Hope Street Real Estate v Toronto Dominion Bank, 2017 ABQB 086

Court of Queen’s Bench of Alberta Citation: Hope Street Real Estate v Toronto Dominion Bank, 2017 ABQB 086 Date: 20170209 Docket: 1601 15708 Registry: Calgary Between: Hope Street Real Estate Plaintiff - and - Toronto Dominion Bank Defendant _______________________________________________________ Memorandum of Decision of J.B.

Hanebury , Master in Chambers _______________________________________________________ [ 1 ] At issue in this application is the extent to which a Bank can unilaterally increase the interest rate of a commercial loan agreement when the agreement provides that its “terms may be changed by the Bank from time to time at the Bank’s sole discretion.” [ 2 ] Hope Street Real Estate Corp. (Hope Street) seeks a declaration that its lender, the Toronto Dominion Bank, is not entitled to certain interest charges and fees pursuant to their banking agreement.

The matter came before me in morning chambers and one case was provided. It did not specifically address the question in issue. The parties advised me that there were no cases specifically on point. I adjourned the matter for a week to allow the parties to undertake a case law search and several cases were provided for the Court’s consideration. Unfortunately none dealt specifically with the matter in issue. FACTS

[ 3 ] The facts are not in dispute. The Toronto Dominion Bank filed no affidavit. [ 4 ] Hope Street entered into a "demand operating facility agreement" (loan agreement) with the Toronto Dominion Bank in 2011. The loan agreement was amended twice to increase the borrowing limit. In October 2015, the Bank expressed concerns to Hope Street about the nature of its security. As a result, the Bank put forward certain amendments to the loan agreement that Hope Street rejected.

Ultimately, in order to avoid the Bank calling the loan, Hope Street entered into a forbearance agreement which converted its line of credit to a fully drawn, non-revolving loan. [ 5 ] Hope Street subsequently discovered that new fees and interest charges were being taken from its account. It appeared the Bank had unilaterally implemented the changes it had sought. Hope Street brought this application arguing that the clauses relied upon by the Bank to make these unilateral changes either did not permit them or were ambiguous and should be interpreted in Hope Street’s favour.

I note that the parties agreed that the issue was one of

interpretation only and they did not argue that the relevant clauses or the agreement itself were void for uncertainty. [ 6 ] With that overview I turn to the specific terms of the contract in issue and the arguments of the parties. [ 7 ] The

preamble of the loan agreement states in (iii) that "the [revolving demand credit] facility will operate on the basis established in this… agreement including…the standard terms and conditions attached as

schedule ‘A’… the terms of which may be changed by the Bank from time to time at the Bank's sole discretion .” [underlining added] [ 8 ] There is a clause in the loan agreement entitled “Interest Rates and Stamping Fees”. It states: …interest rates and fees are as follows: Prime Based Loans: Prime Rate + 0.50 % per annum Information on Interest Rate

Definitions, Interest Calculations and Payment is set out in the

Schedule "A" attached hereto. [ 9 ] The loan agreement provides for a renewal fee of $300 per annum and states that

Schedule A sets out the Standard Terms and Conditions that apply to the borrower and the loan and it forms part of the agreement. [ 10 ] In

Schedule A is a clause entitled “Interest Rate

Definitions”. It defines prime rate as the rate of interest per annum established and reported by the Bank to the Bank of Canada from time to time. It contains no definition of “interest rate”. [ 11 ] Clause 15 of

Schedule A contains the wording primarily in contention between the parties: 15. BANK MAY CHANGE AGREEMENT The Bank may change the provisions of this Agreement from time to time . These changes include, without limitation, changes to the credit limit, interest rate, or fees payable by the borrower. The Bank will notify the Borrower of any change in this agreement by mail, hand delivery, electronic mail or facsimile transmission or for a change in any interest rates or interest rate

definitions by posting a notice in all of the Bank's branches. [underlining added] [ 12 ] In 2013 the agreement was amended to establish a credit limit of $950,000. [ 13 ] In 2016 the Bank sought to further amend the agreement by: reducing the credit limit to $936,000; changing the interest rate from prime + 0.50% to prime +4.75% per annum; and, the addition of two new fees, a late statement fee of $500 monthly for the non- receipt of reporting and an administration fee of $500 per month. It also sought to increase the renewal fee from $300 to $2000 per annum. [ 14 ] Hope Street refused to sign these amendments.

