A rent article by Peter J. Roberts, of the Vancouver firm of Lawson Lundell LLP, appearing in a March issue of Mondaq, summarized a couple of interesting legal cases. With important implications for both commercial mortgage borrowers and lenders alike, it summarizes the Courts interpretation of two distinct situations. The common thread is one of a fee being charged. The fee is in addition to the rate of interest being paid on the principal loan.
Interest Act Challenges
Experienced lenders will know that the Interest Act prohibits any “fine, penalty or rate of interest… that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears”.
Courts Weigh In
In the first case mentioned by Peter J. Roberts, the borrower and lender agreed to a 25% interest rate, notwithstanding a “pay” rate of 7.5%. The accrued interest would be forgiven if the original contractual loan was repaid on time. The lower Courts took the view that this “incentive to pay” did not contravene the Interest Act. The Supreme Court of Canada took the opposite view.
In the second case, a borrower agreed to pay an “exit fee” of $96,000 to a Mortgage Broker. This was payable in the event the loan was not repaid on time. Upon default, the borrower took the view that the fee contravened the Interest Act. The Courts in this case upheld the fee. It was deemed not to be part of the secured debt.