Zapfe Holdings Inc. and Michael Sourlis v. 1923159 Ontario Inc.

2022 ONSC 3062

COURT FILE NO.: CV-22-627

DATE: 20220518

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

ZAPFE HOLDINGS INC., and MICHAEL SOURLIS

Applicants

– and –

1923159 ONTARIO INC.

Respondent

Michael Myers, Counsel for the Applicants

Samir Chhina Counsel for the Respondents

HEARD: May 18, 2022

REASONS ON APPLICATION

CHRISTIE J.

[1] The Applicant makes an application, on extremely short notice, for:

a. An urgent injunction and/or Order restraining the Respondents from

access to and possession of the property municipally known as 101

Entrance Drive, Bracebridge, Ontario, legally described as Part Lot 3,

Concession 1, Macaulay, being designated as part 1 on plan 35R-8040

Save and except for parts 1, 2 and 3 on plan 35R-26017, Bracebridge, in

the District Municipality of Muskoka (the “Property”);

b. A Declaration that the Applicant is a mortgagee in possession of the

Property, as permitted under the Applicant’s Mortgage (defined below);

c. An Order that the status quo, as existed at 8:00 a.m. on May 18, 2022,

when the mortgagee was in sole and exclusive possession of the

Property, be restored;

d. Such companion orders and declarations as necessary to bring into

effect the orders claimed above; and

e. The costs of this Application on a substantial indemnity scale

[2] The facts in relation to this Application are not in any serious dispute and, therefore, will be summarized from the Applicants’ application material.

[3] The Applicant, as mortgagee, advanced a first mortgage loan to the Respondents on August 25, 2020. This first mortgage loan was secured by the granting by the Respondent to the Applicants of a first mortgage, which was registered against title to the commercial Property on August 25, 2020, in the Muskoka Land Registry Office as a first mortgage bearing instrument number MT232286 (the “Mortgage”). The Mortgage provides for interest only payments on the principal sum of $3,500,00.00 at 9.50% and has a maturity, or balance due date, of September 1, 2021.

[4] The Set of Standard Charge Terms attached to the mortgage include the following:

9. The Chargee on default of payment for at least fifteen (15) days may, on at least thirty-five (35) days’ notice in writing given to the Chargor, enter on and lease the land or sell the land. Such notice shall be given to such persons and in such manner and form and within such time as provided in the Mortgages Act . In the event that the giving of such notice shall not be required by law or to the extent that such requirements shall not be applicable, it is agreed that notice may be effectually given by leaving it with a grown-up person on the land, if occupied, or by placing it on the land if unoccupied, or at the option of the Chargee, by mailing it in a registered letter addressed to the Chargor at his last known address, or by publishing it once in a newspaper published in the county or district in which the land is situate; and such notice shall be sufficient although not addressed to any person or persons by name or designation; and notwithstanding that any person to be affected thereby may be unknown, unascertained or under disability. Provided further, that in case default be made in the payment of the principal amount or interest or any part thereof and such default continues for two months after any payment of either falls due then the Chargee may exercise the foregoing powers of entering, leasing or selling or any of them without any notice, it being understood and agreed, however, that if the giving of notice by the Chargee shall be required by law then notice shall be given to such persons and in such manner and form and within such time as so required by law. It is hereby further agreed that the whole or any part or parts of the land may be sold by public auction or private contract, or partly one or partly the other; and that the proceeds of any sale hereunder may be applied first in payment of any costs, charges and expenses incurred in taking, recovering or keeping possession of the land or by reason of non-payment or procuring payment of monies, secured by the Charge or otherwise, and secondly in payment of all amounts of principal and interest owing under the Charge; and if any surplus shall remain after fully satisfying the claims of the Chargee as aforesaid same shall be paid as required by law. The Chargee may sell any of the land on such terms as to credit and otherwise as shall appear to him most advantageous and for such prices as can reasonably be obtained therefore and may make any stipulations as to title or evidence or commencement of title or otherwise which he shall deem proper, and may buy in or rescind or vary any contract for the sale of the whole or any part of the land and resell without being answerable for loss occasioned thereby, and in the case of a sale on credit the Chargee shall be bound to pay the Chargor only such monies as have been actually received from purchasers after the satisfaction of the claims of the Chargee and for any of the said purposes may make and execute all agreements and assurances as he shall think fit. Any purchaser or lessee shall not be bound to see to the property or regularity of any sale or lease or be affected by express notice that any sale or lease is improper and no want of notice or publication when required hereby shall invalidate any sale or lease hereunder.

