Executive Summary: Key Legal and Evidentiary Issues

• Validity of Owemanco’s unilateral “automatic renewal” of the mortgage loan and the enforceability of the associated 2% renewal fee under the Commitment Letter.
• Characterisation of the renewal fee and related charges as either a genuine renewal term or a disguised penalty contrary to s. 8(1) of the federal Interest Act.
• Timing and communication requirements for the lender’s exercise of the unilateral renewal right in s. 5 of the March 22, 2024 Commitment Letter.
• Applicability of s. 17 of the Ontario Mortgages Act (three months’ interest on discharge) where the mortgagee is actively enforcing its security through receivership proceedings.
• Recoverability of legal fees and additional interest exacted as a precondition to mortgage discharge when those fees are tied to an invalid renewal and enforcement steps.
• Allocation of costs between the earlier receivership/injunction segment and the later accounting/refund application, including which party is entitled to costs for each segment.

Background and loan transaction
The dispute arises out of a $5 million mortgage loan advanced by Owemanco Mortgage Holding Corporation to Med Group Ontario Inc., 2713339 Ontario Inc., Ricardo Agraso and Ann Antonia Agraso. The loan was governed by a March 22, 2024 Commitment Letter and was secured by mortgages over the applicants’ properties. The loan matured on May 1, 2025 and was not repaid on the balance due date. Negotiations in May 2025 about a consensual extension to September 1, 2025 failed, leaving the loan in default and the lender in a position to decide between enforcement or some form of renewal. The Commitment Letter contained a key provision in s. 5 (the “Term” clause) that granted Owemanco a unilateral right, at its “sole and absolute discretion”, to treat the loan as renewed for an additional year if the borrowers failed to repay at maturity and did not accept a renewal offer. Under this clause, a renewal would carry an interest rate equal to the original rate and a renewal fee equal to 2% of the outstanding loan balance, plus legal fees, disbursements and HST, with the renewal fee deemed fully earned and due on the first day of the month following the balance due date.

Automatic renewal clause and disputed charges
After the loan remained unpaid at maturity and no consensual extension was agreed, Owemanco purported to exercise the unilateral automatic renewal provision on June 3, 2025. It demanded a renewal fee of $105,900, said to have been due as of June 1, 2025, together with interest on that amount. In addition, a formal demand for the full secured indebtedness and a s. 244 Bankruptcy and Insolvency Act notice of intention to enforce security were served on June 9, 2025, and a receivership application was commenced in July 2025 seeking the court appointment of a receiver with authority to market and sell the mortgaged properties. On September 3, 2025, the borrowers repaid the loan in full on the eve of the receivership hearing and obtained a discharge of the mortgages. To achieve that discharge, they were required to pay several disputed items: one month’s interest of $46,666.67, seven days’ additional interest of $10,739.73, the $105,900 renewal fee, $988.40 interest on the renewal fee, and legal fees totalling $69,198.20. They subsequently brought this application seeking an accounting and a refund of those amounts, arguing that the automatic renewal was invalid or, alternatively, that the associated charges were unenforceable penalties.

Interpretation of the term and renewal clause
A central issue was the proper interpretation and enforceability of s. 5 of the Commitment Letter. That clause provided that if the borrower failed to repay at maturity and failed to accept any renewal offer, Owemanco could, in its discretion, treat the loan as renewed for a further year at the same interest rate and on payment of a 2% renewal fee plus legal costs and taxes, with the fee due on the first day of the month immediately following the balance due date. The court held that there were only two realistic ways to read s. 5, and under neither interpretation could Owemanco’s June 3, 2025 “automatic renewal” and the resulting charges stand. For the clause to function as a genuine renewal provision and not simply as a mechanism to impose a penalty for default, several implied terms had to be read into it. First, the lender’s decision to renew had to be communicated to the borrower, because the borrower’s payment obligations under the renewed arrangement were triggered by that decision. Second, the effect of a valid renewal would be that the loan is actually renewed and brought into good standing for the renewed term, at least as to scheduled payments, which necessarily implies that any prior payment default is cured and any enforcement proceedings premised on that default must be discontinued. Third, the renewal decision had to be exercised and communicated before the borrower’s renewed obligations first fell due (in this case, by June 1, 2025) and within a reasonable time before that date so as not to impose retroactive obligations that the borrower had no practical opportunity to meet. Absent these implied terms, the “renewal” would amount to nothing more than an after-the-fact device to levy a fee and additional interest on an already fully due debt, thereby functioning as a penalty.

