ONTARIO – A lender’s right to enforce a mortgage debt owing is not hampered by the lender’s postponement agreement with another lender that would have delayed enforcement for over 20 years. The motions judge erred by failing to distinguish between “owing” and “enforceable”. The more unreasonable the result of a case the more unlikely it is that the parties can have intended it.
Sicotte v. 2399153 Ontario Ltd. et al.
2021 ONCA 912
ONCA (MacPherson, Simmons and Nordheimer JJ.A.)
December 21, 2021
The Appellant sued to enforce an $800,000 mortgage loan against a primary debtor and the guarantors. The loan was secondary financing to a BDC mortgage loan. The Appellant signed a Postponement Agreement with BDC, which stated, inter alia, “the Creditor will not, so long as the Borrower is indebted to the Bank in respect of the Loan, demand payment, either in whole or in part, of the Debt.”
Justice R. Bell dismissed the Appellant’s motion for summary judgment and the action to enforce the debt on the basis that the wording of the Postponement is clear and unequivocal. The judge found that the intention of the parties to the Postponement — BDC, Ms. Sicotte, and 239 Ontario — was that no payments (interest or otherwise) could or would be made on the Sicotte Loan until such time as the BDC loan is repaid in full.
Under the terms of the BDC loan, the payment date could be extended to 2043 or even longer, which meant that the Appellant might have to wait two decades to enforce payment of the debt. Nevertheless, the motions judge held that the Appellant’s debt was not “owing” because the BDC loan had not yet been paid: para. 11.
Nordheimer JA, writing the unanimous decision of the ONCA, held that the motion judge’s central error was that she confused the appellant’s rights as they relate to the underlying debt with her rights as they relate to the guarantee. The two are separate and distinct contractual obligations, and that distinction must be respected. The result arrived at by the motion judge improperly conflates the two. In the circumstances, this amounts to an error of law, or at the very least, a palpable and overriding error of mixed fact and law, as those concepts relate to the standard of review.”: para. 16.
The debtors and guarantors were not parties to the Postponement Agreement between the Appellant and BDC. Nordheimer JA held that nothing in the Postponement Agreement affected the rights between the Appellant and the debtor and guarantors under their loan agreement. The motions judge also erred in fact and in law in holding that the debt to the Appellant was not owing. The debt had matured and was due: para. 19 .
The Court of Appeal noted that contractual interpretation must be conducted in the context of the surrounding circumstances: para. 26. As the Supreme Court of Canada noted in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, at para. 47:
[T]he interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding”. To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. [Citations omitted.]
The surrounding circumstances known to the parties were that the Borrower required construction financing to ensure that the vacant land that it held as its only asset could be developed so as to generate revenues to pay the Borrower’s obligations.
The Appellant, recognizing that reality, agreed to postpone her rights as against the Borrower to enable that financing to take place. Indeed, she did so twice: once for the Borrower to obtain construction financing, and then again when the Borrower negotiated the loan with the BDC that, among other things, paid out the construction financing. However, the Appellant did not agree with the guarantors that the guarantee debt was not owing when the mortgage loan matured: para. 27-28.
The Court of Appeal noted that the conclusion of the motions judge has the effect of precluding the Appellant, not only from being repaid the monies that were borrowed from her for the next 22, but also from receiving any interest payments on those same funds. Indeed, the time for repayment could go beyond that point since the primary lender, BDC, has the right to extend its financing. It means that the Appellant would have to wait more than two decades, not only to be repaid the monies that she lent, but even to receive any return on those monies.
The Court of Appeal held that such an interpretation of the security arrangements between the Appellant and the guarantors produced an absurd result: para. 36. In allowing the appeal, Nordheimer JA referred to what Cromwell J. wrote in Bhasin v. Hrynew, 2014 SCC 71, at para. 45:
“as Lord Reid observed in Schuler A.G. v. Wickman Machine Tool Sales Ltd., [1974] A.C. 235 (H.L.), at p. 251, “[t]he more unreasonable the result the more unlikely it is that the parties can have intended it”.
The Court of Appeal allowed the appeal and granted summary judgment for the debt and interest against the guarantors.