10. Upon default in payment of principal and interest under the Charge or in performance of any of the terms or conditions hereof, the Chargee may enter into and take possession of the land hereby charged and where the Chargee so enters on and takes possession or enters on and takes possession of the land on default as described in paragraph 9 herein the Chargee shall enter into, have, hold, use, occupy, possess and enjoy the land without the let, suit, hindrance, interruption or denial of the Chargor or any other person or persons whomsoever.

[5] Clearly clause 10 allows the mortgagee to enter and take possession of the property upon default. There is no reference in the contract to how this can or should occur.

[6] The Mortgage matured on September 1, 2021 and the Respondent failed to pay out the Mortgage, as agreed, on that date. As of September 2, 2021, the Respondent was in default of the Mortgage and to date the Mortgage continues to be in default. Interest was paid under the Mortgage to September 30, 2021, but no payments of principal or interest have been made by the Respondent or received by the Applicants since that date.

[7] On January 27, 2022, counsel for the Applicants sent a Demand for the repayment of all amounts owing under the Mortgage to the Respondent. This demand went unanswered.

[8] On March 24, 2022, the Applicants issued a notice of sale under charge/mortgage of lands (the Notice of Sale”) to all those entitled to receive this notice in accordance with the Mortgages Act of Ontario. The redemption period set out in the Notice of Sale expired on May 2, 2022.

[9] On April 27, 2022, counsel for the Applicants wrote to counsel for the Respondent confirming a phone call between counsel, and advising in writing that the current situation (in which the Respondent was in possession of the Property) would not be tolerated by the Applicants unless the Respondent provided to the Applicants full financial disclosure of the business being operated by the Respondent at the Property. No such disclosure has been delivered.

[10] On April 28, 2022, counsel for the Applicants wrote to counsel for the Respondent advising that only full payment of the mortgage would resolve the issue. Counsel for the Respondent responded, “Thank you. Your response is much appreciated.”

[11] On May 6, 2022, the Applicants, as first mortgagees of the Property, attempted to take possession of the Property as permitted by the Mortgage contract, but the Applicants were not able to take possession as the Respondent and its principal, Mr. Scott Harkness, refused to vacate the premises.

[12] Early this morning, May 18, 2022, the Applicants, as first mortgagees, took possession of the Property by changing the locks and denying entry to the Respondent and all tenants (other than one tenant, Simply Cottage, which holds a lease that is registered against title to the Property in priority to the Mortgage). Other tenants and the principal of the owner / Respondent, Scott Harkness, were each denied entry into the building by the mortgagee.

[13] Subsequently, someone called the Ontario Provincial Police who attended at the Property. After speaking to both counsel, the officer told the Applicants to return possession of the property to the Respondent because the officer was hearing different versions of the law and was not certain of the law of possession in mortgage actions. The Applicants refused to give up possession notwithstanding the direction by the OPP.

[14] The Respondent advised that he intended to cut the new locks installed by the Applicants with a bolt cutter and re-enter and re-take possession of the Property.

[15] Later this morning, the door was open to the public, it appearing that someone had cut the locks and entered the property. A tenant advised that Scott Harkness had re-entered the Property and was asserting his right to occupy the Property.

[16] The mortgage is a contract between the parties. The terms of the contract are clearly set out in writing.

[17] Further section 7 of the Mortgages Act states:

7 There shall, in the several cases mentioned in this section, be deemed to be included, and there shall in those several cases be implied, covenants to the effect stated in this section, by the person or by each person who conveys, as far as regards the subject-matter or share thereof expressed to be conveyed by that person or each person with the person, if one, to whom the conveyance is made, or with the persons jointly, if more than one, to whom the conveyance is made as joint tenants, or with each of the persons, if more than one, to whom the conveyance is made as tenants in common, that is to say,

on mortgage by beneficial owner

(a) in a conveyance by way of mortgage, the following covenants by the person who conveys, and is expressed to convey as beneficial owner, namely,

(i) for payment of the mortgage money and interest, and observance in other respects of the proviso in the mortgage,

(ii) for good title,

(iii) for right to convey,

(iv) that, on default, the mortgagee shall have quiet possession of the land, free from all encumbrances,

(v) that the mortgagor will execute such further assurances of the said lands as may be requisite, and

(vi) that the mortgagor has done no act to encumber the land mortgaged,

according to the forms of covenants for such purposes set forth in Schedule B to the Short Forms of Mortgages Act, being chapter 474 of the Revised Statutes of Ontario, 1980, subject to the provisions of that Act;

[18] Also, section 7 of the Land Registration Reform Act is relevant, which states:

