



COURT OF APPEAL FOR ONTARIO

CITATION: Walia v. 2155982 Ontario Inc.,
    2020 ONCA 493

DATE: 20200804

DOCKET: C66651

Huscroft, Zarnett and Coroza
    JJ.A.

BETWEEN

Surendra
    Walia

Plaintiff (Appellant)

and

2155982 Ontario Inc.
, Prem Chand Sharma,
Agim Mollaj


and Armoclan Engineering
    Ltd.

Defendants (
Respondents
)

Amandeep
    Sidhu and Shaun Singh, for the appellant

Gregory
    Weedon and Melissa Truong, for the respondents

Heard:
    in writing

On appeal
    from the judgment of Justice Pamela Hebner of the Superior Court of Justice,
    dated August 23, 2018, with reasons reported at 2019 ONSC 1059.

REASONS FOR DECISION

[1]

The appellant, Surendra Walia (Walia), loaned
    money to 2155982 Ontario Inc. (215), which was jointly owned by Prem Sharma
    (Sharma) and Agim Mollaj (Mollaj). 215 owned properties located in Drumbo
    and Stratford, Ontario.

[2]

Initially, 215 secured the sum of $208,500 from
    Walia on October 27, 2014 and granted him a mortgage over the property in
    Drumbo. The mortgage commitment was for a three-month term and the interest
    rate on the mortgage was 12 percent. Sharma and Mollaj signed the mortgage
    documents on behalf of 215 and in their personal capacities as guarantors.

[3]

On December 24, 2014, 215 secured a further $141,500
    pursuant to a second mortgage commitment ($350,000 in total as the registered
    amount). This mortgage commitment was for a four-month term and the interest
    rate on the mortgage was 12 percent. However, the second mortgage commitment
    also contained a condition that if the mortgage matured and was not paid, or
    there was a default of any payment, the interest rate would increase to 21
    percent. Again, Sharma and Mollaj signed the mortgage documents.

[4]

The mortgage matured on April 28, 2015 and it
    was not paid. A renewal agreement, dated April 24, 2015, was signed only by
    Sharma on behalf of 215, increasing the interest rate to 21 percent per annum,
    with payments to continue at 12 percent and the difference in interest to be
    paid as a lump sum at the time of sale of the property.

[5]

By early 2017, 215 stopped making monthly
    payments on the mortgage. In September 2017, Walia filed a statement of claim
    to enforce the mortgage on the Drumbo property. In November 2017, the mortgage on
    the Drumbo property was transferred to the Stratford property. 215 then sold
    the Drumbo property.

[6]

No further payments were made on the transferred
    mortgage. On January 4, 2018, Walia commenced an action to enforce the mortgage
    on the Stratford property. On March 22, 2018, he brought a motion for summary
    judgment against 215 and Mollaj as the guarantor, seeking possession of the
    Stratford property and prejudgment and postjudgment interest at the rate of 21
    percent. In the alternative, Walia sought prejudgment and postjudgment interest
    at the rate of 12 percent.

[7]

The motion judge declared that the condition in the
    second mortgage commitment that increased the interest rate from 12 percent to
    21 percent was invalid, as it violated s. 8 of the
Interest Act
, R.S.C.
    1985, c.I-15
,
which provides:

(1)

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.

(2)

Nothing in this section has the effect of prohibiting a contract for
    the payment of interest on arrears of interest or principal at any rate not
    greater than the rate payable on principal money not in arrears.

[8]

The motion judge also declared that the renewal
    agreement was not enforceable because Mollaj had not signed the agreement. She
    rejected Walias argument that the indoor management rule applied to the
    circumstances of this case, as Walia knew, or ought to have known, that
    Mollajs signature was required on the renewal agreement.

[9]

Walia appeals and raises two issues.

[10]

First, he argues that the motion judge erred in
    her declaration that the condition of the mortgage increasing the rate of
    interest was invalid because it violated s. 8. Walia relies on the Supreme
    Court of Canadas decision in
Krayzel Corp. v. Equitable Trust Co.
, 2016
    SCC 18, [2016] 1 S.C.R. 273. He contends that the mortgage rate increase in the
    second mortgage commitment is triggered only by the passage of time and does
    not infringe s. 8.

[11]

Second, he argues that the motion judge erred in
    finding that the renewal agreement was not valid because of the absence of
    Mollajs signature. Walia contends that pursuant to the indoor management rule,
    he was entitled to assume that 215s internal procedures for entering into the
    renewal agreement had been followed and that the failure of Mollaj to sign is
    not fatal to the validity of the renewal.

