Mortgage Broker

46 | fall 2015 mbabc.ca MORTGAGEBROKER legalease her in the power of the stronger; and ■ substantial unfairness in the bargain (such as undue advantage or benefits secured as a result of that inequality by the stronger party). How do the factors apply in this case? Penalty versus liquidated damages e parties must have agreed that $1.7 million was a fair pre-subdivision price for the property being sold. ere was no evidence that the parties had any reason to believe the value would decrease in the absence of future subdivision or that the property at the time of trial was worth any less than what the buyer paid for it. If the sellers did not submit the subdivision plans, the only loss the buyer would suffer would be the loss of any increased value the subdivision was expected to create. ere was no evidence to indicate the amount of such a loss. Even if there was to be such a loss, the buyer could mitigate it by applying for the subdivision himself. ere was no evidence to suggest the costs of such mitigation could have been contemplated as being anywhere close to $500,000. As well, the $500,000 was to be payable even if the waterfront lots appraised only marginally less than $1.9 million, even if the sellers performed their obligations fully and the lower price was caused by an external cause such as less favourable market conditions. In the circumstances, the $500,000 requirement (as the buyer admitted) was to ensure the subdivision took place. e Court said it was a "fear" clause. It was a penalty and not liquidated damages. Is relief appropriate? e differences between the initial agreement and the second agreement were substantially more onerous for the sellers, including the obligation to pay $500,000 in the absence of subdivision. By the time of the second agreement, the sellers were facing losing all of their property to the existing lender who had obtained a court order to take the property but was holding off enforcing it. It was too late for the sellers to find another buyer and, to have any hope of salvaging things, the sellers had no choice but to agree with whatever new terms the buyer demanded. ere was inequality in the position of the parties. It arose from the distress the sellers were facing and it le them in the power of the buyer. Because of this the sellers had unusual inability to protect their own interests. e first branch of the test for unconscionability was satisfied. e second branch was satisfied because, as discussed above, the required payment bears no relationship to any expected real damages. e sellers were made to guarantee a future sale price over which the market, not the sellers, had control. No reasonable party with real bargaining power would accept these terms. e terms amount to an undue advantage the buyer was able to secure only because of the desperate situation in which the sellers found themselves. e Court applied s.24 of the Law and Equity Act and relieved the sellers from obligations under the $500,000 mortgage. e buyer was ordered to pay costs of the court action. The Takeaway e best deal truly available to a lender might not be the most onerous mortgage to which a borrower will agree. Payments which are triggered by mortgage defaults should bear resemblance to actual costs which are triggered by the defaults; they should be genuine pre- estimates of damages. ey should certainly not have as their essential purpose to scare the party into compliance. Not following these suggestions can, particularly aer allowing for court-ordered relief and court costs, cause the lender to suffer a significant loss on the investment.

• Cover