7 (1) A charge in the prescribed form shall be deemed to include the following covenants by the chargor, for the chargor and the chargor’s successors, with the chargee and the chargee’s successors and assigns:

Usual covenants

1. In a charge of freehold or leasehold land by the beneficial

owner:

i. That the chargor or the chargor’s successors will pay, in the manner provided by the charge, the money and interest it secures, and will pay the taxes assessed against the land.

ii. That the chargor has the right to give the charge.

iii. That the chargor has not done, omitted or permitted anything whereby the land is or may be encumbered, except as the records of the land registry office disclose.

iv. That the chargor or the chargor’s successors will insure the buildings on the land as specified in the charge.

v. That the chargee on default of payment for the number of days specified in the charge or in the Mortgages Act, whichever is longer, may on giving the notice specified in the charge or required by that Act, whichever is longer, enter on and take possession of, receive the rents and profits of, lease or sell the land.

vi. That where the chargee enters on and takes possession of the land on default as described in subparagraph v, the chargee shall have quiet enjoyment of the land.

vii. That the chargor or the chargor’s successors will, on default, execute such assurances of the land and do such other acts, at the chargee’s expense, as may be reasonably required.

viii. That the chargee may distrain for arrears of

interest.

ix. That on default of payment of the interest secured by the charge, the principal money shall, at the option of the chargee, become payable.

[19] There would seem to be no question that the mortgagee is entitled to seek possession of the property given the admitted default. The real question here, however, is whether the mortgagee was entitled to take possession in the manner in which it occurred this morning.

[20] This court does note that when the mortgagee attended the property this morning, there appears to have been no one present. They changed the locks. However, a short time later, the principal of the numbered company Respondent, Scott Harkness, and other tenants were denied entry by the mortgagee. Subsequently, someone called the OPP, who attended at the Property. After speaking to both counsel, the officer told the Applicants to return possession of the property to the Respondent because the officer was hearing different versions of the law. The Applicants refused to give up possession. The Respondent cut the locks and re-entered. This reaction from Mr. Harkness should have been anticipated given the history of this matter to date.

[21] In Royal Trust v. Gupta, [1997] O.J. No. 347 (Gen. Div.), relied on by the Applicant, there was an action by Royal Trust for money owed under a mortgage and a counterclaim by Mr. Gupta due to the actions of Royal Trust in taking possession and selling the property. This property was a boarding house. One of the questions the court was deciding was whether Royal Trust wrongfully took possession by, without notice, changing the locks, and by putting in a management company to manage the property. The Court stated as follows:

[31] In Lee v. Guettler the Court of Appeal said, as quoted above: "If the mortgagor does not surrender possession voluntarily, then an action for possession is necessary."

[32] In discussing the mortgage provision of quiet possession on default of the mortgage, Joseph E. Roach in The Canadian Law of Mortgages of Land (Toronto: Butterworths, 1993) commented at p. 209:

Under this clause, as soon as the mortgagor defaulted, the mortgagee could take possession of the estate without having to serve the mortgagor with a writ of possession. The sole condition for so doing was to take possession peaceably: Lusk v. Perrin (1920), 19 O.W.N. 58 at 60.

[33] Marriott and Dunn, Practice in Mortgage Remedies in Ontario, 2nd ed. (Toronto: Carswell, 1995) vol. 2 at p. 46-4, states:

Where the mortgagor or the person in possession by leave of the mortgagor refuses to give over possession to the mortgagee or the mortgagee cannot otherwise obtain possession peacefully, the mortgagee will be required to commence proceedings for possession.

[34] Does "otherwise obtain possession peacefully" include changing the locks and taking possession without the knowledge of the mortgagor as Royal Trust did in this case?

[35] If "peaceably" is interpreted literally, i.e., no conflict arose, then Royal Trust took possession peaceably. However, if "peaceably" is interpreted to mean with knowledge and consent of the mortgagors, or "voluntarily" as described by the Court of Appeal, then Royal Trust did not take possession peaceably.

[36] In Lusk v. Perrin (1920), 19 O.W.N. 58, Lusk granted a mortgage to Perrin. The mortgage was in default. Lusk left the premises and returned a month later and found Perrin in possession of the premises. Orde J., at p. 60 said:

The lands being vacant, Perrin was able to enter peaceably and without resorting to the issue of a writ. The plaintiff alleged that Perrin entered the house forcibly, the doors being locked.

But the question whether an entry is forcible or not in no way affects the relative position of the mortgagor and mortgagee as to the possession of the mortgaged premises. Once in, whether peaceably or otherwise, he is in possession as against the mortgagor for all civil purposes, ...

