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In our July 2021 newsletter (Vol. 27, No. 2), we covered a receivership case called First National Financial GP Corp. v. Golden Dragon HO 10 Inc., 2020 ONSC 6994.  Although the background involved a dispute over the proceeds of the court-ordered sale of two properties, the scenario gave rise to a noteworthy legal issue around accelerated mortgage interest.  The trial ended with the judge ruling that the mortgagee/lender was entitled to $1.5 million in lost future interest due under two closed mortgages that it held over those properties. 

Now, in a reversal of that trial ruling, the Ontario Court of Appeal has offered clarity on the interpretation of these kinds of closed mortgage agreements. It has affirmed that any entitlement to accelerated interest amounts on early repayment is found in the mortgage contract itself; there is no independent common law right to them, apart from what is enshrined in the parties’ contract.

The mortgages in the First National case were closed (i.e. allowed for no right of prepayment) unless: (a) the mortgagor was not in default; and (b) there was a bona fide arm’s-length sale of the property.  At the point where there was about 8 years remaining on their 20-year terms, the mortgages went into default and a court ordered that a receiver be appointed to sell the properties.

The lender then asked for a court declaration that it was entitled to $1.5 million from the sale proceeds – over and above the amounts for mortgage principal and arrears.  Even though the mortgage was closed and in default, the lender argued it was entitled to the future interest payments that would have been earned over the remaining 8 years, had they not been prematurely vested off title in the receiver’s sale.  In support, the lender pointed to: (a) the terms of the mortgage itself; and (b) a common law “rule” that if a closed mortgage is discharged before the end of its full term, then the lender is entitled to all accelerated interests owing up to the date of maturity. The trial judge accepted these arguments, and granted the lender’s request.

On subsequent appeal, the Ontario Court of Appeal reversed that ruling; it found the trial judge had erred in several ways. First, the judge failed to consider the contractual provisions of the mortgage as a whole.  On proper reading, they clearly set out the consequences of the mortgagor’s default, being the early discharge of the mortgage and the triggering of the entitlements under the standard charge terms. 

Next, on a closed mortgage discharged prior to its term, the lender was not entitled to a so-called “standalone common law entitlement” to accelerated interest; rather, such entitlements were to be found in the mortgage contract itself  (and in this case, since the mortgagor was a corporation rather than an individual, the statutory prepayment provisions in the Ontario Mortgages Act did not apply). If a mortgage contains no prepayment clause, then the borrower would be left to negotiate an amendment to the mortgage with the lender, which would include a penalty; the common law would then recognize such a revision, the Court said. 

The trial judge had essentially implied a contractual term into the mortgages, even though it was inconsistent with the mortgage provisions as drafted, and was unnecessary to give business efficacy to them.  In doing so, the trial judge had made an error in principle.

In the end, and based on proper interpretation of the particular mortgage, the Court of Appeal ruled that the lender’s entitlements were relegated to the payment of the principal, accrued interest, and costs. See First National Financial GP Corporation v. Golden Dragon Ho 10 Inc., 2022 ONCA 621.  (Note: An application for leave to appeal to the Supreme Court of Canada was filed on November 23, 2022).