The ingenious methods by which lawyers attempt to circumvent the provisions of section 8(1) of the Interest Act (Can) never cease to amaze us. We discussed one such method in our October 2015 newsletter. The latest is set out in the Supreme Court of Canada decision in Krayzel Corp v. Equitable Trust Co., 2016 SCC 18.
Section 8(1) of the Interest Act provides:
“No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.”
The courts have noted that “the general purpose of this section is to protect landowners from charges that would make it impossible for them to redeem, or protect their equity.”
The original mortgage had an interest rate of prime plus 2.875%. The mortgage matured and the mortgagor was unable to pay the mortgage. The parties entered into a renewal agreement to extend the term for 7 months. The interest rate was to be prime plus 3.125% for the first 6 months and 25% for the 7th month. When the mortgage matured, the mortgagor again was unable to pay the mortgage. The parties entered into a 2nd renewal agreement retroactive to the start of the 7th month after the original maturity date. It called for an interest rate of 25%. However, the actual rate for payments, referred to as the pay rate, was to be at prime plus 5.25%. The difference between the pay rate and the 25% actual interest rate was not required to be paid; rather, it was to be accrued to the principal. If there were no default, the accrued interest would be forgiven; if there were a default, then there would be no forgiveness.
The mortgagor defaulted and the fight was on. What was the proper rate?
The basic principle of statutory interpretation is to discern “Parliament’s intent by examining the words of the statute in their entire context and in the grammatical and ordinary sense, in harmony with the statute’s schemes and objects.” In doing so, pursuant to the Interpretation Act (Can), every statute is deemed remedial and is to be given “such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.”
The court had to determine whether section 8 applied not only to a higher interest rate cast as a penalty for default, but also to a discounted interest rate for punctual payment.
We will spare you the means by which the Supreme Court parsed the words of the section and will just report on the punch line. Mortgage terms having the effect of a bonus, discount, or benefit will not comply with section 8. Substance, not form, will prevail. What counts is how the impugned scheme operates, and the consequences it produces, regardless of the label used. If its effect is to impose a higher rate of interest on money in arrears than on money not in arrears, then section 8 is breached.
The Supreme Court held that the effect of the scheme was to reserve a higher charge on arrears than that imposed on principal not in arrears and that the labelling of one charge as an interest rate and the other as a pay rate was of no consequence. The 25% rate was held to be void.
Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.