COURT FILE NO.: CV-21-3323 and CV-22-1390
DATE: 2022-12-28
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Greenpath Capital Partners Inc., Applicant
AND:
1903130 Ontario Ltd., Filbitron Marketing Corporation 2018 Ltd., Diamantino Silva, Jacinta Silva, Tina Betti, Sergio Molella, Frank Greco, Amond Management Inc., G.A.P. Farms Inc., Pierina Pizzardi and Trilend Inc., Respondents
AND RE: 1903130 Ontario Ltd., Filbitron Marketing Corporation 2018 Ltd.,
Diamantino Silva, Jacinta Silva, Tina Betti, Sergio Molella, Frank Greco, Amond Management Inc., G.A.P. Farms Inc., Pierina Pizzardi and Trilend Inc., Applicants
AND:
East Sovereign GP Inc. and Blake Andrew Wyatt, Respondents
BEFORE: Kurz J.
COUNSEL: Bryan Rumble & Julien Bonniere for the Greenpath Capital Partners Inc.
Kevin D. Sherkin & Nathan Lean for 1903130 Ontario Ltd., Filbitron Marketing Corporation 2018 Ltd., Diamantino Silva, Jacinta Silva, Tina Betti, Sergio Molella, Frank Greco, Amond Management Inc., G.A.P. Farms Inc., Pierina Pizzardi and Trilend Inc.,
Wojtek Jaskiewicz for East Sovereign GP Inc. and Blake Andrew Wyatt,
HEARD: October 18, 2022
ENDORSEMENT
Introduction
The Greenpath Application
[1] This endorsement deals with two related applications, which were heard together. In this decision, I describe the first one as the “Greenpath Application” and the second as the “East Sovereign Application”.
[2] The Greenpath Application, CV-21-3323, was brought by Greenpath Capital Partners Inc. (“Greenpath”). Greenpath is the second mortgagee[^1] of a number of real properties, described below (the “Properties”). The Respondents in the Greenpath Application are the first mortgagees of the Properties (the “First Mortgagees”), and the mortgage broker who arranged the first mortgage on the Properties (the “First Mortgage”) on behalf of the First Mortgagees.
[3] The First Mortgagees are an investment syndicate, consisting of 1903130 Ontario Ltd., Filbitron Marketing Corporation 2018 Ltd., Diamantino Silva, Jacinta Silva, Tina Betti, Sergio Molella, Frank Greco, Amond Management Inc., G.A.P. Farms Inc., Pierina Pizzardi. Those First Mortgagees loaned the First Mortgage funds to the owner and mortgagor of the Properties, East Sovereign GP Inc. (“East Sovereign”). That loan and the first mortgage was brokered by Trilend Inc. (“Trilend”).
[4] Greenpath applies for “a judicial determination” of the right of the First Mortgagees to collect two fees, totaling $283,508.64 (the “Disputed Fees”) in priority to its second mortgage on the Properties (the “Second Mortgage”). The First Mortgagees collected the Disputed Fees from the proceeds of sale of the Properties under power of sale, leaving a shortfall in the payment of the Second Mortgage from those proceeds.
[5] Greenpath claims that the First Mortgagees are not entitled to claim the Disputed Fees in priority to its own claims under the Second Mortgage. Greenpath makes two arguments in regard to that purported priority. First, Greenpath says that the Disputed Fees are not part of the First Mortgage. They are part of a separate agreement, the Forbearance Agreement, described below. Thus, the First Mortgagees cannot claim priority over Greenpath when it attempts to collect the Disputed Fees from the proceeds of sale of the Properties.
[6] Second, Greenpath argues that the Disputed Fees represent an improper “fine, penalty or rate of interest”, forbidden by s. 8 (1) of the Interest Act, R.S.C. 1985, c. I-15 (“s.8(1)”).
[7] The First Mortgagees answer that they properly collected the Disputed Fees under the provisions of the Forbearance Agreement. As set out below, the First Mortgagees contend that the Forbearance Agreement was incorporated into the First Mortgage.
[8] The parties to the Forbearance Agreement were the First Mortgagee, Trilend, East Sovereign GP Inc., the owner and mortgagor of the Properties, as well as Blake Andrew Wyatt (“Wyatt”). Wyatt is the principal of East Sovereign and the guarantor under the First Mortgage.
[9] The Forbearance Agreement was entered into on January 1, 2021, after East Sovereign went into default of the First Mortgage.
[10] Under the Forbearance Agreement, East Sovereign and Wyatt acknowledged all of the unparticularized amounts that the First Mortgagees claimed against them (i.e., a principal balance of $7,544,450 plus interest of $1,987.67 per day). In return, the First Mortgagees agreed to forbear from enforcing the First Mortgage so long as certain terms were being met.
The East Sovereign Application
[11] The East Sovereign Application, CV-22-1390, was brought by the First Mortgagee and Trilend against East Sovereign and Wyatt. The First Mortgagee and Trilend assert that East Sovereign and Wyatt are legally obliged to pay the Disputed Fees to them under the Forbearance Agreement. Thus, even if the First Mortgagees are not entitled to the Disputed Fees in priority to Greenpath, they (and Trilend) are entitled to claim them directly against East Sovereign and Wyatt under the Forbearance Agreement.
[12] The First Mortgagees contend that the Forbearance Agreement is binding on East Sovereign and Wyatt, because its financial terms represent the consideration for the agreement to forbear from enforcing the First Mortgage. They argue that this consideration takes the Forbearance Agreement out of the reach of s. 8(1). They also rely on the same arguments that they raised in the Greenpath Application.
