Mortgage (Penalty)

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Date Retrieved:	2024-04-30
CLNP Page ID:	2367
Page Categories:	Contract Law
Citation:	Mortgage (Penalty), CLNP 2367, <https://rvt.link/bi>, retrieved on 2024-04-30
Editor:	MKent
Last Updated:	2024/04/04

Mortgages Act, RSO 1990, c M.40

Payment of principal upon default

17 (1)  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.

Exception

(2)  If the mortgagor or person entitled to make such payment fails to make the same at the time mentioned in the notice, the mortgagor or person is thereafter entitled to make such payment only on paying the principal money so in arrear and interest thereon to the date of payment together with three months interest in advance.

Saving

(3)  Nothing in this section affects or limits the right of the mortgagee to recover by action or otherwise the principal money so in arrear after default has been made.

Greenpath Capital Partners Inc. v. 1903130 Ontario Ltd., 2024 ONCA 42 (CanLII)

[29] This provision serves a protective purpose: P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331, 126 O.R. (3d) 108, at para. 50, citing Reliant Capital Ltd. v. Silverdale Development Corp., 2006 BCCA 226, 270 D.L.R. (4th) 717, leave to appeal refused, [2006] S.C.C.A. No. 265. As held by the British Columbia Court of Appeal in Reliant Capital, at para. 53, Parliament intended for mortgages on real estate to be treated differently than other loans:

Parliament has singled out mortgages on real estate for special treatment, or at least treatment that differs from loans that are not secured on real property. I infer that at least one legislative purpose was to protect the owners of real estate from interest or other charges that would make it impossible for owners to redeem, or to protect their equity. If an owner were already in default of payment under the interest rate charged on monies not in arrears, a still higher rate, or greater charge on the arrears would render foreclosure all but inevitable.

[30] This passage was endorsed by the Supreme Court in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, [2016] 1 S.C.R. 273, at paras. 20-21.

[31] In P.A.R.C.E.L., at paras. 53-56, Cronk J.A., writing for the court, outlined the criteria to be applied in determining whether an amount constitutes a violation of s. 8. The criteria may be summarized as follows:

1. The covenant in question must impose a “fine”, “penalty” or “rate of interest”. If it does not, then s. 8(1) is not engaged.

2. The “fine”, “penalty” or “rate of interest” must relate to “any arrears of principal or interest secured by mortgage on real property” (emphasis omitted), whether the arrears arose on default occurring before or after maturity of the relevant debt instrument.

3. The covenant must have the prohibited effect of “increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears”.

4. The arrears of principal or interest must be “secured by mortgage on real property”.

Mohtashami v. Letichever, 2009 CanLII 281 (ON SC)

[7] The mortgagee says that when on August 8, 2008, almost three months after the maturity date of the mortgage, the mortgagor requested a statement for discharge purposes as of August 29, 2008, the mortgagor was deemed to be invoking its right under s.17 of the Act to discharge the mortgage “upon paying of three months interest on the principal money so in arrears”… and that the provision in the mortgage document referred to earlier was rendered inoperative by the words at the beginning of s.17 of the Act namely, “Despite any agreement to the contrary”.

[8] I believe that the mortgagee’s position is correct for the following reasons:

(a) The mortgagee’s interpretation of s.17 of the Act is consistent with the views expressed by the court in Mastercraft Properties Ltd. V. EL EF Investments Inc. (1993), 1993 CanLII 8545 (ON CA), 14 O.R. (3d) 519 at para. 21 and 22:

21 By its terms, the provisions of s. 16 are incorporated into every mortgage in Ontario, and overrridge any contrary provision in the mortgage. Section 16 gives a mortgagor a right, when in default of payment of principal, to repay that principal on giving three months’ notice to the mortgagee of his intention to pay, and protects him from any further payment of interest except to the date of payment. Such interest would merely constitute payment for the use of the principal during the notice period. The provision protects the mortgagor by permitting payment of arrears without penalty, or by permitting early redemption at a price. It protects the mortgagee by giving him a three-month period during which to arrange the reinvestment of his principal, or monies to compensate for lack of that notice. The option is that of the mortgagor.

22 Covenants which go beyond what is provided for in s. 16 of the Mortgages Act may well run afoul of s. 8 of the Interest Act. However, that does not affect the constitutional validity of s. 16, or the enforceability of covenants which do not go beyond its provisions. In my view, covenants which provide the protection intended by s. 16 are in harmony rather than in conflict with the provisions of s. 8. Both enactments can stand as constitutionally valid federal and provincial law.

