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Feb 27, 2021

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

My last 4 blog posts (Parts XXXV and XXXVI and XXXVII and XXXVIII) have examined fees, charges and penalties that private and some institutional mortgagees add to discharge statements (after default or after issuing power of sale). The law in Ontario is clear – these fees and charges and penalties are not enforceable. In a similar vein, mortgagees cannot increase the interest rate payable by a mortgagor just because the mortgage is in default.

But what about the 3 months’ interest charge included in virtually all mortgage discharge statements? This is a little more confusing. Because section 17 of the Mortgages Act allows a mortgagor to give the mortgagee 3 months’ notice of her or his intention to repay the mortgage debt or, in the alternative, the mortgagor may pay 3 months’ interest on the principle sum in arrears without any notice. This type of statutory provision has been called ‘mortgagor centric’ because it gives the mortgagor a choice to pay the extra 3 months’ interest or at the mortgagor’s option, to give 3 months’ notice of her or his intention to make such payment. This clause is valid legislation and may be used by the mortgagor to her or his advantage.

However, many mortgages have a similarly worded clause requiring a mortgagor to pay 3 month’s interest on default. This type of clause in the mortgage contract is often determined by the Court to be a penalty and to not be enforceable. But sometimes the Courts do allow this 3 month ‘penalty’ to be charged. If, for instance, a mortgagee is enforcing its mortgage and is asking the Court for judgment for amounts owing under the mortgage, there are recent cases that have not allowed this 3 month penalty to be charged by the mortgagee. However, when the mortgagor has requested a mortgage statement for discharge purposes, Courts seem more likely to allow the mortgagee to include a 3 month charge under section 17 of the Mortgages Act. The validity of this 3 months' interest charge therefore seems to depend on whether the mortgagor is trying to repay (then it may be valid) or alternatively, whether the mortgagee is enforcing its mortgage (which is more likely to result in the 3 months’ charge being invalid).

The next post will move on to a new power of sale and mortgage remedy topic, TBD. 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.