Litowitz v. Royal Trust Corp. of Canada

  • Document:
  • Date: 2018

Re Litowitz et al. and Royal Trust Corporation of Canada, Trustee for The Standard Life Assurance Company et al. *

Vale and H.L.V. Trading Limited v. Sun Life Assurance Company of Canada *

Vale and J.V. Trading Limited v. Sun Life Assurance Company of Canada *

Re Glied and Confederation Life Insurance Company et al. **

[Indexed as: Litowitz v. Standard Life Assurance Co. (Trustee of)]

 

30 O.R. (3d) 579

[1996] O.J. No. 3816

Nos. C22266, C22224, C22226, C22225, C20629

Court of Appeal for Ontario,

 

Robins, Finlayson and Weiler JJ.A.

October 31, 1996

 

* Applications for leave to appeal to the Supreme Court of Canada dismissed with costs April 17, 1997 (Lamer C.J. and Cory and McLachlin JJ.).                    S.C.C. File No. 25692 (Litowitz).                    S.C.C. Bulletin, 1997, p. 702.                    S.C.C. File No. 25714 (Vale).                    S.C.C.

Bulletin, 1997, pp. 703.

** Notice of discontinuance of application for leave to appeal to the Supreme Court of Canada filed March 13, 1997.            S.C.C. File No. 25720.                   S.C.C. Bulletin, 1997, p. 526.

Mortgages — Restrictions on right to redeem — Prepayment — Statutory right to prepay where mortgage for more than five years — Statutory right to prepay not available to corporations — Corporate mortgagors acting as nominees or agents of individuals — Individuals not entitled to right of prepayment where mortgages given by corporation — Mortgages Act, R.S.O. 1990, c. M.40, s. 18 — Interest Act, R.S.C. 1985, c. I-15, s. 10.

Mortgages — Restrictions on right to redeem — Prepayment — Statutory right to prepay where mortgage for more than five years — Statutory right to prepay not available to corporations — Individual and corporation signing mortgage as co-mortgagors — Individual entitled to right of prepayment — Mortgages Act, R.S.O. 1990, c. M.40, s. 18 — Interest Act, R.S.C. 1985, c. I-15, s. 10.

Section 18(1) of the provincial Mortgages Act or s. 10(1) of the federal Interest Act gives a person, which would include a corporation, the right to prepay a mortgage after the expiry of five years. These provisions were introduced over 100 years ago to remedy the problem of farmers being locked into mortgages and being subjected to large bonuses or penalties when they sought prepayment. However, after their enactment, exemptions were enacted to respond to the new problem that lenders had become reluctant to provide long-term financing to corporations, particularly railway companies, because the corporations might exercise their rights to prepay to the detriment of the lenders, who would make their own financial commitments on the strength of mortgages being closed for their full term. Thus, s. 18(2) of the Mortgages Act and s. 10(2) of the Interest Act exclude the prepayment rights when the mortgage is given by a corporation. In three appeals heard together, the Court of Appeal was required to address the question of whether individuals who were beneficial owners were entitled to rely on the prepayment rights when mortgages were given by corporations acting as their nominee or trustee.

In Litowitz v. Standard Life Assurance Co. (Trustee of), to finance the construction of an apartment, in 1978, H Inc. — Old granted a first mortgage to E Trust to secure an $11,627,000 loan for a term maturing in 1990. There was no reference in this mortgage to any agency or trust relationship, but in an unregistered agreement: (a) H Inc. — Old was named as agent; (b) H Inc. — New was named as mortgagor; (c) E Trust acknowledged that the mortgagor was a joint enterprise of unitholders using a common agent; and (d) it was agreed that the unitholders were entitled to all rights and subject to all obligations under the first charge but limited to their proportionate holdings in the property. In 1984, title of the property was put in the name of H Inc. — New and it was named as the trustee of the unitholders. In May 1990, the property was refinanced, with the time for payment of the first mortgage extended for a further 20 years and an additional $7,500,000 advanced for the same term. The new advance was by R Trust as trustee for Standard Life. R Trust was also the assignee of the first mortgage as trustee for Standard Life. Both the extended first mortgage and the new second mortgage were closed mortgages. Before any funds were advanced, R Trust was provided with documents showing that H Inc. — New held the property as bare trustee for unitholders. At that time, about two-thirds of the units were owned by B Ltd., which company was owned by GL and his associates, who were also the owners of H Inc. — Old and H Inc. — New. The remaining units were owned by individuals. In December 1994, GL, H Inc. — Old, and H Inc. — New applied for an order that the mortgages could be redeemed pursuant to the statutory rights of prepayment. The application was granted, and R Trust and Standard Life appealed.

In Vale v. Sun Life Assurance Co. of Canada, JVT Ltd. granted a $1,250,000 mortgage on an apartment to secure a loan maturing in 2009. HLVT Ltd. granted a $1,750,000 mortgage on an apartment to secure a loan maturing in 2002, and it granted a $3,700,000 mortgage on another apartment to secure a loan maturing in 2005. JV signed all the mortgages as an “additional covenantor” agreeing to be liable to the mortgagee, which in every case was Sun Life, in the same manner and to the same extent as if he had executed the mortgage as mortgagor. The corporations were acting as bare trustees for JV, and title had been put in corporations to facilitate rent review applications and to avoid the nuisance of JV being contacted at home by tenants. He applied for an order that he could exercise the statutory right to prepay. The application was dismissed, and he and HLVT Ltd. appealed. In Glied v. Confederation Life Insurance Co., WG was the owner of an undivided one-quarter leasehold interest in an apartment. The remaining leasehold interest was held by corporations controlled by him or members of his family. In 1985, WG and the corporate owners, as co-mortgagors, granted a first mortgage to CL Insurance Co. to secure a $5,926,000 loan maturing in 2002, and in 1988, they granted a second mortgage to CL Insurance Co. to secure a $3,950,000 loan also maturing in 2002. Under the mortgages, WG was jointly and severally liable with the corporate mortgagors for the payment of all principal and interest. In August 1994 the first mortgage was assigned to H Trust. In November 1994, WG brought an application for a declaration that he was entitled to prepay the mortgages. The application was dismissed, and he appealed.

Held, the appeal in Litowitz v. Standard Life Assurance Co. (Trustee of) should be allowed; the appeal in Vale v. Sun Life Assurance Company of Canada should be dismissed; and the appeal in Glied v. Confederation Life Insurance Co. should be allowed.