[13] East Sovereign and Wyatt make two counterarguments. First, they agree with Greenpath that the Disputed Fees violate s. 8(1) of the Interest Act. Because of that statutory violation, they argue that the First Mortgagees and Trilend cannot collect the Disputed Fees from either East Sovereign or Wyatt. Second, East Sovereign and Wyatt point out that the Disputed Fees, are not expressly set out in the Forbearance Agreement. Thus, East Sovereign and Wyatt cannot be seen as having waived any rights regarding fees that are “hidden “in the Forbearance Agreement.
Summary of Findings
[14] For the reasons set out below, I find that the Forbearance Agreement does not form part of the First Mortgage and does not give the First Mortgagees any priority over Greenpath to collect the Disputed Fees from the proceeds of sale of the Properties. In addition, or in the alternative, the Disputed Fees violate s. 8(1) of the Interest Act. In light of that finding, I also find that the First Mortgagees and Trilend are not entitled to claim the Disputed Fees against East Sovereign and Wyatt as the parties cannot contract out of that statutory provision.
[15] Thus, I grant Greenpath’s application and dismiss the application of the First Mortgagees and Trilend.
Background
[16] The Properties are a group of properties which are municipally described as 124, 126, 128 East Street and 2286, 2296, 2298 Sovereign Street, Oakville Ontario. At all materials times, the Properties were owned by East Sovereign.
[17] On February 26, 2020 East Sovereign granted the First Mortgage over the Properties, registered as instrument no. HR1686407, to the First Mortgagees. The First Mortgage secured a principal sum of $7,182,000 for a one-year term, commencing March 1, 2020. Interest under the First Mortgage was payable at 10% per annum.
[18] Also on February 26, 2020, East Sovereign granted the Second Mortgage to Greenpath, which was registered as instrument no. HR1686409. It secured a principal sum of $700,000 for a one-year term, commencing March 1, 2020. Interest under the Second Mortgage was payable at 11.99% per annum. There is no dispute that Greenpath was provided with a copy of the First Mortgage at the time of the registration of the Second Mortgage.
[19] Wyatt was the guarantor of both the First Mortgage and the Second Mortgage.
[20] East Sovereign fell into arrears of payment of the First Mortgage well before its maturity date. East Sovereign and Wyatt requested forbearance on the enforcement of the First Mortgage, claiming that they were attempting to raise funds to refinance. On January 1, 2021, East Sovereign, Wyatt, the First Mortgagees, and Trilend, entered into the Forbearance Agreement.
[21] Under that agreement, the First Mortgagees agreed to forbear from enforcing the First Mortgage upon certain terms. In return, East Sovereign and Wyatt agreed to make a series of payments, totalling $179,550, in three installments between February 3 and March 1, 2021. Two related terms of the Forbearance Agreement are relevant to this application:
East Sovereign and Wyatt “hereby confirm and acknowledge that as of 8 January 2021, the total indebtedness of $7,544,450 plus interest of $1,967.67 per day from 9 January 2021 was due and owing to [the First Mortgagees] under the [First] Mortgage”.
East Sovereign “further “confirms and acknowledges that, as of the date hereof, it is validly indebted to [the First Mortgagees] for the payment in full of the Mortgage Debt, without defence, counterclaim, offset, cross-complaint, claim or demand of any kind or nature whatsoever.”
[Emphasis added]
[22] Nothing in the Forbearance Agreement offered any calculation or particulars of the $7,544,450 “total indebtedness” figure.
[23] Payments under the Forbearance Agreement were to be made to the First Mortgagee’s broker, Trilend. No other role or independent interest for Trilend is spelled out in the Forbearance Agreement.
[24] Greenpath was not a party to the Forbearance Agreement. At no material time prior to the power of sale proceedings was it provided with notice of the existence of the Forbearance Agreement.
[25] East Sovereign made only a $30,000 payment towards the $179,550 figure it was required to pay between February 3 and March 1, 2021. As a result, the First Mortgagees commenced power of sale proceedings. They served East Sovereign, Wyatt and Greenpath with their notice of sale, dated March 25, 2021 (the “Notice of Sale”).
[26] The Notice of Sale set out the following breakdown of the amounts that the First Mortgagees were claiming to be owed under the First Mortgage:
Principal Balance $7,182,000.00
Interest for January and February 2021 $ 119,700.00
Less Partial Payment received February 3, 2021 -$ 30,000.00
Accrued Interest to March 25, 2021 $ 49,191.75
Prepayment Fee $ 103,958.64
NSF Fees $ 250.00
Default Fees $ 179,550.00
Other Fees $ 1,250.00
TOTAL: $7,588,191.38
[27] Those numbers and in particular the principal balance figure, do not correspond with the unparticularized $7,544,450 figure set out in the Forbearance Agreement. As set out below, the First Mortgagees later asserted that the Notice of Sale “wrongly broke out the amounts”.
[28] On August 24, 2021, the sale of the Properties under power of sale closed for $9,000,000. Following the sale, the First Mortgagees issued and served a discharge statement dated August 17, 2021, under the letterhead of Trilend (the “Discharge Statement”). The Discharge Statement claimed that the principal balance owing to the First Mortgagees was $7,544,450, as of January 9, 2021. That is the same figure cited in the Forbearance Agreement but a different one from that found in the Notice of Sale.
