Mortgagee not entitled to accelerated interest: Ontario Court of Appeal

The Court of Appeal for Ontario found in a recent case that the lower court judge should not have awarded the mortgagee accelerated interest under the closed mortgages’ contractual provisions or the common law.

The case of First National Financial GP Corporation v. Golden Dragon Ho 10 Inc., 2022 ONCA 621, involved a priority dispute relating to the distribution of proceeds from a court-ordered sale of mortgaged properties under a receivership. The parties were the mortgagors, Golden Dragon Ho 10 Inc. and Golden Dragon Ho 11 Inc. (Golden Dragon); the first mortgagee, First National Financial GP Corporation (FN); and the second mortgagee, Liahona Mortgage Investment Corporation.

Golden Dragon assumed one closed mortgage over a residential apartment building in Ottawa and two closed mortgages over an adjoining property. The principal amounts under these mortgages totalled $7,546,240. FN held these three mortgages. Next, Golden Dragon placed a second mortgage on the first property in the principal amount of $2,900,000. Liahona held this mortgage.

Golden Dragon became insolvent and defaulted on the mortgages. The trial judge granted FN’s application to appoint Deloitte Restructuring Inc. as the interim receiver, approved Deloitte’s sale of the properties, and authorized a partial distribution from the sale’s net proceeds.

The trial judge found that FN, as the first mortgagee, was entitled to future, unearned, and accelerated interest until the end of the term of its mortgages. Golden Dragon appealed this determination and from the order approving the court-appointed receiver’s costs.

The judge relied on four cases to conclude that FN had a common law entitlement to accelerated interest: Saperstein v. Royal Trust Corporation of Canada, 1988 CanLII 3005 (BC CA); Bankruptcy of CAF +, 2013 ONSC 2749; NJS Midtown Portfolio Inc. v. CMLS Financial Ltd., 2020 ONSC 3973; and 1186708 Ontario Inc. v. Attara Developments Limited, 2013 ONSC 3137.

Ontario Court of Appeal grants appeal from judgment

First, the appellate court ruled that the trial judge improperly decided, without considering all the relevant contractual provisions, that FN had a standalone common law entitlement to accelerated interest apart from these provisions.

The appellate court said that the cases upon which the judge relied would not lead to this decision. Instead, these cases stood “for the proposition that, absent any contractual provisions to the contrary, where a mortgagor claims an early discharge of a closed mortgage, the mortgagee can insist on prepayment of interest as consideration for the amendment of the mortgage to provide for the early discharge,” wrote Justice Lois Roberts for the appellate court.

The appellate court held that the judge failed to interpret FN’s mortgages as a whole. The court said that the contractual provisions, when read in their entirety, clearly showed that the parties contemplated when FN would be entitled to accelerated interest and what would happen if Golden Dragon defaulted, leading to the early discharge of the mortgages. In this situation, the entitlements that ss. 10 and 12 of the standard charge terms provided would take effect, the court explained.

Under the correct analysis, the appellate court said that FN had no contractual entitlement to accelerated interest under its mortgages in these circumstances. Instead, upon default, FN’s entitlements were limited to payment of the principal, accrued interest until that point, and costs.

Next, the appellate court determined that the judge made an error in principle when he implied a contractual term into the FN’s mortgages. The court said that that term was inconsistent with the contracts’ express terms. The court added that such a term was not necessary to give business efficacy to the mortgages.

Lastly, the appellate court dismissed the appeal from the costs order. The court concluded that the judge made no errors in exercising his discretion to award costs to the receiver, whose presence at trial was helpful and necessary.