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Mortgagee’s Right to Withhold Funds Clarified

In Pacifica Mortgage Investment Corp. v. Laus Holdings Ltd., the legal question was whether a mortgagee was arbitrarily and unreasonably withholding funds it had agreed to loan on a multi-year development project that was only about six weeks from completion.

The borrower, a family-owned company run by a husband and wife, owned a 38-unit apartment building slated for conversion into condominiums. Toward this end, the borrower secured $2.6 million in financing from the lender in 2007, with $2 million to be advanced up-front. The mortgage agreement was embodied in a commitment letter and included certain terms and conditions, amongst them that the lender had the right to advance funds at its “sole discretion” after a “satisfactory review of [the] construction/renovation budget by the Lender.”

About a year later, the lender advanced a further $300,000 after making a site visit. However, it later refused to advance the final $300,000 on the basis that it had not received sufficient budget information from the borrower. The mortgage’s term expired a few days after that refusal, and the parties negotiated a renewal featuring a new commitment letter, a higher interest rate, and an increase in the total borrowed amount to $2.9 million.

Then, in April 2009 – with only about six weeks to go on the project – the borrower required a $600,000 construction draw, and provided the lender with construction budgets to support that estimate. However, since the parties could not come to terms on a further renewal, the existing mortgage went into default. The lender started foreclosure proceedings, and a receiver was appointed by the court.

The borrower objected, claiming that it was unconscionable for the lender to refuse to advance additional funds at such a late date, especially since it effectively prevented the conversion project from being completed. The trial judge disagreed as the mortgage agreement clearly stated that the lender had sole discretion on whether to advance funds. Moreover, any advance was predicated on the borrower providing satisfactory construction budgets, which it had never done during the mortgage’s term.

The borrower’s appeal of the foreclosure order was likewise unsuccessful. From the lender’s standpoint, its security was predicated on the borrower’s timely and efficient completion of the conversion project, and upon its own ability to monitor its financial risk on an ongoing basis. As such, it was not unreasonable for the lender to insist that the borrower comply with its contractual obligations to provide updated construction budgets as the conversion progressed, nor to make the advance of further funds contingent upon the receipt of satisfactory information. Pacifica Mortgage Investment Corp. v. Laus Holdings Ltd., 2013 (BCCA), leave to appeal to the Supreme Court of Canada filed May 6, 2013.