[29] The Discharge Statement particularized the First Mortgagees’ claims to the proceeds of sale of the Properties as follows:
Principal Balance $7,544,450.00
Interest for January 9 -31 2021 $ 44,108.64
Interest for February – July 2021 $ 359,100.00
Interest for August 1-20, 2021 $ 39,353.40
Charge for Preparation of Statement of Claim $ 2,000.00
Discharge Fee $ 750.00
Appraisal fee for two appraisals $ 14,125.00
Management Fee from May 14 – August 20, 2021 $ 9,800.00
TOTAL: $7,983,687.04
[30] Neither the Notice of Sale nor the Discharge Statement set out a calculation for their differing “principal balance” starting points. Those divergent principal balance figures represent the key difference between the amounts claimed in the two documents.[^2]
[31] The Notice of Sale’s principal balance is described as $7,182,000, which is clearly a figure as of January 1, 2021.[^3] The Discharge Statement’s principal balance is described as $7,544,450, as of January 9, 2021. Inasmuch as the daily interest fee set out in the Forbearance Agreement is $1,967.67 per day, it can be assumed that the Discharge Statement’s principal balance for January 1, 2021 would be $7,544,450 - $15,741.36 (8 x $1,967.67) = $7,528,708,64. Thus the difference between the two principal balance figures, as of January 1, 2021 appears to be $346,708.64 ($7,528,708,64 - $7,182,000).
[32] On August 26, 2021 Greenpath’s lawyer wrote to the First Mortgagee’s lawyer to point out that the principal balance figure in the Discharge Statement was not consistent with the figure in the Notice of Sale. Greenpath requested a corrected Discharge Statement.
[33] The First Mortgagee’s counsel responded on September 2, 2021, claiming that the Discharge Statement figures were correct. He ambiguously attempted to explain the differing figures as follows:
[w]hile the totals in the notice of sale accord, it looks as if the counsel who issued the notice broke out the amounts different [sic] than perhaps I would.
[34] The First Mortgagees’ counsel went on to refer to the Forbearance Agreement, (which he attached), containing East Sovereign’s “confirmation of $7,544,450 plus additional sums o/s [outstanding] In [sic] Feb of 2021”. Counsel added “I can confirm that the amount o/s [outstanding] to our client was indeed accurate”.
[35] While asserting the accuracy of the figures in the Discharge Statement, counsel again failed to offer a particularized calculation of its $7,544,450 principal balance figure. Of course, as set out above, the Forbearance Agreement also failed to offer a particularized calculation of the $7,544,450 total figure.
[36] On September 24, 2021, Greenpath’s counsel replied, pointing out that Greenpath is not a party to the Forbearance Agreement. He asserted that its terms “are not relevant to the discussions between our respective clients.” His letter referred to the two Disputed Fees, which were set out in the Notice of Sale but absent in the Discharge Statement. Those Disputed Fees are the prepayment penalty of $103,958.64 (the “prepayment fee”) and the default fee of $197,550 (the “default fee”).
[37] Greenpath’s counsel explained that his client objected to the prepayment fee because the term of the loan had expired at the time of the sale of the properties. He pointed out that the prepayment penalty provision of the First Mortgage “contemplates an early payment of the mortgage principle [sic] and not payment in the context of default.” Regarding the default fee, he pointed out that the fee may come from the first mortgage commitment, but that the term allowing that fee has been found to violate s. 8(1) of the Interest Act, in Benson Canadian Corporation v. Situ et al., 2019 ONSC 3077. I will have more to say about those arguments below.
[38] Greenpath’s counsel ended by asserting that his calculation demonstrates the availability of sufficient surplus funds to fully pay out the Second Mortgage, after the payment of the First Mortgage and all of the charges Greenpath was willing to accept. Without recognizing the applicability of the Disputed Fees, he maintained that the proper surplus after payment of the First Mortgage was $806,702.97. That was more than enough to pay the $762,436.42 set out in Greenpath’s own Discharge Statement.
[39] On October 21, 2021, counsel for the First Mortgagees reaffirmed his client’s position that its Discharge Statement was both valid and proper.
[40] On or about November 4, 2021, the First Mortgagees transferred $522,278.81 to Greenpath, leaving a shortfall of $240,157.61 from the figure in Greenpath’s Second Mortgage discharge statement.
Evidentiary Gap
[41] I cannot consider the issues raised in this case without first pointing to a gap in the First Mortgagees’ evidence. They have failed to provide evidence of the particulars of the calculation of the $7,544,405 figure in both the Forbearance Agreement and the Discharge Statement. The issue of the correctness of the $7,544,405 figure is made more acute by the fact that the Notice of Sale made specific reference to the Disputed Fees but the Forbearance Agreement and the Discharge Statement make no reference to them.
[42] The only evidence offered by the First Mortgagees in the two applications are the two affidavits of Bryce Coates, the president of Trilend. In his affidavit for the Greenpath Application, Mr. Coates deposes that the Notice of Sale “wrongly broke out the amounts”, without saying how they should have been or really were broken out.
[43] Rather, Mr. Coates simply says that “the Discharge Statement properly listed the principal balance” as set out in the Forbearance Agreement. Mr. Coats continued, stating that the principal balance “included additional charges and further amounts owing for interest” [Emphasis added]. Mr. Coates fails to identify those “additional charges” or set out how they meet the test of s. 8(1).
[44] Mr. Coates implies but fails to state that the Disputed Fees form part of the Discharge Statement’s principal balance when he deposes:
Although the Notice of Sale separately listed the amounts that made up the Mortgage Debt, instead of indicating the Mortgage Debt as the outstanding principal balance, there is no discrepancy between the amounts claimed in the Notice of Sale and Discharge Statement.
[45] In his affidavit for the East Sovereign Application, Mr. Bryce says nothing regarding the disparate figures in the Notice of Sale as opposed to the Forbearance Agreement and the Discharge Statement. Rather, he adopts the contents of his earlier affidavit.
