Determining when to demand repayment of a loan is often difficult for a lender in any situation. This decision becomes exponentially more complicated in circumstances where the borrower has not defaulted on any payments. Lenders have to weigh the fact that a loan is being repaid as required against the risk to their security arising from the other defaults. In addition, many lenders and borrowers are under the impression that a demand for repayment that is based upon defaults unrelated to payment may be unsustainable and may be disallowed by the Courts. A recent decision of the Ontario Superior Court of Justice has shed some light on this issue and demonstrated that the Courts are reluctant to interfere in those situations where demand is made in the absence of a payment default provided that the demand is not either capricious or impermissible in law.
In Ocean Sands1, the Bank of China (the "Bank") brought a motion for summary judgment for repayment in relation to funds advanced to Ocean Sands Developments Ltd. ("Ocean"). Ocean opposed the motion on the basis that it was up-to-date on all loan payments and, as a result, the demand was unreasonable and unsustainable.
The loan in this case was evidenced by a promissory note which specifically stated that it was payable on demand and was governed by a facility letter containing a number of covenants. In addition, both the mortgage and guarantee securing the loan indicated that they were payable on demand.2 Given the demand language in the loan documents, the Bank took the position that it was within its rights to simply require repayment at any time, and that there did not need to be a breach of any term of the loan commitment in order for it to do so. In the event that a justification for the demand was required, the Bank argued that the following triggering events entitled it to make a demand:
- Ocean sold the mortgaged premises without the Bank's consent in breach of the negative covenants in the facility letter;
- There were misrepresentations made in two sworn statutory declarations from the principal of Ocean which constituted events of default under the facility letter;
- Ocean failed to provide financial statements in the time frame required under the facility letter;
- Ocean failed to maintain the minimum debt service ratio required under the facility letter;
- Ocean failed to pay realty taxes as due in breach of the positive covenants in the facility letter; and
- Ocean failed to inform the Bank of an unregistered mortgage on the mortgaged premises.
The Bank took the position that its security had been considerably weakened as a result of the actions of Ocean, that it had lost trust in Ocean due to the misrepresentations, and that it was unwilling to continue to do business with Ocean as a result.3 The Bank argued that in these circumstances it was entitled to demand repayment of its loan in full and that it would be improper for the court to force it to do business with someone that it did not want to, particularly in circumstances where it justifiably had lost confidence in the borrower.4
Ocean took the position that the defaults were either unsustainable or had been rectified by the time the motion was heard, and that there was no basis for the Bank's demand given that it had made all of the required payments on the advance.5 The Borrower also argued, among other things, that the fact that the loan could not be prepaid without penalty was evidence of an intention of the parties to have a specific arrangement for a fixed term. Ocean suggested that the parties had in fact contractually agreed to a five year term for the loan, and the Bank should not be able to now demand repayment prior to the end of that fixed term.6 However, no text from the facility letter was quoted as evidence of that five year term in order to counteract the demand language.
The Court rejected the arguments of Ocean and granted summary judgment.7 It held that the loan documents clearly stated that the loan was payable on demand and rejected Ocean's claim that the parties had intended for a fixed term, concluding: (i) that the wording of the specific security prevails over any conflict in wording that may be found in the facility letter; and (ii) that the specific security documents did not restrict the Bank from making a demand prior to the conclusion of the five year term of the loan.8
The Court further held that if it was wrong in its initial determination and that a triggering event is required for a proper demand to be made, the following was sufficient to justify the demand by the Bank9:
- There was clear evidence of a transfer of the property without the Bank's consent and the existence of an unregistered vendor take-back mortgage;
- The statutory declarations were inaccurate;
- Ocean was in breach of the debt service ratio;
- Ocean's principal admitted under cross-examination that the promissory note and mortgage security were payable on demand without any limitation and that the loan was structured on the basis that Ocean was to be both the legal and beneficial owner of the interest under the leases on the mortgaged property; and
- Ocean's principal admitted that the financial statements were late.
The Court rejected the argument put forth by Ocean that there needed to be something more than a simple demand made by the Bank in these circumstances, stating that it is "reasonable not to constrain commercial lenders to lend to borrowers whom they no longer trust or with whom they no longer wish to do business ... so long as the Bank has not made a demand which is either capricious or impermissible."10 The demand made by the Bank in this case was supported by: (i) the loan and security documents which stipulated clearly that they were payable on demand; (ii) the confirmation of the validity of those documents by Ocean; and (iii) the fact that that the non-financial breaches of the facility letter by Ocean were concerning, real and created an understandable breakdown of the parties' business relationship. As a result, the Court concluded that the Bank should not be prevented from making a demand and ending its relationship with Ocean.
While the facts of the Ocean Sands case are fairly unique, it does demonstrate an acceptance by the Courts of the importance of the role of factors beyond simply whether or not payments are being made in the relationship between a lender and a borrower and the reluctance of the Courts to interfere with the legitimate business decisions of lenders. This decision should also provide some comfort to lenders that they may, in the right circumstances, demand repayment of loans where non-payment defaults have led to a breakdown in the relationship with the borrower without fear that the Courts will look solely at whether or not payments have been made when determining whether or not a demand is reasonable. It should be noted however that the Court did not comment on the amount of time needed to be given to a borrower after making demand to arrange for alternative financing in order for the demand to be reasonable. Ocean Sands also shows the importance, wherever elements of a demand loan are blended with certain features of a term loan in a facility letter, of making it abundantly clear that the demand nature of the loan takes precedence over the term features.
1. Bank of China (Canada) v Ocean Sands Developments Ltd, 2013 ONSC 1413 [Ocean Sands]
2. The specific text of the facility letter was not disclosed in great detail in the judgment. From those excerpts of the facility letter that were referenced in the judgment, it appears to have contemplated events of default even though the promissory note, mortgage and guarantee were all payable upon demand.
3. Ocean Sands, at para. 15.
4. Ocean Sands, at para. 11.
5. Ocean Sands, at para. 19.
6. Ocean Sands, at para. 23.
7. In a subsequent costs ruling, the Court also awarded the Bank its costs on a partial indemnity basis. Bank of China (Canada) v Ocean Sands Developments Ltd, 2013 ONSC 1828.
8. Ocean Sands, at para. 30(a).
9. Ocean Sands, at para. 30(b).
10. Ocean Sands, at para. 33.
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