York Ventures Ltd. v., 2015 BCSC 1105

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: York Ventures Ltd. v. 0775740 B.C. Ltd., 2015 BCSC 1105 Date: 20150626 Docket: H112885 Registry: Victoria Between: York Ventures Ltd. Varsity Capital Corporation Petitioners And 0775740 B.C. Ltd., Gurdip Singh Aujla, Satnam Johal, Harinder Bal, Aujla Developments Ltd., HB Enterprises Inc., Nu Tek Properties Ltd., Cambro Capital Corp., 0751461 B.C. Ltd., Hamilton Duncan Armstrong & Stewart Law Corporation Respondents Before: Master Keighley Reasons for Judgment Counsel for the Petitioners: B.C. Markus Counsel for the Respondents: J.W.

Bilawich Place and Date of Hearing: Vancouver, B.C. June 18, 2015 Place and Date of Judgment: Victoria, B.C. June 26, 2015 Background [ 1 ] This is a foreclosure proceeding, the subject of which is a first mortgage registered against title to a vacant 3.4 acre development site zoned for 38 townhouses in Colwood, BC (the “Lands”). [ 2 ] Order nisi was granted to the petitioners on September 6, 2011. By the terms of that order, the amount required to redeem the Lands on that date was $1,950,594.64, together with interest at a daily rate of $832.07. [ 3 ] The respondents, Cambro Capital Corp. and 0751461 B.C.

Ltd. (the “Cambro respondents”), were the holders of a second mortgage registered against the Lands securing the principal sum of $1,000,000. [ 4 ] On April 4, 2012, the petitioners were granted conduct of sale over the Lands. [ 5 ] On March 27, 2013, the Cambro respondents commenced their own foreclosure proceeding and on October 21, 2013, were granted order nisi .

That order stipulated that the amount required to redeem the second mortgage was $1,349,798.30, plus interest at the annual rate of 12% per annum, compounded semi-annually, not in advance being the equivalent of a per diem rate of $437.58. [ 6 ] Also as of October 21, 2013, the Cambro respondents were granted conduct of sale over the Lands in their foreclosure proceeding. [ 7 ] The petitioners, I gather, were content to allow the Cambro respondents to take the lead in attempting to sell the Lands. [ 8 ] On May 28, 2015, the Cambro respondents brought application in this proceeding for approval of a sale.

Additional offers were presented at the hearing and in the result, Master McCallum approved a sale to 1004223 B.C. Ltd., for the sum of $3,010,000. The order further provides for the delivery of vacant possession of the Lands by 6:00 p.m. on June 29, 2015.

[ 9 ] As a term of the order approving sale, the Cambro respondents had sought an order in the following terms: 7. A determination of the amount required to redeem the Petitioners’ mortgage CA1837122 as at the closing date of the proposed sale, including without limitation a determination of the following issues: a. Whether the Petitioners’ claim for interest compounded monthly is enforceable pursuant to the terms of their mortgage; and b.

Whether the Petitioners’ claim for 16% per annum interest, based on a rate increase from the initial 12% per annum interest rate provided for in their mortgage, said increase taking effect in the final month of the term of the mortgage, is enforceable. [ 10 ] Master McCallum adjourned the hearing of that aspect of the relief sought to June 4, 2015 at 9:45 a.m. in Vancouver Supreme Court Chambers. In due course, the matter was adjourned further to June 18, 2015, when I heard counsel’s submissions and reserved judgment. Issues [ 11 ] On this application I am obliged to determine: (

a) whether the petitioners’ claim for interest compounded monthly is enforceable pursuant to the terms of their mortgage; and (

b) whether the petitioners claim for 16% per annum interest based on a rate increase from the initial 12% per annum interest rate provided for in their mortgage, said increase taking effect in the final month of the term of mortgage is enforceable. A resolution of these issues should allow the parties to determine the amount required to redeem the petitioners’ mortgage as at the closing date of the approved sale.

Further Background [ 12 ] The petitioners first mortgage is a $1,810,000 fully open six month interest only loan, with interest pre-paid and held on account for three months bearing interest at 12% per annum for four months, and increasing to 16% thereafter.

