Is Notice of Sale Void for Inclusion of 3 Months' Interest on Default?

In Attalla v. Moody, the simple question was whether a Notice of Sale, given by a mortgage lender to trigger power of sale proceedings, was invalid merely because it referred to an agreed additional fee for three months’ interest.

The borrowers owned a property that was the subject of several mortgages.  The third mortgage was in favour of a group of  lenders for $1.1 million, with a one-year term. The mortgage contained a provision that stated that upon default or if not renewed prior to maturity, the lenders at their option were entitled to charge an additional fee of three months’ interest.

When the borrowers failed to renew and did not pay the outstanding balance at maturity, the lenders issued their Notice of Sale, claiming almost $1,133,000, including about $33,000 as the “additional fee,” equivalent to three months' interest.

The borrowers – who also owed significant sums of money under first and second mortgages – failed to redeem or refinance, and were evicted after a default judgment was obtained. The lenders then listed the property for sale.

The borrowers went to court to try to block the sale. They complained that the Notice of Sale was defective because it referred to the three months’ interest fee, which was tantamount to a “fine or penalty” prohibited by section 8 of the Interest Act.  As such, they claimed that the lenders’ enforcement attempts were also void.

The court disagreed. Merely because the lenders had imposed some sort of charge of fee did not automatically mean that the provisions of the Interest Act had been offended.   The key was to look at the effect of the fee, rather than its label. It was not in the nature of a “fine,” “penalty” or “interest,” nor did it increase the charge on arrears.  Based on the principles set out by the Court of Appeal in P.A.R.C.E.L. Inc. v. Acquaviva (discussed in SR Law’s prior Mortgage and Real Property Report newsletter, Vol. 21, No. 3 (August 2015)), the fee was merely an independent charge arising from the borrower’s default, to reflect the fact that lenders had been forced to initiate enforcement proceedings. The court stated that “[t]he fee charged in this case does not increase the charge on the arrears in the sense that it does not increase the amount required to pay off the arrears and discharge the mortgage and redeem the property. In the covenant at issue, the fee applied by the mortgagee is not enforceable against the equity.  The right of enforcement of this aspect of the mortgagee’s claim is against the mortgagors on the covenant, not against the security in the property.” The mere fact that the fee happened to be calculated using a fixed number of months of interest did not alone convert it into an interest charge prohibited by law.

After concluding that section 8 of the Interest Act had not been offended, the court added that a minor irregularity of this type did not render the Notice of Sale wholly invalid in any case, since it was something that could be cured by a simple subsequent accounting.

The lenders were entitled to proceed unfettered with their power of sale remedy. See Attalla v. Moody, 2017 ONSC 1971.