Equitable Trust Company v Richardson, 2012 ABQB 411

Court of Queen ’ s Bench of Alberta Citation: Equitable Trust Company v Richardson, 2012 ABQB 411 Date: 20120629 Docket: 0901 08221 Registry: Calgary Between: The Equitable Trust Company Plaintiff (Appellant) - and - Neil John Richardson, The Lougheed Block Inc. and Hugh Daryl Richardson Defendants (Respondents) _______________________________________________________ Reasons for Decision of the Honourable Madam Justice B.E. Romaine _______________________________________________________ Introduction [ 1 ] This is an appeal from a decision of a Master with respect to the

interpretation of

Section 8 of the Interest Act , R.S.C. 1985, c. I-15. The issue is whether two interest provisions, commonly used by mortgagees to navigate the difficult waters of

Section 8 , are caught by the exception to freedom of contract set out by that section. Facts

[ 2 ] The facts of this appeal are succinctly set out in paragraphs 2 through 16 of the decision of Master Hanebury, 2011 ABQB 193 , which I adopt and will repeat for ease of reference: [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 $500,000.00. [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 [First Calgary Savings] 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 [a] foreclosure action was commenced.

A Consent Order Nisi was granted [pursuant to which the principal amount owed to Equitable Trust as of February 1, 2009 was agreed to be $27,792,185.27 and] 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 $556,000.00.

As well, certain issues between the parties have been settled. [emphasis in original]. [ 3 ] In the application before the Master, the second mortgagee, Krayzel, and a subsequent encumbrancer, Heritage Capital Corporation, applied to determine the amount owing under the Equitable Trust mortgage. [ 4 ] In her reasons, Master Hanebury framed the issue as whether the lender, Equitable Trust, was able to collect the described administration fees and an interest rate increase that would occur upon default and for the final month of a mortgage.

Specifically, she found that the question was whether certain provisions of the Interest Act rendered the increased interest rate and other charges unenforceable. [ 5 ] As noted by the Master, Section 8(1) of the Interest Act provides that no “fine, penalty or rate of interest” shall be exacted on any arrears of principal or interest secured by a mortgage “that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.” [ 6 ] The Master discussed the history of this provision, and the difficulties that courts have had in interpreting

Section 8 “in light of the right of commercial parties to make their own bona fide business arrangements”: para. 21. She identified and discussed the divergence in case law on this issue among the courts of British Columbia, Ontario and Alberta. In particular, she identified the difference between the narrow

interpretation of

Section 8 taken by the Courts in British Columbia and the contextual approach taken in Alberta as expressed in Paragon Capital Corporation Ltd. v. 395342 Alberta Ltd. , 2004 ABQB 25 . [ 7 ] The approach taken by the Court in Paragon , she described, was to examine the substance of the transaction, and not just its form, in determining whether a provision violated

Section 8. Master Hanebury noted that the Paragon approach was binding on her. She therefore summarized the analysis that she would undertake of the provisions before her at para. 58 of her decision: 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 oftheir business. [emphasis in original] [8] Applying these principles to the interest rate under the First Renewal Agreement, the Master found that, on its face, theclause appeared to be an attempt to avoid the prohibition set out in

Section 8. She therefore proceeded to consider the terms of theagreement and the surrounding circumstances in an attempt to determine the “substance” of the transaction. [9] Master Hanebury described her

interpretation of the history of the loan. She found that, while the borrower was asophisticated party, there was insufficient evidence of increased risk or any other reason for the increase in interest rate for the last monthof the term in the context of the surrounding circumstances, other than that it became apparent with the failure of the First CalgarySavings mortgage that the mortgagors could not pay out Equitable Trust.

She stated at para. 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, withoutmore, is not a bona fide business reason to increase the interest rate on the renewal of a fully-funded floating-rate loan.

The same resultcould have been achieved by advising the borrower that there would be no further renewal. [10] The Master found that, although not unsophisticated, the borrower was in a vulnerable position at the time of the agreement,and concluded at para. 72: With a vulnerable borrower, and no apparent bona fide business reason to increase the interest rate by such a large amount just a monthbefore the due date, the inevitable conclusion is that the lender included this large increase in the interest rate as a form of penalty. Theprovision was abusive.

Master Hanebury also reviewed the circumstances of the Second Renewal Agreement and found that, whether it was characterized as arenewal agreement or a forbearance agreement, it was similar to the circumstances in Paragon. In her examination of the “substance” ofthe transaction, she found the following at para. 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 on money not inarrears from prime plus 3.125% to prime plus 5.25%.

However, neither the documentation nor the circumstances of the loan, disclosesany bona fide business purpose for the interest rate on default increasing to 25%. Furthermore, the borrower was as, or more, vulnerablethan at the time of the renewal. It could not pay the lender out and had no options available. It was on the brink of foreclosure. Thearrangement appears to be the very kind of coercive, unfair lending the case law has disallowed. The Master therefore found that the interest rate provisions in both the First Renewal Agreement and the Second Renewal Agreementcontravened

Section 8, and that the surviving interest rate to be charged on the balance owing would be the floating rate of prime plus5.25% or 7.5%, whichever is higher, as set out in the Second Renewal Agreement. [11] Turning then to the administration fees, the Master reviewed the Supreme Court of Canada decision in Les ImmeublesFournier Inc. v. Construction St.-Hilaire Limitee, (SCC), [1975] 2 S.C.R. 2, which found that an “indemnity” of 15%claimed by the mortgagee after the mortgage went into default violated

Section 8 as it was a payment to be made only upon default. TheMaster also reviewed Alberta decisions that concentrated on the issue of penalty, rather than

Section 8 and found that the case-specifictest was whether the fee was a reasonable estimate of the lender’s liquidated damages. She noted at para. 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 foreach month the mortgage is in default. The fee appears to be claimed for the costs of administering the mortgage. How it does or couldrepresent 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 adefault, whether the default is minor or major, and whether it is remedied promptly or not at all. [12] She rejected the analogy to a residential mortgage, pointing out that in a commercial mortgage, a receiver is normally

appointed (as here) and that it is therefore “difficult to envisage what administrative work undertaken by the lender could amount tocosts or other charges to it of $10,000.00 a month.”: para. 94. [13] Master Hanebury found the administration fees to be penalties and in contravention of