For the purposes of the Litowitz appeal, it could be assumed that the appellant knew of the trust or agency relationship before completing the transaction and that the unitholders were persons liable to pay or entitled to redeem the first and second mortgages. However, the respondents did not have the right to prepay. The exemption to the right to prepay is determined by the corporate status of the mortgagor. The unitholders chose of their own volition to conduct their business through a corporation, and there was no question that the corporation was authorized to arrange the financing and that it was intended that the mortgage would be an obligation enforceable against the corporation. The fact that beneficial ownership was made up of individual investors did not remove the mortgages from the exemption or entitle the investors to the right of prepayment. There was no reason to look past the corporate entity, and lenders ought to be entitled to rely on the title documents to determine the mortgagor’s prepayment rights. To hold that the exemption clause was inapplicable would be to say that lenders cannot rest on title documents or the terms of a mortgage in determining whether a long-term closed corporate mortgage is subject to a statutory right of repayment. To do this would have the effect of re-introducing the problem that the exemption clause was enacted to eliminate. The mortgages in question were and remained mortgages given by a corporation and were not subject to the statutory right of prepayment.

In the Vale appeal, the exemption applied to the mortgages. The fact that a corporate mortgagor was acting as nominee or trustee for a non-corporate beneficial owner did not in the circumstances of this case entitle the beneficial owner to the statutory right of prepayment. The mortgages were given by a corporation within the meaning of the exemption. JV chose to take title to the properties in the names of the corporations and bargained for and obtained mortgage financing for the longest term at the most favourable rates he could then negotiate through corporate vehicles. There was no reason to find an interpretation to narrow the corporate exclusion. The trial judge was correct in rejecting JV’s argument that because he was “liable to pay or entitled to redeem” the mortgages, he was entitled to the benefit of the right to prepay. The applicability of the exemption clause did not depend on these factors. The mortgage remained a mortgage given by a corporation and was outside the ambit of the right to prepay.

In the Glied appeal, unlike the others, the appellant was clearly shown on the mortgages as a co-mortgagor and assumed responsibility in his personal capacity. The wording of the statutory prepayment right is such that where an individual obtains a long-term closed mortgage, the exemption does not apply. When a mortgage is given by an individual, the individual is entitled to the right of prepayment regardless of the purpose of the loan. As the legislation is drafted, the individual is not precluded from this right when the mortgage is given jointly with a corporation. Determining an individual’s statutory rights by reference to whether he or she holds a minority or majority percentage interest is an approach not prescribed by the legislation and which cannot be imported therein.

Cases referred to

 

233467 B.C. Ltd. v. Montreal Trust Co. (1994), 115 D.L.R. (4th) 124, 40 R.P.R. (2d) 102, [1994] B.C.J. 195 (B.C.C.A.), affg (1993), 28 R.P.R. (2d) 313 (B.C.S.C.); 511666 Ontario Ltd. v. Confederation Life Insurance Co. (1985), 50 O.R. (2d) 181, 35 R.P.R. 293 (H.C.J.); Confederation Life Insurance Co. v. Shepherd, McKenzie, Plaxton, Little & Jenkins (1992), 29 R.P.R. (2d) 271 (Ont. Gen. Div.), affd in part (1996), 88 O.A.C. 398 (C.A.); Deb-Bac Investments Ltd. v. Imperial Life Assurance Co., [1994] O.J. No. 379 (Gen. Div.); First City Trust Co. v. Syrnyk (1985), 43 Sask. R. 236, [1985] 5 W.W.R. 285 (Q.B.); Kates v. Maritime Life Assurance Co., [1992] O.J. No. 1903 (Gen. Div.); Royal Trust Co. v. Potash, [1986] 2 S.C.R. 351, 31 D.L.R. (4th) 321, 44 Man. R. (2d) 30, 69 N.R. 286, [1986] 6 W.W.R. 550, 34 B.L.R. 167, 41 R.P.R. 197; Wall v. Maritime Life Assurance Co. (1992), 64 B.C.L.R. (2d) 358, 22 R.P.R. (2d) 166 (S.C.)

 

Statutes referred to

 

Condominium Act, R.S.O. 1990, c. C.26, ss. 7(9), (10), 60 Interest Act, R.S.C. 1985, c. I-15, s. 10(1), (2) Mortgages Act, R.S.O. 1990, c. M.40, ss. 1, 18(1), (2)

 

Authorities referred to

 

Ontario Law Reform Commission, Report on Section 16 of the Mortgages Act (1971), p. 9

Ontario Law Reform Commission, Report on the Law of Mortgages (1987)

 

APPEALS from judgments of the Ontario Court (General Division) in three applications ((1995), 24 O.R. (3d) 607, 46 R.P.R. (2d) 10 (Potts J.); (1995), 24 O.R. (3d) 619, 47 R.P.R. (2d) 1 (R.A. Blair J.); December 22, 1994, Potts J. (unreported)), for orders with respect to the operation of s. 18 of the Mortgages Act, R.S.O. 1990, c. M.40, or of s. 10 of the Interest Act, R.S.C. 1985, c. I-15. Malcolm M. Mercer and Tycho Manson, for appellants, Royal Trust Corp. of Canada and Standard Life Assurance Co. Ronald B. Moldaver, Q.C., for respondents, Gerald E. Litowitz, Headway Property Investment 78-1 and Headway Property Investment 78-1 Inc. Joel Vale, in person. Arthur Birnbaum and Joel Vale, for appellants, H.L.V. Trading Ltd. and J.V. Trading Ltd. Joel Goldenberg, for respondent, Sun Life Assurance Co. of Canada. J. Gregory Richards, for appellant, William Glied. Graham D. Smith and Robby Bernstein, for respondent, Confederation Life Insurance Co. Scott Maidment, for respondent, Harris Trust & Savings Bank.

 

The judgment of the court was delivered by

 

ROBINS J.A.: — These appeals, which were heard together, require the court to address essentially the same question albeit in different factual situations. The question is whether or under what circumstances individuals who are beneficial owners of real property are entitled to rely on the statutory right of prepayment provided by s. 18(1) of the Mortgages Act, R.S.O. 1990, c. M.40, and s. 10(1) of the Interest Act, R.S.C. 1985, c. I-15, to discharge long-term closed commercial mortgages given by corporations acting as their nominee or trustee.

 

THE LEGISLATION

 

Section 10(1) of the Interest Act gives any person, and this includes a corporation, liable to pay or entitled to redeem a mortgage, the right to prepay the outstanding balance on the mortgage after the expiry of five years. The section states:

10(1) Whenever any principal money or interest secured by mortgage on real property is not, under the terms of the mortgage, payable until a time more than five years after the date of the mortgage, then, if at any time after the

expiration of the five years, any person liable to pay or entitled to redeem the mortgage tenders or pays, to the person entitled to receive the money, the amount due for principal money and interest to the time of payment, as calculated under sections 6 to 9, together with three months further interest in lieu of notice, no further interest shall be chargeable, payable or recoverable at any time thereafter on the principal money or interest due under the mortgage.

