The Government of Canada recently enacted new regulations under
the Interest Act (Canada) (Act) which have
the effect of expanding the class of "prescribed
entities" for the purposes of section 10(2)(b) of the Act.
These new regulations, which will significantly clarify the
practice of commercial mortgage lending throughout Canada, apply to
mortgages and hypothecs granted on or after January 1, 2012.
Pursuant to section 10(1) of the Act, closed mortgage loans
(other than those given by corporations or joint-stock companies)
with terms greater than five years may be prepaid by the borrower
at any time after five years from the date of the loan for an
amount equal to the principal of the loan and accrued interest,
together with an additional three months of interest (as penalty
for early prepayment). This provision was originally enacted in
1880 and was intended to ensure that individuals were not locked
into long-term mortgages with high interest rates, with no ability
to prepay without incurring significant penalties. The Act has
always excluded corporations and joint-stock companies from these
protections (see section 10(2) of the Act).
Although only corporations and joint-stock companies were
identified as entities being excluded from the protections of
section 10(1) of the Act, other forms of business organization,
notably business trusts, partnerships and unlimited liability
corporations were not expressly dealt with in the legislation.
Although not expressly exempted from the application of section
10(1), in modern commercial transactions these other forms of
business organization are commonly used and, it has been frequently
argued, for the purposes of the protections set out in the Act are
analogous to corporations and not individuals. In fact, the
provisions of the Act have introduced difficulties for these types
of business entities accessing long-term mortgage financing.
In Ontario, jurisprudence evolved to partially address this
perceived legislative deficiency. In two important
cases1 the Ontario Court of Appeal established a
"look through" principle such that the relevant analysis
for purposes of determining the applicability of limitations on
interest prepayment penalties is conducted at the level of the
legal title holder of the real property interest being mortgaged.
In particular, where the legal title of a property being mortgaged
is held by a corporation the fact that beneficial ownership
remained with a partnership does not operate to extend the
protections of section 10(1) to the corporate mortgagor. The bar in
Ontario has also generally adopted this principle with respect to
trust property held by a corporate trustee. The Ontario practice
has been widely followed in the other common law provinces. In the
province of Québec, for various reasons, including the
absence of division between legal and beneficial ownership, the
analysis put forward in Litowitz and Kucor could
not be directly applied.
The new regulations should serve to clarify commercial mortgage
practice across Canada. Pursuant to section 10(3) of the Act, the
Governor in Council may, from to time, designate other entities
(i.e., other than corporations and joint-stock companies) as
"prescribed entities" for the purpose of section 10(2)(b)
of the Act. In so doing, such prescribed entities are carved out
from the mandatory prepayment penalty regime established in section
Since January 1, 2012, (i) partnerships, (ii) trusts settled for
business or commercial purposes, and (iii) unlimited liability
corporations (as they exist in the provinces of Nova Scotia,
Alberta and British Columbia) are now "prescribed," and
therefore mortgages or hypothecs granted by such entities on or
after such date will no longer attract the prepayment penalty
requirements of section 10(1) of the Act. Each of these entities
exists for business or commercial purposes and therefore this
reform is seen by the government as bringing the mortgage
requirements for all business or commercial entities into line.
1 See Litowitzv. Standard Life
Assurance Co. (1996, Ont. C.A.) and Kucor Construction
& Developments & Associates v. Canada Life Assurance
Co. (1998, Ont. C.A.).
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