Mainstreet Equity Corp v Gypsy-T Investments Ltd, 2017 ABQB 661

Court of Queen’s Bench of Alberta Citation: Mainstreet Equity Corp v Gypsy-T Investments Ltd, 2017 ABQB 661 Date: 20171101 Docket: 1603 06680 Registry: Edmonton Between: Mainstreet Equity Corp Plaintiff - and - Gypsy-T Investments Ltd Defendant _______________________________________________________ Reasons for Decision of S.L. Schulz , Master, Court of Queen's Bench of Alberta _______________________________________________________ [ 1 ] This is an application brought in morning chambers by the Defendants to settle the amount of compensation arising out of the assumption of a mortgage.

During argument, a number of difficulties with the evidence were identified and the matter was set over to allow the parties to file whatever additional evidence they felt appropriate and to provide written briefs. Background [ 2 ] The property in question was originally owned by Gypsy-T Investments Ltd (“Gypsy-T”). Gypsy-T sold it to 132549 Alberta Ltd (“numbered company”) who eventually transferred it to Mainstreet Equity Corp (“Mainstreet”). [ 3 ] When Mainstreet took title, there were two mortgages registered. The first mortgage was with First National Mortgage.

The second mortgage was a “wraparound” vendor take back mortgage with Gypsy-T, whereby payments made by Mainstreet on the Gypsy-T mortgage were to be used to pay the First National Mortgage. [ 4 ] Gypsy-T was not given notice of the sale from the numbered company to Mainstreet. The first notice Gypsy-T had of the sale was in February of 2016 when Mainstreet requested a payout statement with respect to the Gypsy-T mortgage. Gypsy-T did not provide the payout statement and refused to allow the mortgage to be paid out because of a dispute over whether the First National Mortgage had matured.

Gypsy-T took the position that payout of its mortgage could not occur until the First National Mortgage matured.

[5] There ensued a dispute over a number of issues related to the mortgage, including the payment of an assumption fee byMainstreet, accounting fees, an administration and management fee and legal fees. Event of Default [6] Paragraph 10.11of the mortgage, stipulates that an Event of Default occurs if the numbered company sells the land to a thirdparty (Mainstreet) without the prior written consent of Gypsy-T.

It goes on to require the execution of an assumption agreement as acondition of giving consent to the transfer. [7] The facts are clear that such consent was not provided and there has been an Event of Default. This must be consideredwhen looking at the issue of the Assumption Fee and the claim for an Administration and Management fee. Assumption Fee--$5,000.00 [8] In the briefs, the parties have agreed that the assumption fee should be $5,000 and I so order.

Administration and Management Fee--$2,400 Claimed [9] Gypsy-T claims entitlement to an administration and management fee of $100 per month for the months following the Eventof Default. The Mortgage provides: 10.4 Administration Fee In the event of the occurrence of an Event of Default, then the Mortgage shall, notwithstanding anything contained herein to the contrary,be entitled to receive in addition to all other fees, charges and disbursements an administration and management fee for each month orpart thereof for which the Mortgagor remains in default.

This administration and management fee is intended to reimburse theMortgagee for time and trouble in the management and administration of this Mortgage and of the Lands. The said sum or sums areagreed to be a liquidated amount to cover the Mortgagee’s administration and management costs and are not intended nor shall beconstrued to be a penalty. All such sums payable to the Mortgagee shall be a charge upon the Lands and shall bear interest at the InterestRate until paid. Emphasis Added [10] Section 8(1) of the Interest Act, RSC 1985, c I-15 (“Interest Act”) prohibits a penalty on arrears of a mortgage.

The issue thenbecomes whether the administration and management fee contained in this clause amounts to a penalty and if it does, whether the partiescontract out of this provision. [11] To determine if this clause is a penalty, the Court considers the context of the mortgage contract, specifically whether theamount in the clause is reasonably related to the damages that would flow from the breach (i.e. the Event of Default). Here, theadministration fees relate to failure to give notice of sale, which attracted a sum that was ultimately agreed upon as $5,000.

Theadministration and management fee claimed is almost half as much again as the assumption fee, an amount that is unreasonablecompared to the actual amount of the assumption fee claimed. (See National Bank of Canada v Merit Energy Ltd, 2001 ABQB 680and Dial Mortgage Corporation v Baines, ). [12] Additionally, there is no evidence before the Court of an agreement on the flat rate of $100 per month, nor is there evidence asto how this sum was arrived at.

These factors detract from the idea that the sum claimed is a genuine pre-estimate of the actual damages. [13] Master Hanebury considered a similar monthly payment, albeit for a much larger monthly sum, in The Equitable TrustCompany v Lougheed Block Inc, 2011 ABQB 193: [92] There is no evidence before the Court as to the reasoning behind the calculation of the administration fee of $10,000.00 per monthfor each month the mortgage is in default. The fee appears to be claimed for the costs of administering the mortgage.

How it does orcould represent a genuine pre-estimate of the administration costs of a default is unknown. It is a flat sum to be paid each month of adefault, whether the default is minor or major, and whether it is remedied promptly or not at all. ... [95] The case law is clear that in such an instance the administration fee cannot stand. It is a penalty. Furthermore, as the fee is onlytriggered on default and thereby increases the interest rate to be paid on default, s. 8 of the [Interest] Act must be considered.