Section 18(1) of the Mortgages Act is to the same effect. As with s. 10(1), this statute provides:

18(1) Where any principal money or interest secured by a mortgage of freehold or leasehold property is not, under the terms of the mortgage, payable until a time more than five years after the date of the mortgage, then, if at any time after the expiration of such five years any person liable to pay or entitled to redeem tenders or pays to the person entitled to receive the money the amount due for principal money and interest to the time of such tender or payment, together with three months further interest in lieu of notice, no further interest is chargeable, payable or recoverable at any time thereafter on the principal money or interest due under the mortgage.

The broad scope of these provisions is, however, limited by s. 10(2) and s. 18(2) of the respective statutes. These subsections specifically exempt any mortgage on real property “given by a joint stock company or any other corporation” from the operation of s. 10(1) and s. 18(1). Section 10(2) provides:

1(2) Nothing in this section applies to any mortgage on real property given by a joint stock company or other corporation, nor to any debenture issued by any such company or corporation, for the payment of which security has been given by way of mortgage on real property.

Section 18(2) of the Mortgages Act similarly exempts corporate mortgagors from the protection afforded by the preceding subsection. It states:

18(2) This section does not apply to any mortgage given by a joint stock company or other corporation nor to any debenture issued by any such company or corporation for the payment of which security has been given on freehold or leasehold property.

These statutes are plainly to the same effect and, in so far as these appeals are concerned, nothing turns on whether reference is made to the federal or the provincial enactment. The basic question here is whether the scope of the exemption clause is such as to preclude the mortgagors in the particular circumstances of these cases from availing themselves of the right of prepayment to which, but for the exemption clause, they would be entitled.

 

GENERAL OBSERVATIONS

 

The s. 10 right of prepayment was first enacted by Parliament in 1880. Shortly thereafter, the province passed what is now the s. 18 counterpart of the federal enactment. Subsection (1), as the parliamentary debates reveal (House of Common Debates, March 31. 1880, p. 954), was intended to remedy the problem of farmers being locked into long-term mortgages at high interest rates and being subjected to large bonuses or penalties when they sought prepayment. The exemption clause was enacted some ten years later in response to problems that s-s. 1 had created for corporations, particularly railway companies, in obtaining long-term financing by way of loans secured by mortgages of real property. Lenders were understandably reluctant to provide long-term money when it was open to borrowers to repay the loan after five years even though the mortgage was closed on its terms. Subsection (2) was added to remedy this problem and facilitate long-term commercial borrowing by exempting any mortgage “given by a joint stock company or other corporation” from the operation of s-s. (1). As a result, the application of s-s. (1) is restricted to non-corporate mortgagors.

There is little case-law dealing with the interaction between s-ss. (1) and (2). The only Supreme Court of Canada decision discussing these provisions, Royal Trust Co. v. Potash, [1986] 2 S.C.R. 351, 31 D.L.R. (4th) 321, is not on point. That case concerned the question of when the statutory right to prepay arises in a residential mortgage that had been extended or renewed beyond its original five-year period. Simply put, the court held that a renewal or extension agreement effectively re-dates the mortgage so as to commence another locked-in period of up to five years.

While that issue does not arise in these appeals, Wilson J.’s discussion of the interpretive approach to be applied to s. 10 is instructive. She ruled that s. 10 should be interpreted in the light of contemporary commercial reality if such an interpretation is compatible with the legislative language. At p. 358 S.C.R., p. 326 D.L.R., the learned judge noted that the court was being asked:

. . . to interpret and apply in a contemporary setting a section enacted in response to conditions prevailing a century ago when farmers were locked into long-term mortgages at exorbitant interest rates by money-lenders who were “eating up the vitals of the yeomanry of this country”

. . .

She went on to observe at p. 368 S.C.R., pp. 332-33 D.L.R. that:

While there is no doubt that the Legislature at the time it enacted s. 10 did so in light of the commercial practices of the day, I do not believe that this precludes the court from giving it an interpretation consonant with today’s commercial reality if such an interpretation is equally compatible with the legislative language.

The Ontario Law Reform Commission Report on Section 16 of the Mortgages Act (1971) (now s. 18 of the Act) provides a helpful statement with respect to the scope of s-ss. (1) and (2) and the basis upon which exemption is to be determined. At p. 9, the Commission makes the following observation with which I respectfully agree:

Subsection 2 determines exemption on the basis of the identity or status of a party to the mortgage contract, rather than upon the nature of the transaction of which the mortgage is an integral part. The working of subsection 1, which was enacted first, does not depend at all upon the identity or status of any person, natural or otherwise. Any mortgagor or his assignee is entitled to exercise the prepayment right if the mortgage satisfies the requirements of the subsection. The exemption granted by subsection 2 however, is determined by the identity of the mortgagor.

On the language of s. 10 and s. 18, the exemption granted by s-s. (2) must be determined by reference to the identity of the mortgagor and not by reference to the nature or purpose of the mortgage. No distinction is drawn between “consumer” and “commercial” mortgages. Although the rationale for enacting the exemption was to facilitate long-term commercial financing, s-s. (2) is worded so as to restrict the application of s-s. (1) to non-corporate borrowers. It follows that if an individual were to obtain long-term mortgage financing for commercial purposes, notwithstanding that the transaction was for such purposes, he or she would be entitled to take advantage of the statutory right of prepayment. By the same token, if a company were to obtain long-term financing for private or non-commercial purposes, the mortgage would be caught by the exemption clause and the mortgagor would have no statutory right of prepayment. As s-s. (2) is worded, the exemption is not dependent on the size of the company, the amount of the loan or the nature of the transaction of which the mortgage is an integral part. So long as the mortgage is a mortgage given by a company, the corporate mortgagor is excluded from the protection afforded by s-s. (1).

However, this question remains: if the corporate mortgagor is a nominee or trustee for a non-corporate beneficial owner, is the identity of the beneficial owner, rather than the identity of the corporate mortgagor, determinative of the applicability of the exemption clause? Similarly, is the exemption clause applicable if the party seeking to prepay a corporate mortgage pursuant to s-s. (1) is an individual “liable to pay or entitled to redeem” the mortgage? These questions, as we shall see, arise in both the Litowitz and Vale appeals where the contention is that if a mortgage is given by a company acting as nominee or trustee for non-corporate beneficial owners, the beneficial owners are entitled to the protection of s-s. (1) as are individuals who are liable to pay or entitled to redeem the mortgage. It is argued that in these circumstances the question of whether the exemption is applicable should not be determined solely or entirely on the basis of the identity of the mortgagor. In the Glied appeal, the issue is whether a mortgage given by a company and an individual as co-mortgagors attracts the exemption clause so as to extinguish the individual co- mortgagor’s statutory right of prepayment.