The mortgage appears to have been granted as part of a complicated refinancing arrangement entered into in December 2010, which paid out prior mortgages already in foreclosure, discharged judgments, completed site servicing, and qualified the owners for construction financing to build the first 10 of an anticipated 38 townhome units on the Lands. [ 13 ] As part of this same refinancing, the $1,000,000 Cambro second mortgage was registered against title to the Lands and additionally against a property in Surrey British Columbia.

The second mortgage was also a pre-paid interest only loan bearing interest at 12% for 12 months and increasing to 18% thereafter. [ 14 ] The first mortgage went into default as soon as the prepaid three month interest reserve had been exhausted. A dispute apparently erupted amongst members of the ownership group. Certificates of Pending Litigation were filed. Site servicing was not completed. Building and development permits expired and construction never started.

The Lands remain vacant and unimproved, producing no revenue. [ 15 ] The petitioners say that after taking into account all interest payments that have been made, the sum of $2,363,536.37 remains due and owing as at June 15, 2015. [ 16 ] As indicated, the Cambro respondents challenge the enforceability of the interest rate “bump” whereby the interest rate increased from 12% to 16% and the claim for compounded interest. The Terms of the First Mortgage [ 17 ] The terms of the petitioners mortgage which addressed payments and interest are as follows: 3. Form B - Item 5 - Payment Provisions a. (

a) Principal Amount - $1,800,000.00 b. (

b) Interest Rate - See

Schedule c. (

c) Interest Adjustment Date - 10 - 12 - 01 d. (

d) Interest Calculation Period - Monthly e. (

e) Payment Dates - 1 st day of each month f. (

f) First Payment Date 11 - 01 - 01 g. (

g) Amount of each periodic payment - Interest Only h. (

h) Interest Act (Canada) Statement. The equivalent rate of interest calculated half yearly not in advance is NA% per annum i. (

i) Last Payment Date - 11 - 06 - 01 j. (

j) Payment Due Date - 11 - 06 - 01 [ 18 ] The Filed Standard Mortgage Terms provide the following payment provisions: 5. PAYMENT PROVISIONS 5(

b) Interest Rate:

Interest Rate under this Mortgage shall be the greater of: (

i) the Prime Rate plus nine (9%) percent per annum; OR (ii) the minimum rate of twelve (12%) percent per annum.

Should the Prime Rate increase prior to the advance of the Principal Amount of this Mortgage the Minimum Rate will increase by a like amount; The Interest rate shall be the greater of the Prime Rate plus nine (9%) percent per annum or the minimum rate of twelve (12%) percent per annum for the first four (4) months from the date of advance of the Principal Amount, at which time the Interest Rate shall then increase to the greater of the Prime Rate plus nine (9%) percent per annum or the minimum rate of sixteen (16%) percent per annum thereafter.

The Mortgagor acknowledges and agrees that the above stepped rate is commercially reasonable and a legitimate rate structure for this loan transaction. In the event that a court of competent jurisdiction does not allow the above second rate of sixteen (16%) percent per annum, then the Mortgagee and the Mortgagor agree that the Interest Rate will be the rate set out at 5(b)(

i) above, namely Prime Rate plus nine (9%) percent per annum. [ 19 ] The following additional or modified terms were added to the Standard Mortgage Terms by agreement between the petitioners and the owners: 21A Commercial Reasons: It is acknowledged and agreed to by the Lender and Borrower that if there is an interest rate increase within the term of this Mortgage it is for commercial reasons, including but not limited to mitigation of risk to the Lender of increasing interest rates during the term of this Mortgage.

The Borrower expressly acknowledges and agrees that the defined, limited increase in the interest rate for the remainder of the term of this Mortgage has been explained to it and it has had the opportunity to independently appraise the commercial reasons for such increase in the interest rate. … 21C Payments: Monthly, interest only payments shall be made on the 1 st day of each month in the amount of $18,100.00 for the first four (4) months and $24,133.33 thereafter.

The Lender shall deduct the sum of $54,000.00 from the advance of the Principal Amount to service the interest payment for the first three (3) months. Interest on the Principal Amount shall commence to accrue as and from the day the Principal Amount is forwarded to the Lender’s Lawyers (the funding date), notwithstanding that the Principal Amount may not actually be received by the Borrower on that day.