Thebusiness purpose of a fee in this amount is not evident and it appears, on its face, to be punitive. Therefore it also cannot stand as itoffends s.8 of the [Interest] Act. [14] Master Hanebury was upheld on this point as reported at 2012 ABQB 411 at para 82. [15] I agree with the reasoning of Master Hanebury and find that this clause is unenforceable as a penalty that offends s. 8 of theInterest Act. This claim is disallowed. Accounting Fees--$4,425.75 claimed

[ 16 ] Gypsy-T makes a claim pursuant to clause 5.4 (

g) of the mortgage for accounting fees in the amount of $4,425.75. It takes the position that it was necessary to have the accountant review all of the calculations regarding the assumption of the mortgage due to the complexity of the transaction and “complications in calculating the method for application of such payments”. [ 17 ] Mainstreet takes the position that the accounting fees are a “thinly veiled attempt to charge Mainstreet for the cost of preparing a mortgage payout statement” which is prohibited by

section 38 of the Law of Property Act . Further, they argue that Gypsy-T has not provided justification for this expense. They take the position that the confusion regarding the payments is entirely that of Gypsy-T’s own making. [ 18 ] The Affidavit of David Dunville sworn on April 27, 2016 attaches as an exhibit a letter from the accountants dated March 13, 2015 which purports to be a

summary of monies owed to Gypsy-T upon the assumption of the First National Mortgage by Mainstreet. Contained in that

summary is $2,000 for “Accounting fees paid in direction [sic] relation to this matter Jun [sic] 2014”. There are no details justifying this amount. [ 19 ] Counsel for Gypsy-T argues that this amount should be increased to $4,425.75 to allow for the accounting fees incurred since the March 13, 2015 letter. Attached to counsel’s written brief is a statement of account from the accountant that breaks down its fees on a yearly basis.

The only detail provided is that the statement is for “special work relating to assumption on Castlestone Property...relating to First National Mortgage, 132549 Alberta Ltd and Mainstreet Properties”. This statement of account is not properly in evidence before the Court and cannot be considered on this application. [ 20 ] If the

summary dated March 13, 2015 is to be considered as evidence that at least $2,000 has been incurred for accounting fees, the letter lacks sufficient detail to assess whether this sum is properly claimed and is not allowed on that basis alone. Further, Section 38(6) provides that a fee cannot be charged for a statement in writing of the amount of principal, interest and any other charges owing, including the balance in the tax account. Although the evidence is scant, it indicates that the fees relate to what would be considered to be a “payout statement” as referenced in

Section 38 of the Law of Property Act . There is no evidence that Mainstreet has made more than two yearly requests for a payout statement. Accordingly, I find that the accountant fees are also not allowed on this basis. Legal Fees--$13,246.01 claimed [ 21 ] Gypsy-T takes the position that there has been an event of default as defined in the Mortgage and therefore not only is an assumption fee due, the legal costs are also payable for: 5.4... (

f) enforcing, attempting to enforce or in pursuance of any right, power, remedy or purpose under this Mortgage and...in relation to any court proceedings initiated or defended by the Mortgagee in respect of this Mortgage; and (

g) legal costs as between a Solicitor and his own client (together with an allowance for the time, work and expenses of the Mortgagee, or of any Agent, Solicitor or Servant of the Mortgagee) incurred or paid by the Mortgagee in relation of the above matters;... [ 22 ] Gypsy-T takes the position that it was necessary for its lawyer to be involved for an extended period of time due to the complexity of the transaction and advances a claim of $13,246.01. [ 23 ] Mainstreet takes the position that a large portion of the legal fees claimed by Gypsy-T is a result of Gypsy-T’s inappropriate actions and not related to any inappropriate action by Mainstreet.

Mainstreet argues that if Gypsy- T is entitled to legal fees associated with the assumption of the mortgage by Mainstreet, then Gypsy-T should only be entitled to $3,250 which was the amount of fees associated with a similar purchase and assumption of mortgage with Gypsy-T. [ 24 ] Gypsy-T has attached to its brief its statements of account with respect to the legal fees claimed. Attaching a statement of account to a brief does not put it in evidence before the Court.

In any event, those statements of account do not provide a time breakdown or an hourly rate for the work performed, so even if they were properly in evidence before the Court, an assessment could not be made. [ 25 ] On examination of these accounts, it appears that these accounts include an amount for a dispute over insurance which is not before the Court. It also appears that Gypsy-T is claiming for legal fees associated with the application before Master Schlosser on May 2, 2016, for which Mainstreet was awarded costs and so are not appropriate.

Much of the dispute appears to have arisen from Gypsy-T’s refusal to provide a payout statement because of its mistaken understanding of the maturity date on the mortgage, and I agree with Mainstreet that Gypsy-T should not be allowed fees when they have been incurred because of their own mistaken behaviour. Just because the mortgage allows an award of legal fees does not mean that everything done attracts the obligation to pay those fees. The fees must be properly incurred. [ 26 ] Gypsy-T has had ample opportunity to provide proper evidence of the amounts claimed for legal fees but has not done so.

Mainstreet is prepared to accede to $3,250 as a fair amount, so I will order that amount be paid. Costs of this Application [ 27 ] Mainstreet has been largely successful on this application. It is entitled to its taxable costs under the appropriate column of

Schedule C to be agreed upon between the parties, failing which they will be assessed on notice.

Dated at the City of Edmonton, Alberta this 1 st day of November, 2017. S.L. Schulz M.C.Q.B.A. Appearances: Tyler Derksen Warren Benson Amantea LLP for the Plaintiff/Applicant Norman St. Arnaud McAllister LLP for the Defendant/Respondent