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Jan 30, 2021

THE NEW REALITY: PRIVATE MORTGAGE DEFAULTS - POWER OF SALE & FORECLOSURE - Part XXXVII of a Series – Examining Default Fees and Penalties part 3 of 5

My last 2 posts Part XXXV and XXXVI dealt with the fees, charges and penalties that private mortgagees often add to discharge statements when the mortgage is in default. Many of these after-default fees and charges can be quite costly to a mortgagor/home owner who is already in financial difficulty (what with the mortgage being in default). I’ve seen post-default charges added to mortgage debt exceeding twenty and thirty thousand dollars and more. These same mortgagees are also known to increase the interest rate payable by the mortgagor after default or after the maturity date of the charge in question. And charging a 3 month interest penalty just adds insult to injury!

The law in this area is getting clearer and clearer. The issue is one of fairness and compliance with the common law and the Interest Act of Canada. This statute says that, in a nut shell, any penalty or any rate of interest that is added to a mortgage debt after default that has the effect of increasing the amounts owing by the mortgagor (above and beyond the original interest rate charged before default) is simply not allowed.

Courts have consistently accepted the fact that mortgagees are absolutely entitled to recoup from mortgagors (who have defaulted in their mortgage payments) all reasonable administrative costs actually incurred by the mortgagee in collecting the mortgage debt then owing. And that for sound business reasons, these costs can be estimated in advance and fixed in a mortgage contract.

But conversely, because most of the fees and charges added to the mortgage debt in private mortgages are not genuine pre-estimates of costs that will actually be incurred by the lender, they are held to be penalties at law. This makes them uncollectible by the mortgagee for being void at common law and likely in violation of the Interest Act mentioned above.

I’m certain you have all seen these kinds of penalties. They are usually added as a schedule to the mortgage contract and include items such as $500 (or more) for each default, $2,500 (or more) for each step or proceeding instituted by the mortgagee following default, $250 (or more) for each late payment or NSF cheque. The list goes on and on.

None of these fees are properly chargeable by the mortgagee to a mortgagor. None of these fees are valid at common law and most if not all of these fees offend the Interest Act and are not enforceable under that statute either. Why? Because they are not fair! Because they are little after-default bonuses that mortgagees try to collect – at a time when the mortgagor is most vulnerable (she or he is at risk to lose their house or other mortgaged property).

And it doesn’t matter if these fees and charges are listed in the commitment letter or are added to the mortgage. Courts will not allow mortgagees to collect the fees or charges. All that a mortgagee can collect from its mortgagor (who is in default) are the principle and interest amounts owing under the mortgage plus real, fair, out of pocket administrative and professional fees to help enforce the mortgage and collect the mortgage debt.

The next couple of posts will look at post-default interest rate increases and the 3 month interest penalty that are often added to a mortgage debt. And remember, that this blog is intended for information purposes only. It is not legal advice and cannot be relied on as such. Nor is it a substitute for hiring your own legal counsel, who will be an essential member of your mortgage default and power of sale team. And lastly, this blog is just my opinion. I reserve the right to change my mind. And I reserve the right to be wrong.

Be well and stay healthy.