If the Prime Rate increases after the first funding date resulting in additional interest due and owing to the Lender then the Borrower will be assessed the additional interest quarterly and will pay the same within seven (7) days of receipt of such assessment to the Lender. The Borrower will pay to the Lender a one hundred and fifty ($150.00) dollar service fee, in each and every instance, when the Mortgage payments hereunder are not received by the Lender on the 1 st day of each month.

The Borrower will pay to the Lender a one hundred and fifty (150.00) dollar service fee on all monthly payments of interest that are not honoured by the Borrower’s Bank. 6. Standard Mortgage Terms MT900360: a. (m) “Interest Rate” means the Interest rate set out in item 5(

b) of the Mortgage Form or a

schedule attached thereto; b. (l) “interest Calculation Period” means the period or periods for the calculation of interest set out in item 5(

d) of the Mortgage Form; c. (u) “Other Money” means all money other than the Principal Amount, the Borrower owes to the Lender and the payment of which is secured by this Mortgage and includes all accrued interested. d. 4.

Interest 4.1 The Borrower shall pay the Lender interest on the Principal Amount and Other Money at the Interest Rate calculated in accordance with the Interest Calculation Period from the Date of the Advance to the date of payment, both before and after default, judgment, or the Maturity Date. 4.2 If the Borrower fails to make a Loan Payment on a Payment Date or any other payment as required by this Mortgage when the same become due, then the Lender may charge compound interest on arrears of the Principal Amount and on arrears of interest and any Other Money until the same are paid by the Borrower at the Interest Rate. 4.3 In the event of an Order Nisi for foreclosure of this Mortgage is made, then the Lender, at its option may fix the Interest Rate charged thereafter calculated at the Prime Rate as at the date of the Order Nisi, plus the additional percentage amount set out in the Interest Rate on the Mortgage Form. 4.4 If the Interest Rate stipulated herein would, except for this clause be a criminal rate or void for uncertainty, or unenforceable for any other reason, then the Interest Rate chargeable on the credit advanced or secured by this Mortgage shall be ONE (1.00%) per cent per annum less than the rate which would be a criminal interest rate, calculated in accordance with generally accepted actuarial practices and principles.

Position of the Cambro Respondents

[ 20 ] The Cambro respondents refer to s. 8 of the Interest Act , R.S.C. 1985, c. 1-15, which provides as follows: 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. Interest on 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. [ 21 ] The Cambro respondents refer me to the case of TD Trust Co. v. Guinness, [1995] B.C.J. No. 1854 , in which Tysoe J. was obliged to consider whether a mortgage with a one year term which provided for an interest rate increase from 16.5% to 24% one week prior to the end of the mortgage terms was a penalty which offended s. 8 of the Interest Act .

His Lordship found that the interest provision violated s. 8 and was unenforceable, saying, at para. 16 and 17: 16 In my opinion the Raintree decision is not binding on me and should not be followed by me in view of the other authorities. A provision in a mortgage increasing the interest rate one week prior to the maturity date of the mortgage is a device similar to the device of forgiving interest in the event of timely payment of the mortgage monies. Strictly speaking, the increase in the interest rate is not triggered by a default.

However, the effect of the provision is to charge a higher interest rate on the mortgage monies if they are not paid by the maturity date. 17 The authorities establish that in considering s.8 the Court should not restrict itself to the form of the provision in the mortgage and should look to its substance. In this case the substance of the provision is clearly to extract a higher rate of interest if the mortgage was not repaid by its maturity date. It is apparent on the face that the wording of the provision was an attempt to avoid s.8 and no other explanation to justify the provision was offered.

Section 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. In this case, the substance of the interest provision violates s.8 and is unenforceable. [ 22 ] At paras. 20 and 21 of the decision, Tysoe J. considered that an exception was indicated if the interest or the increase had a “legitimate commercial purpose”: 20 Where does one draw the line in deciding whether an interest provision contravenes s.8? This is an obvious question and it was asked in the hearing before Master Bolton in the Raintree case.

