Equitable Trust Company v. Lougheed Block Inc., 2011 ABQB 193

Court of Queen ’ s Bench of Alberta Citation: Equitable Trust Company v. Lougheed Block Inc., 2011 ABQB 193 Date: 20110321 Docket: 0901 08221 Registry: Calgary Between: The Equitable Trust Company Plaintiff - and - The Lougheed Block Inc., Neil John Richardson, Hugh Daryl Richardson and Heritage Property Corporation Defendants _______________________________________________________ Memorandum of Decision of J.B.

Hanebury, Master in Chambers _______________________________________________________ [ 1 ] This application raises the question of whether a lender can collect certain administration fees and an interest rate increase that occurs upon default and for the final month of a mortgage. At issue is whether certain provisions of the Interest Act R.S.C. 1985 c. I- 15, render the increased interest rate and other charges unenforceable. FACTS

[ 2 ] The defendant, The Lougheed Block Inc., owned a heritage office building in downtown Calgary. It granted Krayzel Corp. a first mortgage over the property in the sum of $500,00.00. [ 3 ] Lougheed Block subsequently granted The Equitable Trust Company a mortgage in the sum of $27,000,000.00 over the property. Krayzel Corp. postponed its interest to the mortgage of Equitable Trust. [ 4 ] The Equitable Trust mortgage provided for interest at prime plus 2.875 % per annum.

However, upon default, Lougheed Block would be charged an administration fee of $10,000.00 for each month, or part thereof, that the mortgage remained in default. [ 5 ] The Equitable Trust mortgage matured on June 30, 2008. Lougheed Block had secured a commitment from another lender for $26,000,000.00 in first mortgage financing. This sum was insufficient to fully pay out Equitable Trust ’s mortgage and the commitment was never funded. [ 6 ] As a result, the Equitable Trust mortgage was renewed on August 27, 2008, for a period expiring March 1, 2009 (First Renewal Agreement).

This renewal provided for interest for the first six months at prime plus 3.125 % per annum and at 25% per annum for the last month of the term. It also stipulated a renewal fee of $417,000.00. A default administration fee of $10,000.00 was charged by Equitable Trust in connection with the renewal as the mortgage was in default at the time of renewal. [ 7 ] The renewal was registered against the title on September 18, 2008 and Krayzel Corp. executed a postponement of its rights to it. [ 8 ] The First Renewal Agreement matured on March 1, 2009.

No satisfactory arrangements could be made to pay out Equitable Trust. [ 9 ] In April, 2009, Lougheed Block executed a Second Renewal Agreement. This agreement was retroactive to a month prior to the expiration of the First Renewal Agreement, when the increase in the interest rate to 25% was to commence. It was for 12 months with the loan to be repaid on or before Feb. 1, 2010. It provided for interest at 25 % per annum from February 1, 2009, until repayment in full.

However, Lougheed Block was to make monthly payments at an interest rate of the greater of 7.5 % per annum or prime plus 5.25 % per annum, compounded and payable monthly. The interest differential between that sum and interest calculated at 25% per annum would accrue to the loan.

If there were no default, and the principal and any other outstanding costs and fees were paid by the due date, February 1, 2010, the accrued interest would, in effect, be forgiven. [ 10 ] If there were a default under any of the borrower’s obligations, the borrower would be required to pay interest at 25% per annum and that amount would continue to be paid monthly until the default was cured.

However, Equitable Trust could refuse to allow the default to be cured, in which case interest would have to be paid monthly at the rate of 25 % per annum, and all accrued unpaid interest would immediately become due and payable. [ 11 ] The agreement also provided for a renewal fee of $556,000.00 to be paid by June 30, 2009.

However, if the full loan amount were repaid by August 31, 2009, there would be a rebate of $185,000.00 on the fee. [ 12 ] The Second Renewal Agreement acknowledged that Lougheed Block could not pay out the loan at the time of renewal. [ 13 ] The month after the execution of the Second Renewal Agreement the mortgage went into default and Equitable Trust demanded $30,180.321.35, which included a $10,000.00 default administration fee, and a per diem rate based on an interest rate of 25 % per annum.

[ 14 ] Payment was not made and this foreclosure action was commenced.

