Mortgage Enforcement: Issues for Discussion
Common issues expected to arise and confront legal counsels in mortgage enforcement practice, whether from the mortgagor’s perspective or from the lender’s perspective are under discussion here. Divided into ten sections, each of which addresses a discrete point, the purpose is to assist counsels in identifying the relevant issues, the common problems, and the usual solutions.
Entitlement to 3-Months Interest
According to Section 17(1) of the Mortgages Act:
“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.”
There is a great deal of case law on this issue. Having regard to that and the inconsistencies in the jurisprudence, it is not uncommon that counsels are often unsure of their client’s right to bonus interest. In such matters, the leading precedents are Mastercraft Properties v. El Ef Investments  and O’Shanter Development Co. v. Gentra Canada Investments Inc. . Considered together, it would be seen that Mastercraft and O’Shanter incorporate the following principles:
1. Section 17 is a part of every mortgage in Ontario;
2. Section 17 (and contractual terms of similar effect) are not in contradiction to section 8 of the Interest Act; and
3. A lender has a claim on the bonus after maturity.
Quite a vexatious issue in respect of the entitlement to bonus interest is whether or not a lender remains entitled to the bonus even after commencing enforcement steps, such as delivery of a notice of sale or issuing a statement of claim. Justice Saunders’ views in the matter given in O’Shanter are that a borrower ought not to be able to avoid the covenant to pay three-months interest by purposefully defaulting and forcing the lender to enforce the charge. He observed as follows:
“If the submission of O’Shanter were to be accepted, a mortgagor with the same terms could avoid the prepayment amount simply by allowing the mortgage to go into default and forcing the mortgagee to take steps to realize on the security. Equity will on occasion relieve a mortgagor of the rigorous terms of a mortgage document, but that, in my opinion, is not the case here. A mortgagor should fulfill his proper contractual obligation as a condition of redemption.”
The debate on a lender’s entitlement to bonus after commencing enforcement did not end with O’Shanter. In Ialongo v. Serm, Justice Brown ruled that after enforcement had begun, a lender could not rely on Section 17 to claim the bonus. He added that a lender may only claim the bonus payment after enforcement if the mortgage contract provides for the bonus. In Ialongo, since the bonus was disallowed, it could be concluded that the mortgage contract did not provide for the payment of the bonus.
The day after Ialongo verdict was released, a seemingly contrary decision was given in Ontario Inc. v. Canada Trust Co. where the three month interest payment was awarded after enforcement proceedings had begun. There are two recent decisions laying stress on this aspect. In Irwin Mintz in Trust v. Mademont Yonge Inc., Justice Pepall observed that the lender was entitled to bonus payment after maturity. Likewise, in Piesok v. Johnson, it was ruled that a lender was entitled to recover the three-months interest from a mortgagor. As a matter of interest, the property was sold under power of sale and the lender was seeking a judgment for the deficiency, including three-months interest. The Court upheld the lender’s right to the bonus.
Mortgagor’s Rights to Redeem or Bring Current
The mortgagor’s right to redeem in a power of sale transaction is given in Section 22 of the Mortgages Act:
“22. (1)Despite any agreement to the contrary, where default has occurred in making any payment of principal or interest due under a mortgage or in the observance of any covenant in a mortgage and under the terms of the mortgage, by reason of such default, the whole principal and interest secured thereby has become due and payable,
(a) at any time before sale under the mortgage; or
(b) before the commencement of an action for the enforcement of the rights of the mortgagee or of any person claiming through or under the mortgagee, the mortgagor may perform such covenant or pay the amount due under the mortgage, exclusive of the money not payable by reason merely of lapse of time, and pay any expenses necessarily incurred by the mortgagee, and thereupon the mortgagor is relieved from the consequences of such default.”
In Logozzo v. Toronto-Dominion Bank, the Court of Appeal ruled that a mortgagor’s right to redeem ends when the mortgagee enters into an unconditional agreement of purchase and sale in respect of the property. Quite relevant to this matter is Girard v. MCAP Service Corporation, where Justice Corbett maintained:
“The right of a mortgagor to put a mortgage into good standing ends upon the acceptance of a valid offer to purchase made in good faith and in the absence of fraud.”