Section 8, as they were only triggeredon default. Standard of Review [14] In Bacheli v. Yorkton Securities Inc., 2012 ABCA 166, at para. 30, the Court of Appeal has recently found that, despite thewording of the new and amended Rule 6.14(3), the standard of review on appeal from a Master to a judge on all issues is stillcorrectness. Analysis [15]

Section 2 of the Interest Act provides that, except as otherwise provided by the Act or other legislation, “any person maystipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on.” [16] Section 8(1) sets out an exception, providing that no “fine, penalty or rate of interest” shall be exacted on any arrears ofprincipal or interest secured by a mortgage “that has the effect of increasing the charge on the arrears beyond the rate of interest payableon principal money not in arrears.” [17] Section 8(2) provides that nothing in

Section 8 “has the effect of prohibiting a contract for the payment of interest on arrearsof interest or principal at any rate not greater than the rate payable on principal money not in arrears”. [18] An analysis of the state of the law in Alberta on the

interpretation of

Section 8 must start by reference to the 1981 Ontariocase of Re Weirdale Investments Ltd. and Canadian Imperial Bank of Commerce et al, (ON SC), 121 D.L.R. (3d) 150(Ont. H.C.). In that case, a provision in a mortgage that waived the payment of interest if the principal of the loan was paid on or beforethe due date was held to violate

Section 8, since the Court was of the opinion that its effect was to make the loan interest-free until thedue date and then impose a rate of 10% upon the arrears. Henry, J. decided that, since the provision contravened

Section 8, the lenderwas not entitled to any interest on the loan. It is noteworthy that the borrower had paid the principal sum of the mortgage into trust priorto the due date of the mortgage and had only failed to pay it to the lender because the borrower was pursuing an action for recissionagainst both the vendor of the property and the lender. It is also noteworthy that Henry, J. found that

Section 8 of the Interest Actprohibited “both the penal and non-penal devices,” commonly used by mortgagees with respect to interest rates described in casesdecided before the enactment of the Interest Act. Henry, J. further found that the Act thus changed the prior equitable rule that aprovision that increases the rate of interest on default is considered a penalty, but a provision that allows a lower rate than the originalrate stipulated to be accepted if the loan is paid punctually is non-penal and acceptable. Thus, the Court in Weirdale found that aprovision that would have been acceptable at equity was no longer so under

Section 8. [19] Weirdale was considered in Alberta in Dillingham Construction Ltd. v Patrician Land Corp. Ltd., 1985 ABCA 91 ,[1985] 4 W.W.R. 468 (Alta C.A.), affirming (AB KB), [1985] 1 W.W.R. 539 (ABQB). In that case, the mortgageprovided for an interest rate of 14% after maturity and after default, but there was no provision for interest prior to maturity. Stevenson,J.A. referred to Henry, J.’s finding that

Section 8 applied to both penal and non-penal devices, and disagreed with it. He commented atpage 471 as follows: In my opinion the

section is directed towards implementing the equitable principle against penalties for non-performance. A stipulationfor an increased rate of interest is, prima facie, such a penalty. It is something which, on the face of it, is held in terrorem over adefaulting debtor. So an increase from any stipulated amount of interest falls foul of the principle and the statute. Here, in a transactionwhich is not a commercial lending transaction, common sense dictates not that the transaction has a nil interest rate, but that it has madeunspecified provisions for interest.

I say this because it is inconceivable that in entering into this transaction the parties did notappreciate, and make some allowance for, the cost of money in arriving at the terms. It is possible, for example, that the mortgagee, asvendor, made a precise calculation based on the amount payable at maturity. I cannot say that the stipulation for interest at maturity hasthe effect of increasing the interest component. I am unable to conclude that the particular provision is penal and cannot, therefore, saythat it comes within the principle which the

section embodies. [emphasis added]

[20] The Court in Dillingham found that “on the face of it, the application of s. 8 works an unreasonable hardship on the [lender]rather than relieving any penalty which he had exacted”: page 471. It found that the mortgage did not come within the literal prohibitionof

Section 8. Stevenson, J.A. noted at pages 471-472 that, if the provision was interpreted as a penalty, “the judicial implementation of aninterest-free loan gives me considerable pause,” referring to

Section 2 of the Interest Act which provides that, except as otherwiseprovided, any person may exact in any agreement any rate of interest that is agreed upon. [21] In 1993, in an oral judgment in Raintree Financial Ltd. v. Bell (1993), 85 B.C.L.R. (2d) 82 (B.C.S.C.), the British ColumbiaCourt considered a mortgage where the interest rate escalated one week prior to the end of the term.

Ryan, J. accepted the argument thatan increase in interest that comes into effect before redemption increases the interest payable on both the principal not in arrears and theportion in arrears, and thus found that there was no increase in the interest rate triggered by a default. She noted that Section 8(2) of theInterest Act provides that so long as the rate of interest on arrears is not greater than the rate of interest on principal money not in arrears,then such a provision is not prohibited. Thus, interpreting

Section 8 literally and narrowly, she found that the provision did not violateSection 8(1). Raintree was followed in Alberta by Master Waller in Granville Savings and Mortgage Corp. v. Pekick, (M.C.). [22] However, in TD Trust v Guinness (1995), 12 B.C.L.R. (3d) 102 (B.C.S.C.) a Court interpreting

Section 8 veered again. In TDTrust, the interest rate increased from 16.5% to 24% one week before the mortgage came due. The Court declined to follow Raintree.Tysoe, J. referred to a number of cases, including Weirdale, and specifically referred to Henry, J.’s finding that

Section 8 prohibits bothpenal and non-penal devices. He considered whether Weirdale had been over-ruled in British Columbia by North West Life AssuranceCo. of Canada v. King’s Mount Holdings Ltd. (1987), (BC CA), 15 B.C.L.R. (2d) 376 (B.C.C.A.), and concluded thatit had not.

