REASONS FOR JUDGMENT

SUGUNASIRI, J.:

Overview:

[1] Yama Ahmaddi is the owner of 202 Dinnick Crescent in Toronto. Ho Lim Mak secured a loan to Ahmaddi with a second mortgage (“Lim mortgage”). The second mortgage matured in October of 2020 but was not paid in full nor renewed. In January of 2021 Ahmaddi discharged the Lim mortgage to facilitate a new lending transaction even though the discharge statement included default charges which Ahmaddi believes are contrary to section 8 of the Interest Act[^1] and outside the terms of the Lim mortgage. Mak purported to charge Ahmaddi $42,000 as a lender fee for his loss of opportunity to lend to another borrower as at the date of maturity. He also increased the interest rate after the maturity date from 12% to 18%. Finally, Mak charged Ahmaddi $2000 per payment for two unilateral payments Mak made to the first mortgagee to keep that mortgage in good standing (“Disputed Charges”). The parties agreed to resolve these Disputed Charges by court proceeding with $42,000 held in Ms. Mehta’s trust account. Ms. Mehta’s only role is as holder of the funds.

[2] The parties agree that the dispute is ripe for summary judgment. I agree. There is no genuine issue requiring trial. The sole issue in the action is whether the Disputed Charges are contrary to the Interest Act and outside the loan agreement. I can decide this on the record before me. I grant judgment in favour of Ahmaddi and order Mak to pay Ahmaddi $53,457.10, with $42,000 coming from Ms. Mehta’s trust account and the balance owing solely from Mr. Mak.

Facts:

[3] The facts are not in dispute. On October 9, 2019 Mak loaned Ahmaddi $600,000 as a second mortgage on 202 Dinnick Crescent in Toronto, pursuant to a Loan Agreement (“Second Mortgage”). The Second Mortgage was payable over a one-year term at a rate of $6000/month. It bears an annual interest rate of 12%. The Mortgage Commitment also stipulated the payment of a Financing Fee to Mak that was deducted from the principal. The Second Mortgage matured on October 31, 2020. At that time Ahmaddi neither repaid it in full nor did he renew.

[4] Instead, Ahmaddi secured a new lender to pay off both the Home Trust and the Second Mortgage and required a discharge statement from Mak. On January 6, 2021 Mak provided a discharge statement (“Discharge Statement”) which included $46,000 of additional charges identified as:

a. A default maturity charge of $42,000;

b. Interest calculated up to the maturity date of 12% and interest thereafter of 18%; and

c. Two default charges of $2000 per payment made on the first mortgage lender fee and levies for Mak’s payments to the first mortgagee.

[5] To facilitate Ahmaddi’s transaction with the new lender, he paid the Disputed Charges. The parties agreed that Ms. Mehta, as Mak’s solicitor, would hold $42,000 in her trust account pending resolution of the issue.

The default maturity charge and interest rate increase upon default violates [section 8](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html) of the [Interest Act](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html)

[6] Mak’s discharge statement refers to a “default maturity charge” that appears nowhere in the Lim Mortgage commitment. Mak attests that what he meant in the Discharge Statement was the charge for a lender and broker fee referenced in the maturity clause:

…if the mortgagor has not paid the principal balance owing together with any interest, or entered into a renewal agreement with the Mortgagee, the mortgage shall bear interest at the rate of eighteen percent (18%) plus any applicable fees including the “lender fee and broker fee” will be charged and add on to the principal until such time the mortgage is paid in full or renewed.

Unfortunately, the Lim Mortgage commitment also does not refer to a lender or broker fee. It refers instead to a $42,000 Financing Fee which Mak attests captures the lender and broker fee referred to in the default maturity clause.

[7] Quite apart from the fact that the Discharge Statement charges Ahmaddi for a fee that is not referenced in the plain wording of the Lim Mortgage Commitment, Ahmaddi argues that it is contrary to section 8 of the Interest Act. Section 8 prohibits a mortgagee from levying a penalty or fine against any arrears in principal or interest which has the effect of increasing the charge on arrears beyond the rate of interest payable on principal money not in arrears. Mak argues that the Financing Fee, which is described as a lender fee in the default maturity clause, is not a penalty imposed upon default but rather an increase triggered by the mere passage of time, as accepted by the Supreme Court of Canada in Krayzel Corp. v. Equitable Trust Co.[^2] Alternatively, he attests that the Financing Fee has nothing to do with interest charges but was instead commission payable to him as a fee for lending in the first place.