[12]

Turning to the first issue, the motion judge
    found that the condition of the second mortgage commitment increasing the rate
    of interest violated s. 8. For ease of reference, the condition is set out
    below:

The mortgage will become due and payable at
    the end of the term, failing which or in default of any payment interest rate
    of interest will be 21% per annum.

[13]

During the motion, Walia conceded that the
    phrase or in default of any payment violated s. 8. However, he urged the
    motion judge to strike out the offending language and find that the condition, as
    amended, did not violate s. 8. He argued that the 21 percent interest arose only
    because of the passage of time (i.e. the mortgage continued past the end of the
    term).

[14]

The motion judge disagreed, and she held that
    even if the offending words were removed, the provision would still have the
    effect of an increase to 21 percent because either one of two triggering events
    has occurred: (1) nonpayment of a monthly payment; or (2) nonpayment of the
    principal on the due date.

[15]

In her view, the condition offended s. 8 because
    it did not increase the rate of interest solely because of the passage of time.
    To the contrary, she held that once a mortgage has matured, and it has not been
    repaid on the date of maturity, the balance becomes outstanding and is in
    arrears. Therefore, the condition in this case increased the rate because of
    default.

[16]

We agree with the motion judges finding.

[17]

Generally speaking, s. 8 creates an exception to
    the rule that lenders and borrowers are free to negotiate and agree on any rate
    of interest on a loan. The purpose of s. 8 is to prohibit lenders from levying
    fines, penalties, or rates of interest on any arrears of principal or interest
    that are secured by mortgage on real property. The prohibited effect is
    increasing the charge on arrears beyond the rate of interest payable on
    principal money not in arrears:
P.A.R.C.E.L. Inc. v. Acquaviva
, 2015
    ONCA 331, 126 O.R. (3d) 108, at para. 51. In order to violate s. 8, the
    mortgage must both: (1) stipulate for a fine, penalty, or rate of interest; and
    (2) have the prohibited effect:
P.A.R.C.E.L.
, at para. 55, citing
Mastercraft
    Properties Ltd. v. El Ef Investments Inc.
(1993)
,
14 O.R. (3d) 519
    (C.A.), at p. 522, leave to appeal refused, [1993] S.C.C.A. No. 463.

[18]

Brown J., writing for the majority in
Krayzel
,
    held that in assessing whether a term violates s. 8, [w]hat counts is how the
    impugned term operates, and the consequences it produces, irrespective of the
    label used to describe the term. If the effect of a term is to impose a higher
    rate on arrears than on money not in arrears, then s. 8 is offended:
Krayzel
,
    at para. 25.

[19]

Krayzel
involved
    a lender who was granted a mortgage that bore interest at the prime rate plus
    2.875 percent per annum. On maturity, the parties entered into a renewal
    agreement for several months that provided the interest rate in the last month
    would increase to 25 percent. The parties then entered a second renewal. The
    second renewal set the interest rate at 25 percent per annum, but a discounted
    rate would apply if the mortgage was in good standing.

[20]

A majority of the Supreme Court concluded that
    the first renewal complied with s. 8, but the second renewal did not. The
    majority held that an interest rate increase triggered by the mere passage of
    time (and not by default), such as that imposed under the first renewal
    agreement, did not offend s. 8:
Krayzel
, at para. 33.

[21]

The motion judge considered the
Krayzel
decision. She acknowledged that a rate increase triggered by the passage of
    time alone does not infringe s. 8. However, she reasoned that the effect of the
    condition was a rate increase when the mortgage became due and the entire
    arrears were not paid by the due date.

[22]

We see no error in the motion judges analysis. In
    this case, on a plain reading of the condition, there can be no doubt that the
    increase from 12 percent to 21 percent is triggered as a result of the nonpayment
    of the mortgage on the expiry of its term, which is a default. We agree with
    the motion judge that the condition contravenes s. 8 and is invalid.

[23]

Turning to the appellants second ground of
    appeal that the motion judge erred in declaring that the renewal agreement is
    not enforceable, we note that the motion judge held that the indoor management
    rule did not apply in the circumstances of this case based on her assessment of
    the factual constellation: at para. 45. We see no basis to disturb her
    careful finding of fact that Walia knew or ought to have known that Mollajs
    signature was required to give effect to the renewal agreement and that,
    therefore, the indoor management rule did not apply.

[24]

The appeal is dismissed. The parties may make
    brief submissions of two to three pages on costs within ten days of this
    decision.

Grant
    Huscroft J.A.

B.
    Zarnett J.A.

S.
    Coroza J.A.


