Lender Not Entitled to Prepayment Charge: Loan Repaid Before Maturity, But Interest Paid to Term's End

In a recent case which stemmed from a refinancing wherein our firm represented the borrower, the important issue for the court was this: Whether the lender was entitled to receive a $36,671.08 prepayment penalty where the loan was repaid before maturity, but the interest was paid to the end of the mortgage term.

The borrower had purchased a property for $26.5 million, and arranged $3.5 million in mortgage financing with a lender. Prepayment was precluded for the first six months of the term, and was subject to stipulations thereafter. The mortgage maturity date was December 6, 2018.

In a short period leading up to November 22, 2018, which was two weeks before the maturity date, the borrower took steps to pay back all the principal and interest that would have been payable under the mortgage. In effect, the borrower was paying everything that the lender could expect to receive under the mortgage at maturity; it had merely made the needed payments two weeks earlier than that date.

However, the lender nonetheless sought to extract a prepayment charge of one months' interest, relying ostensibly on the mortgage's prepayment clause. The clause stated that: the borrower could repay the whole or any part of the principal outstanding plus interest accrued, upon giving at least one month's notice on any monthly payment date.

The crux of the parties' dispute was whether the borrower had indeed given notice, and triggered the clause. The correspondence between the parties' respective lawyers was pivotal on this issue. In a November 8, 2018 letter, the borrower's lawyer, David Markowitz of our firm, advised the lender's lawyer of the borrower's intent to payout the mortgage on or prior to maturity, and requested a discharge statement. A week later, on November 15, 2018, he wrote again to advise that the borrower was arranging new financing in time for a November 22, 2018 payout, and requested a discharge statement again.

The lender's lawyer did ultimately send it, but included the unanticipated prepayment charge; pointing to the November 15, 2018 letter as being tantamount to one-months' notice as of December 6, 2018 (being both the next payment date and the maturity date of the loan) and charging interest to January 6, 2019, for one month's pay in lieu of notice under the prepayment clause.

Although repayment of the mortgage was made on November 22, 2018, the borrower offered to pay interest to maturity, being December 6, 2018. As such, the disputed amount was $36,671.08 (being one-month's interest). On November 22, 2018, the borrower paid the disputed amount under protest, obtained registered discharges from the lender, and applied to the court for a determination.

The court began noting there were few Canadian court cases on the meaning of "prepayment" in the mortgage context, but it is often linked to a reduction in the amount of interest owed, with the lender being given advance notice so it has time to arrange for an alternate investment of its funds. Here, based on the mortgage's wording, the clause was intended to benefit the borrower, as a means of allowing it to save on interest over the remaining term of the mortgage.

The Court found that the borrower's payment on November 22, 2018 did constitute a breach of the mortgage, since it was technically a full mortgage repayment before the December 6, 2018 maturity date. However, the borrower's breach did not entitle the lender to charge a fee that was neither agreed-to, nor provided for in the mortgage. Plus, with the repayment being a mere two weeks early, the lender was unlikely to have suffered damages and provided no evidence to the Court of any damages suffered. It had been paid all the interest it could expect to receive under the mortgage agreement.

In the end, the court declined to award even nominal damages for the borrower's breach, and declared that the lender must repay the borrower for the $35,671.08 that was improperly charged. Further, the Court made a subsequent costs award, awarding the borrower costs of $60,000 as a result of its success in the proceedings. See: 2598508 Ontario Inc. v. 2394049 Ontario Inc. o/a Goodman Green Solutions, 2021 ONSC 5293 (CanLII).