Supreme court | Mortgages
Interest
Effect of renewal agreement was to reserve higher charge on arrears than that imposed on principal money not in arrears, contrary to Interest Act
Lougheed owned office building and granted mortgage to Equitable Trust to secure $27 million loan. Interest rate was agreed at prime interest rate plus 2.875 per cent per annum. When mortgage matured on June 30, 2008, Equitable Trust agreed to extend term by seven months. “First Renewal Agreement,” effective Aug. 1, 2008, carried per annum interest rate of prime rate plus 3.125 per cent over first six months and 25 per cent over seventh month. When First Renewal Agreement matured, parties entered into “Second Renewal Agreement” which provided per annum “interest rate” on loan of 25 per cent. It was effective Feb. 1, 2009, retroactive to one month prior to expiration of First Renewal Agreement. Second Renewal Agreement required Lougheed to make monthly interest payments at “pay rate” of greater of 7.5 per cent or prime interest rate plus 4.25 per cent. Difference between monthly payments and amount payable at stated interest rate would accrue to loan but would be forgiven if Lougheed made no default. Lougheed defaulted May 15, 2009 and Equitable Trust demanded repayment at stated rate of 25 per cent. Master found that both renewal agreements offended s. 8 of Interest Act (Can.). Chambers judge reversed master’s decision. Court of Appeal unanimously agreed that First Renewal Agreement complied with s. 8 and majority agreed that Second Renewal Agreement complied with s. 8. Lougheed’s appeal allowed. Pursuant to s. 8 of Act, mortgage agreement must not stipulate for, take, reserve or exact fine, penalty or rate of interest if effect of doing so imposes higher charge on arrears than that imposed on principal money not in arrears. Section 8 applies to discounts (incentives for performance) as well as penalties for non-performance. Inquiry is directed to effect of impugned mortgage term rather than term itself. Effect of Second Renewal Agreement was to reserve higher charge on arrears (25 per cent) than that imposed on principal money not in arrears (7.5 per cent or prime plus 5.25 per cent). Use of terms “pay rate” and “interest rate” of no consequence. 25 per cent per annum interest rate set by Second Renewal Agreement void and instead set at higher of 7.5 per cent and prime interest rate plus 5.25 per cent.
Krayzel Corp. v. Equitable Trust Co. (May. 6, 2016, S.C.C., McLachlin C.J.C., Abella J., Cromwell J., Moldaver J., Karakatsanis J., Wagner J., Gascon J., Côté J., and Brown J., 36123) Decision at 242 A.C.W.S. (3d) 438 was reversed. 265 A.C.W.S. (3d) 223.
Effect of renewal agreement was to reserve higher charge on arrears than that imposed on principal money not in arrears, contrary to Interest Act
Lougheed owned office building and granted mortgage to Equitable Trust to secure $27 million loan. Interest rate was agreed at prime interest rate plus 2.875 per cent per annum. When mortgage matured on June 30, 2008, Equitable Trust agreed to extend term by seven months. “First Renewal Agreement,” effective Aug. 1, 2008, carried per annum interest rate of prime rate plus 3.125 per cent over first six months and 25 per cent over seventh month. When First Renewal Agreement matured, parties entered into “Second Renewal Agreement” which provided per annum “interest rate” on loan of 25 per cent. It was effective Feb. 1, 2009, retroactive to one month prior to expiration of First Renewal Agreement. Second Renewal Agreement required Lougheed to make monthly interest payments at “pay rate” of greater of 7.5 per cent or prime interest rate plus 4.25 per cent. Difference between monthly payments and amount payable at stated interest rate would accrue to loan but would be forgiven if Lougheed made no default. Lougheed defaulted May 15, 2009 and Equitable Trust demanded repayment at stated rate of 25 per cent. Master found that both renewal agreements offended s. 8 of Interest Act (Can.). Chambers judge reversed master’s decision. Court of Appeal unanimously agreed that First Renewal Agreement complied with s. 8 and majority agreed that Second Renewal Agreement complied with s. 8. Lougheed’s appeal allowed. Pursuant to s. 8 of Act, mortgage agreement must not stipulate for, take, reserve or exact fine, penalty or rate of interest if effect of doing so imposes higher charge on arrears than that imposed on principal money not in arrears. Section 8 applies to discounts (incentives for performance) as well as penalties for non-performance. Inquiry is directed to effect of impugned mortgage term rather than term itself. Effect of Second Renewal Agreement was to reserve higher charge on arrears (25 per cent) than that imposed on principal money not in arrears (7.5 per cent or prime plus 5.25 per cent). Use of terms “pay rate” and “interest rate” of no consequence. 25 per cent per annum interest rate set by Second Renewal Agreement void and instead set at higher of 7.5 per cent and prime interest rate plus 5.25 per cent.
Krayzel Corp. v. Equitable Trust Co. (May. 6, 2016, S.C.C., McLachlin C.J.C., Abella J., Cromwell J., Moldaver J., Karakatsanis J., Wagner J., Gascon J., Côté J., and Brown J., 36123) Decision at 242 A.C.W.S. (3d) 438 was reversed. 265 A.C.W.S. (3d) 223.