A consent Order Nisi was granted which left for determination the question of the entitlement of Equitable Trust to the interest, fees and charges it claimed: default fees of $10,000.00 per month, totalling $130,000.00, for the month of July, 2008, and the months from June 2009, to June 2010; renewal fees of $417,000.00 for the first renewal and $556,000.00 for the second renewal; interest on those fees which have been capitalized; and the accruing interest at 25 % per annum. [ 15 ] The property was sold by judicial sale and Equitable Trust has been paid $29,147,618.37. [ 16 ] This Court has already determined in a prior decision that the mortgage of Equitable Trust does not have priority over the mortgage of Krayzel Corp. with respect to the second renewal fee of $556,000.

As well, certain issues between the parties have been settled. [ 17 ] Remaining for this Court to determine are the questions of the interest to be charged under the mortgage and whether the default fees can be claimed. ISSUES [ 18 ] There are three issues in dispute: (

a) Is the increase in the interest rate to 25% per annum found in the First Renewal Agreement and in the Second Renewal Agreement contrary to the Interest Act or should it be disallowed in equity? (

b) What are the rates of interest payable under the mortgage? (

c) Are the administration fees charged pursuant to the mortgage contrary to the Interest Act or should they be disallowed in equity? ANALYSIS Is the increase in the interest rate to 25% per annum as set out in the First Renewal Agreement and the Second Renewal Agreement contrary to the Interest Act or should it be disallowed in equity? [ 19 ] Sections 2 and 8 of the Interest Act provide: 2. Except as otherwise provided by this Act or any other Act of Parliament, any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on. ... 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 .

(2) Nothing in this

section has the effect of prohibiting a contract for the payment of interest on arrears of interest or principal at any rate not greater than the rate payable on principal money not in arrears.

[emphasis added] [20] In the 19th century, the British courts refused to enforce penalties against borrowers in default. However, the courtsdistinguished between a penalty charged for default and a rebate given for prompt payment. This distinction existed in law, despite bothprovisions having the identical goal of encouraging the borrower to pay on time and charging him if he failed to do so.

Section 8 of the Act was promulgated in Canada in 1880, most likely to avoid that distinction.[1] It requires the court to turn its attentionto the substance and effect of the mortgage provision as it must ask if the rate charged on money in arrears increased. [21] Lawyers and lenders sought ways to avoid the effect of s. 8 and included provisions in their mortgages that increased theinterest rate just prior to the end of the mortgage term or forgave accrued interest. When considering such provisions the courts havestruggled with the

interpretation to be given to s. 8, in light of the right of commercial parties to make their own bona fide businessarrangements. As noted by Finch C.J.B.C. in Reliant Capital Ltd. v. Silverdale Development Corp. 2006 BCCA 226, “[a]bout the onlything on which the courts seem to agree is the difficulty of construing the language of s. 8 in the context of the modern commercial world.”[2] This divergence in the case law can be seen in the

interpretation of s. 8 found in the decisions of the courts in British Columbia,Ontario and Alberta. [22] The British Columbia Court of Appeal considered s. 8 in North West Life Assurance Co. v. Kings Mount Holdings Ltd.[1987] B.C.J. No. 1417. In that case the mortgage amending agreement provided that if the payments were kept current until thematurity date, the difference between the interest rate of 19% per annum and 13% per annum would be forgiven by the lender. However,if the payments fell into arrears, no interest would be forgiven and the full amount of principal and interest would be due.

In a brief oraljudgment that considered no other case law the Court found that this arrangement did not offend s. 8 of the Act. [23] In Raintree Financial v. Bell (1993) 85 B.C.L.R. (2d) 82 (B.C.S.C.), the interest rate escalated one week prior to the end ofthe term and this approach was allowed by the Court. See as well: Prenor Trust Co. of Canada Ltd. v. Hills of Columbia EnterprisesLtd. (1994) (BC SC), 12 B.L.R. (2d) 180 (B.C.S.C.), Granville Savings and Mortgage Corp v. Pekick [1995] A.J.No. 275 (M.C.). [24] A different view was taken on similar facts by Tysoe J. in TD Trust v. Guinness [1995] B.C.J.

No. 1854. In that case the interest rate increased from 16.5 % to 24 % a week before the mortgage came due. After considering case law[3] not cited to the Court inRaintree, Tysoe J. declined to follow that decision. He held that when considering s. 8 of the Act the Court should not look to the form ofthe interest provision, but rather its substance. He found that it was apparent on the face of the provision that it was an attempt to avoid s.8 and no other explanation to justify the interest increase was provided by the lender.