[15] It was not argued by the parties that these amendments were proposed at the time of a renewal of the loan. In fact theproposed amending document dated August 2016, states: In accordance with the terms of the Agreement, the Bank may change the provisions of the Agreement from time to time on notice to theBorrower.

The Bank hereby notifies the Borrower that this Amending Agreement amends the Agreement effective as of August 20, 2013(sic) [16] As a result it is assumed that the Bank put forward these amendments during the currency of the agreement. [17] In October, 2016, the parties entered into a forbearance agreement whereby, under certain terms and conditions, the Bankagreed not to demand the loan.

It provided that: Except as may be expressly set out in this Forbearance Agreement, nothing herein shall affect or amend the terms of the LoanAgreement…except for in the Lender’s full, sole and exclusive discretion as required to give effect to the Forbearance Agreement. All terms and conditions as set out in the Loan Agreement and the Lender’s Security shall remain in full force and effect except asamended herein. [18] Hope Street argues that the words in the

preamble of the loan agreement stating that the Bank may change the terms of theagreement from time to time are not a term of the agreement and are, in any event, vague and should be construed against the Bank.While it acknowledges that clause 15 is a term of the agreement, it says that it is even more vague and should not be interpreted to allowthe Bank to unilaterally increase the fees and the interest rate Hope Street is required to pay. The clause is onerous and should be strictlyconstrued.

The agreement, it says, provides only for a change in the prime rate. [19] As to the change in fees, it argues that clause 15 only permits a change in the fee structure for all borrowers, not just a singleborrower, and it does not contemplate new fees being added. Any ambiguity, it says, should be construed against the lender. [20] The Bank responds that an interest rate is usually prime plus a certain amount, which amount it calls the “margin rate”. Clause15, it says, is neither ambiguous nor onerous and should not be construed narrowly. If Hope Street is unhappy with the agreement itshould find a new lender.

ANALYSIS [21] The Supreme Court of Canada has set out the fundamental premise underlying contractual

interpretation in TerconContractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 , [2010] 1 SCR 69 at para. 64, where it saidthat “the key principle of contractual

interpretation here is that the words of one provision must not be read in isolation but should beconsidered in harmony with the rest of the contract and in light of its purposes and commercial context.” [22] In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 , [2014] 2 SCR 633, para. 47, it reiterated this pointstating that the

interpretation of contracts “has evolved towards a practical, common-sense approach not dominated by technical rules ofconstruction.” The decision-maker is to “read the contract as a whole, giving the words used their ordinary and grammatical meaning,consistent with the surrounding circumstances known to the parties at the time of formation of the contract”. [23] Excerpts from the text M.H. Olgilvie, Bank and Customer Law in Canada, [Toronto: Irwin Law, 2007] were provided. At p.185, the author states that standard form banking agreements, which are contracts of adhesion, have shifted risks to the customer.

Itpoints out that the terms of banking agreements are “not negotiable in a marketplace where there is virtually no real choice.” As a resultthe courts often imply terms, use the contract

interpretation rules of strict construction and contra proferentem, and rely on generalcontract principles such as unconscionability and unreasonableness to protect consumers.

[ 24 ] From these cases and the text provided, the Court is to read the agreement as a whole giving the words their ordinary meaning consistent with the circumstances. If there is an ambiguity the context of the agreement should be considered in applying the rules of contractual

interpretation. [ 25 ] Turning to the

preamble of the loan agreement, its reference to the ability of the Bank to change the terms of the loan at its sole discretion is not a term of the agreement, but merely sets the stage for a reading of the contract as a whole. [ 26 ] The clause in the loan agreement on “Interest Rates” sets out the rate as a prime rate plus a specific percentage and refers the reader to

Schedule A for information on interest rate

definitions.

