Executive Summary: Key Legal and Evidentiary Issues

• Significant, deliberate delay in defending the mortgage action and moving to set aside the 2023 default judgment, despite early and clear notice of the claim and judgment.
• Use of a City of Toronto Order to Comply (arising from unpermitted construction) as a strategic “bargaining chip” by the mortgagors, undermining their claim to equitable relief.
• Challenge to the enforceability of interest under section 6 of the Interest Act, based on alleged blended payments and failure to clearly state principal and interest in successive renewal agreements.
• Allegation that the seventh renewal, with stepped interest rates up to 19.99% per annum, was an unconscionable transaction under the Unconscionable Transaction Relief Act.
• Argument that the mortgagee’s discharge statement was inaccurate or inconsistent with the default judgment, invoking section 22 of the Mortgages Act and a potential suspension of enforcement.
• Weighing of the interests of justice between senior, fixed-income mortgagors and institutional mortgagees, with the court ultimately rejecting relief because of intentional default, “gaming the system,” and lack of clean hands.

Background and parties

The case arises from a dispute over a first mortgage on a residential property in Toronto owned by John Kenneth White Shearham and his spouse, Maureen Shearham. The plaintiffs, Northwood (2003) Mortgage Investment Corporation and Malmac Enterprises Inc., are the mortgagees; the defendants, the Shearhams, are retired individuals living on a fixed income and the property was their primary and largest asset. The litigation comes before the Ontario Superior Court of Justice on a motion to set aside a default judgment and related enforcement orders, heard by Associate Justice C. Wiebe.

Mortgage financing and repeated renewals

In February 2017, the Shearhams refinanced their property with the plaintiffs, obtaining a loan of $920,000 for 12 months at 8.5% per annum, with interest-only monthly payments. This loan was secured by a first mortgage registered in the principal amount of $941,000 with a term from May 1, 2017 to April 1, 2018 and an interest rate of 8.5% per annum, payable monthly. Over time, instead of being repaid or refinanced elsewhere, the mortgage was renewed seven times. The renewals were typically sent after the previous term had expired and set out an approximate principal balance at maturity. Each renewal stated that the original mortgage terms and conditions continued to apply, and the renewal periods became progressively shorter. The defendants signed each renewal agreement, continuing the lending relationship well beyond the original one-year term.

The Order to Comply and its impact on refinancing

Independently of the mortgage documentation, a significant municipal compliance problem developed. As a retired builder, Mr. Shearham performed construction work on the home without obtaining a building permit. In March 2018, the City of Toronto issued an Order to Comply requiring cessation of construction and the obtaining of an appropriate permit. The Order remained outstanding for years, and on June 1, 2021 it was registered on title to the property. The defendants did not disclose the Order or its registration to the plaintiffs. In October 2021, when the defendants sought to refinance the mortgage with Home Trust—using Northwood’s assistance as broker—the plaintiffs first learned of the Order to Comply. The proposed refinancing failed. The Order raised serious concern for the plaintiffs because it negatively affected the value and marketability of their security. Although Mr. Shearham promised to rectify the issue and obtain the necessary permit, he did not do so for a long period, and the Order remained registered on title.

The seventh renewal and escalating interest rates

Growing frustrated with the ongoing presence of the Order to Comply and the defendants’ failure to cure it, Northwood issued a seventh renewal offer on December 29, 2022. This renewal was expressly more onerous and was intended to create a financial incentive for the defendants to resolve the compliance issue. The letter, signed by Northwood’s president, set a four-month term with sharply increased interest: 13.99% per annum for the first three months and 19.99% per annum for the final month. In bold type, the letter warned that there would be no further renewal if the work order was not discharged from title. The Shearhams nevertheless accepted and signed this renewal, thereby committing to the higher interest structure. The defendants later attacked the seventh renewal as unconscionable, but at the time they agreed to it and did not contest the terms through litigation.

Default, commencement of the action, and enforcement steps

After the seventh renewal, the relationship deteriorated further. The defendants defaulted on their installment payments and faced issues with unpaid realty taxes, which led a bailiff to become involved. On May 10, 2023, the plaintiffs commenced an action seeking judgment on the mortgage debt and possession of the property. The statement of claim was served on May 12, 2023. A Notice of Sale was issued on May 31, 2023. On June 12, 2023, in response to the defendants’ request, the plaintiffs granted an extension of time to June 21, 2023 to serve a statement of defence. The defendants, however, made a deliberate decision not to defend. Instead, they focused on attempting to refinance the property with other lenders. After waiting roughly three months with no defence filed, the plaintiffs noted the defendants in default and, on October 20, 2023, obtained a default judgment. That judgment ordered payment of $912,780.47 plus $1,195 in costs and granted delivery of possession of the property, with post-judgment interest fixed at 19.99% per annum. The plaintiffs served the default judgment and a notice of possession on November 1, 2023. Despite having clear notice of these powerful remedies, the defendants took no steps at that time to challenge the judgment or seek relief from default.