[46] Mr. Coates’ approach to those figures is reflected in the September 2, 2021 correspondence of the First Mortgagees’ counsel, cited above. That counsel wrote to Greenpath’s counsel, stating: “[w]hile the totals in the notice of sale accord, it looks as if the counsel who issued the notice broke out the amounts different [sic] than perhaps I would.” Again, a representative of the First Mortgagees dances around the issue of whether the Disputed Fees form part of the “total indebtedness” cited in the Forbearance Agreement and as “principal balance” under the Discharge Statement.
[47] That ambiguity still leaves open the questions of how the balances set out in the Forbearance Agreement and the Discharge Statement were arrived at and why they differ from the figure set out in the Notice of Sale. The onus must rest on the First Mortgagees to answer those questions, as they prepared the documents in question and seek to enforce the Forbearance Agreement.
[48] Despite the ambiguity, the First Mortgagees do not explicitly deny that the Disputed Fees are embedded in the principal balance claimed in both the Forbearance Agreement and the Discharge Statement. In fact, their counsel goes to some trouble in their factum to justify the fees. The other parties to the two applications accept that the First Mortgagees have included the Disputed Fees in the amounts contained in the Forbearance Agreement and the Discharge Statement. Further, they accept that the First Mortgagees received those funds from the proceeds of sale of the Properties.
[49] As set out below, whether they are separately described or embedded in the principal balance, the Dispute Fees still must not violate s. 8(1) of the Interest Act if they are to be enforceable.
Issues
[50] The key common question in both applications is the propriety of the Disputed Fees as either holding priority over the Second Mortgage and/or as a claim against East Sovereign and Wyatt. In order to respond to that question, I must consider the following issues:
Are the First Mortgagees Entitled to Claim the Disputed Fees in Priority to the Second Mortgage Debt?
If so, are the First Mortgagees prohibited by s. 8(1) of the Interest Act from claiming the Disputed Fees?
Issue No. 1: Are the First Mortgagees Entitled to Claim the Disputed Fees in Priority to the Second Mortgage Debt?
[51] In arguing that they are entitled to claim the Disputed Fees as part of the First Mortgage’s priority, the First Mortgagees rely on the terms of clause 19 of the Set of Standard Charge Terms, number 200033 (“cl. 19”). Those Standard Charge Terms form part of the First Mortgage.
[52] The full text of cl. 19 provides as follows:
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.]
[53] The First Mortgagees rely on the highlighted portion of cl. 19, above, regarding the renewal of the Charge at maturity “for any term with or without an increased rate of interest notwithstanding that there may be subsequent encumbrances.” Citing that subclause, the First Mortgagees write in their factum that they were “entitled to both adjust the amount owed under the First Mortgage and extend the time for repayment or enter into the Forbearance Agreement”. They add that they “were entitled to enter into the Forbearance Agreement on such terms as the parties agreed to.”
[54] The First Mortgagees continue in their factum that cl. 19 allows them to “elect to either adjust the amount owed under the First Mortgage and/or extend the time for repayment”. That implies that a mortgagor and a first mortgagee can increase the principal debt of any mortgage at any time, to the prejudice of the interests of subsequent mortgagees. As set out below, I do not agree.
[55] In plain language and within the context of this case, the lengthy, two sentence, 143-word cl. 19 refers to the preservation of two rights of the First Mortgagees:
Their rights shall not be prejudiced should they offer East Sovereign and Wyatt an extension of time to perform their obligations under the First Mortgage.
The First Mortgage may be renewed for any term by an agreement in writing at its maturity. The word “term” in this context has been defined by the Ontario Court of Appeal as “the time frame between the commencement date of the Charge and the "maturity" (or balance due date) of the Charge”: Three Seasons Homes Limited v. Faris, [2005] O.J. No. 4856 (Ont. C.A.) at para. 36. Thus, the First Mortgage may be renewed for any length of time when it matures. That renewal may include an increased rate of interest, even though that increased rate affects any subsequent encumbrancers, such as Greenpath. It is not necessary to register the renewed mortgage with its altered terms in order to maintain its priority over any subsequent encumbrance.
[56] Neither right set out in cl. 19 of assists the First Mortgagees. I say this for two reasons.
[57] First, nothing in cl. 19 allows the parties to the First Mortgage to increase its principal balance or agree to an increase of any part of the First Mortgage, other than the interest rate, to the prejudice of subsequent encumbrancers. Recall that Greenpath was not a party to the Forbearance Agreement.
[58] Second, cl. 19 does not grant the right to graft the Forbearance Agreement onto the First Mortgage.
[59] Thus, the only increases that cl. 19 allows to the First Mortgage in priority to subsequent encumbrancers are to its term and interest rate. Cl. 19 does not give carte blanche to increase the principal debt on the First Mortgage to the detriment of subsequent encumbrancers, even with the consent of East Sovereign.
[60] In other words, the Forbearance Agreement is not subsumed into the First Mortgage. It is a separate agreement.
[61] The First Mortgagees nonetheless rely on 2495940 Ontario Inc. v. 263346 Ontario Inc., 2020 ONSC 7937 (“249”). There, a second mortgagee unsuccessfully challenged an increase in a first mortgage’s increased principal and interest rate. The First Mortgagees assert that 249 “dealt with similar circumstances to this case.” As set out below, I disagree.
[62] The facts of 249 were unusual. There, the first mortgage was renewed, with an increased principal and interest rate, despite the facts that the mortgagor was in default and the first mortgagee had obtained a default judgment against the mortgagor.
