Legal Blog

Interest Bonus

Most charge terms contain a provision that, upon default of the payment of principal, a mortgagee is entitled to demand that the mortgagor pay an additional 3 months’ interest. When the standard charge terms are silent as to a bonus, mortgagees can rely on section 17(1) of the Mortgages Act. Or can they? That was the issue in 2468390 Ontario Inc. v. 5F Investment Group Inc., a 2017 decision of the Ontario Superior Court of Justice. A mortgagor failed to pay principal after maturity. The mortgagee issued a notice of sale, claiming principal and interest plus an additional 3 months’ interest as bonus. The mortgagee had to rely upon section 17(1) of the Mortgages Act because the mortgage documents made no provision for this bonus.

The Act

In its own convoluted way, using a 255 word sentence, section 17 (1) states the following:

“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 property, 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.”

The judge held that section 17 gives a mortgagor an option to pay 3 months’ interest or to give 3 months’ notice of its request to pay arrears of principal. It does not give a mortgagee the right to make that decision. Once the mortgagee issued a notice of sale, the mortgagor had a right to pay the appropriate amount to redeem the mortgage without the bonus.

This decision would have been different had the mortgage documents required payment of 3 months’ interest.

Image courtesy of DodgertonSkillhause.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.