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Use of Receiver Disentitles Lender to 3 Months Interest Penalty

In a recent Ontario case, the legal question was whether a lender/mortgagee was still entitled to charge for three months’ interest, amounting to over $350,000, even though it used a privately-appointed receiver to realize on the secured property.

The borrower owned a Waterloo-area student residence property still under construction, for which the lender had advanced $11.7 million in financing. When the borrower defaulted, the lender appointed a private receiver-manager, as it was entitled to do under the mortgage terms. The receiver was later able to sell the property for $14.4 million.

In its accounting of the proceeds, the lender withheld three months’ interest, totaling over $350,000, which was in addition to the mortgage interest calculated at closing. The lender relied on a clause in the mortgage stating that, upon default, the borrower “shall not require the Chargee [i.e. lender/mortgagee] to accept payment of the said principal amount without first giving three months’ previous notice in writing.”  In the lender’s view, this phrasing allowed it to keep the three months’ interest charge upon default.

The borrower disagreed, claiming that this right did not apply to a forced sale of a property by a privately-appointed receiver, as was the case here.  Nor was such a three-month interest charge allowed by legislation. The matter ended up in court for resolution.

The court looked at two possible bases for the lender’s claim to retain the disputed funds:  1) section 17 of the Mortgages Act; and 2) the terms of the mortgage itself.  First, while section 17 of the Mortgages Act did allow for the payment of three months’ interest after the borrower’s default or mortgage repayment, it was a “shield” behind which the borrower could take steps to give notice of an intent to pay arrears, and thus “buy some time” equivalent to three months. Importantly, it was an option given to the borrower – not the lender – upon default.

Also, prior courts have established that section 17 does not apply to situations involving a receivership and forced sale, or in cases where the lender has already taken other steps to realize on its security. Because a private receiver is generally considered to be an agent of the lender (rather than the borrower), the section is simply not “activated” in these scenarios.

Next, the court examined the wording of the mortgage itself.  Like section 17 of the Act, the provision stating that the borrower “shall not require” the lender to accept payment of the principal without giving either three months’ notice or an equivalent interest bonus was also “borrower-centric.” It granted a right and option to the borrower; it was not set up as a right belonging to a lender intending to realize on the security.

The court concluded that in this situation where the lender had sold the property using a privately-appointed receiver, neither the mortgage provisions nor the legislation justified the lender’s attempt to impose a three-month interest penalty as part of its mortgage realization proceeding.  If the lender wanted to impose such a charge as part of enforcement proceedings using a receiver, the proper approach was to draft the mortgage terms accordingly.  See: 58 Cardill Inc. v. Rathcliffe Holdings Limited, 2017 ONSC 6828.