In 30724453 Nova Scotia Company v. 1623242 Ontario Inc., 162 was the mortgagor and 307 was the mortgagee of a commercial property (an old non-functioning factory which happen to contain PCBs!).
The Ontario government wanted the PCBs cleaned up. The government made a Clean-up Order upon the former owner (Wolverine-GLC) and upon the new owner 162.
The mortgagee (307) was related to the former owner Wolverine-GLC. (para 8)
162 sued the former owner (Wolverine-GLC) for fraud. In other words, Wolverine’s vendor-take back mortgage, which Wolverine had assigned to 307, was attacked for fraud. 307 had to defend this fraud attack. That meant legal fees. Could 307 recover those ‘fraud-action’ legal fees as a cost of the mortgage?
162 refused to clean up the PCBs.
Wolverine-GLC cleaned up the PCBs and then applied a construction lien to the property to recover its clean-up costs ($600,000). (para 35)
162 wanted to minimize its risk on the mortgage. 162 sought a mortgage discharge statement under the Mortgages Act. 162’s strategy was that it would insist upon only paying principal and interest on the mortgage, pay the mortgage out and be free of the claim for clean-up costs (which were internalized in the construction lien).
Naturally 307 tried to put the cost of the construction lien on the mortgage discharge statement as well as costs associated with prior motions that 162 has taken against 307. (para 35)
307 then abandoned the attempt to impose the clean-up costs (construction lien removal) through the mortgage discharge statement (para 38).
But 307 insisted upon recovering its legal costs of defending the mortgage fraud action that 162 had commenced against the former owner (on the hidden PCB allegation).
Can the Court discharge the mortgage?
The court evaluated its jurisdiction to grant a discharge where there is a dispute as to amount (para 72) (Mortgages Act s.12).
The court can grant an order discharging the mortgage (Mortgages Act s.12(3))
Similar to the Construction Lien Act paying in of security, the court can require a paying into court of an amount in excess of the principal and interest (Mortgages Act s.12(6), specifically to answer the question of interest and costs (Mortgages Act s.12(7)).
Ultimately the mortgage is not discharged until the full question has been decided (para 85). In other words, putting an amount of money into court will not dischanged the mortgage (para 85).
So were the mortgagee’s fraud defence costs recoverable in the mortgage dischange statement? (yes!)
The court looked at the standard charge term 8 which says that the mortgagor shall pay:
costs, charges, legal fees (as between solicitor and client) and expenses which may be incurred in taking, recovering and keeping possession of the land
Which is the main legal cost provision that underpins the everyday payment of legal costs of the mortgagee when a mortgage is discharged.
But the standard charge terms also contain the critical further provision requiring the payment of any costs incurred:
generally in any other proceedings taken in connection with or to realize upon the security given in the Charge (including legal fees and real estate commissions and other costs incurred in leasing or selling the land or in exercising the power of entering, lease and sale contained in the Charge
So is this wording comprehensive enough to capture the mortgagee’s fraud action legal costs? The motion judge refers to Karakatsanis J. (as she then was) in 1427814 Ontario Ltd v. 3697584 Canada Inc.
[117 ] It is implicit in Karakatsanis J.’s reasons that the court should give a broad interpretation to the words in clause 8 of the charge terms: “proceedings taken in connection with or to realize upon the security given in the charge.” In 1427814 Ontario Ltd v. 3697584 Canada Inc., Karakatsanis J. concluded that such costs reasonably include the mortgagee‘s costs of defending an action by the mortgagor for damages for negligence in an improvident sale. In the present case, I find that they reasonably include the mortgagee‘s costs of defending 162’s Fraud Action in which the validity of the Mortgage is called into question.
The motion judge did not permit the construction lien payout by the mortgagee
[117]…They do not reasonably include the costs of the Construction Lien Action. Those costs are properly the costs of GLC, not 307. Clause 8 permits the “Chargee” to recover certain costs under the Mortgage.35 This does not entitle 307 to recover GLC’s costs of the Construction Lien actions.
comment:
The rejection of the mortgagee inclusion of the cost it incurred in paying out the construction liens means that 162 has been enriched by the amount of the construction liens. Who ultimately pays for the PCB clean-up (past-owner or new-owner), has now effectively been decided. the costs of the PCB clean-up falls upon the old owner. 162 is now free to sell the higher-value property having been enriched by the clean-up paid for by the past-owner.
This was not the correct way to decide the PCB clean-up cost. That discrete question should have been decided upon its merits (i.e. did 162 knowingly buy the PCB issue by paying a low price with such PCB warnings integrated in the agreement of purchase and sale?)
If the motion judge was going to take a strict reading of the standard charge term and deny the PCB clean-up cost (construction lien payments by the mortgagee), then the motion judge should have granted leave to 307 to bring a counter-claim against 162 for unjust enrichment in the mortgage fraud action that was ongoing between the parties.
Alternatively 307 should not have cleaned up the PCBs without a court order stipulating that the question of who was ultimately liable for PCB clean-up is reserved.
