A Legal Bill Added to Your Business Loan:
Must You Pay Your Bank’s Legal Fees in a Commercial Foreclosure?
Every entrepreneur facing financial difficulty spends a great deal of their time and energy trying to minimize the costs incurred by their business in an effort to stay operating or maximize the return from a sale of the business’ assets. If the lender commences foreclosure proceedings, all of the cost-cutting efforts can be thwarted by the addition of the lender’s legal fees to the balance owing on the loan. This legal bill has the effect of reducing the amount of capital the entrepreneur can recover from their business, or adding to the amount that must be paid back to the lender under a personal guarantee.
The lender’s right to recover their legal fees in a foreclosure arises from standard terms in the commercial security agreements that lenders require their customers to sign at the time financing is provided to the customer. However, the existence of a contractual term requiring the borrower to pay all legal fees in connection with the enforcement of the mortgage is not the end of the story. If your business is facing foreclosure proceedings, you should be aware of the legislation that is intended to protect borrowers from having to pay the full amount of the lender’s legal fees.
The purpose and effect of this legislation was considered in the recent decision of the British Columbia Supreme Court in First West Credit Union formerly known as Valley First Credit Union v. Gateway Industrial Park Ltd., 2018 BCSC 1749 (“Gateway Industrial Park”). In that case, the Court reviewed the legislative history that has led to the current provisions in Section 20 of the Law and Equity Act and Section 5 of Appendix B of the Supreme Court Civil Rules and analyzed the previous court decisions interpreting those sections.
In essence, the Court found that Section 20 of the Law and Equity Act was intended to give the judge hearing a foreclosure proceeding the discretion to depart from the contractual terms of the mortgage when considering the issue of costs. This discretion will not always be exercised in favour of a reduced costs award to the lender; indeed, in a complex commercial foreclosure where the borrower opposes all the relief sought, the Court is likely to exercise its discretion in a manner consistent with the borrower’s contractual promise to pay the full amount of the legal costs of enforcing the mortgage. Nevertheless, the borrower is not bound to accept the lender’s claim for full recovery of its legal fees pursuant to the terms of the mortgage in every case, and can argue that the lender’s legal costs should instead be assessed under the tariff for court-ordered costs set out in the Supreme Court Civil Rules (the “Tariff”). Costs assessed pursuant to the Tariff typically represent only a fraction of the actual legal costs incurred.
In certain cases, the borrower has the right to be protected from full payment of the lender’s legal fees and therefore the Court’s discretion under Section 20 of the Law and Equity Act does not need to be invoked. Gateway Industrial Park was such as case. The borrowers had not opposed any of the relief sought by the credit union regarding the amount owing on the loan or the manner of enforcement; they objected only to the requirement to pay the full amount of the credit union’s legal fees. Accordingly, the Court found that Section 5 of Appendix B of the Supreme Court Civil Rules – which deals with costs in “uncontested” foreclosure proceedings – governed the result and ruled that the credit union’s legal costs be assessed under Scale A of the Tariff. Scale A is the lowest measure of costs under the Tariff.
The difference between the lender’s actual legal costs and the amount recoverable under the Tariff will vary depending on the number of properties involved in the foreclosure proceedings, but the “savings” will likely be significant to the borrowers in each case. Accordingly, business owners must assess how they will respond to foreclosure proceedings and should be hesitant to take an adversarial position without first considering the amount of legal costs that are likely to be incurred by the lender. Despite the terms of the mortgage, it is possible to avoid having to pay full amount of the lender’s legal bill, but the outcome will be influenced by any steps that have the effect of increasing the amount of fees the lender incurs.
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