Tysoe, J. found that, while “(s)trictly speaking,” the increase in the interest rate was not triggered by a default, the effect of theprovision was to charge a higher interest rate on mortgage money if the mortgage was not paid by the maturity date. [23] He noted that, in his view, the Court should not restrict itself to the form of the provision but should look to its substance.

Hecommented that the issue was where to draw the line, and stated at para. 20 that: . . . the line should be drawn between interest provisions which are intended to extract a higher rate of interest in the event of default andinterest provisions which have a legitimate commercial purpose. The true intent may be obfuscated by clever devices designed byingenuous lawyers and it will be the function of the Court to determine the true intent. [emphasis added] [24] Tysoe, J. disagreed with Ryan, J.’s

interpretation of Section 8(2), that providing that the rate of interest on arrears is notgreater than the rate of interest on principal money not in arrears, Section 8(1) is not offended. Instead, he commented at para. 19 thatSection 8(2) merely means that “interest can be charged on arrears as long as, in substance, the rate of interest is not greater than the ratepayable prior to default”. With respect, it is difficult to see why a reference to the timing of default should be added to the plain words ofSection 8(2).

This issue re-surfaced in a later case. [25] Both Raintree and TD Trust were considered by the British Columbia Court of Appeal in Langley Lo-Cost Builders Ltd. v.474835 B.C. Ltd., 2000 BCCA 365. In that case, a take-back mortgage granted as a step in a complicated arrangement to purchase anddevelop a real estate project provided that there would be no interest payable until a specific date, being the closing date of the purchase.After that date, interest would run at a specific rate until maturity of the mortgage three days later and at the same rate on arrearsaccruing after the closing date and maturity.

The purchaser was to receive a substantial pre-payment and was thus willing to waiveinterest on the take-back mortgage prior to closing, but not beyond. [26] The Court of Appeal described Ryan, J.’s decision in Raintree as being that a contractual change in the interest rateimmediately before the maturity of the mortgage date and before any arrears accrued did not offend

Section 8 of the Act, and noted thatshe implicitly held that parties are entitled to craft their instrument in order to avoid offending against the [Interest] Act: para. 87. [27] McEachern, C.J.B.C. then referred to TD Trust and the cases referred to by Tysoe, J. He noted at para. 93 that in North WestLife, the British Columbia Court of Appeal “expressed doubt about but did not expressly overrule” Weirdale. He then commented atpara. 95 as follows: In

summary, these cases, each one decided on its particular facts, are authority for the view that a change in interest rate upon default, or

some other arrangement such as a waiver of interest upon due payment may not offend against the Act. This raises the question of whenthe freedom of the parties to restructure their bargain is restricted by the Act. [28] The Court found that the facts in the case before it disclosed a “sensible commercial explanation” for the interest provision:para. 96. It commented that

Section 8 is intended to protect borrowers against “penalties and oppression at the hands of a ruthless lender”and that the thrust of the

section is to avoid fines and penalties: para. 97. [29] McEachern C.J.B.C. quoted with approval from the Alberta Court of Appeal decision in Dillingham Construction, and notedthat the arrangement before it “was entirely fair and carried none of the stench of coercion, intimidation or penalty”, and that it could notbe characterized as a “clever device”: para. 100. He refused to distinguish Raintree. [30] In 2004 came Paragon, the Alberta decision that Master Hanebury considered binding.

The mortgage in that case provided foran interest rate of 2% per month that would be reduced to 1.16% if the loan was not in default and was paid on or before maturity. Themortgagee was a high-risk lender who had stepped in when the first mortgagee refused to renew. Some four months later, instead ofmaking the monthly payment on its due date, the borrower requested a payout statement, as it had secured more conventional financing.Since the last monthly payment had not been received at the date of the request for a payout statement, the mortgagee assessed payout atthe 2% rate.

The conventional refinancing was not sufficient to pay out the mortgage at the higher rate. The mortgage was eventuallypaid out, and the dispute concerned roughly $700,000 in interest differential. [31] Sirrs, J. referred to

Section 2 of the Act, and confirmed that, in his view, this

section makes it clear that “[e]nterprise is to befree to reach whatever rate of interest the parties consider reasonable”. He noted that

Section 8 was an exception to this rule, and that theonus was on the mortgagor to satisfy the Court that the transaction fell within the exception. [32] He reviewed the previous authorities, commenting unfavourably on Raintree. He reviewed Dillingham, and commented that,in his view, the Court in that case looked to the substance of the transaction and not just the form. He then referred to Tysoe, J.’scomments in TD Trust with approval. [33] Sirrs, J. then attempted to determine the “substance” of the transaction, and his analysis of this issue illustrates the problemsof this approach.

At the time the mortgage was signed, the mortgagor had also signed a promissory note that referred only to a 2%interest rate.

There was evidence that the mortgagee was concerned about the mortgagor’s ability to pay even the lower rate, but hadaccepted payments at the lower rate “in the expectation that the [mortgagors] would perform their obligations.” Sirrs, J. could not find a“business substance” to the interest rate differential and instead found as follows at para. 40: . . . by agreeing to rely upon the good faith of the respondents to comply with the terms of the mortgage amending agreement (exceptingthe requirement to pay 2% interest per month) and by agreeing in the loan agreement to collect only 1.167% interest per month duringthe term of the loan, Paragon clearly changed the form of a discount into a penalty in substance, which clearly falls within the forbiddenexception in s. 8 of the Interest Act.

He therefore dismissed the appeal from the Master and found that the interest should be calculated at the lower rate. [34] In the 2006 case of Reliant Capital Ltd. v. Silverdale Development Corp. (2006), 2006 BCCA 226 , 270 D.L.R. (4th)717, the British Columbia Court of Appeal undertook a thorough review of

Section 8. The mortgage in that case provided for an interestrate of 14% for the first 12 3/4 months and then an increase to 20% one month prior to maturity. The purpose of the loan was to finance aproposed industrial park. Monthly payments covered only the interest. As lots were developed and sold, the mortgage was to be prepaid.The ability of the borrower to repay the loan depended on the successful completion of the project.