He said that s. 8 “cannot be avoided by clever devices if the substance of the provision has the effect of increasing the interest rate in the case of default”[4].

When considering whereto draw the line he found that it “should be drawn between interest provisions which are intended to extract a higher rate of interest in the event of default and interest provisions which have a legitimate commercial purpose.”[5] It is up to the Court to determine the true intent of the arrangement as it “may be obfuscated by clever devices designed by ingenuous lawyers.”[6] [25] The British Columbia Court of Appeal considered the test to be applied when considering s. 8 in Langley Lo-Cost BuildersLtd. v. 474835 B.C. Ltd. 2000 BCCA 365 , [2000] 7 W.W.R. 46.

In that case the mortgage was part of a transfer of land and itwas always intended that no interest would be paid during the currency of the mortgage due to a substantial prepayment that had beenmade. However, interest was to be paid after maturity. Recognizing a possible problem with s. 8 of the Act, counsel, relying on Raintree,drafted the provision so that interest commenced three days before maturity at prime plus three percent. [26] After reviewing the case law considering s. 8, the Court said that the purpose of the

section is to protect borrowers againstpenalties and oppression at the hands of a ruthless lender. The cases, it noted, fell into two camps. Prima facie a rate of interest payableat default or increased in that event will offend s. 8 of the Act. However, the transaction may be analysed to determine whether there is abusiness reason for the rate increase, i.e. a legitimate commercial purpose that is not a penalty, economic coercion or unfairness. [27] The arrangement in the case before it, said the Court, “carried none of the stench of coercion, intimidation or penalty”.[7] It

could not fairly be seen to be a clever device to avoid the law and therefore, it was allowed. See as well: Vancouver City Savings Credit Union v. 53501 Ltd et al 2001 BCSC 1405 . [ 28 ] The British Columbia Court of Appeal had a further opportunity to consider s. 8 in Reliant Capital Ltd. v. Silverdale Development Corp. 2006 BCCA 226 [8] . In that case the term of a 2.261 million dollar mortgage was for just over 13 months and the interest rate increased from 14% to 20% in the last month. Interest-only payments were to be made prior to the due date.

The purpose of the loan was to fund a real estate development in an industrial park. The lands were to be subdivided, serviced and sold, with the mortgage being repaid as sales occurred. [ 29 ] The courts below found that these interest provisions were a violation of s. 8 as there was no legitimate commercial purpose for the rate increase. The Court of Appeal came to a different conclusion. [ 30 ] It heard the evidence of the lender that its usual practice was to assess its risk after a year. At that time, if the mortgage was renegotiated and extended, the increased interest rate would be replaced by a fee.

If the loan was not extended, then the interest increase was to offset the increased risk that the lender would face. The Court paid little attention to this evidence and found it self-serving. [ 31 ] The Court held that if the effect of the clause is to charge a greater rate of interest on money in arrears than money not in arrears, s. 8 is breached. However, in this case the increased rate of interest became effective by the passage of time, not as a result of payments going into default. It did not have the effect of charging more on arrears.

Since the increase came into effect a month before maturity and applied equally to money in arrears and not in arrears. [ 32 ] Acknowledging that this determination was sufficient to dispose of the appeal, the Court went further and addressed the test to be applied when examining an interest provision to determine if it offends s. 8 of the Act. [ 33 ] The Court took a purposive approach to the legislation, and looked at the harm or evil it was intended to remedy.

The Court stated that s. 8 seeks “to protect property owners against abusive lending practices, while recognizing that generally speaking, parties are entitled to freedom of contract.” [9] It rejected the legitimate commercial test discussed in earlier cases, saying that it put an “unnecessary and unhelpful gloss” on s. 8 [10] . [ 34 ] The Court found that a strict or narrow

interpretation of s. 8 is required, so long as it does not frustrate or impair the overall purpose of the legislation. It held that to consider the interest provision, the Court should determine the intention of the parties from the language used in their agreement, viewed in the context of the objective circumstances in which that agreement was made. [ 35 ] The Court then examined the language found in the agreement, taking into account its commercial context. [ 36 ] In this case the loan was not a conventional mortgage loan, but rather had been specially tailored to enable the borrowers to develop the property.