[37] Although the mortgagee has the right to immediate possession upon default, the mortgagee usually does not exercise that right unless the mortgagor consents to giving up possession, or if the premises are abandoned. The reason for a mortgagee's reluctance to exercise its right to immediate possession was discussed by the Ontario Law Reform Commission in, Report on the Law of Mortgages (Toronto: Ministry of the Attorney General, 1987) at p. 212:

While there is no legal obligation to obtain a writ of possession, a lender will not ordinarily taken possession without a writ, unless the borrower either consents to such action or has abandoned the secured property. The reason that lenders usually seek the court's imprimatur prior to enforcing their right to take possession is that the taking of possession by force, even where the lender's right to possession is undisputed, may constitute a criminal offence under section 73(1) of the Criminal Code.

In their 1987 report, the Commission provided proposals for reform to protect certain borrowers. The Commission suggested that where the property is residential premises the borrowers should be protected from dispossession of their home any earlier than is necessary to protect the lender's interest. Subsequent to the Commission's report, the Mortgages Act was amended to protect mortgagors of a "single-family unit" from being dispossessed of their home by the lender.

[38] At p. 214 the Commission recognized that a mortgagee of commercial property may be justified in taking immediate possession upon default, unlike a mortgagee of residential property:

There can be many reasons why a lender will want to go into possession immediately upon default by a commercial borrower, particularly where the lender is entitled to collect revenue from the property or wishes to ensure that the property is maintained as a viable commercial operation. The commercial borrower may well receive some financial or other quid pro quo for property as acceding to such a right. However, a borrower who occupies the secured property as a residence may suffer considerable hardship from immediate dispossession, a hardship normally shared by others, such as members of the borrower's family, who live in the premises.

[39] An important fact to keep in mind in cases of the taking of possession by mortgagees is the question of the nature of the mortgaged property. Is the mortgagor in possession of the property in the sense of actually occupying the property or part of the property as a residence? The defendants did not live on the property.

[40] When a mortgagee takes possession of commercial property, such as rental property, the mortgagee essentially takes physical possession of only the management office. Therefore, even if the mortgagor was a resident of the rental premises, the mortgagee, in taking possession of the management office, would not be dispossessing the mortgagor of his residence. In such a case, the mortgagor would be protected from immediate dispossession of his home by the Mortgages Act, as amended. In a commercial setting, the mortgagee may; without notice, take immediate possession upon default to ensure the ongoing operations of the business. As long as the possession is taken peaceably and the mortgagor is not prejudiced by the dispossession, the mortgagor is not in wrongful possession.

[44] In my view, Royal Trust took possession peaceably and, therefore, were in lawful possession of the property. Royal Trust was not in violation of s. 42(1) of the Mortgages Act. The questions remain whether the taking of possession prejudiced the defendants in the sale of the property and whether the sale was an improvident sale.

[22] The Applicant argues that this case is virtually identical to the case at bar in that the mortgagee waited for the redemption period to expire and that the court distinguishes between residential properties and commercial properties.

[23] The Applicant argues that the mortgagee did not breach the peace in taking the property it was entitled to take under the mortgage contract. Rather, it was Mr. Harkness who breached the peace when he broke the new locks, went in as a trespasser, in breach of the mortgage contract.

[24] The Applicant claims that they have satisfied the RJR MacDonald test, in that they have demonstrated a prima facie case. There is no issue that they are entitled to take possession where the mortgage is in dispute. No one disputes the default. The Applicant argues that there is irreparable harm in that there is a falling real estate market and the mortgagee wants to get out of this contract and sell the property before there are further losses. The Applicant also points out that if and when they sell the property, Mr. Harkness will receive the benefits of any left over money after all debts are paid. The Applicant refers to Arnold v. Bronstein et al., 1970 245 (ON SC), [1970] O.J. No. 1677, a seminal case on mortgage remedies which makes it clear that, short of pay off, the mortgagee is entitled to enforce and exercise remedies.

[25] This court is of the view that the Applicant in the case at bar created the urgency of this Application by attempting to enforce the mortgage in this manner. The Applicant could have, and had plenty of time to, follow a typical power of sale process, by issuing a statement of claim. They admittedly chose not to do so because it would be inconvenient to them, especially if the mortgagor chose to defend.

[26] The Applicant claims that Ontario is a “self-help” jurisdiction, in which the mortgagee can simply take possession in accordance with the contract. It is the view of this court that mortgagees choosing to enforce in the manner in which this mortgagee chose will lead to chaos and police involvement as occurred in this matter. It will also discourage parties from reaching fair and reasonable resolutions to remedy defaults where possible. The typical power of sale process allows for notice and fairness. A statement of claim could have been issued in this case many months ago. This court is not convinced that a commercial property should be dealt with in any different manner than a residential property.

