Real estate lawyers who draft mortgage documents should take note of a recent Ontario Superior Court decision that provides important guidance on what fees and charges can be imposed on borrowers in default. In TMSSD Inc. v. Ojeikere, 2025 ONSC 5245, Justice Kurz granted summary judgment to a mortgage lender but significantly reduced the additional charges claimed under the mortgage, finding that several violated section 8 of the Interest Act.
Background
The case involved a straightforward mortgage default scenario. In January 2025, the plaintiff advanced $120,000 to the defendant, secured by an interest-only second mortgage on property in Mississauga. The mortgage had a six-month term expiring July 8, 2025, and carried a 12% interest rate.
When the mortgage matured without payment, the lender brought a motion for summary judgment seeking the principal amount, interest, possession of the property, and costs on a substantial indemnity basis. The defendant raised several defenses, including that no proper demand was made, that $8,695.05 in additional charges were improperly added, and that she should receive a 120-day grace period to refinance or sell.
As stated above, the court ultimately granted summary judgment in favor of the lender, disagreeing with the numerous defenses raised by the defendant, except one: that additional charges were improperly added to the costs owing.
The Court’s Analysis of Additional Charges
The heart of the decision concerns the plaintiff’s claim for $8,695.05 in additional charges beyond the principal and interest. These charges included default correspondence fees, default proceedings fees, a mortgage statement fee, three months’ bonus interest, and legal costs. The lender relied on paragraph 8 of the Standard Charge Terms, which allowed the mortgagee to add various costs and expenses to the principal amount secured by the mortgage.
Justice Kurz applied section 8 of the Interest Act, which prohibits mortgagees from imposing fines, penalties, or interest rates on arrears that exceed the interest rate on principal not in arrears. This provision protects property owners from abusive lending practices that could make redemption impossible.
Following the leading Ontario Court of Appeal decision in P.A.R.C.E.L. Inc. v. Acquaviva, Justice Kurz outlined four prerequisites for section 8(1) to prohibit a charge. The covenant must impose a fine, penalty, or rate of interest relating to arrears of principal or interest secured by mortgage, it must have the effect of increasing the charge beyond the regular interest rate, and the arrears must be secured by mortgage on real property.
Critically, the court placed the onus on the mortgagee to prove that challenged fees “reflect real costs legitimately incurred by the mortgagee for the recovery of the debt, in the form of actual administrative costs or otherwise.” Without such proof, fees are presumed to be improper penalties.
What Was Allowed and What Was Struck Down
Applying these principles, Justice Kurz made the following determinations about each claimed charge:
Allowed:
- Interest to July 9, 2025 ($39.45) – properly calculated at the contractual 12% rate
- Mortgage statement fee ($565) – a legitimate pre-estimate of the cost to prepare a discharge statement
Disallowed:
- Default correspondence fee ($500) – no proof this represented actual costs beyond legal fees already claimed
- Three months’ bonus interest ($3,600) – an improper penalty exceeding the contractual interest rate
- Default proceedings fee ($500) – no evidence of a genuine pre-estimate of costs
- Legal costs ($3,490.60) – already addressed in the costs award and should not be added to the mortgage debt
In total, the court reduced the additional charges from $8,695.05 to just $565, plus the nominal accrued interest.
Key Takeaways for Transactional Lawyers
This decision offers several important lessons for lawyers drafting mortgage documents:
Freedom of contract has limits. While parties can generally negotiate mortgage terms freely, they cannot contract out of section 8 of the Interest Act. Boilerplate language allowing all costs to be added to the principal will not insulate improper charges from judicial scrutiny.
Document and justify fees in advance. If a mortgage includes administrative fees payable on default, the lender should be prepared to demonstrate that these represent “genuine pre-estimates” of actual costs. Generic “default fees” without supporting justification are vulnerable to challenge.
Avoid duplicate recovery. Charging both legal fees as an addition to the mortgage debt and claiming legal costs as part of the judgment creates an improper double recovery. Choose one approach or the other.
Bonus interest is prohibited. Charging additional interest beyond the contractual rate on arrears is a penalty prohibited by section 8, even if the mortgage document purports to allow it.
Legitimate costs can still be recovered. The decision confirms that genuine administrative expenses, like preparing a discharge statement, can properly be added to the mortgage debt if they represent real costs and are not already covered by other provisions.
For transactional real estate lawyers, this case underscores the importance of ensuring that default fee provisions in mortgage documents comply with the Interest Act and reflect actual anticipated costs rather than penalties designed to make default prohibitively expensive. While lenders have legitimate interests in protecting their security, courts will scrutinize and strike down charges that cross the line into abusive lending practices.
