In MCC Mortgage Holdings Inc. v. Fernandes, 2025 ONSC 3178, Justice Boswell provided important guidance on which mortgage fees will survive judicial scrutiny and which will be struck down as penalties or violations of the Interest Act. For transactional lawyers drafting mortgage terms or advising clients on private lending arrangements, this decision offers valuable lessons about the enforceability of various administrative charges and default fees.
Background
The borrower, Cajetan Fernandes, obtained a substantial mortgage from MCC Mortgage Holdings in October 2021, with a variable interest rate tied to the Bank of Canada prime rate plus 3.49%. After defaulting in March 2024, the lender sought summary judgment for possession and payment of approximately $995,000, including nearly $30,000 in disputed fees and charges.
The mortgage was renewed multiple times, with the lender threatening automatic renewal terms that included dramatically increased interest rates and fees if the borrower failed to execute renewal agreements. While Fernandes did sign the renewal documents, he challenged the validity of numerous charges including NSF fees, renewal fees, administrative fees, and default legal proceeding fees.
The Court’s Framework
Justice Boswell confirmed this was an appropriate case for summary judgment, noting the contractual relationship was well-documented and required no credibility findings. The court emphasized that in summary judgment motions, parties must “put their best foot forward” and the evidentiary record filed should represent what would be available at trial.
The decision then addressed two critical issues: whether the fees were contracted for, and whether they violated section 8 of the Interest Act.
Section 8 of the Interest Act: The Key Constraint
Section 8 of the Interest Act prohibits any fine, penalty, or rate of interest on arrears that increases the charge beyond the rate payable on principal not in arrears. As Justice Boswell noted, this protection extends beyond just interest rate increases to include post-default fines and penalties—what matters is the effect, not the form.
The court identified four prerequisites for section 8 protection: (1) the charge must be a fine, penalty, or rate of interest; (2) it must relate to arrears; (3) it must increase the charge beyond the rate on non-arrears; and (4) it must be secured by a mortgage on real property.
Critically, the court held that the lender’s threatened automatic renewal terms, which would have imposed substantially higher interest rates and fees upon default, clearly violated section 8. However, because Fernandes actually signed consensual renewal agreements, these draconian terms were never applied.
The NSF Fee Penalty
The most significant holding for transactional lawyers involves NSF fees. The mortgagee charged $650 for each returned payment, and six such charges totaling $3,900 were claimed.
Justice Boswell struck down these fees as unenforceable penalties. The court reasoned that even assuming an administrative assistant earning $50 per hour, the $650 fee would represent 13 hours of work—an amount that could not conceivably reflect the actual administrative burden of recording and following up on a returned payment.
This analysis demonstrates the importance of “quantum” when determining whether a stipulated sum is a genuine pre-estimate of damages or an unenforceable penalty. If the amount is “extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved,” it will be struck down.
Default Legal Proceedings Fees: Upheld
In contrast, the court upheld default legal proceedings fees of $7,500 ($3,750 for commencing the action and $3,750 for power of sale proceedings). Justice Boswell acknowledged that commencing and managing legal proceedings could require significant administrative work, and on the evidentiary record before him, he could not conclude the stipulated amount was unconscionable.
Importantly, the onus of establishing that a clause is a penalty rests on the party challenging it—here, the defendants failed to meet that burden regarding the legal proceedings fees.
Other Fees
The court allowed various other charges including renewal lender fees ($8,236.60), administration renewal fees ($2,400), administration fees ($1,198), and the discharge administration fee ($1,079), finding these were clearly contracted for in the registered charge or subsequent renewal agreements. However, a pro-rated lender fee of $4,820.24 for a post-maturity period was disallowed as insufficiently clear and unenforceable.
Practical Takeaways
For transactional lawyers, this decision underscores several critical points:
- Keep NSF fees reasonable: Charges must bear some relationship to actual administrative costs. Amounts like $650 per instance will be scrutinized and likely struck down as penalties.
- Document actual costs: While default legal proceeding fees were upheld here, lenders should be prepared to justify fee amounts with evidence of actual administrative burdens.
- Beware automatic renewal penalties: Terms that impose dramatically increased charges upon failure to renew will violate section 8 of the Interest Act.
- Clarity matters: Vague fee provisions (like the “pro-rated” lender fee here) may be unenforceable even if otherwise legitimate.
- Registration binds borrowers: The court confirmed that when counsel registers a charge electronically with the standard attestation, the borrower is bound by all terms in the registered document.
The decision provides a useful roadmap for drafting enforceable fee provisions while avoiding the penalty trap and Interest Act violations.
