Locked-In Mortgages – a Further Report; Non-Refundable Deposits – a Further Comment #56

By Gerry Neely
B.A. LL.B.

The battle to force a mortgagee to accept prepayment of a locked-in, high-interest rate mortgage which had been renewed after the initial term of five years had expired, continues on several fronts within the legal system. Column #47 referred to the case of Kaltenbach v. The Royal Trust Company, which left The Royal Trust Company the winner. However, a Manitoba Court of Appeal decision, which again involved The Royal Trust Company, has given fresh hope to those mortgagors who are able to bring themselves within the special set of facts necessary to take advantage of the cases discussed in Columns #38 and #39. The Royal Trust Company's extension agreement contained a waiver on the part of the mortgagor of the right of prepayment found in Section 10 of the Interest Act (Canada). The Manitoba Court of Appeal held in April of this year that this attempt by The Royal Trust Company to waive the benefits given by the Section was contrary to the policy contained in the Statute and as such, was void. The Royal Trust Company is seeking leave to appeal to the Supreme Court which leaves the end of this story still to be told. One point to note is that any mortgagor who assumed a mortgage originally taken out by a limited company, cannot take advantage of this decision. The Interest Act only gave this right of prepayment to individuals and not corporations.

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Column #52 discussed phrases used in an apparent attempt to reduce uncertainty by stating what the legal result would be if a vendor or purchaser removed a condition such as "subject to financing." One example referred to was the phrase "non-refundable deposit" used in circumstances where the contract between the parties was subject to a purchaser being able to obtain financing. This phrase was inserted for the purpose of drawing to the attention of the purchaser that once the condition had been removed, the deposit would not be refunded. The column stated that the expectation of the parties would be that if the purchaser was unable to obtain his financing, the deposit would be refunded. The Fraser Valley Real Estate Board has commented that this statement may be too broad because there are circumstances in which the vendor should be entitled to retain the deposit as consideration, for example, for having his property off the market for a period of time. That comment is fair. While the example used covers the majority of circumstances in which an offer is made subject to the fulfillment of certain conditions with the deposit to be returned if the conditions cannot be fulfilled, there are instances in which the vendor should be entitled to negotiate a non-refundable payment.

However, if it is the intention of the parties that the vendor is to retain the deposit whether or not the condition is removed, then that should be clearly stated. The wording to achieve this need not be complicated, perhaps being nothing more than the following: "The vendor shall be entitled to retain the deposit of $_______ whether or not the purchaser removes the condition referred to above, but if it is removed by the purchaser, the deposit shall be applied toward the purchase price."

A case to which Peter Watts has referred in some of his seminars may require a change in practice. It is a case in which no specific consideration was paid to the vendor in return for the vendor accepting an offer which was subject to a condition. If the purchaser were unable to fulfill the condition, the purchaser had the right to cancel the agreement. The Court held that the failure to pay specific consideration to the vendor meant that the offer was only an option and, since it was unsupported by consideration, the vendor was entitled to terminate the agreement before the purchaser removed the condition. If this case is correct and it is followed, it will change the real estate practice since it will mean that any time a subject to clause is included in an interim agreement, some consideration will have to be paid to the vendor.

1.

Potash v. Royal Trust Company,Manitoba Court of Appeal (1984) 4 W.W.R. 210.

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