The Government of Canada recently enacted new regulations under
the Interest Act (Canada) (Act) which expand the class of
"prescribed entities" that are not entitled to the
statutory prepayment rights accorded to borrowers by section 10(1)
of the Act. These new regulations, which will significantly impact
the practice of commercial mortgage lending throughout Canada,
apply to mortgages and hypothecs granted on or after January 1,
Prior to January 1, 2012, section 10(1) of the Act provided, in
effect, that a borrower (other than a corporation or joint-stock
company) could prepay a closed mortgage loan with a term exceeding
five years at any time after the first five years of the term upon
payment of a penalty equal to three months' interest. This
provision was originally enacted in 1880 to ensure that individuals
were not locked into long-term mortgages with high interest rates,
with no ability to prepay without incurring significant
As noted, corporations and joint-stock companies were
specifically excluded from section 10(1) of the Act. Although this
exclusion denied them the same statutory prepayment right available
to individuals, it had the effect of motivating lenders to make
long-term loans available to corporations. If lenders were limited
by statute to a maximum prepayment penalty of three months'
interest, they would be less inclined to offer mortgage financing
with a term longer than five years. The exclusion of corporations
and joint-stock companies did not, however, address other commonly
used forms of business organization (such as business trusts,
partnerships and unlimited liability corporations), thereby making
it more difficult for such business organizations to obtain
long-term mortgage financing due to the risk that the lender might
be forced to accept prepayment of three months' interest as its
sole compensation in the event of prepayment.
The new regulations clarify the rules applicable to the
commercial mortgage industry across Canada by explicitly expanding
the types of business organizations that may not prepay with a
three month penalty. Under section 10(3) of the Act, the Governor
in Council may, from time 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, thereby excluding them from the mandatory prepayment
penalty regime established in section 10(1).
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, excluded from the statutory prepayment penalty
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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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