A mortgage lender who asserts his rights under a mortgage may have an obligation to the borrower to do so honestly and in good faith. However, this does not mean that a lender should refrain from taking the steps it is entitled to take to protect its interests even though the consequences for the borrower may be severe.
In 2343680 Ontario Inc. v. Bazaargan, 2021 ONSC 6752 (CanLII), the defendant borrowers were the owners of a large single-family residence in an affluent neighborhood of Whitchurch-Stouffville, Ontario. On December 8, 2017, they entered into a first mortgage with MCC Mortgage Holdings Inc. (“MCC”) for $ 1,608,750, at 7.29% per annum, with monthly payments as interest of $ 11,557.45.
On the same date, the defendants contracted a second mortgage with the Plaintiff Number Company in the amount of $ 371,250, with an interest rate of 13.99% per annum. The second mortgage required interest payments of $ 4,328.16 per month, effective January 1, 2018, with the balance due in full on December 8, 2018.
In total, the defendants mortgaged their property for a combined amount of 1,980,000. Their monthly payments, with interest only, were $ 15,885.61.
The defendants struggled to make the payments on the second mortgage almost from the start. In the summer of 2018, they were struggling to keep both mortgages up to date.
No further interest payments were made on the second mortgage after October 17, 2018, and the principal was not repaid when it matured on December 8, 2018.
The MCC has launched a selling power process. On October 22, 2018, the plaintiff paid $ 25,726.43 to MCC to have the first mortgage in good standing. The power of sale was thus removed. The applicant subsequently paid other amounts due on November 1, 2018, in order to keep the first mortgage in good standing.
On December 14, 2018, the plaintiff redeemed MCC’s first mortgage for $ 1,598,782.35. However, this did not improve the defendants’ situation and the plaintiff brought an action to enforce the mortgages.
The defendants made no further payments for the outstanding mortgages, with the exception of an interim payment of $ 50,000 in December 2020, required by court order.
On September 14, 2021, the Ontario Superior Court of Justice heard a motion for summary judgment brought by the plaintiff. At this point, the plaintiff was looking for $ 2,481,321.84.
In response to the plaintiff’s request, the defendants alleged, among other things, that the lender had breached an obligation of honest contractual performance.
A trilogy of cases published by the Supreme Court of Canada affirmed two “good faith” doctrines, namely the duty to act honestly in the performance of contractual obligations and the obligation to exercise discretion in good contractual faith. : see Bhasin vs. Hrynew, 2014 SCC 71; CM Callow Inc. v. Zollinger, 2020 SCC 45; and Wastech Services Ltd. vs. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7.
The duty to act honestly is not, however, an obligation of honesty “in general”. It is directly linked to the execution of the contract and does not transform a contractual party into a fiduciary or impose broad obligations of loyalty or trust. Rather, the obligation requires that parties generally discharge their contractual obligations honestly and reasonably, and that “they must refrain from knowingly lying or deceiving another contracting party” (para. 28).
In response to the lender’s motion for summary judgment, the borrowers argued that one of them misled the plaintiff’s representatives into believing that she was working in their best interests to sort out a renewal from the first. mortgage, when in fact she was really looking to take more and charge a higher interest rate (13.99%). The defendants argued that they would have arranged new financing at a better rate but were thwarted because the plaintiff provided them with an inflated discharge statement, based on the application of a 13.99% interest rate. against the balance of the first mortgage.
The court assessed the allegations raised by the defendants and found them to be unfounded. Specifically, while the defendants complained that the plaintiff initially sought to recover 13.99% interest on the balance he paid to redeem the first mortgage, the court ruled that this was in fact consistent. under the mortgage. Further, as the defendants never paid the 13.99% interest on the balance owed, the original claim had no consequence.
Next, the defendants argued that they had not had the opportunity to negotiate a timeline for additional mortgage arrangements and that it was, like most terms and conditions, a timeline “to take it or leave it ”. The court noted that this may have been a case of fierce negotiation, but it was not a dishonest performance, as the defendants always had the option to ‘let it go’. Instead, they accepted.
The defendants then argued that the plaintiff had instigated them to violate the terms of the first mortgage. However, the court found that the defendants had violated the terms on their own by failing to pay the interest in a timely manner. There was no evidence that the Plaintiff encouraged, let alone induced, the Defendants not to make payments to MCC when they were due. Nor was the plaintiff prevented from paying the first mortgage simply because it had already brought it into good standing. In most cases, the court noted, it is not in the best interests of a second mortgagee that a first mortgage be in default, and the actions taken by the plaintiff were those authorized by the terms of the mortgage.
The defendants suggested illegality because the plaintiff was not licensed under the Mortgage Brokers, Lenders and Administrators Act, 2006 as a mortgage broker, mortgage lender or mortgage administrator. However, the question of whether a license was required to carry on the activities of the plaintiff was not established in the evidence and it was not for the court to develop or justify the allegations vaguely made by the defendants.
Finally, the defendants argued that they had been tricked by the plaintiff into allowing the first mortgage to go into default so that the plaintiff could take it over and charge them 13.99% interest on the combined value of the two mortgages . The court rejected this position altogether. One of the defendants was a successful immigration consultant with legal training and not a naive borrower who could not understand the actions of the plaintiff as a lender.
In sum, the court concluded that the plaintiff lender had not breached any obligation to honor the performance of the contract. The plaintiff did not mislead the defendants as to the terms of the mortgage contract and acted on the terms agreed to protect its interests as a second mortgage creditor.
The defendants’ claim of bad faith was the legal equivalent of a “Hail Mary” pass and was rejected.
The decision reflects the increasing acceptance by courts to assess the duty of honest contractual performance and shows that the doctrine can be applied to the performance of a lender’s obligations under a mortgage. While the consequences for a borrower may seem severe, the exercise by a lender of rights that are expressly authorized under a mortgage contract rarely amounts to dishonest performance.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.