In resolving the issues raised by these appeals, regard must be had to the policy underlying this legislation. While it would not have been so described at the time the legislation was first enacted, in contemporary terms the legislation is consumer protection legislation. Sections 10 and 18 were clearly intended to protect individuals from being locked into long-term mortgages at what may become unfavourable interest rates by making mortgages given by them open for repayment after their first five years. This protection may not as a matter of public policy be contracted out of or waived. As Wilson J. held in Royal Trust Co. v. Potash, supra, at p. 373 S.C.R., p. 336 D.L.R.: “s. 10(1) was enacted in the public interest and . . . the long-standing rule against contracting out or waiver should apply to it”. This rule must be taken to apply equally to s. 18(1).

Regard must also be had to the practical objective of securing certainty and predictability in commercial lending markets. Parties to these transactions need to know where they stand and to govern their business affairs accordingly. The statutory right of prepayment represents a legislative limit on the general principle of freedom of contract. The exemption clause, on the other hand, reflects a legislative choice that freedom of contract should govern where a mortgage is given by a company. This choice is motivated by the objective of ensuring the availability of long-term sources of corporate financing. In deciding whether or not the exemption clause is applicable so as to preclude the statutory right of prepayment, certain practical realities should be recognized. In lending out funds on a long-term basis, lending institutions “match” those funds and make financial commitments on the strength of the mortgages being closed for the full term. With their profit dependent on their ability to match the length of their loans to the length of their financial commitments, lenders would be seriously disadvantaged if they could not lock in a borrower for a defined term. If s-s. (1) were so broadly applied as to create a significant risk that long-term closed commercial mortgages will nonetheless be repayable when interest rates fall, lenders will be deterred from providing long-term financing and borrowers will find their ability to obtain financing at more favourable long-term rates restricted. In effect, the purpose behind enacting the exemption clause will be frustrated.

With these general observations in mind, I turn to consider the issues raised by these appeals.

 

THE APPEALS

 

I.  Litowitz v. Royal Trust Corp. of Canada

This is an appeal by the appellants The Standard Life Assurance Company and its trustee Royal Trust Corporation of Canada from a judgment of Potts J. dated June 7, 1995 (now reported at (1995), 24 O.R. (3d) 607, 46 R.P.R. (2d) 10) allowing the respondents to prepay two mortgages pursuant to s. 18(1) of the Mortgages Act and s. 10(1) of the Interest Act.

 

(a)  The Facts

The two mortgages in question are on an apartment building at 125 Bamburgh Circle in Scarborough. One is a first mortgage in the amount of $11,025,000 which bears interest at 11 7/8 per cent per annum; the other is a second mortgage in the amount of $7,500,000 which bears interest at the same rate. The mortgages are each for 20-year terms ending in June 2010, and provide no right of prepayment.

The respondent Headway Property Investment 78-1 Inc. has been the registered owner of the mortgaged property since December 1987. Before then, title was registered in the name of Headway Corporation Limited. For the sake of clarity, I shall refer to these companies, respectively, as “New Headway” and “Old Headway”.

The project underlying the development of the property was promoted by prospectus in 1978 as a multi-unit residential apartment building (“MURB”) and involved the construction, ownership and operation of a 20-storey apartment building. The project was known as “Headway Property Investment 78-1”, and, according to the prospectus, its objective was to provide investors who were able to make a long-term investment “with an opportunity to earn cash income from property, enjoy capital appreciation and defer payment of income tax”. The public was offered, by way of a new issue of securities, some 310 units of ownership in the property. Registered title to the property was to be held by Old Headway.

To finance the acquisition of the land and construction of the building, $11,627,000 was borrowed from Exchequer Trust Company by way of a first mortgage or charge against the property. This mortgage was executed on November 3, 1978, by Old Headway as registered owner of the property. It bore interest at 10   per cent per annum, was for a term maturing in 1990, and was not open for repayment before maturity. The mortgage contains no reference to any agency or trust relationship and on its face was given solely by the company.

However, it appears that on the same date the mortgage was signed, another agreement was executed between Exchequer Trust, Headway Property Investment 78-1 and Old Headway. This agreement was never registered. I shall refer to it as “the side agreement”. In it, Headway Property Investment 78-1 was named as “mortgagor” and Old Headway was named as “agent”. Exchequer Trust acknowledged that the mortgagor represented itself as a joint enterprise composed of unitholders for the purpose of carrying out a common undertaking through the facility of a common agent. It was agreed that the unitholders were entitled to all the rights and subject to all of the obligations under the first charge. Their liability was limited to their proportionate holdings in the property but in the event of default the mortgagee’s recourse was to be against the property and not against other assets of the unitholders. The agreement did not indicate who the unitholders were or whether they were individuals or corporations.

In 1984, the respondent Gerald E. Litowitz and his associates acquired control of the property through a takeover proxy bid. They then put title to the property in the name of New Headway. In October 1984, a declaration of trust was entered into between New Headway and the unitholders of Headway Property Investment 78-1. New Headway was named as the trustee of the unitholders and declared that it held registered title to the property as trustee for the unitholders. In 1989, Litowitz and his associates acquired the majority of the units in the property through a company called Bamburgh Holdings Limited whose shareholders are companies representing the interests of the Litowitz group.

The first mortgage to Exchequer Trust went through a number of assignments before it matured in March 1990, with $11,025,000 owing on account of principal. In May 1990, the property was refinanced and, pursuant to the terms of the refinancing, the mortgage was assigned to Royal Trust as trustee for Standard Life. The time for payment of the outstanding $11,025,000 was extended for a further 20 years, and an additional $7,500,000 was advanced by way of a second mortgage for the same term. These are the first and second mortgages in issue and to which I referred earlier. Both mortgages are fully closed before maturity and exclude any prepayment privileges.

New Headway, as I have already noted, had by this stage become the registered owner of the property. In its capacity as mortgagor, it executed the second mortgage and an agreement extending and amending the first mortgage together with all other documents required for the refinancing. Prior to the advance of any mortgage funds, the company provided the appellants with minutes of meeting, financial statements, and other documents usual to corporate borrowings of this nature. These included documents to the effect that nothing restricted or limited the power of New Headway to give a mortgage; that Litowitz, as president of New Headway, had authority to execute documents on behalf of New Headway; and that the documents relating to the mortgage loan were duly authorized, executed and delivered and constituted legal, valid and binding obligations of New Headway enforceable in accordance with their terms. The appellants were also provided with a copy of the original Headway Property Investment 78-1 prospectus and documents showing that New Headway held the property as bare trustee for the unitholders and was fully authorized to enter into and complete this mortgage transaction. At that time, about two- thirds of the units were owned by Bamburgh Holdings Limited; the remaining unitholders have not been identified but it can be assumed that they are mainly individuals. The appellants were not provided with a copy of the side agreement.

 

(b)  The Judgment in Appeal

On December 12, 1994, the respondents applied for a determination of whether the first and second mortgages could be redeemed on or after the fifth anniversary of the granting of the extension to the first mortgage and the granting of the second mortgage. The application came on in motions court before Potts J. who, as I have indicated, held that the respondents were entitled to prepay the mortgages.