[63] That unusual sequence of events occurred as follows. The mortgagor went into default. That led the first mortgagee to commence legal proceedings, which resulted in a default judgment. Before obtaining an order for possession of the subject property, the first mortgagee assigned its first mortgage to a third party (the “assignee”). In return, the assignee paid the first mortgagee the full amount of the default judgment. The defaulting mortgagor and assignee then entered into their own agreement to renew the first mortgage for another year. That renewal agreement called for an increase to both the principal amount of the first mortgage (to the figure set out in the default judgment) and the rate of interest.
[64] The second mortgagee then challenged the increased principal, based on the default judgment, and interest rate. In particular, it argued that the assignee and mortgagor could not increase the principal amount owing under the first mortgage, in priority to the second mortgage.
[65] Vella J. dismissed the second mortgagee’s action. She did so in large measure because, as she wrote at para 42, she was “not prepared to go behind the default judgment to assess the legitimacy of the applicable disputed charges”. She relied on the fact that the second mortgagee had never moved, whether in the original mortgage action or the one before her, to vary or set that judgment aside. She also noted that the assignee had paid the default judgment in full to the first mortgagee. Thus, the increased principal of the mortgage represented a real cost by the first mortgagee in enforcing its mortgage; one assumed by the assignee. That factor is relevant to a s. 8(1) analysis, as set out below. as set out below.
[66] The First Mortgagees also seek to rely on the following statement from Vella J. at para. 70 of the 249 decision, dismissing the second mortgagee’s arguments regarding notice and the increased rate of interest:
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)
[67] The “s. 19” that Vella was referring to is the same cl. 19 in this decision.
[68] It is important to understand that the issue Vella J. was discussing was the increased rate of interest in the renewed first mortgage. That is something which cl. 19 clearly allows. Vella J. pointed out that the second mortgagee before her was deemed to have notice of the possibility of an increase in the mortgage rate upon renewal as it was a term of s. 19 in the subject first mortgage. The second mortgagee actually had the same provision in its own mortgage. Thus, it knew of and assumed the risk of a subsequent increase in the mortgage’s interest rate upon renewal. It did not have to be advised of the registration of the renewed mortgage with the amended rate of interest.
[69] But Vella J. did not make her finding regarding the increased principal of the first mortgage before her under s.19 of the first mortgage. Rather, without referring to the term, her decision in that regard was akin to an abuse of process determination. That is, a previous court had already determined the issue of those added charges in its default judgment. Vella J was not going to attempt to do so again, particularly in the absence of a motion to vary or set aside that decision.
[70] In short, 249 can be distinguished from this case. The issue here is not an increased interest rate on renewal, as it was in 249.
[71] Accordingly, for the reasons cited above, I find that the Forbearance Agreement does not form part of the First Mortgage. It does not carry the First Mortgage’s priority to the Second Mortgage. Thus, the First Mortgagees were not entitled to claim the Disputed Fees out of the proceeds of sale of the Properties, in priority to Greenpath’s Second Mortgage.
[72] That finding should be sufficient to resolve the Greenpath Application. Nonetheless, if I am incorrect in that regard and in order to determine the First Mortgagees’ right to claim the Disputed Fees from East Sovereign and Wyatt, I will consider whether those fees are prohibited under s. 8(1) of the Interest Act.
Issue No 2: Are the First Mortgagees prohibited by [s. 8(1)](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html#sec8subsec1_smooth) of the [Interest Act](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html) from Claiming the Disputed Fees?
[73] Section 8 of the Interest Act reads as follows:
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 Properties or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.
(2) Nothing in this section has the effect of prohibiting a contract for the payment of interest on arrears of interest or principal at any rate not greater than the rate payable on principal money not in arrears.
[74] In Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, [2016] 1 S.C.R. 273 (“Krayzel”), at para. 21, Brown J., writing for the majority of the Supreme Court of Canada, explained that the purpose of s. 8(1) is to protect landowners from charges "that would make it impossible for [them] to redeem, or to protect their equity" (adopting Reliant Capital Ltd. v. Silverdale Development Corp., 2006 BCCA 226, 270 D.L.R. (4th) 717 (B.C.C.A.), at para. 53).
[75] Brown J. summarizes the effect of s. 8(1) as follows at para. 24:
24 Section 8(1) identifies three classes of charges - a fine, a penalty or a rate of interest - that shall not be "stipulated for, taken, reserved or exacted" if "the effect" of doing so imposes a higher charge on arrears than that imposed on principal money not in arrears. Section 8(2) affirms that subs. (1) does not prohibit a contract from requiring payment of interest on arrears of interest or principal at a rate equivalent to or lower than that payable on principal money not in arrears.
[76] The leading Ontario case on the application of s. 8(1) is P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331. There, Cronk J.A., writing for the Court of Appeal for Ontario, explains at para. 51 that:
s. 8(1) creates an exception to the general rule that lenders and borrowers are free to negotiate and agree on any rate of interest on a loan. Section 8 prohibits lenders from levying “fine[s], penalt[ies] or rate[s] of interest” on “any arrears of principal or interest” that are “secured by mortgage on real Properties”.
[Citation omitted]
[77] At paras. 52-56 of P.A.R.C.E.L., Cronk J.A. lays out four prerequisites for the court’s application of s. 8(1) to prohibit a mortgagee from charging certain fees or other amounts to a mortgagor:
The covenant in question must impose a "fine", "penalty" or "rate of interest". If it does not, then s. 8(1) is not engaged.
The "fine", "penalty" or "rate of interest" must relate to "any arrears of principal or interest secured by mortgage on real Properties", whether before or after maturity of the relevant debt instrument.
