Canada: Modernization Of Prepayment Rights Under Interest Act

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate, November 2011

After several years of work and consultation between key stakeholders and the Federal Department of Finance, the federal government has now published regulations that will come into force on January 1, 2012 that modernize the right of prepayment under the Interest Act. These regulations will allow a broader category of business entities to be able to negotiate their own prepayment privileges on long-term mortgage loans.

Right to Prepay after Five Years

Section 10 of the Interest Act provides for a statutory right of prepayment in circumstances where principal or interest under a mortgage on real property or a hypothec on immovables is payable more than five years after the date of the mortgage or hypothec. If this is the case, the mortgage or hypothec can be prepaid in full, regardless of what it might otherwise provide, after the expiry of the five-year period, together with an additional payment equal to three months' worth of interest. No additional payments or penalties can be charged by the lender. Prior to the enactment of the current federal regulations, this statutory right of prepayment was expressly stated not to apply to mortgages given by corporations. Section 10 of the federal Act is closely paralleled by similar provincial legislation in Ontario and Manitoba. In Ontario, the similar provisions are contained in section 18 of the Mortgages Act.

The policy objective for excluding corporations from a statutory right of prepayment was that a corporation should be capable of negotiating its own prepayment terms and did not need the protection of the government. After all, when section 10 was first enacted in the 1880s, the section was meant to protect farmers from being locked into long-term mortgages at high interest rates.

Additional Business Entities Excluded from Right to Prepay

Modern commerce and finance have evolved significantly. There are many business entities, other than corporations, that carry on business and should be able to negotiate their own prepayment terms, and not be hampered in securing long-term financing by virtue of section 10 of the Interest Act. In recognition of this business reality, the regulations published by the federal government now provide that the statutory prepayment right will not apply to mortgages of real property and hypothecs of immovables granted after January 1, 2012 by any of the following entities: (a) partnerships; (b) trusts settled for business or commercial purposes; (c) unlimited liability companies as defined in the Alberta Business Corporations Act; (d) unlimited liability companies as defined in the British Columbia Business Corporations Act; and (e) unlimited companies as defined in the Nova Scotia Companies Act.

Bare Trustee and Nominee Corporations

Even before the enactment of these federal regulations, there were several Ontario cases in the late 1990s that assisted in narrowing the application of the statutory right of prepayment. The Ontario Court of Appeal determined in Litowitz v. Standard Life Assurance Co. that the right to prepay is determined by the corporate status of the mortgagor. Although individuals or other non-corporate entities (such as a partnership or a REIT) might be the beneficial owners of real property, if they arrange to conduct their business through a nominee corporation which signs the mortgage as mortgagor, the corporate status of the nominee corporation will preclude the ability to prepay the mortgage pursuant to section 10. This is true even if the lender is aware of the existence of the individual or other non-corporate beneficial owners and even if they are parties to the mortgage as "additional covenantors". If the registered title to real property is registered in the name of a corporation, the right of a non-corporate beneficial owner to prepay any mortgage given by that corporation will not apply pursuant to section 10.

Quebec Civil Law Position

In the Province of Quebec, prior to the enactment of the new regulations, the application of section 10 of the Interest Act was problematic in situations where a mortgage was granted by a limited partnership, by a corporation acting as a trustee or by a corporation acting as a nominee for a natural person or a non-corporate entity.

The application of section 10 of the Interest Act to a mortgage given by a limited partnership was linked to the concept of the legal personality of, and the ownership of assets by, a limited partnership, both of which are still uncertain under Quebec law. Not being a corporation, however, the limited partnership could benefit from the right to prepayment under section 10 of the Interest Act. With the coming into force of the new regulations, this issue will be resolved.

In addition, the application of the rule in Litowitz was somewhat uncertain in the Province of Quebec. This mostly stemmed from the fact that civil law does not divide ownership between legal and equitable title in the same manner as the common law. Where a corporation acquires title to a property in Quebec on behalf of another, it is doing so as a prete-nom or mandatary (the civil law equivalent of an agent). The prete-nom has no rights of any nature whatsoever and cannot perform any act without the true owner's permission. According to the Civil Code of Quebec, a Quebec hypothec may only be granted by the person having the capacity to alienate the hypothecated property, leading most practitioners to believe that the true owner must hypothecate (which it often does by way of intervention to the hypothec). While many in Quebec thought the better view was that the rule in Litowitz did apply in Quebec, there remained a degree of uncertainty that often led to additional and expensive legal structuring to find ways to qualify under the existing exemptions. The new regulations that come into force on January 1, 2012 will eliminate this uncertainty and be very welcome in Quebec.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

12 Nov 2018, Other, Toronto, Canada

Stories aren’t falsehoods. Stories are the root of all effective human communications: they motivate, animate and clarify. If you aren’t telling stories, you probably aren’t getting your point across.

Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions