Canada: Prepayment Fee Not Recoverable Upon Acceleration Of Loan

Perhaps it was the magnitude of the prepayment fee.  Perhaps it was the timing of the Lender's early demand in relation to the five year term of the loan.  Nevertheless, the British Columbia Court of Appeal was definitely motivated to strictly construe the terms of a loan agreement against the Lender (Maxam Opportunities Fund) in Greenscape1to deny the Lender recovery of its early prepayment fee upon an acceleration of the loan.

In Greenscape, Maxam established a $7 million non-revolving term credit facility in favour of the Borrower (Greenswitch Capital Ltd.) in January 2011.  That loan was guaranteed by multiple related corporations and individuals, including Greenscape Capital Group Inc.  The loan terms were structured such that Maxam's return was to be paid in the form of traditional cash interest, payment in kind interest (PIK) and a royalty fee based upon the Borrower's annual gross revenues.  The loan agreement offered the Borrower the right to prepay all of any part of the principal outstanding, together with all accrued and unpaid interest thereon provided that the Borrower also made payment of the specified prepayment fee.2

The Borrower never attempted to exercise the prepayment right.  However, shortly after two years into the five year loan term, Maxam declared an event of default based upon the Borrower's non-compliance with its debt-service coverage ratio and accelerated the loan.3  Maxam demanded repayment of the principal, interest, fees and other monies outstanding under the loan agreement, and included a prepayment fee of $2.26 million in making that calculation.

The chambers judge granted Maxam's petition for an order declaring the loan to be in default.  However, due to inconsistencies which the chambers judge found within the loan agreement itself, the question whether the "Prepayment Fee" as defined in the loan agreement was due and payable was ordered to be tried by a summary trial.  Both the Lender and the Borrower appealed this order.

The Court of Appeal conducted a thorough examination and review of multiple provisions of the loan agreement.  Madam Justice Newbury noted that although "Prepayment Fee" was a defined term, "prepayment" was not.  In giving that term its ordinary and natural meaning, the Court concluded that no "prepayment" had been made or could be made under the terms of the loan agreement since the loan had been accelerated and all obligations of the Borrower were then due.  "Prepayment" referred, in its view, to a payment made voluntarily prior to the due date of a loan.  Since the original due date had been accelerated to the date demand was actually made, the amount of the Prepayment Fee was computed to be nil.4 

In the Court's view, there was no clear and unambiguous language in the definition of "Prepayment Fee" that would indicate that anything other than the ordinary meaning of "prepayment" was to be adopted in construing that term.5  In support of its position, the Court pointed to the payment terms for the royalty fee which provisions expressly stated that the royalty fee was payable even upon an event of default.6 The Court disregarded affidavit evidence led by Maxam explaining its funding model and indicating that its investors' funds could not be repurposed to provide an alternative return if Maxam's loans were repaid early, whether by voluntary prepayment or acceleration.  Although "Obligations" had been defined in the loan agreement to include the Prepayment Fee, and all Obligations were due and payable upon the occurrence of an event of default, the Court nevertheless strictly construed the calculation provisions in concluding that no fee was payable.7

The lesson to be learned from Greenscape is clear.  If a lender is expecting to collect a prepayment fee upon any acceleration of the loan, that payment expectation and the method of the fee's calculation must be definitively stated in the loan documents in order to defeat the ordinary and natural meaning of the term "prepayment".  It is best for lenders to start by spelling out that payment arrangement in  their term sheets, and to follow it up with an express restatement in the loan agreement as well.


1 Maxam Opportunities Fund Limited Partnership v Greenscape Capital Group Inc, 368 DLR (4th) 331 [Greenscape]

2 Greenscape, at para 5.

3Greenscape, at para 7. It appears that the Borrower was also in default of certain of its cash interest payments and other monetary obligations.  However it is not clear from the Court's judgment as to whether those defaults were included in the notice of default.

4 Greenscape, at para 45.

5 Greenscape, at para 49.

6 The Court also referred to some U.S. cases determining that unless a note expressly provides otherwise, the holder of a note cannot simultaneously accelerate the note and collect a prepayment penalty.  Greenscape, at paras 46-48.

7 Greenscape, at paras 28 and 29.

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