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The Elements of a Discharge Statement and the Validity of Tender

In another recent decision before the Ontario Court of Appeal, the outcome hinged on whether a lending bank’s written statement as to the amount owed by the borrower constituted a “discharge statement,” and whether the borrower’s informal offer to pay the amount was proper tender, so as to trigger the borrower’s right to pay off the loan and obtain a discharge under the Mortgages Act.

The borrower had obtained a demand loan for $875,000 from the bank, which was secured by a first-charge collateral mortgage of $1,500,000, along with a general security agreement and a general assignment of rents. The loan agreement and the mortgage also provided that the borrower would pay the reasonable fees of the bank in enforcing its rights under those documents. The costs were to form a charge against the property and would be secured by the mortgage; the borrower could not have the mortgage discharged until after the monies secured by the mortgage had been paid.

The bank later demanded repayment of the $875,000 under the loan agreement (i.e. not under the mortgage), and it negotiated with the borrower’s lawyer for an agreed repayment period and a forbearance agreement. Prompted by a request by the borrower for a “discharge statement for information purposes,” the bank provided a written statement as to the amount outstanding, consisting of a statement showing only the principal and interest. There was no mention of legal costs, and no heading or other indication on the document that it was a “discharge statement” in the usual form. Furthermore, no formal demand under the mortgage was ever made by the bank.

After receiving the bank’s statement, the borrower’s lawyer sent the bank a letter offering to pay the amount owing, provided the bank would sign a Document Registration Agreement that the borrower had prepared. The issue arose whether the borrower’s offer was valid tender, and whether the provisions of the Mortgages Act were triggered. The borrower accordingly applied to the court for an order compelling the bank to discharge the mortgage and the other security provided by the borrower, provided the borrower paid approximately $800,000 (representing the amount demanded and remaining after two payments to the bank had been deducted).

In bringing its action, the borrower relied on ss. 42 and 43 of the Mortgages Act, claiming that the so-called statement from the bank amounted to a “discharge statement” for the purposes of s. 43 (which obliges a person who has made a demand to accept the payment of the demanded amount, as long as the payment is made as stipulated by the demand). The borrower also claimed that the bank could not require the payment of the disputed legal costs as a condition of discharging the mortgage.

In these circumstances, the court found that s. 43(1) of the Mortgages Act did not come into play at all, since there was a demand for payment under the loan agreement, but no demand under the mortgage, and nothing to indicate that the lender was commencing a power of sale proceeding. Indeed, there had not been a default under the mortgage at all.