In holding that the exemption clause did not apply to the circumstances of this case, the learned judge treated the first mortgage originally given by Old Headway as including the terms of the unregistered side agreement. Based on the language of the side agreement, he concluded that the first mortgage explicitly referred to an agency relationship between the corporation and the unitholders, and that each unitholder was liable to the mortgagee for his or her pro rata share of the outstanding debt. With respect to the second mortgage, the judge made reference to the documents indicating that New Headway held title to the property as bare trustee for the unitholders who were liable for the debt based on their pro rata ownership in the project. The judge observed (p. 616) that the individual unitholders who were attempting to prepay the mortgages comprised “a group of fairly sophisticated investors seeking to make a profit from a residential apartment building, not their own residence”. He found that, while they were in a very different situation than the farmers whom the legislation was enacted to protect, they nevertheless qualified as “any person liable to pay or entitled to redeem the mortgage” within the meaning of s-s. (1).

On the question of whether the corporate exemption clause applied, the judge looked to the purpose behind the exemption which, as he said, was to redress the difficulties posed by the statutory prepayment rights to “the speedy development of railways and other large ventures”. This purpose, he concluded, was not engaged by the financing arrangements at issue. To this end, he said at pp. 616-17:

The applicants’ venture is not a corporate undertaking to build a railway or any similar project. The investment in Headway is a relatively small project: one apartment building, with a group of investors seeking to make a profit without being too involved in the business transactions. For reasons of convenience, the investors have chosen to act through a unanimously appointed agent.

I also comment that s. 10(2) was not enacted to cover any situation where a corporate entity is present, much less any transaction that has the “flavour” of a corporate transaction.

In the view of the motions judge, the appropriate test for determining whether the exemption clause applies (p. 617) is not “[w]hether the transactions in question have any of the typical characteristics of a corporate venture” but whether the mortgagor is “any person” under s-s. (1). Applying this test, he held that the exemption did not apply to these mortgages because the individual unitholders qualified as “any person” within the meaning of s-s. (1). He expressed his conclusion as follows at p. 618: The scope of s. 10(1) of the Interest Act (and, consequently, s. 18(1) of the Mortgages Act) covers the applicants’ situation, despite the existence of a corporate bare trustee as agent for the unitholders. It is the unitholders that are liable for their pro rata share of the investment. The mere fact that for reasons of convenience they have chosen to appoint an agent to carry out their transactions should not affect their statutory right.

 

(c)  Decision

Much argument before this court was directed to whether the appellant knew of the trust or agency relationship before completing the transaction and whether the unitholders were in fact persons liable to pay or redeem the mortgages. On the view I take of the case, it is unnecessary to consider these questions or detail the evidence in this regard. I am prepared to accept that the appellants knew or had reason to know that title to the mortgaged lands was held by Old and New Headway as agent or trustee on behalf of the beneficial owners and that the mortgages were executed on their behalf by these companies. Given the limited liability of the individual unitholders, I would doubt that they can be considered persons “liable to pay” within the meaning of s-s. (1). However, whether they are persons liable to pay or not makes little difference. They are clearly persons “entitled to redeem” the mortgages and, as such, fall within the category of persons covered by s-s. (1). Accordingly, I propose to treat the unitholders as persons “liable to pay or entitled to redeem” for the purposes of this appeal.

However, taking the unitholders’ case at its highest, I am respectively unable to agree that they are entitled to prepay the mortgages in issue. Contrary to the approach taken by the learned motions judge, in my opinion, s-s. (2) is not confined in its application to the financing of corporate undertakings to build railways or other long-term ventures similar to those that prompted the enactment of the exemption clause. Moreover, even if a project involving mortgage financing of over $18,500,000 can be considered “a relatively small project”, I think this is irrelevant. Subsection (2), as I observed earlier, does not refer to the nature, size or purpose of the transaction of which the mortgage is an integral part. As the subsection is worded, exemption is to be determined on the basis of the identity of the mortgagor.

Furthermore, as the Supreme Court of Canada pointed out in Royal Trust Co. v. Potash, supra, the legislation should be given an interpretation consonant with today’s commercial reality. There can be little doubt that in this day and age corporate ventures of all sizes may require long-term sources of financing. The exemption clause should be read with this commercial reality in mind and not so as to deter lenders from providing long-term mortgage financing for ventures such as, to take an example, the real estate developments for which financing was provided in the appeals now before the court.

Individuals may for any number of legitimate business reasons choose to hold property in the name of a company and obtain mortgage financing through the company, and commonly do. That is the situation in the present case. The unitholders here chose to conduct their business through a company. Long before the appellants came into the picture, ownership was registered in the name of the company with nothing on title to indicate that the property was held in a representative capacity. It was the company that applied for and obtained the appellants’ commitment for 20-year first and second mortgages and, as registered owner, executed the necessary mortgage documents. There is no question that the company was authorized to arrange the financing and empowered to enter into the mortgages. Nor is there any question that the mortgage agreements were intended to constitute legal, valid and binding obligations of the company enforceable in accordance with their terms. This manifestly commercial transaction, in short, was conducted and completed entirely on the basis that the mortgages were mortgages given by the company.

The fact that beneficial ownership may be made up of individual investors, in my opinion, does not remove the mortgages from the exemption or entitle the investors to the protection of s-s. (1). The mortgages remain mortgages given by a company and, as such, are subject to s-s. (2). Unless the need to protect consumers dictates otherwise, I see no reason to look past the corporate entity through which the investors have chosen to conduct their business affairs. In commercial transactions, where nothing on title or in the mortgage calls into question a corporate owner’s status or authority to mortgage the property, lenders ought to be entitled to rely on the title documents to determine the mortgagor’s prepayment rights. They ought not to be required to assume a due diligence obligation to ensure that beneficial ownership is not made up in whole or in part of individuals.

The argument here is that the appellants knew or ought to have known before the transaction was concluded that the corporate mortgagor was a trustee for individual unitholders. This, it is said, distinguishes this case from cases in which the mortgagee learned of the trusteeship sometime after the transaction was completed. In my opinion, on the present facts, the result is the same in either situation. The fact remains that the unitholders structured their affairs in this manner of their own volition. For reasons they doubtless considered valid and beneficial, they chose to use a corporation to achieve the perceived advantages of the MURB and to have the corporation arrange and agree to long-term financing that would not have been available to individuals. As the mortgages and the accompanying documents and correspondence make clear, the company was treated by everyone concerned, including the unitholders’ representative, as the borrower, and the transaction was concluded on that basis.