He said that he did not have to decide the point because he was satisfied that the provision before him was on the wrong side of the line. In my view, the line 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.

The true intent may be obfuscated by clever devices designed by ingenuous lawyers and it will be the function of the Court to determine the true intent. 21 An example of an interest provision which could pose difficulty for the Court is one in a mortgage having a two year term that stipulates interest at 12 percent for the first year of a mortgage and 24 percent for the second year and after maturity.

The true intent of the provision may be in violation of s.8 if, for instance, the mortgagor had only wanted the loan for one year and it was anticipated that the high interest rate after the end of the first year would force the mortgagor to repay the mortgage if possible and that the mortgagor would not be able to pay the monthly payments with the increased interest rate in the second year.

On the other hand, the provision could have a legitimate commercial purpose if, for instance, the mortgagor wanted the loan for two years and the mortgagee was only prepared to make the loan for more [ 23 ] The approach in TD Trust Co. was followed in Citizens Bank of Canada v. Babich , 2000 BCSC 954 in which Master Joyce (as he then was) considered a loan which provided for an interest rate change of 7% to 12% per annum.

Master Joyce found that despite the fact that the mortgage did not directly link the increase in interest rate to maturity, the true intention was to extract a higher interest rate in the event of default and as a result, the provision contravened s. 8 of the Interest Act .

The mortgagee sought to distinguish the TD Trust Co. case by arguing that “legitimate commercial purposes” included: a. that there was just an adjustment of the interest rate, not necessarily an increase; b. that the increase was protection for the Petitioner against a rise in the interests rates; and c. it was a protection for the Petitioner against a change in the Mortgagor’s risk rating. [ 24 ] Master Joyce rejected all three basis, stating at paras. 9 - 13: 9 Counsel for the mortgagee in this case sought to distinguish the provision in this mortgage from the situation in TD Trust Co. v.

Guinness on the following grounds. First, he submitted that the provision in this mortgage provides for an "adjustment" of the interest rate, not necessarily an increase in that rate. The provision could result in a decrease if the prime rate fell sufficiently. In my opinion there was no real possibility of that happening in this case. The stipulated rate at the time of the last six month renewal was 7%. The prime rate would have had to fall to under 2% to result in a decrease in the interest rate. Such a suggestion is nonsense.

Looking at the substance of the provision I am satisfied it was intended to and did provide for an interest rate increase just prior to maturity. 10 Counsel for the mortgagee next submits that there are legitimate commercial purposes to justify the provision. The petitioner's manager of Credit Risk and Collections has deposed as to the commercial purposes as follows: There are two commercial purposes for this interest rate change, being a protection for the Petitioner against a rise in the interest rates and a protection for the Petitioner against a change in the Mortgagor's risk rating.

11 As to the first of these suggested "commercial purposes", the same reason could be given for any interest rate increase provision, including that in TD Trust Co. v. Guinness. The provision takes effect only at maturity, or at least seven days before maturity, and will therefore apply only in the event of a default in payment on the maturity date or in the event the parties agree to renew the mortgage. 12 As to the second suggested "commercial purpose" I am not entirely sure what is meant by "protection ... against a change in the Mortgagor's risk rating".

I take it to mean that the mortgagor has less ability to pay at the maturity of the mortgage than he had when the mortgage was granted. The suggestion is that this fact justifies, on commercial grounds, the imposition of a higher rate of interest after maturity. I cannot accept that proposition. 13 In my opinion the provision in this case falls on the wrong side of the line. In my view the true intent of this provision is simply to extract a higher rate of interest in the event of default and I conclude that it contravenes s. 8 of the Interest Act and is unenforceable.

Interest is therefore to be calculated at 7.000% per annum. Counsel for the petitioner is to provide a new

summary accounting using that interest rate. [ 25 ] The Cambro respondents say that the justification for the interest increase provided for in s. 21(

a) of the Modified Terms, is not credible in the context of a mortgage with an extremely short term (five months) and a floating interest rate (prime rate plus 9% per annum) or the fixed minimum rate. The Cambro respondents say that if the interest rate were to rise significantly during the initial months of the mortgage, that risk would be addressed through a proportionate increase in the floating interest rate.