[27] This court does believe that the Respondent could have been more cooperative with the Applicant in providing information when requested, such as full financial disclosure of the business being operated by the Respondent at the Property. This may have avoided this whole situation.

[28] In Hume v. 11534599 Canada Corp., 2021 ONSC 4565, Coats J. considered the manner in which possession of a property was taken by a mortgagee. The Court stated:

[41] In my view, in determining whether the Respondent took peaceable possession, I must determine whether the Applicants acquiesced to the Respondent taking possession and did not by adverse suit seek to recover the possession of the Property. As set out above at para 41 of R. v. George, “peaceable possession” means possession that is “not seriously challenged by others”.

In this case, the court concluded that the Respondent, the lender, did not take peaceable possession as there was no evidence from the Respondent that would support a conclusion that they would not be challenged, the Property was not vacant, and the Respondents changed the locks indicating that the Applicants had not abandoned the property and they would be expecting resistance.

[29] In Sheth v. Randhawa, 2022 ONCA 89, the court granted a request to set aside a dismissal of her appeal for delay and granting her time to perfect an appeal. The order under appeal was made on a motion the appellant brought in her underlying action to set aside a transfer of property and for damages. In considering the merits of the appeal, the court discussed the importance of the power of sale process, stating:

[31] Further, I consider it open to question whether the trial judge assessed the evidence bearing in mind the particular context of power of sale proceedings and a chargee’s duties in that context, potentially calling into question the motion judge’s explanations for excusing the secrecy and haste of this transaction. As an example, it may be questionable whether protracted prior court proceedings in relation to a chargee’s claim for payment on the covenant can in any way relieve a chargee from its obligations when subsequently exercising a power of sale, or serve as an explanation for secrecy and haste in conducting the power of sale. A mortgagee/chargee’s obligation when selling under power of sale has been described generally as an obligation to take “reasonable precautions to obtain the true market value of the property as of the date of the sale”: Centurion Farms Ltd. v. Citifinancial Canada Inc., 2013 ONCA 79, at para. 4. See also Gowling Lafleur Henderson LLP, Marriott and Dunn: Practice in Mortgage Remedies in Ontario, looseleaf, 5th ed. (Toronto: Carswell, 1995), c. 33. It may be questionable whether the motion judge assessed the secrecy and haste with which the sale to 1103 was carried out taking account of the chargee’s obligation in carrying out a power of sale.

[32] Similarly, the motion judge appeared to give little or no weight to the failure of the chargee to obtain a judgment for possession, a writ of possession and ultimately vacant possession of the property prior to sale; the failure of the chargee to list the property on a multiple listing service; and to the purchaser’s evidence that he “assess[ed] the situation similarly to how one would assess a salvaged car”. None of these features of this transaction create confidence that the chargee obtained a proper price.

[33] Further, when discussing the “traditional badges of fraud”, the motion judge noted that “1103 was a bona fide purchaser that has repeatedly tried to take possession of the property.” In making that observation, the motion judge appears to be assuming there is nothing out of the ordinary about a purchaser under a power of sale having to take steps to obtain possession of the property.

[30] In this court’s view, the Applicant knew that there would be serious resistance to them taking control of this property. This would have been obvious from the earlier attempt at taking possession. The Applicant changing the locks also indicated that they expected resistance. This property is not vacant. While the property may not be as lucrative as hoped, there are paying tenants at the property.

[31] Contrary to the Applicant’s submissions, there is no evidence that the property is depreciating in value, no evidence that the rental income will not be able to recuperate the losses, and no evidence about the dire financial circumstances of Mr. Harkness.

[32] The reason that lenders usually seek court orders prior to enforcing their right to take possession is that the taking of possession by force, even where the default is undisputed, may lead to chaotic and unsafe circumstances. It may constitute a criminal offence. The court should not encourage chaos or criminal offences. It is the view of this court that the power of sale process creates a fair and level playing field for all involved, one that encourages resolution of problems. This is what the court must encourage.

[33] For all of the foregoing reasons, the Application is dismissed.

[34] If the parties are unable to agree as to costs of this Application, the court will accept written submissions on costs, which shall be no more than three pages in length, excluding supporting documentation, and which shall be provided to the court office electronically, and to Bev.Taylor@ontario.ca, no later than 4:30 p.m. on May 25, 2022.

Justice V. Christie

Released: May 18, 2022