In my opinion, there is no policy reason for allowing the unitholders on whose behalf the company obtained the mortgages to escape the no prepayment terms even if the mortgagee was aware of their beneficial interest. Indeed, to do so, as the judgment in appeal does, would be to permit the unitholders, unfairly in my view, to both approbate and reprobate. On the one hand, they would have a corporation act as mortgagor so as to enable them to procure long-term definitive mortgage financing while, on the other hand, they would have themselves treated as the mortgagors should interest rates fall. That is precisely what the unitholders seek to do here. They authorized a 20-year loan at an interest rate lower than that on a five-

year loan (which was available) and, now that interest rates have fallen, they seek to have the mortgage treated as though it were a five-year mortgage. Meanwhile, Standard Trust, relying on the covenants given by the corporate mortgagor, proceeded to “match funds” and make commitments based on the market cost of borrowing for the term of the mortgages. If the judgment in appeal were to stand, Standard Trust would be obliged to pay interest for the balance of the 20-year term at 1990 market rates while earning interest on a reinvestment of the outstanding principal at today’s rates. Needless to add, the differential is substantial.

As I noted in my general observations at the outset of these reasons, the statutory right of prepayment constitutes a legislative limitation on the general principle of freedom of contract so as to protect individuals from being locked into long-term mortgages. The exemption clause, on the other hand, permits freedom of contract to prevail where a mortgage is given by a company so as to ensure the availability of long- term sources of corporate financing. In this case, the mortgages at issue did indeed provide a source of long-term financing to a corporation for commercial purposes. This is not a case of an individual waiving or contracting out of the legislation. The consumer protection function served by the statutory right of prepayment is not engaged here regardless of whether some or all of the beneficial owners of the mortgaged property are individuals. To hold that the exemption clause is inapplicable would be to say that lenders cannot rest on title documents or the terms of a mortgage in determining whether a long-term closed corporate mortgage is subject to a statutory right of repayment. To do this would have the effect of re- introducing the uncertainty that the exemption clause was enacted to eliminate.

In sum, the mortgages in question were and remain mortgages given by a corporation and, therefore, are not subject to the statutory right of prepayment. The exemption clause must be applied as it is written. Consumer protection does not require that the clause be given any wider reading in this case than the plain and ordinary meaning of its words.

Finally, with respect to the respondents’ alternative position, I respectfully disagree with the motions judge’s view that the test as to the applicability of the exemption clause turns on the identity of the persons “liable to pay or entitled to redeem the mortgages” and his conclusion that the exemption did not apply to these mortgages because the individual unitholders so qualified.

In my opinion, the wording of s-ss. (1) and (2) is at odds with this interpretation. Reading the section as a whole, the prepayment protection is not intended to apply to every person liable to pay or entitled to redeem a mortgage. A person, such as a guarantor, may be liable to pay a mortgage just as a person included in the definition of a “mortgagor” under s. 1 of the Mortgages Act (i.e., “‘mortgagor’ includes any person . . . entitled to redeem a mortgage”) may be a person entitled to redeem a mortgage. But such persons have no right to prepay the mortgage if the mortgage is “a mortgage given by a corporation”.

The scope of the right of prepayment is cast so as to include anyone who is liable to pay or entitled to redeem a mortgage. However, this right is subject to the exemption clause — and that clause is based on the identity of the party who gives a mortgage. A mortgage can be given only by a titleholder and, if the titleholder is a corporation, a mortgage given by the corporation will, by virtue of the exemption, be excluded from the protection afforded by s-s. (1). Liability to pay or entitlement to redeem a mortgage is not the criterion for determining the applicability of s-s. (1). Thus, accepting as I do that the unitholders may be “persons liable to pay or entitled to redeem”, the fact that the mortgages were given by a company precludes them from exercising the prepayment rights to which they would be entitled had the mortgage been given by a non-corporate mortgagor.

For these reasons, I would allow the appeal with costs, set aside the order of Potts J. and in place thereof order that the respondents’ application to exercise a right of prepayment under s. 10(1) of the Interest Act and s. 18(1) of the Mortgages Act be dismissed with costs.

 

II.  Vale v. Sun Life Assurance Co. of Canada

This is an appeal by the appellants Joel Vale, H.L.V. Trading Limited and J.V. Trading Limited from a judgment of R.A. Blair J.  dated July 5, 1995 (now reported at (1995), 24 O.R. (3d) 619, 47 R.P.R. (2d) 1) dismissing their claim for a declaration that three mortgages in favour of the respondent Sun Life Assurance Company of Canada are prepayable on the terms provided in s. 10(1) of the Interest Act and s. 18(1) of the Mortgages Act.

 

(a)  The Facts

The mortgages in issue are on three apartment buildings in the City of Toronto, one at 77 Spencer Ave., another at 829 Birchmount Rd., and a third at 470 Roncesvalles Ave. They are in the principal amount of $1,750,000, $3,700,000 and $1,250,000, respectively, and bear interest at either 11 or 11.25 per cent per annum. The Spencer and Birchmount mortgages are for 15-year terms maturing in the years 2002 and 2005; the Roncesvalles mortgage is for a 20-year term maturing in 2009. Each mortgage is closed and contains a clause providing that there shall be “no prepayment before the expiry of the term”.

The appellant J.V. Trading Limited holds title to one of the mortgaged properties (the Roncesvalles apartment) while the appellant H.L.V. Trading Limited holds title to the other two. In each transaction, the mortgage was duly executed by the appropriate corporate appellant as mortgagor in favour of Sun Life as mortgagee. The personal appellant Joel Vale signed the mortgages as an “Additional Covenantor” agreeing to be liable to the mortgagee in the same manner and to the same extent as if he had executed the mortgage as mortgagor.

After each mortgage had been in effect for five years, the appellant Vale sought to prepay the full amount then outstanding together with a further three months’ interest on the basis of s. 10(1) of the Interest Act and s. 18(1) of the Mortgages Act. It was Vale’s position that he has a statutory right to prepay the mortgages notwithstanding the no prepayment clause on the ground that he is in fact the beneficial owner of the properties or, alternatively, that he is a person liable to pay and entitled to redeem the mortgages. Sun Life refused to accept prepayment on the basis that the mortgages were given by corporations and, in accordance with s. 10(2) and s. 18(2), were therefore exempt from the statutory prepayment provisions.

 

(b)  The Judgment in Appeal

The learned trial judge accepted that Vale was indeed the beneficial owner of the apartment buildings. Although no declaration of trust was executed, he found that, at least from Vale’s perspective, the companies were corporate nominees or bare trustees for Vale. The buildings were treated as Vale’s personal property in his net worth statement and for income tax purposes. He was the sole and directing mind of the companies; the companies exercised no independent decision-making functions; and, as their financial statements showed, had no assets. Title was put in their name, rather than in Vale’s, only to facilitate rent review applications and to avoid the nuisance of Vale being contacted at home by tenants.