Refinancing efforts and the discharge statement

From May to September 2023, the defendants obtained several unsigned commitment letters from potential lenders, but none of the proposed refinancing arrangements materialized. The defendants blamed the plaintiffs for allegedly failing to provide timely discharge statements; the plaintiffs, in turn, pointed to the Order to Comply and the resulting title defect as the main impediment. On November 3, 2023, Mr. Shearham finally obtained the building permit that was the subject of the Order to Comply. However, the defendants then strategically chose to keep the Order registered on title, apparently to use it as leverage in negotiations with the plaintiffs about the debt. In January 2024, the defendants retained new counsel, who secured further lender commitment letters, and with Northwood’s assistance, an offer from RFA Bank of Canada. On May 9, 2024, the defendants’ lawyer requested a discharge statement from the plaintiffs. On May 29, 2024, the plaintiffs provided a discharge statement showing principal and interest of $1,083,791.89 as of April 30, 2024, along with a detailed statement of account from January 1, 2021. A settlement offer from the defendants followed on May 31, 2024 but was not accepted, and the alternative financing again failed. No further commitment letters were obtained.

Eviction and possession

In the meantime, the plaintiffs continued with mortgage enforcement. In October 2024, they obtained an occupancy inspection and, on February 27, 2025, secured a writ of possession. The Sheriff executed the writ and evicted the defendants on April 23, 2025, after which the plaintiffs took possession of the property. Upon entry, they found the construction incomplete and discovered that, although a permit had finally been obtained, it remained outstanding and the Order to Comply stayed on title. The plaintiffs allowed the defendants access to remove their belongings, some of which were retrieved on June 30, 2025, while the remainder was stored by the plaintiffs. On July 24, 2025, the plaintiffs obtained an appraisal valuing the property, on an unencumbered basis, at $1.3 million, though that appraisal did not reflect the continuing negative impact of the registered Order to Comply.

The motion to set aside the default judgment

In April 2025, the defendants retained new litigation counsel, who attempted to resolve the matter and, in August 2025, brought the motion that led to this decision. The defendants sought to set aside the October 20, 2023 default judgment, the underlying noting in default, and the writ of possession obtained on February 27, 2025. In the alternative, they sought to limit the plaintiffs’ recovery to the judgment amount and to waive post-judgment interest. The governing test under Rule 19.08 required them to demonstrate: that the motion was brought without delay after they learned of the default judgment; that the circumstances leading to default were adequately explained; and that they had an arguable defence on the merits. The court also had to consider whether the interests of justice favoured setting aside the judgment, weighing prejudice to each side.

Intentional default, delay, and use of the Order to Comply

On the first two elements—delay and explanation—the court found that the defendants had intentionally chosen not to defend the action and to do nothing about the default judgment for almost two years. They opted instead to pursue refinancing and to use the Order to Comply as a bargaining tool. The court emphasized that the Order to Comply was the product of Mr. Shearham’s own conduct: undertaking construction without a permit and failing to comply with the City’s directives for over five years. Even after eventually obtaining the permit, the defendants deliberately left the Order registered on title to pressure the plaintiffs in negotiations. Relying on case law such as Luciano v. Spadafora and Schill & Beninger Plumbing & Heating Ltd. v. Gallagher Estate, the court held that a conscious decision not to participate in litigation can, absent special circumstances, be a complete bar to relief from default. The judge rejected the argument that the 19.99% post-judgment interest rate was such a special circumstance, noting that this rate was agreed to in the seventh renewal, pleaded in the statement of claim, and incorporated in the default judgment which the defendants knowingly chose not to contest.