“the covenant must also have the prohibited effect of ‘increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears’.
“the arrears of principal or interest must be ‘secured by mortgage on real Properties’"
[Citations omitted]
[78] The court in P.A.R.C.E.L. placed the onus on the mortgagee claiming the amounts following default to prove that they “reflect real costs legitimately incurred by the First Mortgagees for the recovery of the debt, in the form of actual administrative costs or otherwise”: para 96.
[79] In the absence of that proof, the court concluded:
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(1) of the Interest Act…
[80] Here, the First Mortgagees argue that s. 8(1) cannot apply to the facts and parties of the applications before the court for two reasons:
The Disputed Fees do not violate s. 8(1) because they represent the consideration for an agreement that the First Mortgagees forbear from enforcing their rights under the First Mortgage; and
s. 8(1) is consumer protection legislation that should not apply to the facts of this case.
[81] Regarding the first argument, the issue is whether the parties may contract out of the provisions of s. 8(1). I find that they cannot do so.
[82] As stated above and in P.A.R.C.E.L., s. 8(1) is “an exception to the general rule that lenders and borrowers are free to negotiate and agree on any rate of interest on a loan”. Thus, it is not open to the parties to contract out of s. 8(1) as it constitutes public policy of Ontario, from which the parties may not contract out.
[83] As McIntyre J. wrote for the Supreme Court of Canada, in Ontario (Human Rights Commission) v. Etobicoke (Borough), 1982 15 (SCC), [1982] 1 S.C.R. 202, [1982] S.C.J. No. 2 at p. 8 (QL), referring to the Ontario Human Rights Code:
Although the Code contains no explicit restriction on such contracting out, it is nevertheless a public statute and it constitutes public policy in Ontario as appears from a reading of the Statute itself and as declared in the preamble. It is clear from the authorities, both in Canada and in England, that parties are not competent to contract themselves out of the provisions of such enactments and that contracts having such effect are void, as contrary to public policy.
[84] In Fleming v Massey, 2016 ONCA 7, at para 30, the Court of Appeal for Ontario made clear that in Etobicoke, McIntyre J. “used language that makes clear the principle isn't limited to human rights legislation” (see also paras. 31-35).
[85] The First Mortgagees implicitly accept the notion that s. 8(1) represents public policy in arguing that it represents a form of consumer protection. They point to para. 50 of P.A.R.C.E.L. There, Cronk J.A. cited with approval the comment of the British Columbia Court of Appeal in Reliant Capital Ltd. v. Silverdale Development Corp., which was adopted by the majority in Krayzel, above, that:
s. 8 is intended to ‘protect Properties owners against abusive lending practises, while recognizing that generally speaking parties are entitled to freedom of contract.
[86] In effect the First Mortgagees are arguing that s. 8(1) is a form of consumer protection. For that reason, it should not apply here because both Greenpath and East Sovereign are businesses, not consumers. Thus, they should not be protected by s. 8(1). But the wording of s. 8(1) or the Interest Act itself is not narrow enough to support that interpretation. It does not speak to consumers or individual property owners, or anything of the like. As Cronk J. described the class of legal persons protected by s. 8(1), they were simply the generic class of “property owners”. In Krayzel, McIntyre referred to that class as “landowners”: para. 21. Thus s. 8(1) applies to East Sovereign.
[87] I add that if East Sovereign, as landowners or property owners, can claim to shelter under the umbrella of s.8 respecting the Disputed Fees, it stands to reason that Greenpath benefits from that same umbrella. If the Disputed Fees are not enforceable against East Sovereign, they cannot be enforceable in priority to Greenpath’s Second Mortgage.
Analysis of Application of s. 8(1) to the Disputed Fees
[88] As set out above, the Disputed Fees consist of the default fee of $197,550 and the prepayment fee of $103,958.64. Both are cited in the Notice of Sale but not otherwise explicitly set out in either the Forbearance Agreement or the Discharge Statement. I will deal below with each fee within the context of s.8(1).
Does the Default Fee Violate s. 8(1)?
[89] The First Mortgagees assert in their factum and oral argument that the default fee is based on an agreement that the mortgagor will pay them three months’ interest as part of the Forbearance Agreement. They offer no evidence in support of that contention.
[90] The First Mortgagees further point to the “Events of Defaults” section of the commitment letter for the First Mortgage. That provision entitles the First Mortgagees to three month’s interest in the event of default in accordance with s. 17 of the Mortgages Act, M-40, R.S.O. 1990 ch. M-40, as amended (“s. 17”).
[91] Section 17 states:
Payment of principal upon default
17 (1) Despite any agreement to the contrary, where default has been made in the payment of any principal money secured by a mortgage of freehold or leasehold Properties, the mortgagor or person entitled to make such payment may at any time, upon payment of three months interest on the principal money so in arrear, pay the same, or the mortgagor or person entitled to make such payment may give the mortgagee at least three months notice, in writing, of the intention to make such payment at a time named in the notice, and in the event of making such payment on the day so named is entitled to make the same without any further payment of interest except to the date of payment.
Exception
(2) If the mortgagor or person entitled to make such payment fails to make the same at the time mentioned in the notice, the mortgagor or person is thereafter entitled to make such payment only on paying the principal money so in arrear and interest thereon to the date of payment together with three months interest in advance.
Saving
(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.