The trial judge, however, was unable to find that Sun Life entered into these transactions and advanced the mortgage loans on the basis that the corporations were acting as corporate nominees or bare trustees for Vale. The mortgage documents themselves did not refer to a trust relationship between the corporate mortgagors and Vale, and no declaration of trust indicating that such was the case was ever executed or registered. Neither the mortgage itself nor any of the related documentation contained “even a hint” that the mortgages were given by anyone other than the registered corporate titleholders.

Blair J. concluded that it made no difference that Vale was in fact the beneficial owner of the property. The mortgages, he said, “did not cease to be mortgages given by a corporation merely because of that circumstance”. Sun Life was not aware that the corporate mortgagors were bare trustees for Vale. The mortgages in question were “mortgages given by a corporation” within the meaning of s-s. (2) and, hence, the trial judge held, the statutory prepayment privileges did not apply. As for Vale’s contention to the effect that he is “a person liable to pay or entitled to redeem” and, as such, entitled to the protection of s-s. (1), the trial judge was of the view that liability to pay or entitlement to redeem is not determinative of the applicability of s-s. (1). Even though Vale is an “Additional Covenantor” or guarantor and “jointly and severally liable with the mortgagor as principal debtor and not as surety” or is a “mortgagor” as that term is defined in s. 1 of the Mortgages Act (i.e., “‘mortgagor’ includes any person . . . entitled to redeem a mortgage”), he has no right to prepay if the mortgage is “a mortgage given by a corporation”. “While anyone may agree to be jointly and severally liable, or liable in any other respect, for the payment of the money”, the trial judge said (p. 637), “only the title-holder can ‘give’ the charge on the property”.

 

(c)  Decision

I respectfully agree with Blair J.’s disposition of this case. In my opinion, the exemption clause was properly held to apply to the three mortgages in issue. The fact that a corporate mortgagor acted as nominee or trustee for the non- corporate beneficial owner does not in the circumstances of this case entitle the beneficial owner to the statutory prepayment privileges afforded by s-s. (1).

These mortgages were given by a corporation within the meaning of the exemption clause. They constitute commercial loans for the purpose of financing commercial ventures. Vale chose to take title to the properties in the names of his companies. He bargained for and obtained mortgage financing for the longest term at the most favourable interest rates he could then negotiate, and chose to do so through these corporate vehicles. Given my understanding of the underlying purposes of the statutory protection and the corporate exemption, which I set out in Litowitz, supra, and need not repeat, there is no reason not to construe the section literally in this case. As Blair J. put it at p. 636, “I see no reason why the court should strain to find an interpretation which narrows the

corporate exclusion in order to suit Mr. Vale’s agenda of today”.

I am also of the opinion that the trial judge properly rejected the appellants’ alternate submission to the effect that, because Vale was a person “liable to pay or entitled to redeem” the mortgages, he was entitled to the benefit of s-s. (1). The applicability of the exemption clause, as I noted above in the Litowitz appeal, does not depend on whether the person seeking to prepay is liable to pay or entitled to redeem the mortgage. While an individual may be personally liable for payment of a mortgage or may be entitled to redeem the mortgage, where the mortgage is executed by the corporate titleholder as mortgagor, the mortgage is and remains a “mortgage given by a corporation” and is thus outside the ambit of s-s. (1). Accordingly, an individual who may be liable to pay or entitled to redeem a mortgage, has no statutory right of prepayment.

I should make reference to Kates v. Maritime Life Assurance Co., [1992] O.J. No. 1903 (Gen. Div.), a decision upon which the appellant relies in support of his position that he is entitled to the benefit of the statutory protection. In this regard, I think it significant that the application in that case was unopposed and, while an appeal was subsequently brought, the matter was settled before the appeal was heard. I would also note that the prepayment issue arose, not, as in this case, in the context of a loan to finance an undertaking that was, and would remain, a commercial enterprise, but in the context of a loan on residential condominium units. It seems to me that this may well raise questions as to the rights of mortgagees under the Condominium Act, R.S.O. 1990, c. C.26, and, in particular, under ss. 7(9), 7(10) and 60 thereof. The court in Kates was not directed to these concerns: see 511666 Ontario Ltd. v. Confederation Life Insurance Co. (1985), 50 O.R. (2d) 181, 35 R.P.R. 293 (H.C.J.); and Confederation Life Insurance Co. v. Shepherd, McKenzie, Plaxton, Little & Jenkins (1992), 29 R.P.R. (2d) 271 (Ont. Gen. Div.), affirmed in part (1996), 88 O.A.C. 398 (C.A.).

 

In any event, as Blair J. pointed out at p. 634, the situations here and in Kates are distinguishable, and my conclusion in this case is unaffected by that decision. In these circumstances, I consider it advisable to leave the issues raised in Kates for another day and not pass judgment on its correctness at this stage save in this respect. To the extent that the decision is based upon the premise that the corporate exclusion of s. 18(2) does not apply because the beneficiaries under the bare trust would be liable on the covenant to pay the mortgage, I am of the view that the decision is in error. As I have already said, the test is whether the mortgage is given by a company and not whether the person seeking to rely upon the right to pre-pay the mortgages is liable to pay the mortgage. I would add that the question of whether a beneficial owner who, unlike the appellant Vale, has not joined in the mortgage in any capacity may be liable on the covenant was not addressed in this appeal, and I am not to be taken as having ruled on that issue.

Finally, the appellant Vale argues, by detailed reference to the evidence, that the trial judge erred in finding that Sun Life was unaware that the corporations were merely his nominee or trustee and entered the mortgages on his behalf in that capacity. While there is some evidence tending to support that contention, viewing the evidence as a whole, there is more than ample support for the trial judge’s factual findings. I see no error, let alone any palpable and overriding error, that warrants this court’s intervention in this regard. In any event, for the reasons I gave in Litowitz, I would not have come to any different conclusion on the present facts even if that were the case.

Accordingly, I would dismiss the appeal with costs.

III.  Glied v. Confederation Life Insurance Co.

This is an appeal by the appellant William Glied from an order dismissing his application for a declaration that he is entitled to discharge a first and second mortgage on property in which he has an ownership interest upon payment of the outstanding principal and three months interest in accordance with s. 18(1) of the Mortgages Act and s. 10(1) of the Interest Act.

(a)  The Facts

The appellant is the owner of an undivided one-quarter leasehold interest in an apartment building at 7 Jackes Avenue, Toronto. The remaining leasehold interest in the property is held by numbered companies owned or controlled by him or members of his family.

In October 1985, the appellant and the corporate owners, as co-mortgagors, executed a first mortgage in favour of the respondent Confederation Life Insurance Company. The mortgage secures the principal amount of $5,926,000, bears interest at 11.75 per cent per annum, and is for a term of 17 years maturing in October 2002. In August 1994, the mortgage was assigned to the respondent Harris Trust and Savings Bank.

