Mortgage prepayment penalties are commonly included in mortgages. These clauses require a payment to be made if the mortgage is ended before the term ends. These penalties can end up being quite large. Unfortunately this area is not directly regulated, so banks may do what they wish. The very concept of prepayments is nebulous and the court in 2598508 Ontario Inc. v. 2394049 Ontario Inc. o/a Goodman Green Solutions, (2021 ONSC 5293) indicated that there is no common law definition of "prepayment", "prepayment clause" or "prepayment charge", so the mortgage documentation itself will have to be analyzed.
Courts have looked at the legal enforceability of these contracts, and have generally upheld them. However the case of Sherry v CIBC mortgages (and its associated case Jordan v CIBC mortgages) have pled the doctrines of unconscionability (basically inequality in bargaining power), and statutory illegality(because these clauses are don’t comply with certain laws relating to disclosure, they are invalid.
Interestingly, not long after the lawsuit was certified by the courts, CIBC settled both the Sherry case and the Jordan case, ultimately paying $7.5 Million dollars to settle the class action in the reported decision of Sherry v. CIBC Mortgages, 2022 BCSC 676. The Sherry and Jordan cases have unique facts and may not be applicable in all circumstances.
We have had some success in addressing this issue, and it may be something that banks other than CIBC could have liability for. If you would like advice on prepayment penalties, please feel free to contact us.
The information contained in this article is not legal advice. No solicitor client relationship is formed through this article. The reader is encouraged to retain counsel for advice in these matters.
