COURT OF APPEAL SUMMARIES (August 3 – 7, 2020)Walia v. 2155982 Ontario Inc., 2020 ONCA 493 (CanLII)
[Huscroft, Zarnett and Coroza JJ.A.]
Amandeep Sidhu and Shaun Singh, for the appellant
Gregory Weedon and Melissa Truong, for the respondents
Keywords: Contracts, Interpretation, Real Property, Mortgages, Interest, Legality, Corporations, Indoor Management Rule, Interest Act, R.S.C. 1985, c.I-15, s. 8, Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331, Mastercraft Properties Ltd. v. El Ef Investments Inc. (1993), 14 O.R. (3d) 519 (C.A.), leave to appeal refused,  S.C.C.A. No. 463
The appellant gave the corporate respondent a mortgage commitment for a four-month term with an interest rate of 12 percent. However, the second mortgage commitment also contained a condition that if the mortgage matured and was not paid, or there was a default of any payment, the interest rate would increase to 21 percent. After the mortgage went into default, the appellant sued to enforce the mortgage.
1. Did the motion judge err in determining that the condition of the mortgage increasing the rate of interest from 12% to 21% upon a default was invalid because it violated s. 8 of the Interest Act?
2. Did the motion judge err in finding that the renewal agreement was not valid because of the absence of the signature of the corporate respondent’s principal?
1. No. The motion judge concluded that the condition in the commitment that increased the rate of interest from 12 percent to 21 percent offended s. 8 of the Interest Act because it did not increase the rate of interest solely because of the passage of time. To the contrary, she held that once a mortgage has matured, and it has not been repaid on the date of maturity, the balance becomes outstanding and is in arrears. Therefore, the condition in this case increased the rate because of default. The Court agreed with the motion judge.
Section 8 creates an exception to the rule that lenders and borrowers are free to negotiate and agree on any rate of interest on a loan. The purpose of s. 8 is to prohibit lenders from levying fines, penalties, or rates of interest on any arrears of principal or interest that are secured by mortgage on real property. The prohibited effect is increasing the charge on arrears beyond the rate of interest payable on principal money not in arrears.
In assessing whether a term violates s. 8, what counts is how the impugned term operates, and the consequences it produces, irrespective of the label used to describe the term. If the effect of a term is to impose a higher rate on arrears than on money not in arrears, then s. 8 is offended. On the other hand, an interest rate increase triggered by the mere passage of time (and not by default) does not offend s. 8.
On a plain reading of the condition in this case, there was no doubt that the increase from 12 percent to 21 percent was triggered as a result of the nonpayment of the mortgage on the expiry of its term, which is a default.
2. No. The motion judge held that the indoor management rule did not apply in the circumstances of this case based on her assessment of the “factual constellation”. The Court saw no basis to disturb her careful finding of fact that the appellant knew or ought to have known that a signature of the corporate respondent’s principal was required to give effect to the renewal agreement and that, therefore, the indoor management rule did not apply.