
Legal Blog
Overreach
When a lawyer acts for a mortgagee who is attempting to recover the money due under the mortgage, the lawyer reviews the mortgage and then claims the amounts due in accordance with its terms. However just because the mortgage calls for a particular rate of interest or amounts due on the happening of a particular event, are these terms enforceable? As usual, it all depends. In that regard, we note the decision of the Ontario Court of Appeal in P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331.
Security
A mortgagee loaned money to a mortgagor. As security for the loan, the mortgagor executed a note and granted a mortgage against the mortgagor’s lands. The mortgage did not refer to the note, but the note referred to the mortgage. It was common ground that the note and mortgage secured the same loan.
The mortgage was not exceptional – other than some terms that we will discuss later. It referenced monthly payments, an interest rate of 0.75% per year, and a due date. The note, however, stated that,
“The Principal Amount outstanding at any time, and from time to time, when not in default, shall bear interest at 0.75% per annum. In the event of default mentioned herein by the Borrowers, [sic] then the interest rate applicable shall be calculated at the rate of 10% per annum after demand, default and pre and post judgment.”
We often see a mortgage referencing and incorporating the terms of a promissory note. However, this transaction was unusual. We initially thought that the mortgagee in this transaction might have been sloppy, but then realised that it was more likely that the mortgagee knew exactly what it was attempting to accomplish – using the back door to circumvent the Interest Act (Canada).
Attack
Section 8(1) of the Interest Act provides:
“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 property 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.”
The mortgagor argued that the interest clause in the note violated the Act. The mortgagee argued that the Act referred to “interest secured by mortgage” and that the clause in the note was therefore enforceable. After all, that impugned interest clause was not incorporated into the mortgage. It seemed that the mortgagee was quite content to obtain a personal judgment against the mortgagor for the extra interest and leave the mortgage to secure the lesser sum of interest. To put matters into context, the difference between the two interest provisions was about $50,000 and was rising each day.
Single Loan
The motions judge held in favour of the mortgagee – mostly because the mortgagor did not argue the provisions of the Act at the motion. It raised the Act only on appeal.
The question before the Court of Appeal was whether the Act “applies to the single loan secured by both the Note and the Mortgage, where the terms of the Note provide for escalated interest on default but where the Mortgage, which admittedly secures the Note, contains no such provision.”
The Court concluded that “the arrears of principal and interest in question are ‘secured by [a] mortgage on real property’ and that s. 8 of the Interest Act therefore applies to the debt instruments entered into by the parties, including the Note.” The Court therefore concluded that the interest escalation clause was ineffective.
The Court gave a number of reasons for its decision.
1. S. 8 was enacted to protect property owners against abusive lending practises.
2. The mortgage and note secured payment of the principal liability, a single loan.
3. S. 8 does not stipulate that the prohibited interest rate be imposed under the terms of the mortgage instrument itself; it refers only to a rate, which could be imposed elsewhere, that is secured by a mortgage.
4. The proposition that the mortgagee asserted “is contrary to common sense and, if accepted, would result in commercial uncertainty, as well as fundamental unfairness to the appellants.” The commercial uncertainty that the Court referenced was the spectre of two different interest rates applying to the same loan.
3 months’ interest
The mortgagee claimed for three months’ interest in accordance with section 17 of the Mortgages Act. That claim was not unusual. However, it claimed that interest at the 10% rate set out in the note rather than the 0.75% rate set out in the mortgage. Very confusing logic. The Court, consistent with its previous ruling, held that the appropriate rate was 0.75% and therefore reduced the claimed amount of $9,965.00 to $747.38.
Further Clauses
The mortgage was not completely benign. It contained three additional clauses, not mentioned in the note. Under them, the mortgagor was to pay:
1. $300.00 for each payment returned NSF as an administrative fee.
2. Another $300.00 for each payment missed or late.
3. A late charge of $10.00 per day if mortgage payments were received later than the dates specified.
These charges seemed to overlap, but the mortgagee was pleased to claim payments for each one as if the others did not exist. It claimed, and the motions judge awarded, $11,110 for late payment charges and $7,200 for the default fees. The only reason why it did not claim for NSF charges was because the mortgagor did not bounce cheques; it just did not pay the amounts due.
The Court had no problem, and wasted little space, throwing out these claims. All of them ran afoul of s.8 of the Interest Act. They constituted fines or penalties. As to a claim that these were administrative fees, the Court noted there was:
“no evidence on the record before this court demonstrating that they incurred any actual losses as a result of late or missed payments under the Mortgage, apart from the amount of the non-payment itself. This is not a case where it is alleged that payments made by or on behalf of Parcel under the Mortgage were returned “NSF” or otherwise rejected for payment, giving rise to administrative costs for the respondents.”
Costs
The motion judge allowed the mortgagee $56,000 for costs. The mortgagor wanted that amended because the Court of Appeal had reduced or eliminated many of the motions judge’s awards. The Court refused to do so. After all, the mortgagor had still defaulted under the principal and the mortgagee was still entitled to its costs.
The costs of the appeal were a different matter. The mortgagor was totally successful on the issues litigated in the appeal. The Court awarded the mortgagor $25,000 all in, relating to the appeal and, we gather, two pre-appeal motions.
Moral for Lawyers
We do not often see interest escalation clauses. However, penalty clauses for late or NSF cheques are not unusual. What should a mortgagor’s lawyer do when penalties are included in a mortgagee’s payout statement? Certainly, a lawyer must raise the issue that the penalties are improper. If the mortgagee insists and states, with or without justification, that it will not discharge the mortgage without payment of them, there may be no choice but to pay the penalties and attempt to recoup them after the transaction is completed. However, lawyers should obtain written instructions in advance to protect themselves.
Image courtesy of 401(K) 2012 Flikr, Creative Commons.
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Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices. |