The interest rate of 14% was sufficient while the property was being developed but, after a year had passed, if the mortgage had not been paid off, it would be as a result of the failure of the lots to sell. This would increase the risk and the lender therefore expected further compensation. The Court noted that the developers were experienced business people and accepted this arrangement. [ 37 ] Taking a purposive view of the legislation, and considering the language of the parties’ agreement in the objective circumstances of its creation, the Court held that the clause did not offend s. 8.

It held that an assessment by a lender that indicates there will be an increase in the risk at the end of the mortgage term can legitimately result in an increase in the rate of interest, which in this case occurred before the end of the term. [ 38 ] As one commentator, Mary Anne Waldron, noted, when considering s. 8 the courts have developed artificial means of fitting

commercial needs to an archaic statute.[11] In her view, the test in British Columbia really comes down to unconscionability.[12] Coerciveor unfair mortgage lending practices will not be allowed. [39]

Section 8 has been considered, albeit less extensively, by the Ontario courts. [40] In Weirdale Investments Ltd. and Canadian Imperial Bank of Commerce (ON SC), [1981] 32 O.R. (2d)183 (Ont. H.C.) the mortgage provided for interest at 10% both before and after maturity and default. The payment of interest would bewaived if the principal were paid on or before the due date.

The mortgage was not paid when due and the Court considered whether theprovision offended s. 8 of the Act. [41] The Court held it must look not to the semantics of the provision but its effect, and its effect was to make the loan interest-freeuntil the due date and then impose a rate of 10% upon the arrears. Therefore, the provision violated s. 8 of the Act. [42] In Beauchamp v. Timberland Investments Ltd. (ON CA), [1983] O.J. No. 3279 (Ont. C.A.) the mortgageagreement provided that the interest rate increased from 10% to 20% if default occurred.

The Court found that it is irrelevant to make adistinction between a default occurring before or after maturity, and in either case, s. 8 can apply. The provision was found to offend thesection. [43]

Section 8 has also been considered by the Alberta courts. [44] In Dillingham Construction Ltd. v. Patrician Land Corp. [1985] A.J. No. 652 (ABCA) the mortgage provided for interest at14% after maturity and after default. No interest was to be paid prior to those occurrences. The loan went into default at maturity. [45] The Court held that s. 8 was put in place to implement the equitable principle against penalties for non-performance. Anincreased rate of interest was, prima facie, such a penalty. However, in this case, “common sense dictates” that the lender must have puthis mind to the cost of the money lent.

The rate of interest was not nil, but merely unspecified. The Court held that due to insufficientevidence, it could not say that the stipulation for interest at maturity actually had the effect of increasing the interest component of themortgage. Therefore, it could not conclude that the 14% rate of interest was penal. See also: 746628 B.C. Ltd. v. 674566 B.C.

Ltd. 2006BCSC 817. [46] The most recent case in Alberta to consider s. 8 is Paragon Capital Corporation Ltd. v. 395342 Alberta Ltd. 2004 ABQB 25.In that case the promissory note and mortgage amending agreement both provided for an interest rate of 2% per month that would bereduced to 1.167% per month if the loan was not in default.

The loan agreement signed at the same time contained a similar provisionand provided for payments to be made at the reduced rate. [47] The loan was for 12.3 million dollars and the evidence indicated that the lender was concerned about the ability of theborrower to service the loan even at the reduced rate of interest. [48] The borrower went into default four months later as it had obtained different financing. Therefore, 5 days after a payment wasdue, it sought a payout statement.

The lender claimed interest at the stipulated 2 % per month on the basis that a default had occurred.The borrower argued against the payment of increased interest, relying on s. 8 of the Act. [49] Sirrs J. held that the Act should be read as a whole and s. 8 is the exception to the general rule that “enterprise is to be free to reach whatever rate of interest the parties consider reasonable in the circumstances.”[13] [50] Each case, he said, must be decided on its own facts.

He considered the case law and held that in determining if s. 8 has beenoffended the Court should look more to the substance of the transaction, than its form. Enterprise should be free to negotiate such termsof interest as the parties consider appropriate to their transaction unless the terms are clearly within the exception set out in the Act.

[ 51 ] He took a dubious view of the finding in Raintree [14] that an increase in the interest rate a week before the mortgage came due did not offend the Act and said that the decision appeared to be based more on the form than the substance of the transaction. [ 52 ] Turning to the facts in the case before him he noted the indication that the lender was concerned that the borrower could not service the loan, even at the reduced interest rate.

