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MORTGAGES - Mortgage agreement - Payment - Interest - Excessive interest - Priorities

Friday, April 24, 2020 @ 8:22 AM  

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Appeal by the third mortgagee from orders in ongoing receivership proceedings arising out of a failed residential real estate development. The first and second mortgagees had advanced funds in excess of the face values of the mortgages after the appellant’s mortgage was registered. The judge found that these advances were secured and ranked in priority to the appellant’s mortgage. The judge found that a passing reference to the appellant’s mortgage in an email among legal counsel discussing the terms of a priority agreement between the appellant and the second mortgagees did not constitute notice to the first mortgagees for the purposes of s. 28 of the Property Law Act. She also found the second mortgage provided for a criminal interest rate primarily due to two $2 million lender/broker fees which were defined as interest. As a remedy, the judge struck one of the $2 million broker fees but increased the interest rate from 12 per cent to 18 per cent.

HELD: Appeal allowed in part. The judge did not err in concluding that the mortgages secured advances beyond the amounts set out on the mortgages insofar as the advances were made in accordance with the terms of the mortgages. The registration system was not intended to convey certainty of value of land and encumbrances but was concerned with certainty of title and existing encumbrances. There was no inconsistency in stating an amount of principal on the face of the mortgage and providing that it could be increased in certain circumstances. The Property Law Act specified that the prior mortgagee must have received notice in writing of the registration of the subsequent mortgage from its owner. The judge made no palpable and overriding error in finding that the email from counsel did not amount to notice under s. 28(2)(b) of the Act. The judge erred in principle in the exercise of her remedial discretion in the remedy she granted for the criminal interest rate. She erred in assuming she had wide-ranging discretion to alter the contractual rate of interest, sever terms and impose an effective rate of interest falling somewhere below 60 per cent based on what she considered to be commercially and contextually reasonable. Having determined that the contract should not be declared void ab initio in these circumstances, it was open to the judge to either sever particular terms or leave the terms intact and notionally sever the interest rate to an effective annual rate of 60 per cent. This part of the order was thus varied by leaving the original terms of the second mortgage intact, including the 12 per cent interest rate, and capping the effective annual interest rate at 60 per cent.

Forjay Management Ltd. v. 0981478 B.C. Ltd., [2020] B.C.J. No. 290, British Columbia Court of Appeal, L.A. Fenlon, G. Dickson and G.B. Butler JJ.A., February 27, 2020. Digest No. TLD-April202020005