In August 1988, Confederation Life loaned the appellant and the corporate owners a further $3,950,000 on the security of a second mortgage against the property. This mortgage bears interest at 18 per cent per annum and, like the first mortgage, matures in October 2002, and contains no prepayment privileges. Under the terms of these mortgages, the appellant is jointly and severally liable with the corporate mortgagors for the payment of all principal and interest and, in the event of default, would, as a mortgagor, be entitled to redeem the entire mortgage debt.

In November, 1994, the appellant requested mortgage statements for the purpose of discharging the mortgages on January 13, 1995. The respondents took the position that they would permit prepayment only upon receipt of a “yield maintenance for early repayment” of $623,387.55 on the first mortgage and $337,420.59 on the second, amounts representing approximately one year’s interest in each case. The appellant then brought these proceedings seeking, inter alia, a declaration that he as an individual is entitled under s. 18(1) and s. 10(1) to discharge these mortgages upon payment of three months’ interest and the outstanding principal.

 

(b)  The Judgment in Appeal

The matter came on in motions court before Potts J. who, in a very brief endorsement [December 22, 1994], dismissed the appellant’s application stating “[t]he exemption applies to a joint stock corp. which does not enjoy the benefit of s. 18(1). Accordingly, the plaintiff is not entitled to s. 18(1)”.

 

(c)  Decision

In this case, unlike Litowitz and Vale, this appellant is clearly shown on the mortgages as a co-mortgagor. He executed the mortgages and assumed responsibility for payment thereof in his personal capacity. His individual status is readily apparent on the face of the documents. Both mortgages contain the usual declarations as to age, marital status and the like. The respondent mortgagees could not have been unaware that the mortgages were being given by three corporations and a natural person.

The respondents contend that the exemption clause governs this commercial financing. In their submission, the exemption is not limited to mortgages given solely by a corporation; it applies equally to mortgages given jointly by individuals and corporations. Hence, as long as a corporate co-mortgagor holds any interest, even a 1 per cent interest, in the property and joins in the mortgage, the exemption extends to the mortgage. To uphold the appellant’s position, the respondents contend, would produce a commercial anomaly in the sense that the mortgagors in this large commercial borrowing will receive a windfall by avoiding clear payment obligations simply because an individual co-mortgagor holds a minority interest in the property. The respondents do not argue alternatively, nor does the appellant, that the appellant’s right to prepayment should extend only to his one-quarter interest in the property.

There do not appear to be any prior cases involving a mortgage of this nature. The cases to which the respondents have made reference (e.g., Wall v. Maritime Life Assurance Co. (1992), 22 R.P.R. (2d) 166 at pp. 169, 173-74, 64 B.C.L.R. (2d) 358 (S.C.); First City Trust Co. v. Syrnyk, [1985] 5 W.W.R. 285 at pp. 286-87, 43 Sask. R. 236 (Q.B.); Deb-Bac Investments Ltd. v. Imperial Life Assurance Co., [1994] O.J. 379 (Gen. Div.), at pp. 2-3; 233467 B.C. Ltd. v. Montreal Trust Co. (1993), 28 R.P.R. (2d) 313 at p. 317 (B.C.S.C.), affirmed [1994] B.C.J. 195, 115 D.L.R. (4th) 124 (C.A.)) all involve mortgages given solely by a company.

The wording of s-s. (1) is such that where an individual obtains a long-term closed mortgage, albeit for manifestly commercial purposes, the exemption clause does not apply. Sections 10 and 18 draw no distinction between consumer and commercial mortgages. Subsection (2), as I observed earlier, determines exemption solely on the basis of the identity or status of a party to the mortgage and not upon the nature of the transaction of which the mortgage is an integral part. Subsection (2) comes into play when a mortgage is given by a company regardless of the purpose of the loan. Similarly, when a mortgage is given by an individual, the individual is entitled to the statutory right of prepayment regardless of the purpose of the loan. In this case, it is common ground that had the mortgages been given by the appellant alone on his interest, he would be entitled to the statutory protection notwithstanding the commercial nature of the enterprise. The question then is whether he is precluded by s-s. (2) from relying on his statutory right of prepayment when the mortgage is given jointly by him and his corporate co-owners.

As this legislation is framed, I find myself compelled to the conclusion that an individual’s statutory right of repayment is not extinguished when a mortgage is given by the individual and a company as co-mortgagors. The mortgages in issue were given, not by a company but by a company and an individual. The individual is liable for the entire mortgage debt even though he is a part-owner of the property. The extent of his interest seems to me an immaterial consideration under s. 18 and s. 10. Determining an individual’s statutory prepayment rights by reference to whether he or she holds a minority or a majority or any particular percentage interest in the property is an approach not prescribed by the legislation and which cannot be imported therein. In Litowitz and Vale, I expressed the opinion, consistent with the objective of certainty and predictability in commercial lending markets, that lenders ought not to be required to go beyond the terms of the mortgage to determine if the mortgage can be prepaid. Subject to the need to protect consumers, it is the identity of the corporate mortgagor, and not that of the beneficial owner, that is determinative of the applicability of the exemption clause. The conclusion that the exemption clause is inapplicable to an individual co-mortgagor likewise does not require lenders to go beyond the terms of the mortgage to determine if the mortgage can be prepaid. Lenders surely know or, if not, should know, that individuals possess a statutory right to prepay a mortgage regardless of the express terms of the mortgage or the nature of the loan. If they nonetheless choose to provide long-term financing on the security of closed mortgages which, on their face, are given in part by individuals, they must accept the possibility of early repayment.

I am constrained to add that I would have preferred to have been able to resolve this issue on the basis of the commercial nature of the loan. Commercial and consumer mortgages have little in common other than that land is being used as security for a debt. The distinction between these classes of mortgages, in my opinion, should be statutorily recognized. The Ontario Law Reform Commission in its Report on Section 16 of the Mortgages Act — to which I adverted earlier and, more recently, in its Report on the Law of Mortgages (1987) has recognized the legitimacy of the distinction. This appeal, and indeed the others dealt with in these reasons, illustrates the need for legislative reform in this area of the law.

For these reasons, I would allow the appeal, set aside the order of Potts J. and in place thereof issue an order declaring that the appellant Glied is entitled to pay the outstanding principal, together with three months’ interest, pursuant to s. 10(1) of the Interest Act and s. 18(1) of the Mortgages Act, in full satisfaction of the two mortgages. The appellant has requested a reference to determine the damages sustained by him as a result of the respondents’ refusal to allow him to discharge these mortgages. The damages requested are referable to the difference between the interest paid on the mortgages from the date the appellant was prepared to prepay them, and the interest that would have been payable on a refinancing of the property as of that date. The damages will be payable only with respect to the appellant’s one-quarter interest in the property. If the parties are unable to agree upon the damages, I would order a reference.

 

The appellant is entitled to his costs here and in the court below.

 

Orders accordingly.

RPLT CRPT