[92] The First Mortgagees cite Elle Mortgage Corporation v. Sihota, 2021 ONSC 1593 to say that they were entitled to insist that East Sovereign pay them three months’ interest as one of the terms of the Forbearance Agreement. In Elle, Dunphy J. explored the interplay between s. 17 of the Mortgages Act and s. 8(1) of the Interest Act. He wrote at para. 37:
37 The Court of Appeal considered the potential conflict between these two provisions in Mastercraft Properties Ltd. v. El Ef Investments Inc., 1993 8545 (ON CA) and concluded that the two provisions can indeed be read in harmony with each other and consistent with the mortgagor-protection objects intended by both. This was achieved by interpreting s. 17 of the Mortgages Act as granting a right to the borrower to give at least three months' notice of its intention to repay the mortgage without interest penalty or the obligation to pay three months' interest in advance where such notice is not given.
[Emphasis added]
[93] Dunphy J. then concluded at para 39:
39 Section 17 is thus confined to the narrow circumstance where it is the mortgagor who is seeking to repay the mortgage post-default. In such cases, the mortgagor may either give the required notice and repay the mortgage and interest three months later without penalty or, giving no notice, repay it all at any time but with the three month's interest payment as well. While there is no explicit stay of enforcement proceedings that comes into effect upon giving the notice, the combination of the time required to conduct enforcement proceedings, the availability of relief from forfeiture and the fact that the penalty cannot be exacted if payment is in response to enforcement proceedings all provide a practical level of protection that a mortgagor who is able to repay the mortgage post-default has a means to do so and without increased interest cost by giving the requisite notice.
[94] In 58 Cardill Inc. v. Rathcliffe Holdings Limited, 2017 ONSC 6828, affd. 2018 ONCA 672, Sanfilippo J. further considered the application of s. 17. In that case, he did so within the context of a request to appoint a receiver to enforce a mortgage. At para. 20, Sanfilippo J. described s. 17 as a “shield to the mortgagor to allow for payment of arrears without imposition of three months' interest when three months' notice is provided”. The quid pro quo benefit for the mortgagee is that “by [the mortgagor] giving three months' notice of repayment [the mortgagee] … can plan the reinvestment of the funds that it anticipates receiving on repayment, or receive a lump sum of three months' interest in lieu thereof …”.
[95] At para. 35, Sanfilippo J described s. 17 as “mortgagor-centric”. It is “intended to embody a right available to the mortgagor… not to constitute a basis for a claim by a mortgagee unless first the mortgagor seeks a pay-out.”
[96] In upholding Sanfilippo J.’s decision, the Court of Appeal for Ontario confirmed his view that s. 17 is mortgagor rather than mortgagee-centric: paras. 7-8. In other words, it embodies payment rights available to a mortgagor in the event of default.
[97] In Benson Custodian Corporation v. Situ et al. 2019 ONSC 3077, Schabas J. relied in part on Sanfilippo J.’s decision in 58 Cardill to find that a three-month interest penalty violated s. 8(1). In doing so, Schabas J. distinguished the requirement of a three-month interest payment to retire a mortgage early from a three-month penalty on default. Relying on two authorities cited by Sanfilippo J.,[^4] Schabas J. stated that the former was simply a contractual term for the privilege of early retirement of a mortgage. It does not violate s. 8. However, the latter penalty provision has what s. 8(1) describes as having "the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears." That was not a proper contractual term under s. 8(1) and could not be saved by the right to freedom of contract.
[98] In considering those authorities, I see three problems with the First Mortgagees’ arguments about the default fee. First, there is no evidence that that the default fee was calculated in accord with the strictures of s. 17. There is no evidence of how it was calculated at all. Rather, that assertion is only a statement that the First Mortgagees’ counsel makes in their factum.
[99] It was open to the First Mortgagees to provide evidence regarding the manner in which the default fee was determined in compliance with s. 17. But they failed to do so. In fact, the First Mortgagees’ only evidence on the point was that they were entitled to the amounts claimed in the Discharge Statement because Sovereign and Wyatt acknowledged the total amount of its debt in the Forbearance Agreement. That in itself does not bring the discharge fee within the rubric of s. 17.
[100] Second, as mentioned above, both the Discharge Statement and the Forbearance Agreement fail to include a particularized calculation of the principal mortgage debt owed to the First Mortgagees. In fact, the Forbearance Agreement makes no reference to s. 17 or to its terms regarding notice or repayment. Further, no claim for a three-month interest prepayment fee is set out anywhere in the evidence.
[101] Third, as Sharma J. pointed out in We Care Funding Limited Partnership v. LDI Lakeside Developments Inc., 2021 ONSC 7466, at para. 71, in rejecting a claim to a three-month interest fee once power of sale proceedings had commenced:
the weight of authority suggests that once a mortgagee takes enforcement proceedings, it has removed the option from the mortgagor of redeeming the mortgage. In this case, by the issuance of the Notice of Sale, the expiration of the redemption period and the commencement of these legal proceedings, the plaintiff is entitled to receive the whole of the income stream it contracted for. If it were also entitled to collect a three-month interest bonus, that would constitute a penalty and would offend the Interest Act.
[102] Here, as set out in the Forbearance Agreement, at the time of its signing, the First Mortgagees had commenced what the agreement described as “Foreclosure Proceedings”. The Forbearance Agreement referred to:
the issuance of a Notice of Intention to Enforce Security under s. 244(1) of the Bankruptcy and Insolvency Act,
a demand letter to the mortgagor and Wyatt,
“together with all judicial proceedings related to or ancillary thereto … praying for, Inter alia, a foreclosure of all of the Borrowers' respective interests In the Mortgaged Property ….”.
