Enforceability of administration fees and options when there is damage to mortgaged properties on possession

Several recent court decisions have provided clarity on areas of law of interest to lenders, including the enforceability of administration fees and options when there is damage to mortgaged properties on possession.

In Mainstreet Equity Corp. v Gypsy-T Investments Ltd. (2017 ABCA 661), Master Schulz considered an “administration and management fee” in the amount of $100 for each month that the mortgage in question was in default. The mortgage document provided for fee and stated that it was agreed to be a “liquidated amount to cover the Mortgagee’s administration and management costs and are not intended nor shall be construed to be a penalty”. However, the amount of $100 per month was not stated in the mortgage and no evidence was provided as to how $100 per month was calculated. Master Schulz concluded that, despite the wording that the fee was “not be construed as a penalty”, it was a penalty, and was therefore unenforceable as contrary to the Interest Act. The case is another entry in the series of cases indicating that no matter what type of clever wording is used, the court will not allow any additional charges that function as penalties for being in default of a mortgage. It underscores the advice that Hendrix Law typically offers to our clients that such fees should be removed if challenged, and should not be litigated.

Finding significant damage to a home on taking possession is one of a mortgage lender’s significant fears. That was the scenario faced in MCAP Service Corporation v. Patterson (2017 ABQB 742). This was a foreclosure action on an insured mortgage. In the early stages of the action, it appeared there was equity in the property, so it was listed for sale with a realtor, and went through several re-listings at reduced list prices. Eventually, the lender obtained a final order for foreclosure based on a market analysis valuing the property at $240,000 while the mortgage debt was about $230,000. However, on taking possession of the home, the lender found significant damage and destruction, including removing all the appliances, cabinet doors and light fixtures; damage to the electric system, damage to the drywall and removal of a water filter system.

The lender sought to set aside the foreclosure order in order to seek judgment against the defendants. Master Schlosser considered this issue thoroughly and noted that allowing the final order to be set aside might discourage defendants from this type of behavior. However, he also noted that this would be unfair to one of the defendants, who was a co-signer on the mortgage for his daughter but did not live in the property and took no part in the destruction. He also felt the evidence to establish the amount of the lender’s loss was insufficient, as the market analysis did not adequately describe what value the appliances and other removed items contributed to the property. He further noted the lender may have a right to pursue a claim under the tort of waste of the property. In the result, he dismissed the application, but with leave to reapply on better evidence if the lender chose not to make the tort claim against the defendants for the damage.

This case demonstrates the importance of clear evidence, especially when seeking court orders outside of the norm. It also proposes a potential option outside of the foreclosure process – a tort action for waste of the property. The Master also notes that some counsel – Hendrix Law is among them – are seeking permission specifically in their court orders to have final orders set aside if an interior appraisal on possession reveals a lower value. The Calgary Masters in Chambers are generally accepting of this provision, but it has been granted only on a case-by-case basis in Edmonton. We are continuing to press for this provision in foreclosure orders.