Thomas v. Khosa, 2026 ONSC 5054
A recent decision of the Ontario Superior Court of Justice provides an important reminder that the terms of a mortgage cannot always be enforced exactly as written, particularly when those terms provide for compound interest following default.
In Thomas v. Khosa, the Court enforced a $700,000 vendor take-back mortgage and granted the plaintiffs a Writ of Possession. However, the Court rejected the plaintiffs’ claim for compound interest, finding that it violated s. 8 of the federal Interest Act.
The decision also provides useful guidance concerning alleged oral extensions of mortgages and the effect of the Family Law Act where a spouse’s consent to a mortgage is subsequently challenged.
The Vendor Take-Back Mortgage
The plaintiffs sold a property in Brampton to the defendants and took back a mortgage as part of the transaction.
The mortgage was for $700,000, with interest payable at:
- 5% per annum on the first $500,000; and
- 7% per annum on the remaining $200,000.
The monthly payments totalled $3,250, and the mortgage was originally scheduled to mature in April 2025.
When the mortgage came due, the defendants did not pay the $700,000 owing.
There were discussions concerning an extension. The plaintiffs agreed to a one-month extension at an increased rate of 8%. However, the formal extension agreement was never signed.
The defendants subsequently maintained that further extensions had been agreed upon, including through communications involving their realtor.
The Court rejected that position.
The Importance of Documenting a Mortgage Extension
The defendants argued that the mortgage had ultimately been extended until 2026.
The Court found that there was insufficient evidence to establish such an agreement.
Justice Wilkinson emphasized the importance of the written mortgage and applied the principles associated with the parol evidence rule. The defendants had not provided sufficient reliable evidence demonstrating that the plaintiffs had agreed to modify the written mortgage terms.
This is an important practical lesson.
A mortgage extension should not be left to informal conversations between the parties, their lawyers or real estate agents. If the parties intend to change the maturity date, interest rate or other material terms of a mortgage, the agreement should be clearly documented and executed.
An alleged oral agreement can be particularly difficult to establish when the documentary record shows that the lender continued to demand payment.
Compound Interest and the Interest Act
The most significant aspect of the decision concerns compound interest.
The mortgage’s Standard Charge Terms contained a provision permitting compound interest following default.
The plaintiffs relied upon that provision and sought approximately $74,000 in prejudgment interest, calculated using compound interest.
The Court rejected the claim.
Section 8 of the Interest Act
Section 8 of the Interest Act places a special restriction on interest and other charges associated with arrears secured by a mortgage on real property.
The legislation prevents a mortgage provision from having the effect of increasing the charge on arrears beyond the rate of interest payable on principal money that is not in arrears.
The plaintiffs argued that the provision did not offend s. 8 because the compound interest applied to the entire outstanding mortgage, rather than specifically to the arrears.
The Court did not accept that distinction.
Justice Wilkinson looked at the practical effect of the provision. Because compound interest was triggered by default, the borrower would ultimately pay more interest on the mortgage than was payable before the default occurred.
The Court concluded that this engaged s. 8 of the Interest Act.
As a result, the contractual compound-interest provision could not be enforced to the extent that it violated the statutory restriction.
A Contractual Provision Cannot Override the Interest Act
The decision reinforces an important principle for mortgage lenders.
Parties are generally free to negotiate interest rates and other contractual terms. However, mortgage transactions are subject to statutory restrictions.
The fact that a borrower has expressly agreed to a particular provision does not necessarily mean that the provision will be enforceable if it conflicts with the Interest Act.
The Court relied upon the established jurisprudence concerning s. 8 and emphasized the special protection afforded to owners of real property.
The policy behind the legislation is particularly important in the mortgage context. Increasing the financial burden on a borrower after default can make redemption of the property increasingly difficult and can ultimately threaten the borrower’s equity.
The 8% Rate Also Had a Limited Life
The plaintiffs also argued that the defendants had agreed to an 8% interest rate and that this rate should continue after the mortgage went into default.