The project encountered problemsand was delayed, and the mortgage went into default within a year. [35] The Court of Appeal started its analysis with a review of the Interest Act in its entirety, noting that Sections 6 to 10 of the Actare limitations or restrictions on the general right of freedom to contract set out in

Section 2. The Court concluded that, as an exception tothe general rule, “a strict or narrow

interpretation of s. 8 is required, so long as that

interpretation does not frustrate or impair the overallpurpose of the legislation”: para. 37.

[ 36 ] Finch, C.J.B.C. reviewed the history of

Section 8 and previous cases, noting that, while the

Section 8 prohibition against extra charges on arrears remains in place with respect to mortgages: It is not uncommon now in the commercial world for loan contracts, other than mortgage loans, to require a substantially higher interest rate if the loan becomes in arrears. Common sense suggests that this is recognized as a legitimate and effective way to ensure the prompt or timely repayment of the loan: para. 51. [ 37 ] He concluded that the purpose of

Section 8 “is to protect property owners against abusive lending practises, while recognizing that generally speaking parties are entitled to freedom of contract”: para. 56. [ 38 ] The Court commented that it was difficult to draw any global principles from the cases as each case appeared to turn on its own circumstances and the particular language of the agreement, and concluded at para. 69 that “[a]bout the only thing 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.” [ 39 ] Finch, C.J.B.C. reviewed the circumstances of the loan before him.

He noted that it was not a conventional mortgage loan, but “specially tailored” to facilitate the development of the project: para 74. He took no heed of evidence from the mortgagee as to intention or purpose, commenting that after-the-fact, self-serving evidence of intention was not helpful. He stated that the circumstances of the agreement must be viewed objectively, and the intention of the parties, to the extent it is necessary that it be determined, should be determined from the language of the agreement, viewed against such objective circumstances: para. 76.

He then stated at paras. 77 to 80: [77] Viewed in that way, [the mortgagee] evidently considered that the risk of the loan was adequately protected by an interest rate of 14% for virtually the whole of the mortgage term, and up to the time when it was expected by both parties that the development project would have been completed. However, [the mortgagee] also considered that its risk increased substantially after twelve months.

If the loan had not been repaid by that time it could only be because lots in the development had not been sold, or the development had encountered other problems. [The mortgagee] was not prepared to have its money at risk in these possible future circumstances at an interest rate of 14%, and therefore stipulated for a rate of 20% to reflect the increased risk. The borrowers, as experienced business persons, must be taken to have accepted that risk assessment as in accord with what could be obtained in a competitive marketplace. [78] I do not consider this provision to offend against s. 8.

The fact that the increased rate is not dependent on default having occurred is not to my mind determinative.

Section 8 does not prohibit rates of interest that are higher on arrears than on monies owing that are not in arrears, only if the increase is dependent on default. The

section prohibits higher interest charges on arrears than on other monies owing regardless of the contractual language that creates such a charge. [79] Here, the increased interest rate becomes effective by the passage of time, not by payments falling into default. But in my view that would not save the interest clause from the protection of s. 8 if the effect of the clause were to charge more interest on the arrears than on the other monies owing. This interest clause does not do that.

It simply stipulates for a higher interest rate effective one month before maturity, and applies equally to arrears and to monies owing that are not in arrears. [80] Although I do not consider the petitioner’s first ground of appeal to be well stated, in that default as a “triggering” event is not in my view relevant, the clause does not offend s. 8 because it does not stipulate for an increased rate payable on arrears “beyond the rate of interest payable on principal monies not in arrears”.

The increased interest rate payable after twelve months and twenty-two days applies to all monies owing under the loan whether in arrears or not. [ 40 ] In

summary, the Court followed the reasoning in Raintree , and interpreted the combined effect of Section 8(1) and 8(2) in the same manner as did Ryan, J. The Court appears here to have rejected the

interpretation of Section 8(2) suggested in TD Trust , and found the question of whether a default would trigger the change in interest rate to be irrelevant, so long as the increase does not otherwise contravene Section 8(1) by having the effect of charging more interest on arrears than on other monies owing. [ 41 ] The Court noted that this was sufficient to dispose of the appeal, but went on to comment on the “legitimate commercial

purpose test” that originated with TD Trust. [42] Finch, C.J.B.C. commented that previous references to T.D. Trust by the British Columbia Court of Appeal in Langley Lo-Cost Builders were not an endorsement of the legitimate commercial purpose test. He considered a number of arguments advanced by theappellant as to why the test should not be applied in interpreting

Section 8 and found that these submissions had “substantial merit”.

Heconcluded that the legitimate commercial purpose test “is not a useful test primarily because it gives rise to commercial uncertainty, andleads to arbitrary application”: para. 87. [43] The Court pointed out by way of illustration that attempts to apply the test in the very case before it by the Master andchambers judge led to conclusions contrary to the one reached by the appellate court, despite the fact that “[o]ne might think it to be alegitimate commercial purpose to maximize the interest rate and thus provide reasonable compensation to [the mortgagee] for this highrisk loan”: para. 88.

Finch, C.J.B.C. concluded that the test was “an unnecessary and unhelpful gloss on s. 8": para. 89. [44] Leave to appeal to the Supreme Court was sought and refused: (SCC), [2006] 362 N.R. 396; 400 W.A.C.320 (S.C.C.). Thus, the approach in Paragon that bound the Master was based primarily on a line of cases represented by TD Trust thathave been over-ruled in British Columbia. Reliant, of course, was not available to the Court in Paragon. Paragon does not bind thisCourt, nor does Reliant, although both must be carefully considered. [45] In my view, the approach to an

interpretation of

Section 8 set out by the British Columbia Court of Appeal in Reliant is thecorrect approach, and should be followed by this Court. The strict or narrow

interpretation of

Section 8 is in accordance with theinterpretation of a provision that is an exception to the general rule set out by

Section 2 of the Interest Act, as long as such

interpretationdoes not frustrate or impair the overall purpose of the legislation.