These respondents also point out that in Citizens Bank of Canada , Master Joyce expressly rejected the lender’s argument that protection against the possible rise in interest rate was a legitimate commercial reason for a rate increase. Further, the Cambro respondents say that the prescribed Standard Mortgage Terms expressly provide that in the event of default the lender has the right to charge compound interest on arrears of the principal amount and any arrears of interest and on any Other Money until these amounts are paid by the borrower.

This is clearly a penalty, say these respondents, in the form of increased interest which is expressly trigged by a default of the borrower, and such is contrary to s. 8 of the Interest Act . Alternatively, say the respondents, the compound interest provision is vague and does not specify how frequently such compounding should occur.

In the result, say the Cambro respondents, the 16% per annum compounded interest rate which the petitioners have sought to use in calculating the balance owing under their mortgage is unenforceable and the petitioners should be limited to prime plus 9% per annum, simple interest, from the balance due date or alternatively from the date of the order nisi . The Petitioners Position [ 26 ] The petitioners rely on the terms of loan agreement and upon the affidavit #2 of Mark Nordman sworn June 3, 2015 in support of the enforceability of the interest rate “bump”. [ 27 ] Mr.

Nordman is an officer and director of both petitioner companies. He is a non-practicing lawyer in the business of mortgage financing through the vehicles of the petitioners and other privately held family companies. He says that the petitioner companies are often approached by brokers, lawyers, developers, and businessmen with complicated unconventional financing proposals regarding bare land development opportunities. Often, he says, the financing proposals so presented are mired in litigation and tied up by court process.

The Lands in question he says, were one such example. [ 28 ] He provides the following history of the petitioners’ involvement with the Lands: 7. The Petitioners involvement with the Lands first arose a year prior to the 1 st Mortgage which is the subject of this Petition. On August 8, 2009, one of our mortgage brokers, Mandate National Mortgage (Mandate), forwarded a 2 nd Mortgage Proposal which I attach as Exhibit “A” herein. At that time, development of a 38 unit townhome project on the 3.48 acre Lands was stalled and in foreclosure.

A $2,100,000 2 nd mortgage was sought to pay off various taxes, judgments and liens, bring a 1 st mortgage held by the Canadian Western Bank back to good standing, and finish partially completed site servicing work. In a word, the project was a mess, but I was optimistic at the time that the project could be rehabilitated with new financing. 8.

Further to that proposal, in September 2009, the Petitioners and 3 unrelated co-investor companies obtained fractional interests in a $2,100,000 syndicated inter alia 2 nd mortgage arranged by Mandate, open for one year, at 14% interest (prepaid for 6 months from funding) for the first 10 months, 18% thereafter, and registered as either a 2 nd or 3 rd charge, respectively, against the Lands and 5 other BC properties comprising collateral security. The owners were represented by their own mortgage broker and had legal counsel. 9.

Unfortunately, the owners plan did not materialize after the September 2009 refinance. I verily believe a partnership dispute had erupted between the 3 owners. Site serving was not completed. Liens and lis pendens were filed, and litigation commenced between the partners. The owners defaulted on the syndicated 2 nd mortgage as soon as the 6 month prepaid interest account was exhausted, and foreclosure commenced in summer 2010. The Canadian Western Bank resumed foreclosure of their 1 st mortgage, which had been held in abeyance for 6 months pursuant to the syndicated 2 nd Mortgage financing.

By November 2010 an application for Order Absolute was pending. The project was an even bigger mess than it was a year prior. This presented a very difficult environment for refinancing. At the time I was concerned that the Petitioner’s interest in the syndicated 2 nd mortgage may get foreclosed out. 10. In November 2010, Mandate forwarded a new First Mortgage Financing Proposal to the 5 investor companies that held fraction interests in the syndicated 2 nd mortgage. That proposal is attached as Exhibit “B” herein, along with a search for the Lands dated November 8, 2010. 11.

