Bankers Mortgage Corporation v Plaza 500 is a recent decision of the Court of Appeal for British Columbia. In this case, the borrowers signed a loan retainer agreement which provided in part that 1) the borrowers would receive a loan of 14.4 million $ from the lender, and 2) an exit fee of $96,000 was payable by the borrowers to the broker unless the loan was repaid on time. Since the loan was only repaid after the extended maturity date, it went into default. The broker then started an action against the borrowers to recover the exit fee.
The issue on appeal was whether the judge erred in her conclusion that the exit fee was not a penalty prohibited by section 8 of the Interest Act. This issue was broken down into two questions.
The first question considered by the Court was the following. If the exit fee was a penalty, was it one "stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage or real property... that has the effect of increasing the charge on arrears" in accordance with section 8 of the Interest Act? The Court concluded the exit fee did not meet this requirement for multiple reasons: the obligation to pay the exit fee was owed to the broker, not to the lender; the lender could not enforce payment of the exit fee; the exit fee was not secured and was not part of the mortgage debt; failure to pay the exit fee impeded neither payment of the balance owing to the lender to redeem nor the discharge of the mortgage by redemption; the exit fee was not part of the arrears; although triggered by default on the mortgage loan, it was not "exacted on" the arrears.
The second question the Court examined was whether the exit fee was a penalty as opposed to a genuine pre-estimate of damages. In essence, the Court found that the pre-estimate of damages was the true bargain between the parties. Accordingly, the exit fee did not amount to a penalty that triggered the application of section 8 of the Interest Act.
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