He queried whether the loan agreement was merely a business arrangement to permit lower payments because of the limited cash flow available to the borrower from the project? [ 53 ] He found that there was insufficient information to determine that this was actually the case. He found that by agreeing to collect only 1.167% interest per month the lender changed what appeared to be a discount into what was, in substance, a penalty and fell within the exception found in s. 8 of the Act .

Summary of the Law [ 54 ] In

summary, s. 8 of the Act was promulgated to ensure that lenders could not utilize clever drafting to avoid rates of interest that would otherwise be void. By utilizing the word “effect” in s. 8, the courts were required to examine the substance of the interest provision, not its form. Over a hundred years later, in a very different business environment, the courts have struggled with the test to be applied when considering whether interest provisions violate s. 8. [ 55 ] As the Court noted in Reliant , it is difficult to draw any general principles from the cases.

Each is decided on the particular language found in the agreement and its particular circumstances. [15] [ 56 ] In British Columbia the Court has taken a narrow

interpretation of s. 8 of the Act . An interest provision that provides for the forgiveness of interest, if no default occurs, does not offend the Act , nor does a provision that provides for an increase in interest for the last month of the mortgage, and is not triggered by a default. An interest provision that clearly provides for the payment of an increased rate of interest on arrears and offends s. 8 may still stand if it is not penal, coercive or unfair.

To make this determination, the terms of the agreement and the circumstances of the loan must be examined objectively. [ 57 ] The approach of the courts in Alberta is different and is binding upon this Court. In Paragon Capital Corporation , the Court found that the substance of the transaction should be examined, not just its form, to determine if a provision violates s 8.

The Court quoted with approval the legitimate commercial purpose test: even if the interest provision has the effect of increasing interest on arrears, it may be saved if it has a bona fide business purpose. [ 58 ] The legislation speaks to a fine charge or penalty that has the effect of increasing interest on money in arrears over that not in arrears. The Court should examine the substance of the transaction, not just its form, to determine if s. 8 has been contravened. To make this determination, and taking a purposive view of the legislation, the Court, in my view, must: (

a) ignore clever drafting devices and consider whether the effect of the interest provision is to increase the interest on money in default over that paid on money not in default; (

b) if the provision has the effect of increasing the rate of interest on money in default, consider the substance of the transaction by examining the terms of the agreement and the circumstances of the loan objectively; and (

c) permit the interest provision to stand if the parties are knowledgeable, there is a bona fide business reason for the increase in the interest rate and it does not appear to be coercive, unfair, abusive or a penalty.

Applying s. 8 in this way retains the intent of the original legislation, while permitting lenders to deal with the present-day realities of their business. The First Renewal Agreement [ 59 ] The First Renewal Agreement increases the interest rate after the sixth month of the seven month term to 25% from prime plus 3.125%.

On its face the clause appears to be an attempt to avoid the prohibition contained in s. 8 of the Act as it comes into play only shortly before the mortgage comes due and the increase in the rate of interest is significant . [ 60 ] Therefore the terms of the Renewal Agreement and the surrounding circumstances must be examined objectively to determine the substance of the transaction in issue. [ 61 ] In addition to the agreement, the Court has the benefit of other documentation relating to the lending arrangements and it evidences some of the circumstances in play at the time.

There is no other evidence from the lender as to the purpose of the interest rate increase. The evidence from the borrower that the higher rate of interest was never to be enforced is not relevant to the determination that must be made. Misrepresentation is not the issue before the Court. [ 62 ] The original mortgage loan commitment was for 27 million dollars for a period of 20 months. It was to be a construction loan for renovations to the heritage building and provided for a release of approximately the last half of the funds over time as construction progressed.

It was acknowledged that the property was 55.7% pre-leased. It provided for a renewal for a further 7 months if the loan was never in default and an interest rate of prime plus 2.875% for 19 months and of 25% for the final month of the loan. It was executed by the borrower. [ 63 ] A subsequent commitment was executed six weeks later. It did not speak to a future renewal nor an increase in the interest rate.

The mortgage ultimately registered was in line with the terms of the second commitment letter and provided for interest at prime plus 2.875%, with no provision for an increase in the interest rate either before or after default. [ 64 ] The mortgage was not paid out on the due date, June 30, 2008, and, on August 8, 2008, the lender gave an Expression of Interest to the borrower. It stated that it was not a letter of commitment [emphasis in the original]. It was for a second mortgage to be registered after first mortgage funding of 26 million dollars which had been offered by First Calgary Savings and Credit Union.