[103] For those reasons, the First Mortgagees’ problem with enforcing the default fee in the face of s. 8(1) is not solved by s. 17 of the Mortgages Act. If s. 8(1) applies, the parties cannot contract out of it. The onus rests on the First Mortgagees to justify their charge and prove that it does not offend s. 8(1). They have failed to do so. The claim of a default fee, as set out in the Notice of Sale, is, in the absence to the contrary, a breach of s. 8(1)’s prohibition.
Does the Prepayment Fee Offend s. 8?
[104] The First Mortgagees argue that in charging a $103,958.64 prepayment fee, they are not charging a “fine”, “penalty” or “rate of interest” per s. 8(1). Rather, they were merely extending a 3% lender fee to the broker, Trilend, that is already included in the First Mortgage commitment.
[105] In their factum but not their evidence, they assert that “[a]s a mortgage broker, Trilend Inc.’s revenue model relies on lender fees at the time its syndicated mortgages are entered into as well as renewed”. They continue, arguing that “[t]he Forbearance Agreement had the effect of extending the First Mortgage past the maturity date, instead of the First Mortgage being repaid or renewed. In both the later scenarios [sic] Trilend would have had the opportunity to charge another lender fee”.
[106] Thus, they assert that Trilend is being compensated for the “missed opportunity of being able to repurpose the funds from First Mortgage and charge a new lender fee or receive a lender fee in connection with the renewal”.
[107] There are three problems with this argument. First, the Forbearance Agreement does not represent a renewal of the First Mortgage. It does not even contain the words “renew” or “renewal”.
[108] Second and once again, a factum is not evidence. The renewal fee is not even cited in the Forbearance Agreement or Discharge Statement. Nor is the basis for its calculation set out in the evidence.
[109] Third, there is no evidentiary foundation for a claim that the $103,958.64 prepayment fee was an actual cost that the First Mortgagees incurred. Nor is there evidence that the First Mortgagees were actually required to make the payment to Trilend.
[110] As Sharma J. pointed out in We Care Funding Limited Partnership v. LDI Lakeside Developments Inc., 2021 ONSC 7466, at para 66[^5]:
66 With respect to administrative costs, while a mortgagee is generally entitled to be indemnified for the costs that are incurred to respond to a default by a mortgagee, the costs claimed must be reasonable and properly incurred. There must be some basis in the evidence to determine that costs were incurred at the amounts claimed. Absent proof of specific costs being incurred, the costs are rightly subsumed in the ordinary course of the mortgagee's business: see Lee v He, supra, at para 43; BMMB Investments Limited v. Naimian, 2020 ONSC 7999, at paras. 26 and 43, citing P.A.R.C.E.L.; NRD Management Services Ltd. v. Dorothy Litwin, 2021 ONSC 3238, 155 O.R. (3d) 729.
[111] Sharma J. adds in para. 67 that absent evidence of actual administrative costs being incurred, he would have disallowed it because “[i]t would have constituted an increase in the interest rate applicable to monies in default, in excess of the interest rate payable upon moneys not in default, contrary to s. 8(1) of the Interest Act.”
[112] As the Supreme Court of Canada pointed out in Krayzel, above, at para. 32, attempting to look into the existence of a “legitimate commercial purpose” to skirt the provisions of s. 8(1) would undermine both its intent and effect. Section 8 requires a “purely results-oriented focus” which looks to the result of the charge not the justification.
[113] The result here is a form of “fine, penalty or interest rate” that offends s. 8(1) and is not enforceable.
Conclusion
[114] For the reasons cited above, I find that the Forbearance Agreement does not form part of the First Mortgage and thus cannot be enforced in priority to the Second Mortgage. Further and in any event, I find that the terms of the Forbearance Agreement and in particular, the Disputed Fees are unenforceable under s. 8(1).
[115] Accordingly, I grant the Greenpath Application and find that the First Mortgagees were not entitled to charge the Disputed Fees in priority to the Second Mortgage. I also dismiss the East Sovereign Application, finding that the Disputed Fees may not be claimed against East Sovereign.
[116] In light of these findings, I assume that the parties will be able to arrange for the appropriate payment out from the proceeds of sale of the Properties by the First Mortgagee/Trilend, to Greenpath, of its entitlement under the Second Mortgage.
Costs
[117] The parties should attempt to resolve the issue of costs on their own. If they are unable to do so, Greenpath, East Sovereign and Wyatt may submit their costs submissions of up to three pages, double-spaced, one-inch margins, plus a costs outline and offers to settle. They shall do so within 14 days of release of this endorsement. They need not include the authorities upon which they rely so long as they are found in the commonly referenced reporting services (i.e., LexisNexis Quicklaw, or WestlawNext) and the relevant paragraph references are included. The First Mortgagees and Trilend may respond in kind within a further 14 days. No reply submission will be accepted unless I request it. If I have not received any submissions within the time frames set out above, I will assume that the parties have resolved the issue and will make no costs order.
“Marvin Kurz J.”
Electronic signature of Justice Marvin Kurz
Date: December 28, 2022
[^1]: In this decision, I refer to the terms: mortgage” and “charge” interchangeably and according to the context in which they are used in the statutes and instruments cited. I do the same for the terms “mortgagee” and “chargee” as well as “mortgagor” and charger”. For the purposes of this decision, I assume that the terms have equivalent meanings. [^2]: There are also claims for ancillary amounts, which Greenpath, East Sovereign and Wyatt have not disputed. [^3]: That is because the Notice of Sale claims additional interest for the month of January 2021. [^4]: Piesok v. Johnson, 2010 ONSC 1284 and Piesok v. Chessell, 2016 ONSC 1647, [^5]: Citing his previous decision in NRD Management Services Ltd. v. Dorothy Litwin, 2021 ONSC 3238, 155 O.R. (3d) 729.