Application of the Interest Act and finding on renewal
Justice Dunphy concluded that Owemanco’s attempt to exercise the renewal option on June 3, 2025 occurred after its unilateral right to renew had already expired. By that point, any reasonable period in which the lender could decide and communicate renewal prior to the June 1 payment date had passed. As a result, the June 3 notice could not effect a valid renewal under s. 5 of the Commitment Letter. Even considered alternatively, if the notice were treated merely as adding the renewal fee and associated interest to the existing debt without any real renewal of the loan, the court held that such an arrangement would offend s. 8(1) of the federal Interest Act, which prohibits fines, penalties or higher rates of interest imposed on arrears. On either analysis, the “automatic renewal” failed: it was either untimely and incapable of putting the loan back into good standing, or it was a legal fiction designed only to justify extra charges on a defaulted loan. Accordingly, the renewal fee of $105,900, the $988.40 interest calculated on that fee, and the additional interest components tied to the supposed renewal were found to be improperly claimed and collected. Because these sums were extracted as a condition of discharging the mortgages, they had to be repaid to the applicants.

Section 17 Mortgages Act claim for three months’ interest
In response to the challenge to the renewal, Owemanco sought to rely on s. 17 of the Ontario Mortgages Act, which in some circumstances permits a mortgagee to require three months’ interest on early payment in lieu of notice. Initially this was advanced only as part of the lender’s argument that its renewal-related charges were not penalties; during oral argument, the position evolved into a stand-alone claim for three months’ interest if the renewal fees were disallowed. The court rejected this attempt on two independent grounds. First, s. 17 does not apply where payment is made in the context of the mortgagee enforcing its security. Here, Owemanco had served a s. 244 BIA notice, issued a receivership application seeking a court-appointed receiver with power to market and sell the properties, and pursued that application up to the eve of the confirmation hearing. These steps were the very definition of enforcement proceedings, and they triggered the debtors’ equitable right to redeem. Second, when the borrowers paid out the mortgage on September 3, 2025, Owemanco did not demand, reserve, or condition discharge upon payment of three months’ interest under s. 17. The statute does not create a free-standing right to retroactively claim that amount after discharge. Having accepted full repayment and discharged its mortgages without asserting a s. 17 entitlement, Owemanco could not later resurrect such a claim once its renewal-based fees were struck down.

Treatment of legal fees and costs framework
The applicants also challenged the legal fees they were required to pay as part of the payout, in the total sum of $69,198.20. These fees were embedded in the amounts demanded to achieve discharge and were tied to the enforcement and renewal steps Owemanco had taken. Since the court found that the automatic renewal had not been validly exercised and that the extra charges premised on it had been improperly exacted, the associated legal fees demanded as part of the same package stood on the same footing. The judge therefore held that all of the disputed payments identified by the applicants, including the legal fees paid to obtain their discharge, had been wrongfully collected and had to be returned. Separately from this refund, the court addressed the broader question of costs for the two related proceedings. At an earlier hearing, Justice Dunphy had ruled that Owemanco would be entitled to its costs of the initial receivership application and of the abandoned emergency injunction the debtors had contemplated during that phase. For the later segment—the present application to determine what amounts, if any, should be returned to the mortgagors—the question of success and costs was taken under reserve. In these reasons, the court determined that the debtors/applicants were substantially successful on the refund application: essentially all of the contested monetary items (other than an unresolved letter of credit replacement issue) were decided in their favour. As a result, they are entitled to their costs for this second segment. However, the court did not fix the dollar amounts of costs for either segment. Instead, it set a timetable for written submissions on scale and quantum of costs, noting only that the $64,198.20 in legal costs paid by the applicants to date would stand to their credit in the eventual costs determination.

Outcome and practical implications
In the result, Justice Dunphy ordered that the full suite of disputed payments made on September 3, 2025 as a condition of discharge—namely $46,666.67 in one month’s interest, $10,739.73 in seven days’ additional interest, the $105,900 renewal fee, $988.40 interest on that fee, and $69,198.20 in legal fees—be repaid to the debtors, for a total refund of approximately $233,493. At the same time, the court confirmed that Owemanco is entitled to its costs of the earlier receivership and injunction segment, while the applicants are entitled to their costs of the subsequent refund application, with the exact monetary amounts of costs for both stages to be set later after written submissions. Overall, the substantially successful parties on the core merits of the accounting and refund proceeding are the applicants, who recover $233,493 in improperly demanded fees and interest, while any additional costs or monetary awards beyond that refund cannot yet be quantified from this decision alone because the court has expressly deferred fixing the amount of costs.