08 Mar Revise those Mortgage Standard Charge Terms Ontario: 1539339 Ontario Inc. v. First Source
Since the 2015 Court of Appeal decision in Parcel v. Acquaviva, the prevailing view about fees and charges added to a mortgage debt by a lender was that unless the fees were actually incurred by the lender, the fees/charges were not collectible. In Acquaviva, the Court reasoned that if the fee/charge was not incurred by the lender, it was a penalty or fine that had the effect of increasing the mortgage’s rate of interest, which violated s.8 of the Interest Act and were therefore unenforceable, much to the shock and dismay of lenders who rebutted, but they were included in the Mortgage Standard Charge Terms Ontario! It would take the year 2020, and the recent decision of 1539339 Ontario Inc. and First Source Financial Management Inc. to offer lenders new hope.
In 1539339 v. First Source, First Source held a first mortgage, and 1539339 held a second mortgage. The First Source mortgage was in default and 1539339 brought an application to determine the amount necessary to redeem First Sources’ mortgage. There were two issues, in particular, to be determined: (1) the applicable rate of interest, and (2)whether fees and charges totalling $167,265.45 for management costs, holding over fees, late charges, and other small charges were enforceable.
The Rate of Interest:
First Source’s Mortgage Standard Charge Terms Ontario provided that the mortgage term was 18 months plus one day. For the first 18 months, up to August 1, 2019, the rate of interest was 9.25%, thereafter the rate of interest increased to 18%. The mortgage matured on August 2, 2019.
1539339 took the position that the increase in the rate of interest ran afoul of the Interest Act because s.8 prohibits a lender from charging a different rate of interest when the loan is in default than when it is in good standing. 1539339 argued that since the mortgage was not being renewed or paid in full on August 2, it went into default on the same day that the rate increased to 18%, which violated the Interest Act.
Fees And Charges:
With respect to the additional charges claimed by First Source, 1539339 argued that the First Source had failed to demonstrate that the fees/charges were reasonable or actually incurred as required by Parcel and the Interest Act, and the charges were therefore not recoverable.
The Courts Decision:
With respect to the rate of interest, the Court determined that since the increase in the interest rate was triggered by the passage of time and not a default, it did not contravene the Interest Act. In this case, the rate of interest increased on the date of maturity, regardless of whether or not the borrower paid the mortgage, renewed r defaulted. The applicable rate of interest was 18%.
As for the fees and charges, First Source took the position that the fees were recoverable because they were included in the Mortgage Standard Charge Terms Ontario, as a genuine pre-estimate of the value of the services performed for same and is not a penalty or additional interest on the loan secured by the charge. The Mortgage Standard Charge Terms Ontario also contained a provision that the clauses regarding the fees and charges were deemed to be proper notice to subsequent encumbrancers in the event of default by the borrower, as well as a clause confirming that the borrower (i) was aware of the fees/charges, (ii)was aware that such fees/charges would be in addition to the principal and interest due under the mortgage, and (iii) acknowledged that the fees/charges were reasonable, and a reasonable pre-estimate of the lender’s actual costs.
The Court determined that because the fees were contractually described as reasonable pre-estimates of damages and not as penalties, they were collectible. The Court did take exception to the amount of $7,350.00 in Late Charges because Parcel specifically described these as penalties, and there was no evidence to suggest that the lender actually incurred any actual losses because of late payments.
First Source provides direct guidance on the specific language that should be included in Mortgage Standard Charge Terms Ontario if the lender wants to safeguard their ability to recover additional fees/charges. While this may appear to be a departure from Acquaviva, the underlying principle in the two cases remains the same: a borrower should know the total cost of borrowing.
If you have any questions, please feel to reach out to Liliana Ferreira directly at lferreira@fijlaw.com or at 905 763 3770 x 242 for further information.
The material provided in this article is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.
Liliana Ferreira’s practice encompasses commercial and estate litigation. She advises individual and corporate clients on a range of legal issues such as employment and contract disputes, construction matters and debt recovery claims. Prior to joining FIJ Law LLP in 2013, Liliana focused her practice on estate litigation at a boutique firm and gained experience in will challenges, dependant support claims, power of attorney disputes and fiduciary issues. Her unique expertise allows her to take a balanced approach to litigation with a sharp focus on advocacy and dispute resolution while assisting her clients in making informed business decisions.