Schedule A contains a clause entitled “Interest Rate

Definitions” and it defines “prime rate”. It does not define “interest rate”. [ 27 ] Clause 15 describes the ability of the Bank to change the provisions of the agreement including a change to the “interest rate”. That rate can be changed by posting notice of the change in all of the Bank’s branches. But what is the “interest rate”? [ 28 ] By failing to clearly define “interest rate” the loan agreement confuses the prime rate and what the Bank called in argument the “margin rate”, the latter being the rate added to the prime rate to give the rate ultimately paid by the customer.

The term “margin rate” is not mentioned or defined in the loan agreement. [ 29 ] I can only assume that what the Bank intended was to be able to change the prime rate by posting the change in the Bank’s branches and to unilaterally change the margin rate upon notice to the customer. However, that is not what the agreement says. It indicates that any change to the “interest rate” must be posted in all the Bank’s branches. A customer could fairly think that the Bank would not post a change to the customer’s margin rate in all the branches, and only the prime rate would be subject to change.

In other words, the margin rate could not be unilaterally increased. [ 30 ] The Bank drafted this agreement. If it intended to unilaterally increase a customer’s margin rate than that is what the agreement should have said. It did not and this lack of clarity should not be decided in the Bank’s favour.

The Bank cannot unilaterally increase the margin rate. [ 31 ] The change in fee structure was also imposed unilaterally pursuant to clause 15 which allows it to change “the fees payable by the borrower”. [ 32 ] The Oxford Dictionary describes “fee” as “a payment made to a professional person or to a professional or public body in exchange for advice or services; money paid as part of a special transaction, for example for a privilege or for admission to something; money regularly paid to a school or similar institution for continuing services.” [ 33 ] The payments to be made by Hope Street to the Bank for the services it was to provide were outlined in the loan agreement.

In my view, while this clause permits an increase (or decrease) in an existing fee, it is insufficient to encompass the addition of new fees. A fee is a payment, and if the Bank wanted the right to unilaterally increase existing payments and add new payment requirements to the loan agreement the wording should be clear. The terms for the payment of fees and the payment of interest are terms crucial to a borrower.

Again, the Bank was the drafter of the contract. [ 34 ] In my view, an ability to unilaterally add new fees to an existing contract when the party benefiting has drafted the contract, requires the drafter to include clearer words to that effect. Failing that, the wording can be fairly assumed to mean that the existing fees can be varied.

As to the argument of Hope Street that a fee increase can only occur if it is applied to all Bank customers, I see nothing in the contract to support that argument. [ 35 ] Therefore, I have come to the conclusion that the only unilateral change made by the Bank that is permissible is the increase in the existing renewal fee. All of the case law provided by the Bank dealt with the issue of whether an objective reasonableness test should be used to determine whether a unilateral change permitted by a contract should be allowed.

Hope Street did not argue that the increase in the renewal fee failed to meet that test so I have not considered this case law.

[ 36 ] Neither party argued the underlying policy question in this case. Should the Courts enforce a clause inserted in a contract by the more powerful party that allows that party to unilaterally change anything in the contract? See Tercon , supra, para’s 107-123. As that question was not raised it has not been considered. [ 37 ] Finally, I note that, in the face of its poorly-worded agreement, the Bank is not without recourse if it wishes to change the margin rate or add new fees to the loan. The loan is subject to an annual renewal. CONCLUSION [ 38 ] The increase in the renewal fee is allowed by the contract.

The increase in the “margin rate” and the addition of new fees is not allowed by the contract. [ 39 ] If the parties cannot agree as to costs, they may make an appointment with the Clerk to have the matter determined. Heard on the 06 th day of December, 2016. Dated at the City of Calgary, Alberta this 09 th day of February, 2017. J.B. Hanebury M.C.Q.B.A. Appearances: Mr. Daniel Jukes Miles Davison for the Applicant Mr. Benedickson Norton Rose for the Respondent