Foreclosure and Unconscionability

In Do v. Nichols, 2015 BCSC 1069, Ryan R. Lee of Watson Goepel LLP represented homeowners faced with an unusual foreclosure petition. The mortgage at issue was registered against the homeowners’ residential properties but arose from an agreement for sale and subdivision of two other, nearby development properties.

The petitioner agreed to purchase the development properties from the homeowners and, as part of that agreement, the homeowners were to do what was necessary to subdivide the development properties. The homeowners agreed to pay the petitioner $500,000 if they failed to complete the subdivision by a certain time and gave the mortgage on their residential properties as security. The homeowners were unable to subdivide the development properties by the required date and the petitioner commenced foreclosure proceedings.

After reviewing the law, the court found the provision requiring the homeowners to pay $500,000 to be a penalty as opposed to a “genuine, pre-estimate of damages”.

Having found the $500,000 provision to be a penalty, the court then went on to consider whether the homeowners should be granted relief pursuant to s. 24 of the Law and Equity Act which provides for relief against penalties and forfeitures. The court noted the test for whether a contract or a provision within a contract is unconscionable:

A party must establish inequality in the position of the parties arising from the ignorance, need, or distress of the weaker which left him in the power of the stronger, and must establish proof of substantial unfairness in the bargain.

The court found the homeowners, when they agreed to the $500,000 provision, were “in a position of weakness and distress amounting to an unusual inability to protect their own interests” and that the provision was substantially unfair. The court stated:

[54] In my view, these are terms that no reasonable party with real bargaining power would accept. I find that they amount to an undue advantage the petitioner was able to secure only because of the desperate situation the respondents found themselves in.

As a result, the court applied s. 24 of the Law and Equity Act and held the $500,000 provision to be not enforceable.

Watson Goepel LLP has lawyers with expertise in foreclosures and other property-related litigation. For more information, contact Ryan R. Lee at Watson Goepel LLP.