Standby interest and expenses but not the lender fee were held to be recoverable by a lender when it cancelled a commitment letter. The case of Marshallzehr Group Inc. v. Ideal (BC) Developments Inc., 2021 ONCA 229, illustrates the effect of failing to satisfy initial funding conditions.
In the Marshallzehr case, a lender was prepared to provide financing to a developer for a residential real estate project in accordance with a commitment letter (the “CL”) that stated that the loan would be for a term of 13 months and that the lender was not required to advance any funds prior to the developer having fulfilled to the lender’s satisfaction certain initial funding conditions specified in the CL. The loan was syndicated and the lender gave the developer notice that the syndicated lenders had started to advance funds and that interest was beginning to accrue on the loan. The lender then advanced the syndicated funds to its counsel, to be held in trust pending the developer’s satisfaction of the initial funding conditions. The parties were unable to agree on a postponement and standstill agreement for a pre-existing mortgage even though the funding conditions required the execution of all ancillary agreements including postponements in a form satisfactory to the lender. The loan never closed and no funds were ever advanced to the developer.
The lender notified the developer it was terminating the CL and brought an action in the Ontario Superior Court seeking payment of various fees and expenses described in the CL. The developer defended and counter-claimed for damages caused by the lender’s wrongful termination. The lender then moved for summary judgment, which the motion judge granted, determining that the lender was entitled to end the loan facility under the CL’s cancellation provision. The developer then appealed.
The Court of Appeal upheld the motion judge [at para. 21 and 22] as follows:
Provisions of the CL clearly stated that MZ, as lender, was not required to advance any funds prior to [the developer] Ideal, as borrower, fulfilling stipulated pre-conditions to MZ’s satisfaction. For example, Part VI states, in part: “The execution of this letter does not obligate the Lender to advance any of the agreed funds unless all of the conditions to such advances have been satisfied to the satisfaction of the Lender and its solicitors.”… When the motion judge’s reasons are read against that background, I am satisfied that his interpretation gave effect to the basic bargain agreed to by the parties and gave meaning to all the CL’s terms.
The Court of Appeal continued [at para. 28] in its support of the motion judge’s interpretation as follows:
But, in my view the motion judge’s interpretation was a more commercially reasonable one in the actual circumstances of this case: the Loan transaction had not closed; no advance had been made to Ideal; the CL contemplated a single, “Initial Advance”, not multiple draws; and MZ was under no obligation to advance funds before Ideal fulfilled the stipulated pre-closing conditions to MZ’s satisfaction.
In holding that the cancellation provision in the CL was available to the lender in the circumstances, the Court of Appeal stated [at para. 42] the following:
The agreed Initial Funding Conditions reflected many of the limits to the risk that MZ was prepared to assume in lending to Ideal. When viewed in the context of the entire agreement, the Cancellation Provision appeared to be designed, in part, to bring the relationship to an end if the borrower was unable or unwilling to satisfy the pre-conditions to lending. Faced with a potential borrower who was not prepared to conclude an agreement within the CL’s agreed-upon risk limits, the Cancellation Provision was available for MZ to use to avoid such unbargained for risk. Again, recall that s. 2.1 of the CL provided that MZ was not required to advance any funds until Ideal fulfilled the Initial Funding Conditions to MZ’s satisfaction. In those circumstances, I see nothing unreasonable about its use of the Cancellation Provision.
The judgment being appealed comprised awards for standby interest of $101,958.82, expenses of $60,112.27, consisting of payments by the lender for legal fees, document review, and planning advice, and a lender fee of $396,000, less the $50,000 good faith deposit (net $346,000). The developer argued that these amounts were not recoverable under the terms of the CL in the event the lender exercised the cancellation provision.
The Court of Appeal held that the lender was entitled to standby interest, stating [at para. 49] as follows:
The practical effect of MZ proceeding under the Cancellation Provision was to terminate the CL “without any advances having been made”, the very circumstance contemplated by the CL’s Standby Interest provision. Pursuant to that provision, MZ was entitled to recover from Ideal interest on the syndicated funds that had been put in place pending closing of the Loan. I see no error in the motion judge granting judgment for that amount.
The Court of Appeal also held that the lender was entitled to recover its legal fees, consultants’ expenses, and the good faith deposit pursuant to the cancellation provision, agreeing [at para. 52] with the motion judge as follows:
The motion judge found, … “it was apparent that Ideal would not or could not satisfy the pre-conditions.” Ample evidence supported that finding, at least in respect of certain informational requirements and the terms of the subordinated financing. Given that conduct by Ideal, I see no error in the motion judge’s implicit conclusion that Ideal did not proceed with, or failed to proceed with, the transaction.
However, the Court of Appeal concluded that the motion judge erred in granting judgment for the lender fee. In holding that the lender fee was not recoverable by the lender, the Court of Appeal stated [at para. 54 to 56] the following:
The motion judge held that the claim for the Lender Fee was recoverable pursuant to the Cancellation Provision. In reaching that conclusion, he did not address Ideal’s submission that the Lender Fee was not payable without an advance of the Loan. On its part, MZ argues that the Lender Fee was earned upon its completion of due diligence and “advance of the Loan to the Trust Account”. … I am persuaded by Ideal’s submission. The language of the CL specifies that the Lender Fee “shall be deducted from the Initial Advance” and MZ did not make an Initial Advance to Ideal. The CL does not contain any other language of entitlement to the Lender Fee. … I do not accept MZ’s argument that the fee was earned upon the advance of the Loan to the Trust Account; the CL clearly distinguishes between the Lender Advance – the transfer of the syndicated funds to MZ’s trust account – and the Initial Advance, which is an advance to the Borrower.
The Court of Appeal concluded [at para. 59] as follows:
By way of summary, the fees and expenses to which MZ is entitled under the CL total $212,071.09 ($101,958.82 Standby Interest + $60,112.27 expenses + $50,000 Good Faith Deposit). MZ has already received the Good Faith Deposit. Therefore, the amount remaining payable by Ideal is $162,071.09.
In light of the foregoing, the Marshallzehr case illustrates the need for commitment letters to be precise in their wording when providing for the payment of fees and expenses. Because the commitment letter in Marshallzehr clearly distinguished between the lender advance of syndicated funds to the lender’s trust account and the initial advance to the borrower, the borrower was able to avoid paying the lender fee when the parties could not agree on a postponement and standstill agreement for a pre-existing mortgage.
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