Section 2 confirms the rights of parties to a contract to negotiate theterms of that contract as long as that right is not abused by an inequality of bargaining power or abusive lending practices. Interpretingthe exception in this manner avoids some of the perils of the “legitimate commercial purpose” test.

It focuses on the words of theexception while authorizing the Court to undertake a limited review of the objective circumstances and context of the interest provision,without having to undertake the difficult task of second-guessing the commercial judgement of the parties in determining whether thepurpose of the provision was “legitimate.” [46] It is useful to reference the arguments against the “legitimate commercial purpose” test that Finch, C.J.B.C. found to bepersuasive, which are set out at para. 82 of Reliant: 1.

The test limits the freedom of contract between borrowers and lenders, contrary to the purpose of the Interest Act; 2. The test creates an unjustified reverse onus; 3. The decision to apply the test is arbitrary; 4. The test expands the scope of s. 8, which as a departure from common law, should be interpreted narrowly; 5. The test fails accurately to target penalty clauses; 6. The test is an unnecessary effort to fill perceived gaps in the Interest Act; and 7. The test causes commercial uncertainty. [47] That the legitimate commercial purpose test is arbitrary is clear from the disparity in the decisions.

That it is difficult to applyis also clear, even from Paragon. I agree with the Court in Reliant that the test gives rise to commercial uncertainty. This does not mean

that a review of the context and substance of a particular transaction should not be undertaken in the application of

Section 8. Rather, such review should be restricted to the issue of whether a strict

interpretation of the provision in question would result in a failure to protect against clearly abusive lending practices in any given case. The onus would rest on the mortgagor to establish that such an abuse exists, not on the mortgagee to establish a commercial purpose that would satisfy the reviewing court that it is legitimate. [ 48 ] The difficulties of

Section 8 were discussed by Professor Mary Anne Waldron, Q.C. in: The “Legitimate Commercial Purpose ” Test Revisited - Case Comment on Reliant Capital Ltd. v. Silverdale Development Corporation , (2008 41 U.B.C.L. Rev. 101- 114). [ 49 ] While applauding the apparent death in British Columbia of the “legitimate commercial purpose” test, Professor Waldron is critical of the Reliant analysis, pointing out that in her view, what actually occurred in Reliant was that the lender accelerated the due date of the mortgage on default, making the entire amount of the loan in arrears.

Thus, when the time for the increase in interest rate arrived, it was during a foreclosure process and “(w)hatever was contemplated by the clause in the mortgage originally, the effect of the clause was an increase in interest that applied only to money in default”. However, in Reliant , the interest rate would have increased a month before maturity in any case.

Therefore, the provision, strictly interpreted, did not have the “effect” of increasing the change on arrears beyond the rate of interest on money not in arrears, although it was actually applied to a loan in arrears. [ 50 ] Professor Waldron also criticized Reliant for failing to establish a clear basis for distinguishing between “an apparent violation of

Section 8 that will be held nonetheless legitimate and one that will not”: para. 14. She pointed out that the Reliant approach still requires courts to analyse the intention of the parties through the words of the mortgage document and the circumstances of the transaction. While this is true, that analysis is more limited than that of the problematic legitimate commercial purpose test. First Renewal Agreement [ 51 ] As noted by the Master, the First Renewal Agreement provides that the interest rate under the mortgage would change on a particular date, not the end of the seven-month term of the renewal but one month prior to maturity. The relevant provisions of this agreement are set out in

Schedule A to this decision. Both Krayzel and Heritage Capital agreed to postpone their rights to this agreement. [ 52 ] Following the approach in Paragon , the Master found that the interest provision in the First Renewal Agreement was “on its face” an attempt to avoid

Section 8: para. 59. She then attempted to examine the substance of the transaction.

That led her to conclude that an attempt to force the borrower to pay out a loan was not a “ bona fide business reason” to increase the interest rate: para. 70. [ 53 ] Under the approach taken in Reliant , which I adopt, the substance of the transaction, whether there was a “legitimate business purpose” to this increase in interest rate, does not require analysis. [ 54 ] As in Reliant and Raintree , the interest rate increase in this mortgage as amended by the First Renewal Agreement becomes effective by the passage of time, not by default.

The First Renewal Agreement amends the mortgage by merely stipulating a higher interest rate, effective one month before maturity, and this provision applies equally to arrears and to monies owing that are not in arrears. Thus, interpreting

Section 8 narrowly or strictly as an exception to the right of freedom to contract entrenched by

Section 2 of the Act leads to the conclusion that this provision does not fall within that exception. [ 55 ] As in Reliant , the objective circumstances of the agreement are important to the analysis, albeit not on the question of whether there was a legitimate commercial purpose to the provision, but on the more limited issue of whether the result of this strict

interpretation of

Section 8 fails to protect against abusive lending practices. This mortgage, similar to the mortgage in Reliant , was a loan for the purpose of development of a commercial real estate project: in this case, renovations to a heritage building. Like the loan in Reliant , funds were to be disbursed as construction progressed. However, the original mortgage loan in this case was not paid out on the due date, and it was only at the time of renewal that the last month’s increase was included.

It is apparent from the documentary evidence that Equitable Trust was to be paid out by the First Calgary Savings loan, but that refinancing did not proceed. Thus, the negotiation of the First Renewal Agreement took place at a time when the parties knew that the borrower was not going to be able to repay the full amount of the loan, and that therefore the mortgage was going to continue in circumstances of increased risk.

As in Reliant , the mortgagee was not prepared to have its money remain at risk in these circumstances without an increased interest rate to reflect such risk if the mortgage was not repaid in six months. It is noteworthy that it was a condition precedent of the offer of renewal that preceded the

First Renewal Agreement that there be a “satisfactory review of the financial situation of the property, the borrower and the guarantors”. [ 56 ] As noted by the Master, the borrower was a sophisticated party, and this was not a situation where a predatory lender preyed on innocent parties.

