The federal government recently introduced a new regulation (the
"Regulation") to the Interest
Act which clarifies the application of what is commonly
referred to as the "5-year rule." The
Regulation will come into force as of January 1, 2012.
The 5 Year Rule
Section 10 of the Interest Act allows any person to
repay or prepay a mortgage on real property which has a term beyond
five years, once the first five years of the term have passed. As a
consequence of such prepayment, a nominal penalty of three months
interest is imposed. This statutory right of prepayment was first
enacted by Parliament in 1880 in order to protect farmers from
being locked into long-term mortgages subject to large penalties
Shortly after its enactment, section 10 began to cause problems.
The country was growing rapidly. Large corporations, and railway
companies in particular, were entering into major ventures of
development. However, these companies found it difficult to obtain
long-term financing necessary for their projects due to the
statutory right of prepayment after five years. Parliamentary
proceedings from the time found this to be hindering the speedy
development of railways and other large ventures.2 In response,
Parliament enacted subsection 10(2) in 1890 which provides an
exemption for corporations to the 5-year rule. The rationale was
that corporations are generally sophisticated entities and should
be able to negotiate their own prepayment terms.
Effect of the Regulation
Up until now, courts were left to determine the applicability of
(and exemptions to) the 5-year rule in peculiar fact scenarios
often involving commercial entities other than corporations. The
Regulation now clarifies and expands the types of entities which
are exempt from the 5-year rule as follows:
trusts settled for business or commercial purposes;
unlimited liability corporations under the Business
Corporations Act (Alberta);
unlimited liability companies under the Business
Corporations Act (British Columbia); and
unlimited companies under the Companies Act (Nova
The Ontario Mortgages Act contains a provision which
essentially mirrors the 5-year rule as it appeared in section 10 of
the federal Interest Act prior to the passage of the
Regulation. However, the coming into force of the Regulation will
now create a discrepancy between federal and provincial
legislation, which shall be resolved either through legislative
change or by the courts.
The take-away for lenders is that they should still remain
mindful of the 5-year rule when providing mortgages secured by real
propery to entities other than corporations. Depending on the
outcome of future case law or changes to the Mortgages
Act, commercial entities in Ontario other than corporations
may still be entitled to the statutory right of prepayment after 5
1. Litowitz v. Standard Life Assurance Co.
(Trustees of) (1996), 30 O.R. (3d) 579,  O.J. No.
3816, (Ont. C.A.), at paragraph 7. 2 Ibid.
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