Did You Know… Late payment charges and default fees set out in a mortgage are unenforceable and contrary to the Interest Act?

chinneck  -  Apr 26, 2016  -  No Comments

In PARCEL v Acquaviva (2015 ONCA 331), Pardis and two of his land holding companies signed a mortgage agreement as well as a promissory note securing a loan against Pardis’ land holdings. The mortgage agreement and the promissory note both secured the same loan of $458,488.07 and both contained an interest rate of .75% annually. The promissory note also provided that in the event of default, the rate of interest would rise to 10% per year.

The mortgage allowed for an administrative fee of $300 for every missed or returned payment for insufficient funds and allowed a penalty of $10 per day for any late payments.

Pardis paid the mortgage from 2011 until 2012 at which time Pardis defaulted on the loan. When Pardis fell into default, the Lender sued Paradis claiming the higher rate of interest of 10% as contained in the promissory note. The charges resulting from the higher rate of interest totalled more than $57,000. The Lender also claimed 24 late payment charges amounting to $7,200 and the default fee of $10 per day which amounted to $11,110.

At the first trial, the judge sided with the Lender and awarded damages based on the Lender’s claims for the higher rate of interest and additional fees as outlined above. Pardis appealed the decision and the action was heard before the Ontario Court of Appeal.

In making its decision, the Court of Appeal turned to section 8 of the Interest Act which states the following:

No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

Based on this provision, the court ruled that the higher rate of interest was disallowed, and the Lender could only charge an interest rate of .75% on the arrears of the mortgage. The court also reasoned that both the fee of $300 for every missed or late payment and the fee of $10 per day for any outstanding payments were “penalties” which were specifically disallowed by section 8. Based upon this finding, the Court of Appeal did not allow the additional $75,000+ claimed by the Lender.

If you are experiencing any notice of sale or foreclosure be sure to review the fees and charges that are being charged to your account as they may be unenforceable penalties or higher rates of interest because of section 8 of the Interest Act. We would also recommend setting up an appointment with us to go over your options.

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