I find that, as in Reliant , the experienced and sophisticated borrower must be taken to have accepted the risk assessment of the lender as being in accordance with what could be obtained in the financing market. [ 57 ] In this appeal, the borrower, Krayzel and Heritage Capital all stress what they characterize as the vulnerable position of the borrower and its loss of bargaining power at the time when the renewal agreements were negotiated.

They submit that Equitable Trust had the option to realize on its security instead of renewing the mortgage “before the [interest charges and renewal fees] created a huge debt for the borrower and soaked up any remaining equity”. First, this ignores the evidence of the failure to finalize the First Calgary Savings refinancing, which makes it clear that the refinancing market did not consider that there was sufficient equity in the project available at that time, at least not to the borrower.

It ignores the fact that the borrower, a sophisticated real estate developer, also had the option of consenting to a sale or foreclosure to cut its losses, and it ignores the fact that Krayzel and Heritage Capital did not have to agree to postpone their interests to the First Renewal Agreement. Equitable Trust submits that the evidence establishes that it was in fact desperate to get out of a bad loan, rather than attempting to exploit the borrower.

These arguments illustrate the difficulties of fact finding on the basis of hindsight evidence from affidavit evidence of intention and motive. [ 58 ] Krayzel and Heritage Capital also submit that the borrower was in exactly the type of situation that the Court in Reliant described in para. 53: I infer that at least one legislative purpose was to protect the owners of real estate from interest or other charges that would make it impossible for owners to redeem, or to protect their equity.

If an owner were already in default of payment under the interest rate charged on monies not in arrears, a still higher rate, or greater charge on the arrears would render foreclosure all but inevitable. [ 59 ] Again, the borrower, a sophisticated real estate developer, did not have to agree to the renewal agreements. The evidence suggests that it had no equity to protect, but was gambling with the chance that it would be able to obtain alternative refinancing if given another year and a half to do so.

It appears that the borrower was gambling with value that may have been available to Krayzel or Heritage Capital, but they cannot complain as they agreed to postpone to the First Renewal Agreement. I cannot infer from the circumstances of this case that it was clear that foreclosure was inevitable. The higher interest rate set out in the First Renewal Agreement did not increase the original interest rate until the last month of the renewal period. [ 60 ] Thus, the strict

interpretation of

Section 8 in these circumstances does not offend the object of the Act , to protect against abusive lending practices. [ 61 ] In searching for a legitimate commercial purpose, the Master found that there was no evidence of increased risk, other than the failure of the borrower to pay out Equitable Trust by reason of the failure of the First Calgary Savings refinancing. She notes the borrower’s “vulnerable position due to its inability to obtain alternate financing”: para. 71. With respect, this illustrates the problems of a “legitimate commercial purpose” test.

As queried by Professor Waldron, what is illegitimate about a lender of high risk loans determining that it wants more compensation for its money after an extended period of time? [ 62 ] How far should a court go in saving a sophisticated borrower from the consequences of a bad bargain that it agreed to at a time of financial duress? Should the uncomfortable situation of a lender with a defaulting loan at a time of falling commercial real estate markets not also be a factor? Does this type of borrower need protection from this type of lender?

The answer to these questions may well vary from court to court and from situation to situation. Should the court apply the principles of statutory

interpretation liberally when the issue involves the

interpretation of an exception to the commercial rule of freedom to contract, or should such an exception be interpreted narrowly, even when the commercial arrangement may be morally offensive to the court? [ 63 ] Heritage Capital submits that the

interpretation of

Section 8 in the manner set out in Reliant would have dire repercussions for residential mortgages. The context of such mortgages, being in the normal course contracts of adhesion with issues of sufficient disclosure and the relative sophistication of mortgagor and mortgagee, may give rise to a different

interpretation of

Section 8 in those circumstances. The protection of the doctrine of unconscionable transactions, and the context-specific

interpretation of the impugned provisions in this case does not mean that they will always be interpreted in the same manner.

[ 64 ] Heritage Capital also submits that the proper calculation of the rate of interest payable on principal monies not in arrears in the context of the First Renewal Agreement is a calculation taking into account both rates of interest charged on the principal monies not in arrears over the entire term of the loan, rather than the arbitrary adoption of the last of the two different rates of interest charged before default or maturity. There is no authority cited for this submission, and it leads to the unsatisfactory situation where it would be impossible to know if the interest provisions were in breach of

Section 8 until the end of the term of the mortgage, particularly if, as here, the interest rate is dependent on a prime rate that varies from time to time. [ 65 ] In

summary, I allow the appeal with respect to the First Renewal Agreement, and find that its provisions do not breach

Section 8 of the Interest Act . Second Renewal Agreement [ 66 ] The Second Renewal Agreement provides for the calculation of interest at 25% per annum from one month before the expiration of the First Renewal Agreement until February 1, 2010. Payments were to be made at the greater of prime plus 5.25% or 7.5% (called the “Pay Rate”), but if a default occurred, interest would be payable at 25% until the default was cured. Equitable Trust retained the right to deny the borrower the ability to cure the default. If no default occurred and the mortgage was paid on maturity, the interest differential would be forgiven. The relevant provisions of the Second Renewal Agreement are set out in

Schedule A to this decision. [ 67 ] The Master found that these provisions echoed the very situation considered in Paragon , and that thus their effect was to increase the interest to be paid on money in arrears over that not in arrears. She noted that this alone was sufficient to determine the matter but went on to consider the “substance” of the transaction in accordance with the legitimate commercial purpose test.

She found at para. 81 that neither the documentation nor the circumstances disclosed a bona fide business purpose for the increase rate on default. [ 68 ] At the time that the Second Renewal Agreement was negotiated, the base interest rate under the mortgage was 25% by virtue of the operation of the First Renewal Agreement. The Second Renewal Agreement specifically included an acknowledgement and representation by the borrower that it was not in a position to fully repay the loan, as required by the mortgage and the First Renewal Agreement.

