Typically security instruments in commercial lending situations contain contractual provisions requiring the borrower to pay the costs of the financial institution for securing and enforcing the collateral. Those are most often stated to be on a solicitor-client scale. That scale of costs is better described in the pleadings as special costs on a full indemnity basis assessed on the basis of costs as between solicitor and his own client.
The foreclosure court has a discretion to assess costs either (i) as special costs ,or (ii) on the minimum tariff for litigation which is expressed in the rules as scale “A”. Scale “A” costs represent only a fraction of the real cost. Masters in the foreclosure court generally prefer to make the lower award on scale “A” on the basis that foreclosure is the simplest of lawsuits and they are generally unopposed, or if opposed, are only opposed on specific points. This memorandum reviews the circumstances where the court may exercise its discretion and award costs on a higher scale.
Section 20 of the Law and Equity Act provides as follows:
Costs in foreclosure proceedings
20 (1) In this section:
“foreclosure”, in respect of an agreement for sale, as defined in section 16(1), means a foreclosure as defined in that section;
“mortgage” includes an agreement for sale as defined in section 16(1).
(2) In a foreclosure in which costs are awarded, the court may,
(a) despite any covenant or term of a mortgage respecting the payment and calculation or manner of determining costs and expenses in, arising out of, or in connection with a foreclosure, and
(b) instead of making an order in accordance with that covenant or term,
order that costs be assessed as party and party costs or as special costs under the Supreme Court Civil Rules, and the court may make no order for costs if it would otherwise make no order but for the covenant or term referred to in this subsection.
Section 5 of Appendix B of the Supreme Court Civil Rules provides:
Uncontested foreclosure proceedings
5 In a proceeding under Rule 21-7, uncontested at the hearing on any issue except costs, the costs must be assessed under Scale A.
Similarly, the pre-2010 Supreme Court Civil Rules provided that uncontested foreclosures should be assessed on the basic tariff (formerly section 6 of Schedule B).
By virtue of the current Rule 1–2(2)(b) of the Supreme Court Civil Rules, where there is an inconsistency between the civil rules and an enactment, the enactment prevails. Accordingly, notwithstanding the provisions of Appendix B and its predecessors, the Law and Equity Act continues to provide the court with discretion to award costs in accordance with the terms of the contract.
In a recent statement in Valley Mortgage and Investment Company Ltd. vs. The Lakers Golf Club Ltd., 2005 BCCA 28, Mr. Justice Finch determined that section 20 of the Law and Equity Act gives the court a discretion to award solicitor and client costs in foreclosure proceedings whether provided for in the mortgage or not. That is consistent with the day-to-day application of the law of foreclosure.
Mr. Justice Finch considered and applied the factors which indicate whether an order for special costs should be granted, as is set out in Saskatchewan Trust Co. v. Kalanj (1989), 39 B.C.L.R. (2d) 385 (BCSC) [“Kalanj”]. There, Madam Justice Huddart followed the Court of Appeal in C.I.B.C. Mtge. Corp. v. Lalji (1986), 8 B.C.L.R. (2d) 310 [“Lalji”], in determining that:
- the discretion is not limited to the considerations which were applied in civil proceedings generally; and
- a contractual provision for solicitor client costs is not sufficient without special circumstances.
Madam Justice Huddart then considered:
- the delay in the proceeding prompted by the mortgagors;
- substantial equity of the mortgagors; and
- the inequity inherent in the mortgagors having the benefit of the contractual interest rate while in default and not bearing the burden of contractual costs.
Based on those factors she awarded special costs on a solicitor client basis. She then considered the criterion in Security Pac. Bank Can. v. Crippen Engr. Ltd. (1987), 19 B.C.L.R. (2d) 179 (SC) [“Crippen”], which can be paraphrased as follows:
- The property was commercial and the parties to the loan transaction were sophisticated business entities with the benefit of independent legal advice.
- There was a multitude of parties in the proceedings. There were also lien claimants, chattels, and equipment, which raised further complications.
- The creditor granted time to pursue refinancing and arrangements with lien claimants.
- The costs would be taxed on a party-and-party basic tariff, which would not provide reasonable recovery against the actual costs of enforcing the debenture.
Both Kalanj and Crippen refer to Lalji. In paragraph 13 of Lalji, the court indicates that the provisions of the contract are a factor to be taken into account by the court in determining whether special (solicitor-client) costs should be awarded. In paragraph 11, the court holds that the discretion in foreclosure is not limited to (mis)conduct of the unsuccessful party. This is particularly important because, in foreclosure, the test for an order for assessment of special costs is not “reprehensible conduct” as it is in other cases.
The following factors drawn from the above authorities support the assessment of special costs on a full indemnity, solicitor-client basis:
1. The parties are sophisticated and the commercial security instruments contain terms which provide for solicitor-client costs. While the contract among the parties is not determinative on its own, it is a factor to be taken into account. It may be a significant factor if:
- there are multiple references to solicitor-client costs made in documents which are not boilerplate but where the parties considered the terms
- there are chattels which are governed by security instruments outside the scope of the Law and Equity Act relating to land mortgages;
- there are other issues in the litigation which are beyond foreclosure but are joined in the foreclosure proceeding;
- after default, the parties entered into discussions which contain a provision for solicitor-client costs; or
- the situation is complex, involving a variety of personal property security interests and rights of enforcement.
2. Consistent with Crippen, there are a multitude of parties, multiple pieces of property, leasehold interests, or potential insurance claim.
3. There is security on chattels and equipment and the general security agreements call for solicitor-client costs. Section 20 of the Law and Equity Act would not apply to those chattels.
4. There is a benefit to the mortgagors of delaying enforcement, which allows the borrowers to seek refinancing.
5. There is substantial equity. As in Kalanj, it is inequitable to permit the mortgagors to have the benefit of the contractual interest rate while in default and while not bearing the burden of the contractual costs.
6. The debt outstanding is large and there will be nowhere near a recovery of actual legal costs.