Late mortgage payment charges contrary to Interest Act

Bob Aaron in Legal

Editor's Note: This article was first published on Feb 1 2016.

Home Gavel Graphic

A decision of the Ontario Court of Appeal has ruled that late payment charges and default fees set out in a mortgage are unenforceable and contrary to the Interest Act.

The case arose in 2011 when Bijan Pardis and two of his companies signed a promissory note and a mortgage on a property he owned on Langstaff Rd. E. in Markham in favour of Sam Acquaviva and Premier Homes Realty Ltd.

The property itself was used as an addiction treatment centre by Pardis, who is a medical doctor and land developer.

Both the promissory note and the mortgage secured a single debt in the amount of $458,488.07, repayable over a six-year term. Under the terms of the mortgage, interest was set at the rate of 0.75 per cent annually. The note, but not the mortgage, also provided that in the event of any default in monthly payments, the interest rate on the debt would increase to 10 per cent per year.

The mortgage entitled the lender to an administrative fee of $300 for every payment which was missed, late or returned due to insufficient funds. As well, any late payments under the mortgage would attract a penalty at the rate of $10 daily.

In early 2012, the borrowers stopped making payments on the debt. In response, the lenders issued a notice of sale and also sued for the amounts owing. They also claimed $300 for each late payment, and interest at the rate of 10 per cent based on the escalation clause in the promissory note.

Interest arrears calculated by the lenders at the 10-per-cent rate totalled more than $57,000. A total of 24 late payment charges at $300 each came to $7,200 and default fees at $10 a day amounted to $11,110. At the first court hearing, the judge accepted the lender’s calculations and granted judgment in the amount claimed, plus $55,600 in costs.

Through his lawyer, Howard Crosner, Pardis and his companies appealed to a three-judge panel of the Court of Appeal in late 2014. In its decision handed down last year, the court applied a section of the federal Interest Act which prohibits any fine, penalty or an interest rate in a mortgage that has the effect of increasing the charge on arrears higher than the mortgage rate which would apply if the borrower was in good standing.

The appeal court referred to an earlier British Columbia court decision which states that the Interest Act is intended to “protect property owners against abusive lending practices, while recognizing that generally speaking parties are entitled to freedom of contract … The prohibition against extra charges on arrears remains in place for loans secured by a mortgage.”

In the end, the appeal court ruled that the only interest rate which applied to the debt was the agreed 0.75 per cent interest rate.

The court of appeal also struck down the $11,110 late payment charges and the $7,200 default fees on the basis that they also constituted a prohibited fine or penalty within the meaning of the Interest Act.

The borrower was awarded $25,000 in court costs against the lender.

Similar penalty provisions often appear in many residential first and second mortgages with private lenders and smaller lenders other than the country’s largest banks and trust companies. This decision of Ontario’s highest court makes it clear that, unless mortgage penalties directly relate to actual costs incurred by a lender, such as an NSF bank charge, the borrower is not required to pay them. The borrower, of course, still has to pay interest at the lower rate.

Bob Aaron is Toronto real estate lawyer. His Title Page column appears on this blog, Move Smartly, and in The Toronto Star. You can follow Bob on Twitter @bobaaron2 and at his website Email Bob

Legal     |    

Toronto’s most authoritative real estate insights, delivered right to your inbox.