Lender's Enforcement of "Additional Fees" Upheld

In Attalla v. Moody, the court drew an important distinction between a lender's right to sue on a borrower's covenant to pay "additional fees", versus the lender's rights to added charges arising under the mortgage security taken on a property.

The homeowner-borrowers had given a third mortgage to the lender for one year, for $1.1 million at 11.75 percent.  It included a provision allowing for "Additional Fees" of three months interest in the event that:  (1) the borrowers did not renew or discharge the mortgage by the maturity date; or (2) the lender issued either a Notice of Sale or a Statement of Claim.

At the one-year maturity date - and not having availed themselves of the renewal option - the borrowers owed the full amount of the principal and interest and remained in default afterwards. The lender did issue a Statement of Claim against the borrowers for $1,330,000, and also issued a Notice of Sale.  Both documents referred to the "Additional Fees" of $33,000, representing three months interest. 

Eventually the lender obtained possession, and took steps to list the property for sale.  The borrowers responded by registering a caution on title, claiming (among other things) that the Notice of Sale was invalid since it contained reference to the "Additional Fees" which they said were in violation of s. 8 of the federal Interest Act as being an illegal fine or penalty". The lender applied to the court to resolve the dispute, so it could sell the property.

The court examined the nature of the Additional Fees, concluding that they did not contravene the Interest Act.  The aim of that Act was to prohibit fees that increase the charge specifically on arrears, which these Fees did not do.  They were simply independent fees, triggered because the lender was required or compelled to bring enforcement proceedings in light of the borrowers' default.  They essentially represented the costs incurred by the lender to issue its Notice of Sale and Statement of Claim. The fact that the amount happened to be determined by reference to a fixed number of months worth of interest did not transform it into a prohibited "interest charge".

Also, the court observed that the Fees were not secured by the mortgage itself, since they were not added to the principal amount outstanding if left unpaid.  They did not serve to increase the amount required to pay off the arrears, discharge the mortgage, and redeem the property. The enforcement of the lender's claim was based on the buyers' covenant, and not against either the equity or the security on the property.

Their only rational purpose, in this case, was simply to offset the costs of the lender's enforcement steps, the court said.

Having decided the Additional Fees were not illegal, the court went on to conclude that Notice of Sale was not void for including them.  But even if the Notice was technically defective in a minor way, it was not invalidated entirely to the point that the lender's attempt to sell the property was impugned. See Attalla v Moody, 2017 ONSC 1971.