[8] I agree with Ahmaddi and find that the requirement to pay $42,000 in the event of failure to pay the principal in full, or renew, amounts to a penalty that has the effect of increasing the charge on arrears beyond the interest rate payable on principal money not in arrears. A charge constitutes a penalty whenever it is imposed as a form of punishment for the breach.[^3] Mak admits in his affidavit that the default maturity charge is a penalty to compensate himself for foregoing earning the same financing fee by lending the funds out again. The payment of the Financing Fee for failing to pay in full or renew is nothing like the clause analyzed by the court in Krayzel where the applicable interest rate changed within the life of the mortgage and was not triggered by a default. Rather, the default maturity clause in this case is the prohibited type described by the Ontario Court of Appeal in P.A.R.C.E.L. Inc. et al. v Acquaviva et al. In that case the court considered whether late payment charges and default fees contravened section 8 of the Interest Act and concluded:

In the absence of evidence that the charges in question reflect real costs legitimately incurred by the respondents for the recovery of the debt, in the form of actual administrative costs or otherwise, the only reason for the charges was to impose an additional penalty or fine, apart from the interest payable under the Mortgage, thereby increasing the burden on the appellants beyond the rate of interest agreed upon in the Mortgage. The courts have not hesitated to disallow similar charges on the basis that they offend s.8 of the Interest Act…[^4]

[9] Similarly, the increase of the applicable interest rate from 12% to 18% in the event of a failure to pay the principal upon maturity, or renew, is precisely the type of increase that section 8 prohibits. It is a rate of interest imposed at default that has the effect of increasing the charge on arrears beyond the rate of interest payable on principal money not in arrears.

[10] On this basis, Ahmaddi is entitled to an interest refund of $7,457.10, as calculated at paragraphs 55-57 of his factum, and payment of $42,000.

There is no basis to charge $2000 per payment towards the Home Trust mortgage

[11] It is trite to say that a mortgagee cannot simply add on charges that are not contracted for or set by legislation. In this case, Mak purports to charge Ahmaddi for two payments that he chose to make towards the Home Trust mortgage. There is no provision in the Second Mortgage allowing for such a charge. The Second Mortgage Commitment provides for an administration charge of $2000 for each Notice of Sale under Mortgage received by the Mortgagee from any party whose encumbrance is in priority. Mak can also levy a $2000 administrative charge should he or his solicitor be required to send Ahmaddi a default letter as to a dishonoured cheque, late payment or default of any other term. Mak never sent a default letter nor received a Notice of Sale from Home Trust.

[12] Ahmaddi is entitled to payment of $4,000 from Mak for charges levied without justification.

Costs:

[13] Counsel provided his Bill of Costs seeking $8,327.35 in partial indemnity costs. There was no real opposition from the Defendants to this amount. I find the request eminently reasonable.

Disposition:

[14] Ahmaddi overpaid a total of $53,457.10 and is entitled to judgment against Mak in that amount plus pre-judgment interest and costs of $8,327.35. I also order Ms. Mehta to satisfy $42,000 of the judgment from the funds she is holding in trust. All funds shall be paid within 30 days of today’s date.

Justice P.T. Sugunasiri

Released: February 2, 2022

COURT FILE NO.: CV-21-655108

DATE: 20220202

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Yama Ahmaddi

Plaintiff

– and –

Ho Lim Mak and Anne Mehta

Defendants

REASONS FOR JUDGMENT

Justice P.T. Sugunasiri

Released: 20220202

[^1] Interest Act, RSC 1985, c.I-15, section 8.

[^2] Krayzel Corp. v Equitable Trust Co., 2016 SCC 18, [2016] 1 SCR 273 at para. 3.

[^3] Mastercraft Properties Ltd. et al. V. EI Ef Investments Inc. et al. (1993), 1993 CanLII 8545 (ON CA), 14 OR (3d) 519 (CA).

[^4] P.A.R.C.E.L. Inc. et al. v. Acquaviva et al., 2015 ONCA 331, 126 OR 3d 108 at para. 96.

Ahmaddi v. Mak et al., 2022 ONSC 752

Case Summary

REASONS FOR JUDGMENT

Overview:

Facts:

The default maturity charge and interest rate increase upon default violates [section 8](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html) of the [Interest Act](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html)

There is no basis to charge $2000 per payment towards the Home Trust mortgage

Costs:

Disposition:

Judge

Counsel

Parties

Areas of Law

Fact Patterns

Financial Outcomes

Issues

Statutory Provisions 1

Legislation 1