The Court disagreed.
The evidence established an agreement for an 8% rate for the one-month extension to May 30, 2025. There was no signed agreement establishing an ongoing 8% rate after that date.
The Court therefore awarded:
- 8% interest for May 2025, amounting to $4,666.67; and
- thereafter, interest at the original mortgage rates of 5% and 7%.
The total interest owing was calculated at $53,416.67, with interest continuing at $3,250 per month until the mortgage was repaid.
Thus, the plaintiffs succeeded in enforcing the mortgage, but their interest claim was substantially reduced.
What About the Matrimonial Home?
There was another interesting issue.
Only Mr. Khosa was registered on title and on the mortgage. His spouse subsequently stated that she did not remember signing the mortgage documents and disputed having consented to the transaction.
Section 21 of the Family Law Act generally provides that a spouse cannot dispose of or encumber an interest in a matrimonial home without the other spouse joining in the transaction or consenting to it.
The Court nevertheless found that s. 21 did not prevent enforcement of the mortgage.
The defendants’ lawyer had specifically advised the plaintiffs’ lawyer that Mr. Khosa had a spouse and that the spouse would sign the required consent.
The plaintiffs were entitled to rely upon that representation.
There was also an important procedural problem for the defendants. Ms. Khosa’s Statement of Defence had originally admitted that she consented to the charge. She had not amended that pleading, nor had she brought an application under s. 23 of the Family Law Act seeking to set aside the transaction.
The Court also noted that the defendants had not provided sufficient evidence establishing that the property was a matrimonial home when the mortgage was registered.
Accordingly, the Family Law Act did not prevent the plaintiffs from enforcing their mortgage.
The Result
The Court granted summary judgment for:
$700,000 principal
plus
$53,416.67 interest
together with continuing interest at the applicable rate.
The plaintiffs were also granted a Writ of Possession.
They were awarded $18,737.50 in costs, including HST and disbursements.
Considerations for Real Estate Professionals
Although this was a mortgage enforcement case, there are several lessons for real estate professionals involved in transactions involving vendor take-back mortgages.
- Put extensions in writing
If a Vendor agrees to extend a VTB mortgage, the extension should be documented and signed. The maturity date, interest rate and all other amended terms should be clear.
- Do not rely on informal communications
Communications through realtors can become significant evidence in later litigation. If an important financial obligation is being changed, the parties should not rely on an informal conversation or an understanding communicated through a third party.
- Interest provisions require statutory scrutiny
A mortgage may contain a detailed default-interest or compound-interest provision, but that does not necessarily make the provision enforceable.
Section 8 of the Interest Act can restrict the operation of such provisions.
- Spousal consent matters
Where a property may be a matrimonial home, the appropriate spousal consent should be obtained and properly documented.
The case also demonstrates the importance of accurate representations by counsel and the ability of parties to rely upon those representations in a transaction.
- Summary Judgment can provide an effective remedy
The Court was prepared to determine the disputed factual issues on a summary Judgment motion. The defendants were unable to produce sufficient evidence establishing a genuine issue requiring a trial.
A party opposing summary Judgment must put forward evidence, not simply allegations.
Conclusion
Thomas et al. v. Khosa et al. is an important decision for anyone involved in vendor take-back mortgages.
The lender ultimately succeeded in recovering the $700,000 principal and possession of the property, but the Court refused to enforce the contractual compound-interest provision because of s. 8 of the Interest Act.
The case is a useful reminder that the wording of a mortgage is important, but statutory restrictions are equally important. A carefully drafted mortgage cannot contract out of legislation that restricts the amount or manner in which interest may be charged following default.
For real estate professionals, the broader lesson is straightforward: when a transaction involves a vendor take-back mortgage, extensions, increased interest rates or a potential matrimonial home, the details matter.
Brian Madigan LL.B., Broker