(b) The protection provided by s.17 is not only for the mortgagor. As the court said at paragraph 21:

“… The provision protects the mortgagor by permitting payment of arrears without penalty, or by permitting early redemption at a price. It protects the mortgageee by giving him a three-month period during which to arrange for reinvestment of his principal, or monies to compensate for lack of that notice. The option is that of the mortgagor.”

[9] It can hardly be considered unconscionable for a mortgagee to receive what is somewhat akin to liquidated damages (fixed by statute) for the mortgagor’s breach of its agreement to repay the loan by a certain date.

Mastercraft Properties Ltd. V. EL EF Investments Inc. (1993), 1993 CanLII 8545 (ON CA), 14 O.R. (3d)

By its terms, the provisions of s. 16 are incorporated into every mortgage in Ontario, and override any contrary provision in the mortgage. Section 16 gives a mortgagor a right, when in default of payment of principal, to repay that principal on giving three months' notice to the mortgagee of his intention to pay, and protects him from any further payment of interest except to the date of payment. Such interest would merely constitute payment for the use of the principal during the notice period. The provision protects the mortgagor by permitting payment of arrears without penalty, or by permitting early redemption at a price. It protects the mortgagee by giving him a three-month period during which to arrange for reinvestment of his principal, or monies to compensate for lack of that notice. The option is that of the mortgagor.

Irwin Mintz, in trust v. Mademont Yonge Inc., 2010 ONSC 116 (CanLII)

[9] While one might conclude from a reading of section 17 that it was designed for a default in payment during the currency of a mortgage, in Gullett v. Income Trust Co., the Court of Appeal held that it also applies to a mature mortgage. In addition, in Mastercraft Properties Ltd. et al v. El Ef Investments Inc., the Court of Appeal stated that section 17 is incorporated into every mortgage in Ontario.

[10] The rationale for section 17 was also described by the Court of Appeal in the Mastercraft decision. On the one hand, the section protects the mortgagor by permitting payment of arrears without payment of a penalty. On the other, the section protects the mortgagee by giving it a three month notice period during which to arrange for reinvestment of the principal or money to compensate for lack of notice. The option is that of the mortgagor.

(...)

[18] In the case before me, Mademont did not give three months’ notice. Having failed to do so, Mademont is required to pay an additional three months’ interest. This is in keeping with the legal principles set forth in Gullett, Mastercraft and Ialongo and it is important for there to be consistency in the law. Furthermore, any other result would do violence to section 17 of the Mortgages Act.

Ialongo v. Serm Investments Limited, 2007 CanLII 6242 (ON SC)

[17] The evidence does not support this contention. It is undisputed that the applicants did not pay the respondent the amount required to discharge the Mortgage when it matured on September 3, 2006. On that date the applicants were in default. Although the respondent’s solicitor’s letter of October 24, 2006 advised that “our client has instructed that the extension is provided until November 3, 2006”, that letter must be read in the context of discussions that Mr. Schaffran deposed having with the applicants in September, 2006 about refraining from taking any steps to enforce the Mortgage. Mr. Sullivan, the applicants’ lawyer, in his letter of November 3, 2006 did not contend that the term of the Mortgage had been extended beyond September 3, 2006; he acknowledged that “the extended mortgage matured in September of this year”. Finally, Ms. Ialongo’s affidavit contained no suggestion that the respondent had extended the Mortgage for a term beyond September 3, 2006. On the contrary, her evidence supported the respondent’s position that their conversations were about the respondent forbearing from taking steps to enforce the Mortgage.

(...)

[22] Notwithstanding this rationale put forward in Mastercraft, in its previous decision in Gullett, supra., the Court of Appeal permitted a mortgagee to charge a bonus of three months’ interest where default had occurred on the maturity of the mortgage. In that case the mortgagor did not pay off the mortgage on maturity, but spent several weeks considering the mortgagee’s offer to renew. Having decided to refinance with another lender several weeks after the mortgage had matured, the mortgagor asked for a discharge statement. In it the mortgagee required payment of three months’ interest. The mortgage contained a clause in the language of section 17 of the Mortgages Act. In holding that the mortgagee was within his rights to insist on the payment, Grange, J.A. stated:

It is quite clear that if the mortgagee had done nothing on the date for payment of principal the covenant would have taken effect and three months interest in lieu of notice would be payable if the balance were tendered at any time after November 15 (the maturity date).

[23] More recently in SK Properties & Development Inc. v. Equitable Trust Co., [2003] O.J. No. 2234 (S.C.J.), the Court held that section 17 of the Mortgages Act applied to a default occurring at the time a mortgage matured, and that where a mortgagor failed to pay off the mortgage on its maturity date, the mortgagee was entitled to require the mortgagor to pay three months’ interest to discharge the mortgage.