Protective disbursements by a mortgagee considered in Québec

In a recent Superior Court ruling¹, the Honorable Lucie Fournier interpreted the concept of protective disbursements or "sue and labour" that a mortgage lender is entitled to claim under the mortgage agreement, and the concept of fees incurred by a representative to cover the amounts owing under the loan.

Background

The Business Development Bank of Canada ("BDC") claimed a loan balance of $190,467.26 in capital and interest and liquidated damages of $9,523.86 from the company 9183-1164 Québec Inc. ("9183") and the company 9074-9094 Québec Inc. ("9074"). BDC also claimed $36,748.93 from two guarantors of this loan. It is important to specify that neither the respondents-9138 and 9074-nor the guarantors contested the existence of the loan or the securities. However, they argued that the amount should be less since the decontamination and extrajudicial fees were wrongfully added to the claim.

Facts

In October 1999, 9074 acquired from a limited partnership a building that was mortgaged to BDC.

In 2006, 9074 put the building mortgaged to BDC up for sale. The new buyer wanted to finance its acquisition through a loan with BDC, which required an environmental assessment. The company SCP Environnement Inc. ("SCP") performed an environmental assessment and concluded that rehabilitation work needed to be done on the building. It is important to specify that 9074 operated a used car business. However, for various reasons, the sale did not go through.

Due to the above, BDC decided to pay the rehabilitation costs incurred by SCP, believing that this was "sue and labour" to protect its warranty.

In June 2007, 9074 sold the building in question to 9183 for $175,000.

In May 2012, BDC filed a motion to institute proceedings in this case.² In opposition to this motion, 9074 argued that $33,615.25 was added to the amounts owing as decontamination fees, that other expenses were added to the debt without justification or authorization, that they were not in default of the loan, and that BDC acted in bad faith.

BDC also filed an amended motion to institute proceedings claiming $30,157.98 in extrajudicial fees, which it argued it had a right to under the terms of the loan agreement.

Analysis

The Court had two questions to answer:

• Do the decontamination costs qualify as "sue and labour" expenditures or protective disbursements according to the definition in the loan agreement?
• Does BDC have the right to extrajudicial fees paid to its lawyers and liquidated damages of $9,523.86 as per the loan agreement?

Decontamination fees

BDC paid the fees for the environmental assessment and the rehabilitation work performed by SCP on the building owned by 9074. BDC argued that both 9074 and the guarantors agreed that the work be performed and that BDC could pay for the work and add it to the total debt owing to it. In addition, it argued that these fees are included in the "sue and labour" that it has the right to claim from 9074 under the terms of the loan agreement as stated in the following clause:

XI GENERAL CONDITIONS

[…]

"All sums paid by the Lender for maintaining and preserving the security given in respect of the loan, as well as a reasonable remuneration for services rendered by any representative of the Lender, shall be immediately payable to the Lender by the Borrower, shall be added to the Principal Sum, shall bear interest at the rate hereinabove stipulated, computed from the time it is paid out and shall be entitled to benefit from the same security."

The tribunal noted that, given the type of business run by 9074, a used car business, it was self-evident to perform an environmental assessment and rehabilitation work at the time of the sale in 2006. However, the tribunal noted that the sale did not go through in 2006, and at this time, since SCP had already begun work, BDC had no choice but to reassure SCP that it would be paid for the rehabilitation work it was performing.

BDC argued that the company and the guarantors were informed multiple times that they needed to pay these fees and that it was not until the sale fell through that the guarantors questioned the amounts paid by BDC to SCP.

The tribunal noted that based on the evidence submitted, it was of the opinion that both 9074 and the guarantors consented to the fees incurred by SCP for the environmental assessment and rehabilitation being paid by BDC. The tribunal noted that not only did 9074 agree to the payment of the decontamination fees, but the loan agreement stated that these fees may be added to the debt given that they are incurred to protect BDC's claim, given the type of activities that 9074 carried out at the building.³

Extrajudicial fees and liquidated damages

BDC claimed $30,157.98 in extrajudicial fees that it incurred and argued that it had a right to these fees due to a clause in the loan agreement:

XI GENERAL CONDITIONS

[…]

"All sums paid by the Lender for maintaining and preserving the security given in respect of the loan, as well as a reasonable remuneration for services rendered by any representative of the Lender, shall be immediately payable to the Lender by the Borrower, shall be added to the Principal Sum, shall bear interest at the rate hereinabove stipulated, computed from the time it is paid out and shall be entitled to benefit from the same security."

BDC also claimed that it had the right to $9,523.86 in liquidated damages under the terms of this clause:

XVIII INDEMNITY

"In addition to the amount due and payable under the section ‘PREPAYMENT’, and in all the cases referred to under the section ‘EVENTS OF DEFAULT’ where the Lender receives payment of the Borrower’s debt before the end of the stipulated term, and if such payment is made following any judicial sale, bankruptcy, liquidation or any other judicial proceedings, the Lender shall be entitled to receive, in addition to the aggregate amount then owing here-under in principal, interest, costs, and accessories, an indemnity equal to five per centum (5% ) of said amount due as liquidated damages."

After reviewing the principles of Groupe Van Houtte,⁴ Judge Fournier concluded that the two clauses overlap and therefore the fees claimed under this action should be analyzed to ensure they were reasonable and see whether they should be reduced.

Therefore, the Court reduced the amounts owing as extrajudicial fees by reviewing the fee accounts of the BDC counsel. Based on this judicial discretion, the tribunal concluded that the extrajudicial fees claimed ($30,157.98) and the indemnity for liquidated damages ($9,523.86) must be reduced to a total of $15,000.00.