Executive Summary: Key Legal and Evidentiary Issues

• This motion asked whether a lawsuit could proceed despite a standstill agreement that barred enforcement action without the first mortgagee's consent.
   
• Interpretation of section 7.1(d) of the Standstill Agreement, and in particular the meaning of "Charged Property" and "any action," was central to the dispute.
   
• Contractual interpretation principles from Sattva Capital Corp. v. Creston Moly Corp. guided the court's analysis of the factual matrix surrounding the agreement.
   
• Whether the plaintiffs' claim to enforce a vendor-take-back mortgage amounted to an indirect attempt to realize on the defendants' charged property was disputed.
   
• The court also considered whether a default judgment obtained by the plaintiffs should be set aside under the test in Mountain View Farms Ltd. v. McQueen.
   
• Evidentiary considerations included a General Security Agreement between the first mortgagee and the defendants, and the plaintiffs' post-claim correspondence with that lender.
   

Facts of the case

In 2022, the plaintiffs, 2637897 Ontario Limited and Pinti Enterprises Limited, sold a property at 1802 Bayview Avenue in Toronto to the defendants, Toronto (Bayview Car Wash) LP and Toronto (Bayview Car Wash) GP Inc, two single-purpose entities created to acquire and develop the property. The Agreement of Purchase and Sale provided for $27,000,000 in cash and $8,000,000 by way of a vendor-take-back ("VTB") mortgage. As part of the deal, the plaintiffs agreed that the VTB would be fully postponed and subordinated to any land financing the defendants arranged, and that they would enter into any subordination and standstill agreement required by such a lender. The defendants obtained a first mortgage of $27,000,000 from Canadian Mortgage Servicing Corporation ("CMSC"), and the VTB mortgage stood as a second mortgage behind it. On July 31, 2023, the plaintiffs, defendants, and CMSC entered into a Postponement and Standstill Agreement (the "Standstill Agreement"). In early 2025, the defendants stopped paying interest owed under the VTB mortgage. On May 23, 2025, without seeking CMSC's consent, the plaintiffs commenced an action seeking judgment against the defendants for $8,078,143.84, representing principal and interest to that date plus costs. The defendants objected, citing the Standstill Agreement, but did not immediately move to stay the action. The plaintiffs then noted the defendants in default and obtained default judgment, and subsequently sought to examine the defendants in aid of execution. This prompted the defendants' motion to stay the action and set aside the default judgment.

Policy and legislative provisions at issue

The dispute turned on section 7.1(d) of the Standstill Agreement, in which the plaintiffs, defined as the "Subordinate Mortgagee," agreed that they would not take or authorize any action by way of suit, power of sale, foreclosure, summary proceedings, or otherwise, or exercise any rights or remedies under the subordinate mortgage security "or otherwise for the purpose of directly or indirectly, realizing on any of the Charged Property," without CMSC's prior written consent. "Charged Property" was defined broadly to include the lands, related leases, rents, revenues, and personal property of the defendants, along with associated rights and proceeds. The original purchase agreement also contained a relevant term, providing that the VTB "shall be fully postponed and subordinated to any land financing arranged by the Buyer from time to time," with the plaintiffs agreeing to enter into any required standstill agreement. The court also relied on section 106 of the Courts of Justice Act and Rule 21.01(3)(d) of the Rules of Civil Procedure, which permit a stay or dismissal of an action found to be frivolous, vexatious, or an abuse of process.

Reasoning and analysis

Justice Schabas applied the contractual interpretation framework set out in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, which directs courts to determine the objective meaning of the words chosen, read in context and in light of the contract as a whole, while considering the factual matrix without letting it overwhelm the text. The court also referred to Prism Resources Inc. v. Detour Gold Corporation, 2022 ONCA 326, on the limited role of post-contract conduct, and to Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, on the importance of commercial reasonableness. Reading section 7.1(d) broadly, the court found that its wording — prohibiting "any action" and the exercise of "any rights or remedies," "directly or indirectly" — barred the plaintiffs from suing on the VTB mortgage without CMSC's consent, even though the claim sought a personal judgment rather than direct enforcement against the mortgaged property. The court drew an analogy to Cerieco Canada Corp. v. Mizrahi, 2022 ONSC 6211, where a similarly broad standstill clause was held to capture an oppression remedy claim. The factual matrix reinforced this reading: the purchase agreement anticipated subordination to future land financing, and a General Security Agreement between CMSC and the defendants pledged all of the defendants' assets, including money, leaving no funds available to the plaintiffs without CMSC's consent. The court also noted that after commencing the action, the plaintiffs had written to CMSC acknowledging the Standstill Agreement and seeking consent to sell the property under power of sale, which was not granted — conduct the court found consistent with the defendants' interpretation. On the motion to set aside the default judgment, the court applied the factors from Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, including promptness, a plausible excuse for default, an arguable defence on the merits, prejudice to the parties, and the effect on the integrity of the administration of justice. The defendants satisfied the promptness and excuse factors but could not show an arguable defence, having admitted their default on the VTB mortgage and relying solely on the plaintiffs' lack of standing to sue under the Standstill Agreement.

Ruling and overall outcome

The court found that a stay was the appropriate remedy and ordered that the action, including any steps to enforce the existing judgment, be stayed. On the second issue, the court declined to set aside the noting in default and the default judgment, reasoning that the stay left the defendants with little prejudice since the judgment could not be enforced, and that the defendants had no defence on the merits given their acknowledged default. The defendants were found to have been largely successful on the motion, having achieved their main objective of a stay, and were awarded costs. Both parties agreed that costs should follow the event on a partial indemnity scale, and that the amount sought by the defendants, approximately $18,000, was fair and reasonable. The court accordingly ordered the plaintiffs to pay the defendants costs of the motion in the amount of $18,000.00.