Arguments on interest, unconscionability, and the discharge statement

Although the finding on delay and intentional default was sufficient to dismiss the motion, the court went on to address the alleged merits. First, the defendants argued that the renewal agreements violated section 6 of the Interest Act because they did not clearly set out principal and interest where payments were blended. They pointed to diminishing balances in successive renewals and claimed that this meant payments were, in fact, blended contrary to the original “interest-only” structure, rendering the interest unenforceable. While the judge accepted that there might be an arguable technical issue concerning how the interest was disclosed and calculated, he emphasized that the principal debt—over $912,000—was not in dispute and constituted by far the largest portion of the judgment. Moreover, the defendants had not clearly articulated the exact amount of interest actually in issue and had declined to provide a full accounting, even when asked on undertakings. In the court’s view, this raised a question of accounting and procedure rather than a substantive defence to the plaintiffs’ right to judgment, and it did not justify reopening the default judgment more than two and a half years later. Second, the defendants claimed the seventh renewal was an unconscionable transaction under the Unconscionable Transaction Relief Act, given the steep interest rates (up to 19.99% per annum) and their alleged lack of choice due to difficulty securing other financing. The court rejected this, finding no inequality of bargaining power in the legal sense. Any pressure the defendants felt stemmed from circumstances of their own making—the long-standing and unresolved Order to Comply, which adversely affected the property and the plaintiffs’ security. The higher interest rates were viewed as a rational response by the plaintiffs to protect their security and to incentivize removal of the Order from title. The defendants willingly signed the seventh renewal and later reinforced that acceptance by failing to defend the action or quickly move against the default judgment. Third, the defendants argued that the May 29, 2024 discharge statement did not align with the default judgment and therefore breached section 22 of the Mortgages Act, which requires timely and accurate discharge statements and suspends enforcement if the mortgagee fails in that obligation. The court observed that the defendants had not actually sought in their notice of motion a formal suspension of enforcement under section 22, and, in any event, the alleged discrepancy was poorly substantiated. The discharge statement showed $1,083,791.89 in principal and interest as of April 30, 2024, and attached a full account history. By contrast, the defendants’ own calculation was only $57,691.41 lower and was unsupported by detailed workings. The judge found no clear evidence of a material inconsistency sufficient to undermine the existing judgment.

Interests of justice and equitable considerations

On the final branch of the test—the interests of justice—the defendants emphasized that they were seniors on fixed incomes, that the property was their longtime home and primary asset, and that the plaintiffs were supposedly fully secured. The court disagreed. The evidence suggested that, even with an appraisal of $1.3 million, the plaintiffs might not actually be fully secured once all debt, interest, charges, and the unresolved Order to Comply were taken into account. The judge stressed that equitable relief is not available to a party who does not come with clean hands. Here, the defendants had engaged in what the court described as dubious conduct: performing construction without a permit, allowing the Order to Comply to remain outstanding and be registered on title, and then treating the resulting title problem as a bargaining chip to pressure the mortgagees. The judge also relied on authority such as Hanratty v. Woods, observing that debtors, like creditors, must respect the litigation process. It is not open to a debtor to ignore a claim, decline to defend, and then later try to “game the system” by seeking relief from judgment only when the consequences (here, eviction and enforcement) become unbearable. In these circumstances, the court held that the interests of justice did not favour setting aside the default judgment or otherwise interfering with the plaintiffs’ enforcement rights.

Costs of the motion

Both sides filed costs outlines. The defendants’ partial indemnity costs were approximately $30,717.17, while the plaintiffs’ partial indemnity figure was $18,712.80, with actual costs somewhat higher. Recognizing that this was not a case warranting substantial indemnity, but that the plaintiffs were nonetheless successful and had engaged in significant work, including cross-examination, the court awarded the plaintiffs a lump sum of $17,000 in partial indemnity costs, payable by the defendants within 60 days. The judge also provided a mechanism for either party to challenge that award through short written submissions, with the warning that if the provisional award were set aside, the ultimate costs order could “go in any direction” and include the added costs of the written submissions process.

Overall outcome and financial consequences

In the final analysis, the court dismissed the defendants’ motion in its entirety, leaving the October 20, 2023 default judgment and subsequent enforcement measures, including the writ of possession and eviction, fully intact. The plaintiffs—Northwood (2003) Mortgage Investment Corporation and Malmac Enterprises Inc.—are thus the successful parties and continue to hold a judgment for $912,780.47 in principal plus $1,195 in judgment costs, with post-judgment interest accruing at 19.99% per annum, together with an additional $17,000 in partial indemnity costs of the motion, for a total fixed monetary award of $930,975.47 in their favour, exclusive of accruing interest and any further enforcement-related charges whose exact amounts cannot be determined from this decision alone.