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:	2024/04/03

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.