The term of the second mortgage was 31 months at an interest rate of prime plus 9.25% or 14%, whichever was greater, and the interest rate would increase to 25% for the last month of the term. [ 65 ] The First Calgary Savings mortgage did not proceed as it was for an amount insufficient to pay out Equitable Trust and the Expression of Interest went no further. Therefore, an offer of renewal was issued by Equitable Trust on August 27, 2008. It was for a term of 7 months and provided for interest at prime plus 3.125% with an increase to 25% for the last month of the term.

It included as a condition precedent a “satisfactory review of the financial situation of the property, the borrower and the guarantors.” [ 66 ] The evidence does not make it clear whether the renovations to the building had been completed as contemplated in the mortgage, but as there were no further advances to be made, it would appear that this was the case. Therefore, at the time of the renewal the mortgage was no longer a construction loan to be disbursed for renovation purposes but a fully funded loan on an existing commercial building. [ 67 ] Was s. 8 violated? [ 68 ] The borrower was a sophisticated party.

The principal behind the company is an experienced developer of historical buildings and has trained and practised as a lawyer. Clearly, the parties were knowledgeable about financing and the nature of commercial loan arrangements. This is not a situation where a predatory lender preys upon innocent parties.

[ 69 ] However, there is nothing in this documentation nor the surrounding circumstances that indicates any increased risk or other reason for the increase in interest rate for the last month of the term. The only evidence of increased risk appears to be that, with the failure of the First Calgary Savings mortgage, the borrower could not pay out Equitable Trust. This increase in risk would appear to affect the entire term of the loan, not just its final month.

The first six months of the renewal already included an increase in the interest rate over that of the original mortgage, presumably for this apparent increased risk. [ 70 ] If the sole purpose of the increased interest for the last month of the term was to force the borrower to pay out the loan, that, without more, is not a bona fide business reason to increase the interest rate on the renewal of a fully-funded floating-rate loan.

The same result could have been achieved by advising the borrower that there would be no further renewal. [ 71 ] While not unsophisticated, the borrower was in a vulnerable position due to its inability to obtain alternate financing. It had lost its bargaining power.

While it had avoided the inclusion in the mortgage of the similar interest rate increase found in the first commitment letter, it could not refuse it in the renewal agreement. [ 72 ] With a vulnerable borrower, and no apparent bona fide business reason to increase the interest rate by such a large amount just a month before the due date, the inevitable conclusion is that the lender included this large increase in the interest rate as a form of penalty.

The provision was abusive. [ 73 ] As a result, it violates s. 8 of the Act . [16] The Second Renewal Agreement [ 74 ] The mortgage was not paid out at the expiration of the First Renewal Agreement and interest continued to run at 25%. An offer of renewal was made by Equitable Trust on February 18, 2009 for a five month period with an interest rate of prime plus 7% or 10%, whichever was higher, and of 25% for the last month of the term. The loan changed from interest-only to an amortized mortgage.

This offer was not signed by Lougheed Block. [ 75 ] After two months of discussions the Second Renewal Agreement was signed by Equitable Trust and Lougheed Block on April 27, 2009. It provided for the calculation of interest at 25% per annum from one month before the expiration of the first renewal, i.e. the date of the interest rate increase, until February 1, 2010.

However, payments were to be made at the greater of prime plus 5.25% or 7.5 %, whichever was higher. [ 76 ] If a default occurred under any of Lougheed Block’s obligations, interest would then have to be paid at 25% per annum until the default was cured. However, Equitable Trust retained the right to deny Lougheed Block the ability to cure the default.

If no default had occurred and all costs and fees had been paid by February 1, 2010, the interest differential would be forgiven. [ 77 ] The Second Renewal Agreement concluded with an acknowledgement by Lougheed Block that it was not in a position to fully repay the loan as required. [ 78 ] After signing this document the mortgage went into default. [ 79 ] Whether this document is characterized as a renewal agreement or a forbearance agreement, the interest arrangement echoes the very situation considered in Paragon and that s. 8 was apparently enacted to cure.

