Ontario Court of Appeal confirms applicability of the Mortgages Act and clarifies Section 17 redemption rights

In Redback Tours Inc. v. Canadian Equipment Finance & Leasing Inc., 2026 ONCA 555 (Redback), the Ontario Court of Appeal (“ONCA”) confirmed that the Mortgages Act, R.S.O. 1990, c. M.40 (the “Act”) applies to both conventional and collateral mortgages.

The ONCA also clarified that the redemption right under Section 17 of the Act applies only to a post-maturity default in the payment of principal, not to a default occurring during the term of a mortgage.

The decision provides guidance on enforcing acceleration clauses that require payment of unaccrued future interest following a term default.

Key takeaways

• The Act applies to both conventional and collateral mortgages. A mortgage does not fall outside the Act merely because it secures obligations arising under a separate loan agreement.
• The redemption right under Section 17 applies only following a post-maturity default in the payment of principal. It does not operate as an early-redemption right or as a right to reinstate a mortgage following a term default.
• Clear contractual language can provide for the acceleration of unaccrued future interest following a term default, and Section 17 of the Act does not itself preclude enforcement of such a provision. However, the ONCA expressly left open whether other statutory, common-law or equitable principles may limit recovery of unaccrued future interest.

Background

In Redback, the respondent, Canadian Equipment Finance & Leasing Inc. (the “Lender”), advanced $559,250 to the appellant, Redback Tours Inc. (the “Borrower”), to finance the purchase of a charter bus. The Borrower’s directors personally guaranteed the loan. Their guarantees were secured by a $25,000 security deposit, a security interest in the bus and a collateral mortgage on their residence.

The Borrower defaulted on the loan on August 22, 2024. The Lender then delivered a notice of default and demanded payment of $672,417.20, representing all remaining payments under the loan, including all unaccrued future interest on the loan.

The Lender could not take possession of the bus because it had been secretly sold by the Borrower to a third party for $500,000. While the Borrower eventually paid the Lender the proceeds of the sale, those proceeds only satisfied the outstanding principal and accrued interest up to September 17, 2024 and they did not cover unaccrued future interest.

The Borrower maintained that the loan agreement did not provide for the payment of unaccrued future interest and, in any event, any obligation to pay unaccrued future interest would be contrary to Section 17 of the Act.

The parties brought competing applications to the Ontario Superior Court of Justice (“ONSC”) to determine whether the Borrower was obligated to pay unaccrued future interest, as well as certain other fees and enforcement costs.

The ONSC held that the loan agreement permitted the Lender to demand unaccrued future interest. It also held that Section 17 of the Act did not apply to the loan agreement because the Act applied only to conventional mortgages, whereas the loan agreement was a commercial financing arrangement secured by a collateral mortgage and not a “mortgage” under the Act. The ONSC therefore ordered the Borrower to pay the claimed unaccrued future interest, as well as the Lender’s enforcement costs and the brokerage fee paid by the Lender to the broker that arranged the loan.

The Borrower appealed on three grounds, arguing the application judge erred in:

1. interpreting the agreement as permitting the acceleration of unaccrued future interest;
2. determining that Section 17 of the Act was inapplicable; and
3. ordering the Borrower to pay the Lender’s enforcement costs and the brokerage fee.

Can a lender accelerate unaccrued future interest following a term default?

The ONCA upheld the Lender’s right to collect the unaccrued future interest on the basis that the contractual language in the loan agreement was clear: “Indebtedness” included both principal (matured or not) and interest (present or future). Accordingly, the ONCA found that the acceleration clause plainly permitted the Lender to accelerate the payment of unaccrued future interest upon the term default.

Does the Mortgages Act apply to collateral mortgages?

Yes. The ONCA confirmed that the Act applies to both conventional and collateral mortgages, consistent with its purpose of protecting mortgagors. In doing so, the ONCA rejected the lower court’s distinction between the two types of mortgage for purposes of the Act.

The statutory definition of “mortgage” is broad enough to encompass a collateral mortgage that secures obligations arising under a separate loan agreement, and excluding collateral mortgages would be inconsistent with the Act’s protective purpose. Accordingly, the fact that the primary indebtedness arose under the loan agreement rather than the mortgage did not, by itself, take the transaction outside the Act.

When does the Section 17 redemption right apply?

In considering the scope of Section 17 of the Act, the ONCA regarded the broader context of the common law and the Act as a whole. The ONCA clarified that the redemption right under Section 17 applies only following a post-maturity default in the payment of principal and does not apply to a principal payment default during the term of a loan or to acceleration of the loan arising from another type of default.

This is because Section 17 of the Act:

• refers only to default in the payment of “principal money secured by a mortgage,” whereas other provisions of the Act refer more broadly to default in “any payment of principal or interest due under a mortgage or in the observance of any covenant in a mortgage”;
• codifies an equitable rule intended to protect borrowers from losing mortgaged property merely because they failed to make the redemption payment at maturity, but by requiring such borrowers to provide three months’ notice of their intention to pay the outstanding debt or three months’ interest in lieu of notice; and
• must be read in a manner consistent with the Act’s separate early-redemption and cure provisions (in Section 18 and Section 22 respectively) and avoid rendering those provisions meaningless.

If Section 17 of the Act were to apply otherwise, it could lead to the unintended result that a borrower failing to meet a principal payment could, in effect, trigger an early redemption right, an outcome that is clearly at odds with Section 18 of the Act, which provides a redemption right after five years.

Further, because Section 18 of the Act requires payment of three months’ interest in advance without providing the option of three months’ notice in lieu, if Section 17 applies pre-maturity, a borrower who wanted to provide notice rather than interest could simply default on their loan by relying on Section 17.

Were the enforcement costs and brokerage fee recoverable?

The ONCA upheld the ONSC’s judgment, deferring to the ONSC’s finding that the Lender’s enforcement costs were reasonable, and noting that the brokerage fee fell within the ambit of certain provisions of the loan agreement.

A note of caution on unaccrued future interest

The ONCA’s conclusion on unaccrued future interest should also be read with some caution. In particular, where the indebtedness is secured by a mortgage on real property, Section 8 of the federal Interest Act R.S.C., 1985, c. I-15 may warrant consideration.

Section 8 prohibits default-triggered charges that, in substance, increase the charge on arrears above that payable on principal not in arrears, and the Supreme Court of Canada has emphasized that substance rather than form governs that analysis: Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18. Redback did not consider whether acceleration of unaccrued future interest at an unchanged contractual rate engages Section 8, and that question remains open.