May 9, 2016
On May 6, 2016, the Supreme Court of Canada decided that a mortgage imposing a higher interest rate in the event of default and reserving a lower rate in the event of no default – whether it’s called an incentive, a penalty or a rose – contravenes section 8 of the Interest Act, and is void. The decision doesn’t mean that a mortgagee or lender can’t offer a borrower an interest rate discount or some relief – but it does mean it must be very careful when drafting it. A mortgage lender that wants to give its clients and borrowers some type of interest rate discount that complies with section 8 must ensure the effect of the performance incentive doesn’t increase the charge on the arrears beyond the rate of interest payable on principal money not in arrears.
In Krayzel Corp. v. Equitable Trust Co. The mortgagor granted the lender a mortgage at an interest rate of prime plus 2.875% per annum to secure a $27M loan. The parties subsequently entered two mortgage renewal agreements. The first, effective August 1, 2008, extended the mortgage term by seven months and provided for interest to be calculated at prime plus 3.125% per annum over the first six months of the term, and then 25% per annum over the seventh month. The second, effective February 1, 2009 but retroactive to one month before the first renewal agreement’s expiry, provided for:
On May 15, 2009, the mortgagor defaulted on the loan; the lender demanded repayment at the rate of 25% per annum. The mortgagor resisted on the basis the mortgage terms infringed section 8 of the Interest Act (Canada) on two basis: first, by a mortgage agreement term imposing a rate increase effective only where the mortgagor defaults by either failing to make prescribed payments at a lower “pay rate” of interest or by paying out the loan upon maturity; or by providing for a higher interest rate triggered solely by mere passage of time. The majority of the Supreme Court of Canada (six to three justices) ultimately decided the term is void and left the lender with a much lower rate of interest:
This decision doesn’t mean that a mortgage lender can’t offer a borrower an interest rate discount or some relief – but it does mean it must be very careful when drafting it. Mortgages imposing a higher interest rate in the event of default and reserving a lower rate in the event of no default – whether it’s called an incentive, a penalty or a rose – contravene section 8 of the Interest Act, and will thus be void. A mortgage lender that wants to ensure it complies with section 8 while providing its clients and borrowers with some type of interest rate discount, can only do so if the effect of the performance incentive doesn’t increase the charge on the arrears beyond the rate of interest payable on principal money not in arrears.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Banking & Financial Services Team to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
© McInnes Cooper, 2016. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.
Mar 2, 2023
All businesses need written contracts. Determining what written contracts are essential depends on many factors, including the nature of the…
Jan 27, 2023
The New Brunswick government has proposed significant amendments to the New Brunswick Business Corporations Act. Bill 24 An Act to Amend the…
May 20, 2022
On May 22, 2010 (affectionately known as “Bitcoin Pizza Day”), a Floridian bought two Papa John's pizzas with Bitcoin. The day is famous…
May 2, 2022
On April 14, 2022, the New Brunswick Court of Appeal released its decision in Royal Bank of Canada v. Estate of Susan Lynn Williams, revisiting…
Feb 23, 2022
On April 1, 2022, changes to the Newfoundland and Labrador Corporations Act proposed in Bill 24 An Act to Amend the Corporations Act will take…
Jan 25, 2022
More and more people are using smart contracts: the global smart contracts market was valued at USD $145M in 2020; it’s projected to be valued…
Aug 5, 2021
On July 28, 2021, the Supreme Court of Canada issued a decision protecting the status of the Companies’ Creditors Arrangement Act (CCAA) as a…
Mar 1, 2021
The Supreme Court of Canada continues to develop and clarify the organizing principle of good faith performance in contract law. In its 2014…
Jan 18, 2021
The Supreme Court of Canada, in the 2014 case of Bhasin v. Hrynew, recognized a general organizing principle of good faith performance in…
Oct 5, 2020
On October 2, 2020, the Supreme Court of Canada clarified the existence and application of the anti-deprivation rule in Canadian bankruptcy law.…
Sep 29, 2020
We updated this publication on December 22, 2022. It’s a forgone conclusion that diversity in thought and in leadership makes good business…
Jun 12, 2020
The financial technology (Fintech) industry uses technology to support and enhance financial and banking services.