The effect of the provision is to increase the interest to be paid on money in arrears over that not in arrears. The interest rate increase can occur as a result of a major or a minor default on the part of the borrower, which default can only be cured with the concurrence of the lender. [ 80 ] However, as the case law in Alberta has found, that in itself is not sufficient to determine the matter. The substance of the

transaction must be examined. [81] Clearly, the overall risk to the lender had increased again, which can be seen in the increase in the interest rate to be paid onmoney not in arrears from prime plus 3.125% to prime plus 5.25%. However, neither the documentation nor the circumstances of theloan, discloses any bona fide business purpose for the interest rate on default increasing to 25%. Furthermore, the borrower was as, ormore, vulnerable than at the time of the renewal. It could not pay the lender out and had no options available. It was on the brink offoreclosure.

The arrangement appears to be the very kind of coercive, unfair lending the case law has disallowed. [82] Therefore this provision contravenes s. 8 of the Act and the increase in interest rate is disallowed. [83] It follows that the subsequent encumbrancer is not bound by the increase sought pursuant to either of the renewal agreements.If the interest rate increase is unsupportable in law it is not binding on subsequent encumbrancers, whether they acknowledged theincrease or not.

What are the rates of interest payable under the mortgage? [84] Having disallowed interest at 25% per annum, the interest rate to be charged on the balance outstanding under the mortgage isthe floating rate of prime plus 5.25% or 7.5%, whichever is higher, as set out in the second renewal, as at the date of its effectiveness,February 1, 2009.

Are the administration fees charged pursuant to the mortgage contrary to the Interest Act or should they be disallowed in equity? [85] The question of whether a specific sum to be paid upon default is a penalty and in contravention of s. 8 of the Act wasconsidered by the Supreme Court of Canada in Les Immeubles Fournier Inc. v. Construction St-Hilaire Limitee (SCC), [1975] 2 S.C.R. 2. In that case an indemnity of 15% was claimed by the lender after the mortgage went into default.

The majorityof the Court noted that s. 8 refers to any “fine or penalty or rate of interest that has the effect of increasing the charge on any such arrears beyond the rate of interest payable on principal money not in arrears.” Acknowledging that earlier case law[17] had held that a bonus paidto the lender at the time the loan was advanced did not offend the Act, the Court held that a payment to be made only upon defaultviolated s. 8. [86] In Dial Mortgage Corporation v. Baines [1980] A.J.

No. 1003 (ABQB), a borrower executed an agreement saying that shewould pay certain fees in relation to a loan and then found a better rate elsewhere. The loan was not advanced. The lender sued for thefees, including a brokerage fee. The Court determined the matter without considering s. 8.

Instead the Court considered whether the feeswere a penalty and therefore could not be collected, or a genuine estimate of the lender’s liquidated damages. [87] To make this determination the Court found that it must look at the terms and inherent circumstances of each particularcontract, judged as at the time the contract was made. If the sum to be paid is extravagant and unconscionable in amount in comparisonwith the greatest loss that could conceivably be proven, it will be a penalty.

When a specific sum is to be paid upon a breach, whether thebreach was serious or minor in nature, there is a presumption that it is a penalty. [88] The intention of the parties themselves, said the Court, is not conclusive. The real nature of the transaction is what is in issue.The Court should examine the practical business relationship rather than the technical legal form in which it is clothed.

It noted that thereasonableness of the sum, or the formula for its calculation, was the key consideration. [89] With this analysis the Court then examined the role of a mortgage broker and the damages it could expect when a transactionis not completed and found the clause to be a penalty. [90] In the case of National Bank of Canada v. Merit Energy Ltd. 2001 ABQB 680, the lender was claiming the sum of almost

1.7 million dollars and the amount remaining outstanding under the loan was $90,000.00. [18] The Court considered the test to be applied to determine if the payment constituted a penalty.

It examined the reasonableness of the amount to be paid in comparison to the actual damages and found the provision to be unconscionable and unenforceable. [ 91 ] In this case clause 28 provides: In the event any default by the Mortgagor is not remedied by the Mortgagor within fifteen (15) days following written notice of default by the Mortgagee to the Mortgagor, the Mortgagor shall pay to the Mortgagee an administrative fee of $10,000.00 for each month or part month during which the Mortgagor remains in default... [ 92 ] There is no evidence before the Court as to the reasoning behind the calculation of the administration fee of $10,000.00 per month for each month the mortgage is in default.

The fee appears to be claimed for the costs of administering the mortgage. How it does or could represent a genuine pre-estimate of the administration costs of a default is unknown. It is a flat sum to be paid for each month of a default, whether the default is minor or major, and whether it is remedied promptly or not at all. [ 93 ] The lender argues that an administration fee of $100 is charged for a residential mortgage of $280,000.00 and therefore a fee of $10,000.00 is not unreasonable for this mortgage. [ 94 ] This is not a residential mortgage, but a commercial mortgage.

