Can A Mortgagee Receive Accelerated Interest Upon The Repayment Of A Closed Mortgage That Is In Default? – Charges, Mortgages, Indemnities


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Overview

The Court of Appeal for Ontario recently confirmed that there is
no standalone “established common law entitlement”
allowing a mortgagee to claim accelerated interest on a closed
mortgage when the mortgage is discharged prior to its term; rather,
the common law recognizes any entitlement to accelerated interest
on an early repayment that flows from the contract bargained for by
the parties or, if applicable, arising from statutes such as
the Mortgages Act (Ontario).

In First National Financial GP Corporation v. Golden
Dragon Ho 10 Inc.
, Golden Dragon purchased two residential
apartment buildings and assumed three mortgages, all of which were
held by First National (“FN”). The
mortgages permitted prepayment of principal so long as the borrower
was not in default upon payment of an amount equal to the
greater of an interest yield maintenance (in accordance with the
formula provided) or three months’ interest, but were
otherwise “closed mortgages” (i.e., the borrower had no
right to prepay). Golden Dragon subsequently placed a further
mortgage on one of the properties, which was held by Liahona
Mortgage Investment Corp. Following various defaults by Golden
Dragon on both the FN and Liahona mortgages, the Court granted
FN’s application for an interim receiver of the
properties.

FN initially agreed not to oppose Liahona’s motion to
expand the receiver’s mandate to permit it to market and sell
both properties. However, after the receiver secured an offer to
purchase the properties and moved for an order to approve the sale,
FN opposed the sale on the basis that its agreement to support the
sale had been predicated on FN receiving, from the sale proceeds,
payment of accelerated interest to the end of the terms of its
closed mortgages.

The trial judge determined that nothing in the express terms of
the FN mortgages gave FN a right to claim the disputed accelerated
interest in circumstances where Golden Dragon was in default. This
was because the mortgages only provided for accelerated interest in
the case of prepayment. As a result of being in default, Golden
Dragon no longer enjoyed the privilege of prepayment as set out in
the mortgage. However, the trial judge held that FN was entitled to
claim accelerated interest under a common law rule that a mortgagee
is entitled to all accelerated interest owing to the date of
maturity when a closed mortgage is vested off title before the end
of the term. According to the trial judge, the accelerated interest
became due when the FN mortgages were discharged prematurely upon
being vested off title pursuant to the receiver’s
court-supervised sale.

On appeal, the three-judge panel overturned the trial judgment
and confirmed that the trial judge erred in finding a standalone
common law entitlement to accelerated interest, divorced from a
holistic interpretation of the contractual provisions of the
mortgage contract. The Court relied on established case law that,
at common law, there is no right to prepay a mortgage (because the
mortgagee is entitled to repayment of the principal and interest
originally bargained for) unless (i) the mortgage contains a
prepayment clause or (ii) prepayment is a statutory right. Where
there is no contractual prepayment clause, the common law
recognizes that in order to prepay the mortgage and receive a
discharge, the mortgagor must reach an agreement with the mortgagee
to amend the terms of the mortgage and pay whatever penalty is
negotiated. Where there is a contractual prepayment clause, the
common law recognizes such a clause.

The Court of Appeal therefore confirmed that while an individual
borrower has a statutory right pursuant to the Mortgages
Act
 (Ontario) to prepay a mortgage that has a term that
exceeds five years after the expiry of five years, upon payment of
three months’ interest as a bonus, a corporate mortgagor or
an individual within a five-year term seeking an early discharge of
a closed mortgage cannot escape the obligation to amend the
original contract and pay additional consideration (in the form of
accelerated interest or otherwise) unless (i) the mortgagee takes
steps to realize on its security; or (ii) the original contract
specifically provides the mortgagee’s entitlements upon early
discharge in the event of default.

In this case, because the borrower was a corporation, the
provisions of the Mortgages Act  (Ontario) did
not apply. The trial judge was required to carry out the
contractual analysis of the plain language of the FN mortgages to
determine if FN had any entitlement to accelerated interest upon
the early, court-ordered discharge off title of its mortgages due
to Golden Dragon’s default. The FN mortgages provided for
prepayment and an early discharge and set out FN’s
entitlements to accelerated interest in the event that Golden
Dragon was not in default. FN’s contractual entitlement to
accelerated interest was predicated on Golden Dragon not being in
default. Where there was a default, as was the case here, FN was
contractually entitled to payment of the principal amount
outstanding and interest accrued to the date of repayment of
principal, but not to accelerated interest.

FN also argued that although a default had occurred, the
contractual provisions nevertheless continued to apply because FN
had not taken any steps to realize on its security under the
mortgages; it was merely “protecting its security.” FN
relied on the deeming provisions contained in the interim
receivership appointment order, which recognized that the
appointment of the interim receiver for the purpose of collecting
arrears “will not be deemed to be a resort to the
security” triggering the mortgagor’s right to
redeem.

The Court of Appeal rejected that argument, finding that despite
the wording of the Order, FN, by its actions, triggered the
realization. FN sought the initial appointment of the receiver.
Although Liahona initiated the sale process, FN agreed to and
encouraged it. FN even consented to the sale of the second building
(over which Liahona held no security) in order to maximize the
recovery. Accordingly, the Court of Appeal noted that FN’s
suggestion that it intended to maintain its mortgages on title
“was disingenuous.”

Notably, while the Court of Appeal otherwise suggested that it
was the “default” itself that was the triggering event
resulting in its decision not to permit the payment of accelerated
interest, it seems that by considering FN’s argument that it
did not commence steps to realize on the mortgages, the salient
test for denying such acceleration would have been
“realization” and not “default”. Regardless
of this distinction, as the Court ruled as a matter of fact that FN
had commenced the realization of its mortgages, it nevertheless
refused to permit FN to receive accelerated payments.

In light of the appellate ruling in First
National
, mortgagees should be mindful of the impact that the
appointment of a receiver may have on their ability to claim
accelerated interest upon the early discharge of a closed mortgage.
In seeking the appointment of a receiver, the mortgagee may believe
that they are only acting to protect their security.
However, despite language to that effect in a receivership order,
depending on the circumstances, a mortgagee may, nevertheless, be
deemed to have taken steps to realize on its
security.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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