Mortgage Lenders Beware – Understanding the limitations on penalties

Torn Contract

Torn Contract

Lenders beware! In the current economic climate, lenders are required to enforce their security to recover loans following default by lenders. However, the recent decision of the Court of Appeal for Ontario in P.A.R.C.E.L. Inc. v. Acquaviva made clear the limitations on the amount of recovery traditionally obtained by lenders enforcing mortgages.

P.A.R.C.E.L. sought an appeal of a summary judgment granted to Acquaviva on a promissory note and mortgage. In the particular circumstance of this matter, the Promissory Note secured a loan of $458,488.07 and was secured by a Mortgage that was registered on unspecified property. Each of the Promissory Note and the Mortage contained specific terms respecting default and the incurring of additional fees and charges to the borrower. However, the Promissory Note and the Mortgage differed in respect of the terms. In particular, the Mortgage provided for additional administrative fees, late charges, and “missed payment fees” which might typically be found in most mortgages, particularly those of private lenders. On the summary judgment motion, the motion judge granted judgment for the principal amount owing plus the additional administrative fees, late charges, and “missed payment fees”. P.A.R.C.E.L. challenged the judgment taking the position that the charges and fees, particularly the increased interest charges, were not allowable under the Interest Act.

While not attacking or challenging the judgment itself, P.A.R.C.E.L. challenged the lender’s entitlement to fees, charges, and the escalated interest rate. More specifically, P.A.R.C.E.L. took the position that the fees, charges, and escalated interest rate violated section 8 of the Interest Act and were “illegal”. The Court of Appeal, for its part, was focused on whether or not the terms contained in the Promissory Note and the Mortgage offended section 8 of the Interest Act.

The Court of Appeal determined that the charges and fees associated with the Promissory Note and the Mortgage violated section 8 of the Interest Act and disallowed them.  The Court of Appeal made two important findings:

  1. it determined that even without an increase to the interest rate, if the charges, fees, and penalties caused the “effective” interest rate to be greater than the listed, and agreed to, interest rate in the Promissory Note and Mortgage, it violated the Interest Act, and;
  2. in the absence of evidence demonstrating that the charges and fees reflected real costs legitimately incurred by the lender for the recovery of the debt, the charges only act to impose additional penalties and fines apart from the interest rate agreed upon and therefore they violate the Interest Act.

So what can lenders do in the face of P.A.R.C.E.L. v. Acquaviva with respect to recovering administrative fees and charges that have long been a regular part of the enforcement process? Where the lender can clearly demonstrate actual costs associated with the recovery of the debt, these charges and fees may be legitimately recovered. In addition to fees such as N.S.F. charges, actual administration fees for the payment of staff and enforcement, there is reason to believe that this decision may leave open the opportunity to seek loss of opportunity damages as a result of not having funds available for reinvestment. In addition to this, while the Court of Appeal determined that such fees, charges, and penalties are not recoverable, the decision does not make it incumbent upon the court to deny claims by lenders for these additional amounts. To that end, there is no immediate need to stop seeking the fees, charges and penalties as a regular part of enforcement. Rather, it is up to the borrower to challenge these amounts at which time the lender should consider not pursuing them. The key is to be aware of the “illegal” nature of these charges and act accordingly if the issue arises.

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