May 11, 2020
McInnes Cooper partner Michael Melvin and Student-at-Law Myriam Whalen provide a detailed Legal Digest in the Spring 2020 Edition of The…
May 11, 2020
The Supreme Court of Canada recently released a much-awaited decision regarding the Companies’ Creditors Arrangement Act (CCAA). The CCAA is…
Mar 10, 2020
The global COVID-19 (a.k.a. Coronavirus or SARS-CoV-2) outbreak has implications for many commercial relationships, its evolving nature and…
Jun 26, 2019
Information disclosure is a key theme that emerges from Canada’s new cannabis regulatory regime: the government wants lots of information from…
May 21, 2019
We updated this publication on February 17, 2023. As of June 13, 2019, private companies incorporated under the Canada Business Corporations…
Sep 10, 2018
As of January 2019, incorporating a limited company in N.S. will be more economical. On September 7, 2018, the N.S. government announced it’s…
Jul 18, 2018
This publication has been updated as at January 26, 2023. Prince Edward Island corporations were formerly governed by the P.E.I. Companies…
Jun 12, 2018
This publication has been updated as at July 8, 2022. Changes to the Canada Business Corporations Act (CBCA) over the past several years have…
Dec 23, 2017
Parents often threaten their children that if their behaviour did not improve they will get a lump of coal in their Christmas stockings. On…
Dec 22, 2017
Blockchain technology has already been a transformative force in a number of sectors. Its most prominent use to date has been as the…
Nov 20, 2017
October 2, 2017 marked the end of the consultation period relating to the taxation of private corporation proposals the Department of Finance…
Oct 31, 2017
On October 27, 2017, the Supreme Court of Canada confirmed that a bank that pays out on a fraudulent cheque has the protection of section 20(5)…
Aug 28, 2017
Recently, the Federal Court of Appeal confirmed that a tax debtor’s bankruptcy does not extinguish the federal Crown’s priority to proceeds…
Aug 16, 2017
In the not-so-distant past, Canadian enforcement of its anti-corruption and anti-bribery legal regime has been relatively laid-back. But the…
Aug 4, 2017
On July 18, 2017, Canada’s Minister of Finance released proposed changes to the Income Tax Act (Canada) that, if implemented, will mark one of…
Jul 17, 2017
A corporation does not always sail in calm or safe waters. Cash shortages, unattainable or unmet goals, Board disagreements over the best course…
Jul 13, 2017
When growing your business, you face many decisions, including choosing the business structure that is right for you. Your legal team can be…
Jun 23, 2017
On June 23, 2017, the Supreme Court of Canada decided that in a contest between the choice of forum clause in Facebook’s online terms of use…
Apr 21, 2017
In three years (lightning speed in the law), medically assisted dying went from being illegal to being legal. A great deal has changed, a great…
Apr 20, 2017
On April 13, 2017, Canada’s federal government introduced legislation that, if passed into law, will legalize recreational cannabis in Canada.…
Apr 6, 2017
Adding a third jurisdiction to Gard Update’s comparison between privilege in the corporate context under U.S. and English law, McInnes Cooper…
Mar 30, 2017
Social media platforms, like Instagram, Twitter, LinkedIn, YouTube, Facebook and GooglePlus, arguably have more followers and are more closely…
Mar 30, 2017
There are very few examples of a Canadian court interpreting and opining on the provisions of an information technology contract. So the Ontario…
Jan 25, 2017
Doing business with the public sector creates an often overlooked – but very real – risk that the confidential information a business…
Dec 14, 2016
On December 9, 2016, the Supreme Court of Canada clarified when a court can rectify a transaction that has had unintended tax consequences for…
Nov 22, 2016
On November 17, 2016 the Supreme Court of Canada decided a mortgagee has the mortgagor’s implied consent to disclose its discharge statement…
Sep 23, 2016
On September 15, 2016, the New Brunswick Court of Appeal clarified the province’s statutory regime governing both the exercise of a lender’s…
Aug 15, 2016
The standards expected of market participants are steadily increasing in response to demand to address white collar crime – including…
Aug 9, 2016
This publication has been updated as at January 27, 2023. A key legal decision in starting or growing your business is choosing the…
Jun 30, 2016
As of June 25, 2016, provincially regulated workers and employers in Nova Scotia, Quebec, BC and Saskatchewan can participate in Pooled…
Jun 30, 2016
The condo real estate market, both retail and commercial, is hot. But condo developers and unit buyers need funding. Here’s the legal…
Jun 6, 2016
On June 3, 2016, the Supreme Court of Canada, in two related decisions, strengthened the legal protection of solicitor-client privilege in…
May 2, 2016
Amendments changing the early warning reporting system take effect on May 9, 2016, provided all necessary approvals are obtained (except in…
May 2, 2016
Amendments changing the early warning reporting system take effect on May 9, 2016, provided all necessary approvals are obtained (except in…
Apr 12, 2016
Federal Budget 2016 proposed to significantly reduce the benefit of and access to the Small Business Deduction. The Small Business Deduction…
Mar 24, 2016
When a business responds to a public sector Request for Proposal or Expression of Interest (both of which we’ll refer to as an RFP for these…
Oct 19, 2015
Access to sufficient capital to fund operations, research and development, and other costs is a key challenge for start-ups and for some small…
Mar 30, 2015
Hindsight is 20/20. Lawyers can’t always predict the outcome of a legal claim. But when a dispute between an investment client and her…
Nov 14, 2014
On November 13, 2014, the Supreme Court of Canada (SCC) effected a significant development in Canadian contract law by recognizing the…
Sep 16, 2014
This publication has been updated as at August 25, 2022. Many believe that only public companies or large, established companies with many…
Apr 29, 2014
Lenders are often faced with a situation where a customer (Borrower) approaches them for funds to complete an acquisition of the shares of a…
Nov 1, 2013
Recent decisions of securities regulators and amendments to Canadian securities laws demonstrate regulators' lowered tolerance for insiders who…
Aug 28, 2013
A general security agreement (GSA) is the most common form of personal property security used in the Atlantic Provinces to secure commercial…
Jun 7, 2013
In Franchise Canada’s Spring 2013 “Viewpoints” feature, McInnes Cooper franchise lawyer Michael Melvin answers this question for…
Oct 1, 2010
McInnes Cooper franchise lawyer Michael Melvin highlights some of the significant features of the Disclosure Documents Regulation and the…
May 31, 2010
In Franchise Canada’s May/June 2010 “Ask A Legal Expert” feature, McInnes Cooper franchise lawyer Michael Melvin answers this question for…
Subscribe to McInnes Cooper to stay current with our leading insights on legal updates, trends, news, events, and services.