There have been a number of occasions over the years, where I, my clients, and/or co-investors have had to refinance or buy out a 1 st mortgage in foreclosure to protect our interest in an existing 2 nd mortgage. This was such an occasion. Such occasions are invariably unpleasant from my perspective both as a lawyer and a mortgage investor, and done as a last gasp measure to somehow shore up failing security and prevent foreclosure. This case was no exception.

12. In November 2010, it appeared to me that the only plausible way for the Petitioners to get paid out of the syndicated 2 nd mortgage, was to participate in the refinancing proposed by 2 of the 3 existing owners and a new partner through Mandate (Exhibit B herein). On behalf of the Petitioners, I was prepared to commit the Petitioners to our pro rata share of the new 1 st mortgage funds with the same fractional coinvestors in the 2 nd syndicated mortgage.

The other co-investors were not interested in this proposal, and refused to continue financing such a dysfunctional, litigious and unreliable development group. So the Petitioners were left with an unpleasant choice: risk getting foreclosed out on the balance of the syndicated 2 nd mortgage, or go it alone funding the new 1 st mortgage proposed, and take our chances on the new partner completing the project and improving the equity in the Lands. 13.

In a nutshell, the new proposal outlined in Exhibit B involved the Petitioners and its coinvestors releasing their existing syndicated 2 nd Mortgage from the Lands and 4 other properties, and the Petitioners stepping up their investment by taking a new 1 st mortgage in the amount of $1,810,000 registered against the Lands only. The owners had a new partner, and required an additional $1,411,000 equity infusion, to clear title, settle the existing judgments, transfer title and pay associated costs. Given the history of the project, I was dubious that the owners would be able to raise new cash.

But they did, and on December 10, 2010, the Petitioners advanced funds to the owners and registered its new 1 st Mortgage on title to the Lands. 14. The 1 st Mortgage is already in evidence and forms the basis of this foreclosure. It is a fully open 6 month interest only loan, with interest prepaid for 3 months, bearing interest at 12% for 4 months, 16% thereafter, with a 2% commitment fee paid to the lender at the front end.

It was put forward as a 1 st mortgage which could roll into a participate as part of a new $5,000,000 syndicated construction mortgage once site servicing was completed, and other construction targets were met. 15. From the title searches I verily believe that the 2 nd Mortgagee Respondents registered their 2 nd Mortgage a day later, on Dec. 11, 2010. It was registered inter alia against the Lands and collateral security in Surrey released by the Petitioners and its co-investors under the prior syndicated 2 nd Mortgage.

The 2 nd Mortgage is an interest only loan, with interest prepaid in advance for one year at 12%, and payable at 18% thereafter. 16. Once again, after the December 2010 refinancing, the owners failed to proceed with the project and improve the Lands. Both the 1 st and 2 nd mortgages went into default immediately after the respective prepaid interest accounts were exhausted. Liens were filed. Two foreclosure proceedings were commenced. One partner commenced Action against the others, and various other parties.

Site servicing remains incomplete, the Lands remain bare and undeveloped, incurring taxes and producing no income. COMMERCIAL NATURE OF BARE LAND MORTGAGE FINANCING 17. From my experience as a lawyer and mortgage investor, bare land loans at the preconstruction phase of development carry the greatest risk of any class of mortgage asset. Market interest rates, financing fees and standard mortgage terms for undercapitalized developers have evolved to reflect that risk and protect against it in a commercially viable manner.

When developers’ plans go awry, bare land produces no income, and the stain of a failed development in foreclosure can make it difficult to sell. That is what happened here. 18. The risks inherent in bare land development, and the ever present commercial tension between the lending and development communities, has given rise to 5 features relatively unique to bare land development mortgages: i. Fully open mortgages with a right of full or partial repayment at any time, often without penalty.

This allows the developer complete flexibility to retire all or part of the loan, as cash becomes available from other sources. ii. Commitment fees between 1% and 5% of principal, payable to the lender when the agreement to fund is reached. This is designed to protect the lender from having committed funds sit idle while conditions precedent to funding are met. iii. Interest only loans, prepaid for all or some of the term, held on account, and deducted from initial funding.

