Mortgage Broker

44 | fall 2015 mbabc.ca MORTGAGEBROKER In certain circumstances, the law empowers the court to grant defaulting borrowers relief from excessively harsh penalties. legalease A LENDER IS OFTEN in a comparatively stronger position than a borrower in structuring the mortgage relationship. At times the lender would like to include in the transaction severe consequences, such as a large additional payment to be made by the borrower to the lender if the borrower defaults under the mortgage. Is the lender free to make these consequences as severe as the borrower, who is sometimes in dire circumstances, will accept? No, the law imposes limits on these clauses by empowering the court to grant borrowers relief from excessively harsh requirements in certain circumstances. e Supreme Court of British Columbia in Do v. Nichols, 2015 BCSC 1069 recently looked at the issue of penalties and forfeitures and set out guidelines, which are of use to the mortgage broker. We will look at the facts of the case, what determines whether a required payment is a penalty, and the consequences of a payment being found to be a penalty. We will conclude with some takeaways for the mortgage broker. The Facts e buyer agreed to purchase development property from the sellers for $1.7 million. e sellers agreed to take the necessary steps and pay the costs to subdivide the property in order to create two waterfront lots and non-waterfront lots from the parent property. e buyer would keep the waterfront lots and convey the non-waterfront lots back to the sellers. At about the same time as the agreement, the existing lender who had security over all of the sellers' property (including another parcel) started the foreclosure process. About six months later, the lender obtained order absolute (meaning the lender could take title to the security property) but, in order to give the sellers additional time to redeem the mortgage, did not execute on it. In that situation the sellers and the buyer entered into a new agreement regarding the properties. e price remained unchanged and the sellers still had the opportunity to acquire the non-waterfront portions aer subdivision but the agreement was now much more onerous for the sellers. Now: ■ the sellers were to acquire the subdivision by a fixed date rather than there being no time limit in which to complete the subdivision; ■ if the sellers did not obtain the subdivision they were to pay the buyer $500,000; ■ the $500,000 was to be secured by an inter alia mortgage on the sellers' other property; ■ the sellers were to obtain an appraisal of the subdivision by a fixed date before completion, as if the subdivision had been completed. e subdivision plan was to be submitted by the sellers within 35 days of the appraisal; ■ the non-waterfront portion of the property was to be transferred back to the sellers at a price of $300,000 if the waterfront lots appraised for at least $1.9 million (or if the sellers paid $300,000 plus any appraised value less than $1.9 million); and ■ if the sellers did not make up the difference or if the subdivision was not complete, the buyer was to receive all of the titles and aer 35 days following the appraisal the buyer could enforce the $500,000 security. e transaction was completed and the sellers used the sale proceeds to pay out the lender. e deadline for completing the subdivision was extended for one year following the completion of the sale. No application for sub- division was made in the time allowed. Aer some time the buyer commenced foreclosure proceedings on the $500,000 mortgage registered against the sellers' other property. e buyer asked the Court to grant the foreclosure order, granting the sellers one day to pay the mortgage balance and an immediate order for sale of the subject property. e sellers asked the Court to release them from the obligations of the $500,000 mortgage, claiming the mortgage was a penalty from which they should be relieved. Levelling the Mortgage Negotiating Table Ray Basi Director of Policy & Education raybasi@mbabc.ca Harsh mortgage terms can produce harsh results … for the lender

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