However, the Second Renewal Agreement provided an incentive for regular payment of interest during its term and repayment of the mortgage prior to the extended term by accepting lower interest payments and waiving the higher rate if there was no default. [ 69 ] This is the kind of provision referred to in Weirdale . As noted previously, Henry, J. in Weirdale found that

Section 8 prohibited both the penal type of provision that increased interest on arrears on default, which was considered a penalty at equity, and a provision such as the one in issue here that allowed a lower rate to be paid if the mortgage was not in default, which was considered not to be a penalty at equity. Equitable Trust argues that this “leap” by Henry, J. which changed the operation of the equitable rule in Canada was unsupported and should not be followed, submitting that this

interpretation ignores

Section 2 of the Interest Act which endorses freedom to contract, aside from exceptions contained therein. [ 70 ] As previously discussed, this finding by Henry, J. in Weirdale was impliedly rejected by the Alberta Court of Appeal in Dillingham , where the Court noted that

Section 8 is directed towards implementing the equitable principle against penalties for non- performance. [ 71 ] I agree that the

interpretation of

Section 8 found in Weirdale and its effect on the equitable rule as it existed prior to the enactment of the Interest Act cannot withstand scrutiny. Henry, J. based this finding on his view that “[i]t is the effect of the provision with which the

section is concerned, and in determining the effect the Court cannot take account of fine distinctions”: page 157 (emphasis in original). He does not explain why this might be so, and he did not refer to

Section 2 of the Act , or acknowledge that

Section 8 creates an exception to the general rule. [ 72 ] Heritage Capital submits that Weirdale is “quite literally text book law”, referring to the Waldron article, which repeats Henry, J.’s reasoning as authority for the suggestion that

Section 8 was likely promulgated in Canada to avoid the distinction that existed in equity. If that was the intention, it is hardly clear from the plain words of the section. It is clear that Weirdale was rejected by the Alberta Court of Appeal in Dillingham four years after it was decided, and that, if not expressly over-ruled by the British Columbia Court of Appeal in North West Life Assurance Co. , that the Court, in the words of McEachern C.J.B.C. in Langley Lo-Cost Builders at

para. 93 , “expressed doubt” about Weirdale . At any rate, Weirdale is not binding on this Court, and Dillingham is. [ 73 ] Heritage Capital submits that Dillingham did not reject Weirdale , on the basis of an

interpretation of the Court’s reasons in Dillingham that I do not find persuasive. While Stevenson, J.A. did not expressly over-rule Weirdale , he made it clear that he was of the opinion that

Section 8 was directed towards implementing the equitable rule against penalties for non-performance, and he commented adversely on an

interpretation in the case before him that would characterize a provision as a penalty and give rise to a “judicial implementation of an interest-free loan”: pages 471-472. [ 74 ] In fact, Heritage Capital advocates an interest-free loan in this case. It endorses the decision of the Master, but, in the alternative, submits that:

a) since the terms of the Second Renewal Agreement supplanted the terms of the First Renewal Agreement from the date that the First Renewal Agreement first purported to impose a 25% interest rate, no interest was charged on any arrears under the First Renewal Agreement and there is therefore no Interest Act issue to be decided with respect to the First Renewal Agreement; and

b) since the Second Renewal Agreement breaches Section 8(1), the effect of that breach is that no interest whatsoever should be paid from the first day of the term of the Second Renewal Agreement. [ 75 ] Heritage Capital may well be correct that, without more, there is no Interest Act issue with respect to the First Renewal Agreement since it was supplanted by the Second Renewal Agreement.

However, in this case, it has already been decided that Equitable Trust mortgage does not have priority over the Krayzel mortgage with respect to the second renewal fee, and it is thus necessary to deal with each agreement separately. [ 76 ] The suggestion that no interest should be paid from the first day of the term of the Second Renewal Agreement, rather than the prime plus 5.25% or 7.5%, whichever is higher, chosen by the Master, also illustrates the problems inherent in applying

Section 8 , which gives no guidance as to what the interest rate should be if the rate specified does not survive its prohibition. The Master’s solution is in accordance with the solution reached by other courts, but it does raise the question of why the lower “incentive” rate which was intended to prompt the borrower not to default on the loan should be the appropriate rate for the Court to substitute when a default did in fact occur.

There appears to be no reason why Heritage Capital’s suggestion of a zero interest rate could not be an option, except this would indeed be a startling judicial implementation, a drastic re-writing of the agreement between the parties of a kind that was referenced with disapproval in Dillingham . Heritage Capital suggests that this would serve as a disincentive for a lender to attempt to impose prohibited rates of interest.

It is questionable whether such a dire remedy is justifiable in the situation where the interest rate provision is designed to provide an incentive for timely payment, a situation that was considered non-penal at equity. [ 77 ] The Court in Paragon did not refer to the implied criticism of Weirdale in Dillingham , except to conclude that Stevenson, J.A. “looked at the substance of the transaction and did not restrict his decision to the form of the provisions”, which Sirrs, J. took to be support for the legitimate business purpose test set out in TD Trust . [ 78 ] Equitable Trust submits that the Court in Paragon was in error in concluding that the conduct of the lender in that case had clearly changed the discount into a penalty in substance that violated

Section 8 . I must agree that the effect of the impugned provisions in the Second Renewal Agreement are to give a benefit to the mortgagor if there was timely repayment of the mortgage debt, as opposed to a penalty, and that thus, the provision does not fall within the strict provisions of

Section 8 . It is noteworthy that, while

Section 2 allows parties to negotiate any interest rate or discount that they wish,

Section 8 is silent with respect to discounts. [ 79 ] This is similar to the situation in North West Life Assurance Co. where the original mortgage provided for interest at 19%, and a modification agreement extended the term and provided that, if the monthly payments were kept current until maturity, the difference between the interest rate of 19% and 13% would be forgiven. The chambers judge found that the effect of the impugned provision was to increase the rate of interest on arrears from 15% to 19% in the event of default and that thus it violated Section 8(1).

He also found that, since attempting to make 13% the governing rate of interest would be to re-write the mortgage, there would be no interest payable since he could not sever what he found offensive. The British Columbia Court of Appeal in a brief oral judgment stated that it “was not persuaded that the provisions of benefit by way of forgiveness for timely payment of the mortgage debt offends the statute.”

