To the contentment of lenders and owners of commercial
properties, a long-awaited amendment involving section 10 of the
Interest Act (Canada) (the "Act") has just been
made. Indeed, on October 20, 2011, the Canadian government adopted
the Prescribed Entities and Classes of Mortgages and Hypothecs
Regulations. These regulations define the entities that will
be eligible for the purposes of applying paragraph 10(2)(b) of the
A brief historical reminder is called for Paragraph 10(1) of the
Act, passed in 1890, provided that borrowers could repay their
loans secured by hypothecs on immovables after five (5) years, even
if the hypothec was a closed hypothec for a longer term, subject to
paying a penalty equal to three (3) months' interest. At that
time, Parliament wished to protect individuals by means of this
provision, in particular farmers. Later, to encourage commerce,
particularly the railway companies attempting to structure their
long-term debts, Parliament amended the Act by adding a second
paragraph to section 10 that provided that the abovementioned
general rule did not apply to joint stock companies or other
From then on, the companies had access to loans for more than
five (5) years secured by hypothecs on immovables.
Commercial real estate practice having greatly evolved since
then, owners of commercial immovables increasingly structure
themselves as limited partnerships or commercial trusts, for tax
Unfortunately, not being governed by the exception in the second
paragraph of section 10 of the Act but rather by the more generous
general rule of paragraph 10(1), it is difficult for these owners
to access loans for more than five (5) years because lenders do not
want to allow their borrowers to repay their loans in advance after
the fifth year by paying a modest penalty (the general rule of
paragraph 10(1) of the Act being of public order).
Therefore, structures such as holding an immovable through a
nominee corporation have been conceived and implemented by these
property owners in order to benefit from long-term loans. However,
numerous lenders remain hesitant, with good reason, to take on this
kind of loan, fearing that these structures will not be recognized
by the courts.
In the explanation of its new regulation, the government clearly
states the reasons for the change: "Some business and
commercial entities, not structured as corporations... have had
difficulties in accessing long-term mortgage financing because the
prepayment terms for their mortgages are prescribed by the
Under this new regulation, partnerships (notably limited
partnerships) and trusts established for business or commercial
purposes will benefit from the exception in the second paragraph of
section 10 of the Act, in the same way as joint stock companies and
other corporations, with respect to hypothecs on immovables entered
into after January 1, 2012.
That will be the long-awaited end of convoluted property
structures aimed at obtaining loans for more than five (5) years
secured by hypothecs on immovables. Lenders will, from then on, be
able to grant such loans to limited partnerships and trusts
established for business or commercial purposes and to freely
negotiate the repayment terms of their loans.
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.
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Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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