When a commercial property goes into default the lender usually puts in a receiver or a receiver manager to collect the rents and undertake the other administrative functions necessary to preserve the security of the lender. This was done in this case. These charges are normally added on to the mortgage and not paid by the lender from the default fee. Therefore, it is difficult to envisage what administrative work undertaken by the lender could amount to costs or other charges to it of $10,000.00 a month. [ 95 ] The case law is clear that in such an instance the administration fee cannot stand. It is a penalty.

Furthermore, as the fee is only triggered on default and thereby increases the interest rate to be paid on default, s. 8 of the Act must be considered . The business purpose of a fee in this amount is not evident and it appears, on its face, to be punitive. Therefore, it also cannot stand as it offends s. 8 of the Act . CONCLUSION [ 96 ] The amount claimed by Equitable Trust is to be adjusted to comply with the interest rate to be charged under the Second Renewal Agreement, as though there had been no default. The administration fees of $10,000.00 per month are disallowed.

The balance outstanding is to be recalculated. The lender has provided those calculations in affidavit form. If the other parties disagree with this calculation and wish the sum recalculated, or if costs cannot be agreed, they may seek a determination before me within one month of the issuance of these reasons. Heard on the 18 th day of January, 2011. Dated at the City of Calgary, Alberta this 21 st day of March, 2011.

J.B. Hanebury M.C.C.Q.B.A. Appearances: Reynolds, Mirth, Richards & Farmer LLP Francis Price, Q.C. for the Plaintiff Mainwood Legal Services Brent Mainwood for Defendant, Heritage Capital Corporation Parlee McLaws LLP Scott Watson for Krayzel Corporation subsequent Encumbrancer Neil Richardson self-represented [1]Waldron, M.A, The “Legitimate Commercial Purpose” Test Revisited - Case Comment on Reliant Capital Ltd. v. SilverdaleDevelopment Corporation, (2008) 41 U.B.C.L. Rev. 101-114 at para. 2 and 3. [2]Para. 69. This case undertakes a detailed historical analysis of the reasons behind this

section of the Act. [3]Vancouver City Savings Credit Union v. Chambers (1975) (BC SC), 59 D.L.R. (3d) 753 (B.C.S.C.), WeirdaleInvestments Ltd. v. Canadian Imperial Bank of Commerce supra n. 2, Chu v. Columbia River Ranches Ltd. (1986) (BC SC), 10 B.C.L.R. (2d) 72 (B.C.S.C.)., and Vohra Enterprises Ltd. v. Creative Industrial Corp. (1988) (BC SC),23 B.C.L.R. (2d) 120 (B.C.S.C.). [4]Para. 17.

[5]Para. 20. [6]Ibid. [7]Para. 100. [8]Leave to appeal to the S.C.C. refused: 31537 (November 23, 2006). [9]Para. 56. [10]Para. 89. [11]Ibid n.1, para 27. She argues, at para. 23, that in Reliant Capital the Court did not address the fact that the arrangement clearlyoffended the Act as the balance outstanding was accelerated prior to the date that the increased interest rate applied.

When that date wasthen reached, the increase applied to the balance in arrears, with the result that the there was a different interest rate for arrears. [12]Ibid, n. 1, para. 26-31. [13]In a decision that did not consider s. 8 of the Act, the Alberta Court has recently confirmed in Mraiche v. Sander 2010 ABQB 34,para. 30, that “it is the not the function of this Court to rewrite Agreements negotiated and executed by sophisticated business people.” [14]In an earlier decision, Granville Savings & Mortgage Corporation v.

Pekich 1995 CanLI 9035 (ABQB) (MC) Master Wallerfollowed Raintree and held that s. 8 was not contravened when the agreement provided for an interest increase from 9% to 14% a monthbefore the expiration of the term of the mortgage [15]Par. 68. [16]It could be argued that even if this interest arrangement did not violate s. 8 of the Act, interest at 25% cannot be collected under theFirst Renewal Agreement as the Second Renewal Agreement replaced it for the period of the increase in interest. This issue was notargued by the parties and has not been addressed in these reasons. [17]London Loan & Savings Co. v.

Meagher ] (SCC), 1930] S.C.R. 378. [18]Para. 35.