[ 80 ] What appears to be most objectionable here is that the base interest rate under the Equitable Trust mortgage was 25% at the time the Second Renewal Agreement was entered into. This is a disturbing rate of interest (which Master Waller referred to as “rapacious and opportunistic”) and gives rise to the temptation to interfere in the bargain negotiated by the parties. However, that rate standing alone cannot be impugned by Section 8(1) of the Interest Act .

As Master Waller pointed out in an application on a different issue relating to this mortgage, the Second Renewal Agreement did not change the rate of interest that existed at the maturity of the mortgage at the termination date of the First Renewal Agreement, and the financial result would be the same even if the Second Renewal Agreement had not been granted. If the 25% rate imposed by the First Renewal Agreement did not offend Section 8(1), how can it be said that the lower incentive provisions of the Second Renewal Agreement do not pass muster?

Master Hanebury blurred this distinction, referring to the lack of a bona fide business purpose for the interest rate “on default increasing to 25%”: para 81. She again referred to the borrower’s vulnerability, and lack of options. However, the borrower was not an inexperienced party dealing with a lender of greater sophistication. Both parties recognized that the borrower was not in a position to repay the loan, but the lender agreed to forbear enforcement in return for payment of interest at the rate then in effect and with a stipulation that provided some incentive for repayment.

The option of a consent foreclosure was available to the borrower, rather than to negotiate a further extension on the chance that the situation would improve. The Second Renewal Agreement merely allowed a rebate for prompt payment that had the potential of alleviating the dire situation in which the borrower found itself. [ 81 ] In

summary, I allow the appeal with respect to the Second Renewal Agreement and find that its provisions do not breach

Section 8 of the Interest Act . Administration Fees [ 82 ] I agree with the analysis set out by the Master. The administration fees are fees payable only on default and thus clearly violate

Section 8. Even if they did not, they are not a reasonable or genuine pre-estimate of the administration costs of a default, and must thus be characterized as a penalty. The appeal of this part of the Master’s decision is dismissed. Conclusion [ 83 ] I allow the appeal from the Maser’s decision with respect to the interest provisions of the First Renewal Agreement and the Second Renewal Agreement. The appeal with respect to administration fees is dismissed.

The defendants’ application for full indemnity solicitor-client costs of both the application before the Master and this Appeal is thus dismissed, as the plaintiff’s appeal has been largely successful. If the parties are unable to agree on costs within 45 days, they may be addressed further by written submissions delivered within 60 days. Dated at the City of Calgary, Alberta this 29th day of June, 2012. B.E. Romaine J.C.Q.B.A. Appearances:

Francis Price, Q.C. of Reynolds, Mirth, Richards & Farmer LLP for the Plaintiff (Appellant) Neil Richardson for the Defendants (Respondents) Scott Watson and Brent Mescall of Parlee McLaws LLP for Krayzel Corp. Brent Mainwood of Mainwood Legal Services for Heritage Capital Corporation

SCHEDULE A First Renewal Agreement (from Equitable Mortgage Amending Agreement) . . . 2.

The interest rate provided for in the Mortgage is amended so that: a. for the period commencing on the Effective Date and ending on January 31, 2009, the term “Interest Rate” as used in the Mortgage shall mean the prime interest rate adopted by The Equitable Trust Company from time to time in determining interest payable by its most creditworthy commercial customers, plus 3.125 percent per annum, compounded and payable monthly, not in advance, on the first day of each calendar month. . . ; and b. for the period commencing on February 1, 2009 and continuing thereafter until the principal sum has been repaid in full, the term “Interest Rate” as sued in the Mortgage shall mean twenty five percent (25%) per annum, compounded and payable monthly, not in advance, on the first day of each calendar month. 3.

The term of the Mortgage is extended, so that the full balance of the principal sum and any unpaid interest thereon and any other amounts owing pursuant to the Mortgage shall become due and be paid on the 1 st day of March, 2009. Second Renewal Agreement 1. Interest shall be calculated, on the full outstanding Loan balance, at the rate of 25% per annum, compounded monthly, from February 1, 2009 until the date of repayment in full. . . . 3. LBI shall be required to make monthly payments, on or before the 15 th day of each and every month starting May 15, 2009 and

ending January 15, 2010, in any amount equal to the greater of 7.5% per annum, compounded and payable monthly, and Equitable Trust Company Prime Rate + 5.25% per annum, compounded and payable monthly (the “Pay Rate”). 4. The difference between the interest payable on the loan, in accordance with paragraph 1 and the interest actually paid at the Pay Rate shall accrue to the Loan (the “Accrued Interest”). 5.

Provided that no default, whether cured or otherwise, (excluding a non-monetary default which is cured within 3 business days notice of such default) has occurred between the date of this letter and February 1, 2010 and provided that the full principal balance and any outstanding costs and fees payable pursuant to Commitment Letter, the Renewal Letter or any other agreement given as security for this Loan are paid on or before February 1, 2010, TCC shall reduce the amount payable in satisfaction of the debt by an amount equal to the Accrued Interest. . . . 8.

Should, at any time, LBI default under any of the obligations contained in this agreement or contained in the Commitment Letter, the Renewal Letter or any other agreement given as security for this Loan, provided TCC has agreed to allow the default to be cured, the Pay Rate shall be 25% from the date of the default until the date that the default is cured and shall only return to the rate set out in paragraph 3 upon rectification of the default. 9.

Should, at any time, LBI default under any of the obligations contained in this agreement or contained in the Commitment Letter, the Renewal Letter or any other agreement given as security for this Loan and TCC elects not to voluntarily permit the default to be cured this agreement shall be in default; the Pay Rate shall increase to 25% and all Accrued Interest to the date of the default shall become forthwith due and payable. By signing this letter, you also hereby acknowledge that: . . . 2. The interest rate payable is 25% per annum, calculated and payable monthly; 3.

The Loan matured on March 1, 2009 and is now, and continues to be, fully due and payable. 4. You are not in a position to fully repay the loan, as required;