inc. et al, 2020 ONSC 6994, First National sought a declaration that it was entitled to receive prepayment of future interest on a mortgage in relation to a sale by a court-appointed receiver of certain properties over which First National held first mortgages. The Court held that it is well settled law that when a closed mortgage is redeemed prior to the end of its term, the mortgagor must pay the principal, accrued interest, and all future interest to the end of the term (paragraph 68).

[24] In NJS Midtown Portfolio Inc. v. CMLS Financial Ltd, 2020 ONSC 3973, the owner of an apartment building entered into an Agreement of Purchase and Sale without the consent of the mortgagee. Similar to this case, the mortgage was a closed one and CMHC insured. The Respondent mortgagee refused to consent to the sale and specifically the partial discharge requested by the Applicant. The Court found that the Respondent mortgagee did not unreasonably withhold its consent because the mortgage terms did not allow prepayment prior to maturity. This was because prepayment would affect the stream of income to the mortgage investors (para 54). Allowing a prepayment as sought by the Applicant would allow such closed mortgages to be open for repayment by selling the property without consent (para 88).

[25] In the case at bar the issue of consent has never actually arisen because the Respondent has not provided a copy of an Agreement of Purchase and Sale. The intended sale which caused this Application to be issued has never materialized.

[26] As to the Respondent’s argument that the mortgage documents registered on title are different from the ones he signed, there is no evidence of this. It was not mentioned in Mr. Nikolic’s affidavit and raised at the hearing for the first time. This argument cannot be considered without foundation or proof.

[27] On the insurance issue, the Applicant is obligated under its mortgage commitment to keep the Property insured. Mr. Nikolic, as representative of the Respondent has never provided an explanation as to why he ceased insuring the property in July 2019. The Applicant has had to put protective insurance in place at a high rate. The terms of Schedule A to the mortgage permit the Applicant to recover those costs including interest.

FINAL ORDERS AND COSTS

[28] Given all of the above, the relief sought in paragraphs 1(b), (c) and (d) of the Application is hereby granted. The Applicant’s counsel to provide a draft Order for my review and signature.

[29] The terms of the mortgage permit the Applicant to recover its costs on a solicitor and client scale. The Applicant has provided an updated Bill of Costs requesting costs of $36,429.50, inclusive of HST plus disbursements of $107.35. Unfortunately, the Bill of Costs was only uploaded to Caselines on the morning of the hearing and Mr. Nikolic had not had an opportunity to review it. I requested that a copy of the Costs Outline be sent to Mr. Nikolic and advised him that I would allow him to make written submissions with respect to his position on costs.

[30] Mr. Nikolic may provide a two-page double spaced summary of his position on costs by November 8, 2021. Mr. Preger may respond in writing by November 10, 2021. The costs submissions may be sent to my assistant by way of email attachment at therese.navrotski@ontario.ca. I will release a brief endorsement on costs following the receipt of the submissions.

C. Gilmore, J.

Date: November 3, 2021