In two earlier editions of Fully Secured (March 2015
and September 2015; Volume 6, Nos. 1 and 3)1, we
reported on the lower court and Alberta Court of Appeal decisions
in the Loughheed Block, Krayzel and Equitable
Trust mortgage litigation2. Those decisions
involved the interpretation of Section 8 of the federal
Interest Act3 and its application to the
interest terms of two real estate mortgage renewal agreements.
Section 8 is well-known in the lending community for its
prohibition on fines, penalties and interest rates being imposed
upon any arrears of principal or interest secured by a mortgage on
real property that have the effect of increasing the charge on the
arrears beyond the rate or interest payable on principal money not
After a split decision at the Alberta Court of Appeal level,
Krayzel4 made its way to the Supreme Court of
Canada. The Supreme Court focussed its decision on the Second
Renewal Agreement which contained provisions that set an initial
interest rate of 25%, but only required Lougheed to make monthly
interest payments at a lower "pay rate" equal to the
greater of either 7.5 % or at the prime rate plus 5.25%.
These provisions also prescribed that the difference between the
amount of interest payable at the 25% rate and the lower pay rate
would accrue on the loan, but if there were no default by Lougheed,
that accrued interest would be forgiven.5 Thus the
benefit or performance incentive represented by the lower "pay
rate of interest" was lost upon a default and the original 25%
interest rate would prevail in that instance.
In another split decision, the Supreme Court of Canada
determined that Section 8 of the Interest Act applies
equally to mortgage terms imposing by way of penalty a higher
interest rate in the event of default, and those mortgage terms
reserving by way of discount a lower rate of interest in the event
of no default.6 In drawing upon the general
principles of construction outlined in Section 2 of the
Interest Act, the majority of the Supreme Court concluded
that even though the word "discount" is not mentioned in
Section 8, that section applies both to discounts (incentives for
performance) as well as penalties for non-performance whenever
their effect is to increase the charge on the arrears beyond the
rate of interest payable on principal money not in
arrears.7 The majority's interpretation could
be seen as the equivalent of applying a "directly or
indirectly" construction to the operative words.
Section 8 has always represented a formidable challenge for
mortgage lenders looking to craft alternative interest rate terms
for specialized commercial transactions. The Supreme Court of
Canada's decision in Krayzel has now added a new
element to keep in mind throughout that process.
1.Prohibited Penalty or Incentive for Good
Performance?: Interpreting the Interest Act, Gillian Scarlett
(March 2015; Volume 6, No. 1) and A Matter of
"Interest" in Alberta Going to the Supreme Court of
Canada, Gillian Scarlett (September 2015; Volume 6, No.
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