Accounting for Law

Mills & Mills LLP : Reshma Kishnani and Richard Worsfold

Three months’ interest penalty – is it payable?


Many mortgagees will add a three-month interest penalty to their Discharge Statements delivered to mortgagors who are in default. Frequently those mortgagees will also deduct the three months’ interest penalty from proceeds of sale even if they are the ones who have caused the property to be sold by Power of Sale.

Their entitlement to claim this penalty is rarely challenged, as frequently the amount may be small or the mortgagor may not have the resources to mount a Court challenge.

A recent Court of Appeal decision has confirmed, however, that such a penalty is not payable to the mortgagee out of proceeds of forced sale and that Receivers acting for mortgagees cannot be said to be agents for the mortgagor for the purpose of extracting such a penalty in the absence of a clear agreement to the contrary.

Mortgages Act: Section 17

Section 17 of the Mortgages Act (“Section 17”) provides that where a mortgage is in default a mortgagor is entitled to make payment of the mortgage amount upon payment of an additional three months’ interest or upon providing at least three months’ notice of the payment. This provision is intended to act as a “shield” for a mortgagor in default permitting them to discharge a mortgage even after default.

Many mortgagees will insert language similar to Section 17 in their Charge documents providing that a mortgagor shall not require a mortgagee to accept payment of the principal amount after default without giving three months’ notice in writing or paying a bonus equal to three months’ interest.

Justice Brown in the 2007 case of Ialongo v. Serm Investments Limited, held that a mortgagee could not convert the rights of a mortgagor under Section 17 to discharge a mortgage after into an obligation to pay an additional three months’ interest upon a forced sale.

Nevertheless, default mortgagees have continued the practice of demanding and extracting a three months’ interest penalty upon a forced sale within the commercial mortgage lending community.

58 Cardill Inc. v. Rathcliffe Holdings Limited

In Justice Sanfillippo’s November, 2017 decision in 58 Cardill Inc. v. Rathcliffe Holdings Limited, His Honour held that neither Section 17 nor the Chargee’s three months’ interest provision could assist the Chargee to claim a three months’ interest penalty upon the sale. Justice Sanfillippo found that as 58 Cardill Inc. was not requiring the sale, the provision did not apply.

58 Cardill Inc. had owned a property in Kitchener, Ontario upon which they were building a student residence in 2014. When the project ran into difficulty their $11,000,000.00 mortgage with Rathcliffe Holdings Limited (“Rathcliffe”) went into default. A Receiver was appointed and eventually the property sold by Rathcliffe so as to discharge their mortgage.

From the proceeds of sale, Rathcliffe claimed a three months’ interest penalty of $351,000.00.  58 Cardill Inc. successfully challenged the entitlement of Rathcliffe to extract such a penalty before Justice Sanfillippo in November 2017.

Rathcliffe appealed Justice Sanfilippo’s decision to the Court of Appeal.

The Appeal Decision

At the Court of Appeal, in 58 Cardill Inc. v. Rathcliffe Holdings Limited, Rathcliffe argued that their security documentation provided that their Receiver was appointed “as an agent of the mortgagor”.  They argued that they were entitled to collect the three months’ interest penalty as the Receiver was discharging their mortgage as agent for the mortgagor.

The Court of Appeal rejected this argument, however, and found that in such a receivership the Receiver was wearing two hats. The Court of Appeal accepted Justice Sanfilippo’s finding that it would be a mischaracterization of the role of the Receiver to suggest that the steps taken by the Receiver to realize maximum recovery on the property for the benefit of Rathcliffe were actually taken as agents of the mortgagor.

In consequence, the Court of Appeal upheld the decision of Justice Sanfilippo and found that the three months’ interest provision did not entitle the mortgagee to claim this penalty on a forced sale even where an appointed Receiver acted.

Solicitors acting for mortgagors should be cautious to ensure that mortgagees respect this decision and do not attempt to extract an extra three months’ interest upon a forced sale, particularly where there is no agreement to the same.

Richard Worsfold was counsel for the Respondent, 58 Cardill Inc., and Reshma Kishnani assisted with drafting the factum for 58 Cardill Inc. v. Rathcliffe Holdings Limited, 2017 ONSC 6828.

This article was originally published by The Lawyer’s Daily, part of LexisNexis Canada Inc.


About the Authors

Reshma Kishnani

Reshma earned her Bachelor of Public Affairs and Policy Management with a specialization in international relations and a minor in law from Carleton University in 2004 and graduated with her LL.B. from the University of Windsor in 2010. Reshma was called to the Ontario Bar in June, 2011 and joins Mills & Mills LLP as a Litigation Associate. Read More


Richard Worsfold

Richard is pleased to bring his over 30 years of litigation experience to Mills & Mills LLP as Counsel.

Richard’s practice includes a wide variety of complex matters, including Will challenges, shareholders’ rights disputes, traffic fatality cases, incapacity issues and wrongful dismissal claims. Read More

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