Prepayment and subsequent capitalization of mortgage interest is particularly important in development loans, where insufficient cashflow often restricts a developer’s ability to service the loan and maintain ownership of the property before the development is complete. iv. Interest rate increase between 2% - 4% per annum before expiry of the term. The rate bump is included to reflect the increase in risk that arises when vital targets in the development process are not met in a timely way, and shifts the risks of delay to the owner of the Property, and subsequent charge holders on title. v.

Collateral security, in addition to the development Lands, usually in the form of personal residences of the principals involved and any other property owned. The availability of collateral security will typically reduce the interest rate and commitment fees, and significantly improve a developer’s bargaining position with mortgage brokers and lenders. 19. From my experience, inclusion of some or all of the above 5 terms are commonplace and commercially necessary in most bare land development mortgages and foreclosure refinancings.

Such terms are generally not commercially viable, nor sought, in conventional lower risk income based residential mortgages, nor revenue based commercial mortgages. These terms are included to reflect the unique risks presented by bare land development, and to protect lenders from the vagaries of the of the construction process. 20. All 5 of the above features were included as terms in the prior syndicated 2 nd Mortgage that began the Petitioner’s involvement with the Lands, and I verily believe in the current 2 nd mortgage of Cambro Capital.

Only the first 4 of the above 5 terms were included in the Petitioner’s 1 st mortgage. There was no collateral security. The December 2010 refinancing, resulted in the Petitioners reducing their interest rate from 18% under the syndicated 2 nd to 12% for 4 months, going back up to 16% thereafter in the new 1 st Mortgage. The Petitioners released the collateral security held under the prior syndicated 2 nd Mortgage and made it available to the owners as security for the new 2 nd Mortgage of the Respondents.

Discussion [ 29 ] The leading decision in British Columbia with respect to the enforceability of an interest rate “bump” in the commercial lending context appears to be the decision of the British Columbia Court of Appeal in Reliant Capital Ltd. v. Silverdale Development Corp ., 2006 BCCA 226 . In that case, the mortgage provided for an increase in the interest rate from 14% to 20% one month prior to the date upon which the mortgage loan became due in full. A master had found that this increase was in the nature of a fine or penalty and therefore unenforceable.

An appeal from the master’s decision to a judge in chambers was dismissed; the chambers judge holding that the true purpose or substance of the interest clause was to create a penalty in the form of an increased rate of interest for non-performance and therefore violated s. 8 of the Interest Act . Both the master and chambers judge considered whether the interest provision was saved as having a “legitimate commercial purpose” or a “business reason that did not amount to a penalty”.

Both had held that, in the circumstances, the subject interest clause did not satisfy those criteria. [ 30 ] On the appeal, the petitioner maintained that the interest provisions were not prohibited by s. 8 of the Interest Act , arguing that the interest clause was not a “penalty” because it “was not triggered by default”. The interest rate, the petitioner pointed out, became payable as of a fixed date regardless of whether payments owing under the mortgage were in default or not.

Counsel for the petitioner also argued that TD Trust Co. , was wrongly decided and inconsistent with other authorities, that, in particular, s. 8 did not require a lender to establish a “legitimate commercial purpose” for an increased interest rate and to impose such a requirement effectively reversed the onus of proof by calling upon the lender to provide a business explanation for the increase when the terms of the mortgage should be allowed to speak for themselves. [ 31 ] Alternatively, the petitioner argued that if the “legitimate commercial purpose” test is a proper test in determining whether s. 8 had been breached, the chambers judge erred and misapplied the test in the circumstances of the case.

The petitioner argued that evidence showed that the parties anticipated an increased risk in the last month of the loan term as the project which was the subject of the financing was to be completed by then and that the increased interest rate was reasonable compensation for that increased risk. The Court of Appeal considered the wording and history of s. 8 and related provisions. [ 32 ] The borrowers argued that making the increased interest rate payable one month prior to the end of the mortgage term was simply a “clever device” of the sort condemned by the Court in TD Trust Co.

