Litigation partner, David Taub, together with senior associate, Samuel Mosonyi, persuaded the Ontario Court of Appeal to overturn the lower court decision in 660 Sunningdale GP Inc. v. First Source Mortgage Corporation. The case was decided earlier this year and has been extensively discussed in the legal community. The Court of Appeal held that our client, First Source Mortgage Corporation, was entitled to collect its full lender's fee, when the borrower, 660 Sunningdale GP Inc., chose to terminate its loan agreement prior to receiving any loan advance.
First Source and Sunningdale had signed a commitment letter where First Source agreed to loan $15,500,000 for an initial $426,500 lending fee (plus interest on the loan advances), $100,000 of the fee was payable on signing the commitment and the $326,500 balance was payable upon the first mortgage advance.
Sunningdale paid the $100,000 upon delivery of the commitment letter and shortly afterward, reneged on its agreement after finding other financing. Sunningdale refused to pay the $326,500 and further claimed the right to receive back the $100,000 payment. Accordingly, the dispute was submitted to Court.
At the Superior Court level, the Judge held that First Source could keep the $100,000, but was not entitled to recover the $326,500 balance because: (1) the balance was payable under an unenforceable "penalty clause", and (2) relief against forfeiture should be granted for the $326,500 balance pursuant to s.98 of the Courts of Justice Act, as that balance was not earned.1
Our team believed that the Judge made the wrong decision and appealed to the Ontario Court of Appeal which overturned the decision, ruling in favour of First Source. The Court of Appeal held that the lender fee was not a penalty clause or an "unconscionable" situation requiring Court intervention to relieve Sunningdale from the consequences of its bargain. The Court of Appeal concluded that the lender fee provision was enforceable as it was clearly written and there was no reason for the Court to upend the bargain made by the parties. Further, the lender's fee was not a penalty clause as it was payable as a result of entering the contract while penalty clauses are payments which arise only when a party breaks a contract.
BEYOND THE DOCTRINE OF UNCONSCIONABILITY AND PENALTIES: OUR KEY TAKE AWAY
The unique aspect of this case is the Court of Appeal's clear rejection of the motion judge's approach and her decision to alter the terms of the contract, followed by a detailed discussion of the limited circumstances where Courts would interfere with the parties' bargain. The motion judge took a result-driven approach in deciding the contract was unfair which undermined the contract's terms as negotiated by two sophisticated parties. Judicial discretion should not and now, will not, interfere with freedom of contract, where the parties are sophisticated, even if the bargain seems unfair or one-sided. Such parties understand the risks involved in entering into their contractual agreements and are well suited to understanding these risks at the time the contract is made.
Plainly put, the Court of Appeals' decision in this case sends a message. Judges hearing similar cases will let stand the negotiated agreements between sophisticated parties and not give weight to after-the-fact complaints. Unnecessary interference from judges will only hinder commercial dealings and create uncertainty if parties don't know whether their bargain will be upheld. In 660 Sunningdale GP Inc v. First Source Mortgage Corporation, the motion judge called the contractual payment a penalty. The Court of Appeal ruled that this was the wrong approach and unwarranted. Thanks to the expertise of our team, we have a precedent-setting case with lasting implications for both the real estate lending industry and the legal community. David Taub and Samuel Mosonyi will continue to fight for our clients to obtain ethical and sound decisions which protect their interests.
Footnote
1 660 Sunningdale GP Inc. v. First Source Mortgage Corporation, 2024 ONCA 252, at paras 3, 4.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
