Executive Summary: Key Legal and Evidentiary Issues

• Central issue involved whether a first mortgagee could lawfully charge an extra three months’ interest under section 17 of the Mortgages Act.

• Court examined the interaction between section 17 of the Mortgages Act and the penalty prohibition under section 8 of the Interest Act.

• Determined that the extra interest constituted an impermissible penalty not supported by either the statute or the mortgage agreement.

• Found that the second mortgagees had legal standing to challenge the charge despite delay and discharge of their mortgage.

• Ordered repayment of $65,625.00 to the applicants with prejudgment interest from the closing date of the property sale.

• Costs awarded partly on a substantial indemnity basis under Rule 49.10(1), recognizing a better-than-offer result by the applicants.

Facts and background of the dispute

The applicants, including second mortgagee David Rout, challenged an additional interest charge imposed by the first mortgagee, Firm Capital Mortgage Fund Inc., upon the sale of a mortgaged property. The dispute centered on whether Firm Capital was entitled to charge an extra three months' interest under section 17 of the Mortgages Act in circumstances where the mortgagor had defaulted both prior to and at maturity, and where the property was sold by agreement rather than under power of sale.

Firm Capital had issued a notice of sale after the default, but the parties ultimately agreed to a consensual sale of the property. Despite the consensual nature of the sale, Firm Capital withheld $65,625.00 from the sale proceeds, citing entitlement to the extra interest. The second mortgagees, having discharged their mortgage to allow the sale to proceed, applied to the court seeking return of the funds, arguing that the charge violated both statutory provisions and the terms of the mortgage.

Court’s reasoning and legal findings

The Ontario Superior Court of Justice, in a decision released on September 17, 2024, found in favour of the applicants. Justice Stevenson held that the extra charge was not permissible under section 17 of the Mortgages Act, as the sale was not conducted under a power of sale. Moreover, the charge functioned as a penalty, which is expressly prohibited by section 8 of the Interest Act. The court emphasized that such penalties cannot be enforced even if framed as interest charges.

Justice Stevenson also confirmed that the second mortgagees had standing to challenge the deduction despite their delay in bringing the application and the earlier discharge of their mortgage. The court concluded that the funds were wrongly withheld and ordered Firm Capital to pay $65,625.00 to the applicants, along with prejudgment interest calculated from the date of the property’s sale closing.

Costs decision and final outcome

Following the main ruling, the parties submitted written arguments on costs. The applicants requested costs based on both partial and substantial indemnity rates, citing a Rule 49 offer to settle made shortly before the hearing. The offer had proposed resolution for $58,000.00, which the applicants ultimately exceeded by obtaining $65,625.00.

The court agreed that the applicants had done better than their offer and awarded $15,508.87 on a substantial indemnity basis for the period following the offer. However, the court reduced the earlier portion of the claimed costs due to excessive preparation time and the pursuit of initially overbroad claims that were later abandoned. As a result, the applicants were awarded $10,011.03 on a partial indemnity basis for the pre-offer period.

In total, the respondent was ordered to pay $36,000.00 in costs to the applicants. Justice Stevenson concluded by noting the delay in delivering the costs decision was due to the court not being notified that the parties’ submissions had been posted.