The Supreme Court of Canada issued its reasons today in Krayzel Corp. v. Equitable Trust Co.,
2016 SCC 18, adding some clarification to a mortgage lender's
right to protect itself from the increased commercial risk
associated with a defaulting mortgagor through the use of interest
rates, given s. 8 of the Interest Act which reads as
No fine, etc., allowed on payments in
8 (1) No fine, penalty or rate of interest
shall be stipulated for, taken, reserved or exacted on any arrears
of principal or interest secured by mortgage on real property or
hypothec on immovables that has the effect of increasing the charge
on the arrears beyond the rate of interest payable on principal
money not in arrears.
At issue before the Supreme Court of Canada was the various
terms of renewal of a mortgage granted in favour of Equitable
Trust. The initial interest rate was prime plus 2.875% per annum.
The mortgage matured on June 30, 2008, at which time Equitable
Trust agreed to extend the mortgage by seven months, with the
interest rate increasing to prime plus 3.125% for the first six
months and then 25% for the seventh month. When that matured, and
the borrower Lougheed was still unable to pay out the mortgage, a
second renewal term was granted, this time retroactive to one month
prior to expiry of the first renewal agreement, and stipulating
interest at 25%. Monthly interest payments were stated to be at the
"pay rate" of either 7.5% or at the prime interest rate
plus 5.25% (whichever was greater). Complicating matters, however,
was that the difference between the amount payable at the stated
interest rate of 25% and the amount payable by Lougheed at the
lower "pay rate" would accrue to the loan; and if there
was no default by Lougheed, the accrued interest would only then be
The majority of the Court found that these terms were contrary
to s. 8 of the Interest Act, noting that
...a rate increase triggered by the passage of time alone does
not infringe s. 8. That said, a rate increase triggered by default
does infringe s. 8, irrespective of whether the impugned term is
cast as imposing a higher rate penalizing default, or as allowing a
lower rate by way of a reward for the absence of default. I would
therefore allow the appeal.
The result of the case was that the 25% interest rate set by the
second renewal agreement was held to be void, with Equitable Trust
only entitled to interest under the second renewal agreement at the
higher of 7.5% and the prime interest rate plus 5.25%.
Of significance is, firstly, the first sentence of the above
statement by the Court, and subsequent statement that an interest
rate increase "triggered by the mere passage of time (and not
by default) such as that imposed under the First Renewal Agreement,
clearly does not offend s. 8."
Many lenders' current practice to ensure that they are not
offending the Interest Act is to provide for an
initial interest rate to a certain date, with the interest rate
increasing at a specific and identifiable date some time prior to
maturity, specifically not linked with default. The comment by the
SCC suggests that such a practice is likely still permissible.
Secondly, the SCC distinguished Krayzel from the
British Columbia Court of Appeal's decision North West Life
Assur Co. of Can v. Kings Mount Hldg Ltd. (1987), 15 BCLR (2d)
365 (CA), where a term providing for relief on interest when the
loan was repaid when due, was upheld. The difference being that in
Northwest Life Assur Co. of Canada, the reduction was
given as a term of one renewal – the original mortgage was
19%, the renewal provided for interest at the same rate of 19%, but
if the loan was repaid on time, the interest for the renewal would
be reduced to 13%. In Krayzel, each renewal resulted in an
increased interest rate, with a significant overall increase from
the originally agreed upon rate of prime plus 2.875% to 25% (with
What this means is that there is still an available avenue to
protect a mortgage lender's ability to use interest rates to
compensate it for the very real commercial risk associated with
lending to high risk borrowers, whether by way of an interest rate
increase prior to maturity (and not tied to default) or by way of
interest rate relief if the mortgage is repaid on time. However,
mortgages must be carefully drafted to ensure that their interest
rate provisions fall within what the British Columbia Court of
Appeal in Northwest Life Assur Co. of Canada, and
subsequent case authority, has indicated is acceptable, and outside
of what the Supreme Court of Canada in Krayzel has
indicated is not.
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The British Columbia Court of Appeal has recently considered whether the doctrine of unconscionability can be invoked to set aside a contractual clause providing for the payment by one party to the other...
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