That the higher rate of interest became payable one month before the end of the mortgage term was no different in substance from the clause in TD Trust Co. which provided for a higher rate one week before the maturity date of the mortgage. [ 33 ] In the result, the Court of Appeal considered its earlier decision in Langley Lo-Cost Builders Ltd . v. 474835 B.C. Ltd. , [2000] 7 W.W.R. 46, [2000] B.C.J. No. 1187, 2000 BCCA 365 and noted that the case remained the leading authority in British Columbia on the

interpretation of s. 8. The Court noted that, as in Langley Lo-Cost Builders , the interest clause in issue had to be considered in the circumstances in which the loan had been made. The Court noted that the loan was not a conventional mortgage loan, but was specifically tailored to facilitate the borrowers plans for development. The agreement, it noted, recognized that payment of principal could only be achieved by successful completion of the development project.

As a result, the monthly payments covered interest only. [ 34 ] The Court gave short shrift to evidence from an employee of the lender purporting to state the lenders intention or purpose, stating in part at para. 75: insofar as that evidence purports to state Gibraltar's intention or purpose. Such subjective, self-serving evidence is not helpful in attempting to determine the parties' mutual intention, or whether the interest clause violates s. 8.

Those statements of intention are made after the fact, and are clearly directed towards showing compliance with the provisions of s. 8, whose language they mirror. [ 35 ] Rather said the Court, the circumstances in which the contract was made must be viewed objectively and the intention of the parties must be determined to the extent that this was possible from the language used by the parties in their agreement, viewed against the objective circumstances in which the agreement was made. [ 36 ] In case before me, it is, perhaps, significant that the borrowers take no issue with the enforceability of the interest provisions of the first mortgage.

Rather, the second mortgagees do. Presumably, the Cambro respondents reviewed the terms of the petitioner’s mortgage prior to registering their own charge and assessed their own risk after considering, inter alia , the terms of the prior charge. [ 37 ] In this case, as in Reliant Capital Ltd ., the first mortgage secured bare land with no collateral security. As indicated, the Cambro respondents’ second mortgage included a 6% interest rate “bump” plus collateral security. [ 38 ] To the extent that Mr.

Nordman’s affidavit attempts to provide some general information with respect to bare land mortgage financing, it may be said to be “subjective”, “self-serving” and “not helpful”. His evidence with respect to the August 2009 and November 2010 proposals, both of which provided for interest rate bumps (the first from 14% to 18% after 10 months of a 12 month mortgage) the second from 12% to 16% after four months of a six month mortgage, however, help to provide some context with respect to the commercial reality facing these borrowers and these lenders.

It appears that both petitioners and owners were represented by mortgage brokers and legal counsel with respect to the subject financing arrangements. The borrowers do not appear to have raised any issue with respect to the “bump” in the course of negotiations or in concluding the loan.

The borrowers, whom I assume were somewhat sophisticated in such transactions given the size and scope of the proposed development, must have accepted that these terms represented what could be obtained in a competitive marketplace. [ 39 ] At paras. 78 and 79 of Reliant Capital Ltd. , Finch C.J.B.C., writing for the Court said: 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. [ 40 ] I of course adopt that statement of the law and similarly, do not find that interest provisions of the subject mortgage loan offend the provisions of s. 8. [ 41 ] The Court in Reliant Capital Ltd . also considered the “legitimate commercial purpose” exception and noted Chief Justice McEachern’s comments in Langley Lo-Cost Builders Ltd. , to the effect that the purpose of s. 8 was “to protect borrowers against penalties and oppression at the hands of a ruthless lender” (para. 97) and that the parties were entitled to fashion their agreements to avoid the application of s. 8 provided the agreement was fair and not tainted by coercion or penalty (paras. 99 - 101). [ 42 ] The Court noted that this was in the context of McEachern, C.J.B.C’s earlier comments at paras. 89 and 90: 89 In my respectful view, the legitimate commercial purpose test is an unnecessary and unhelpful gloss on s. 8.

The thrust of the section, applying a purposive approach and having regard for equity's rejection of penalty clauses in mortgage contracts, the history of the legislation, and a contextual reading of the language used in s. 8, is, in Mary Anne Waldron's words "... to protect the borrowing public from ... abusive treatment by lenders", or in the words of Chief Justice McEachern "... to protect borrowers against penalties and oppression at the hand of a ruthless lender". 90 Interpreting s. 8 in that way, and viewing the language of the parties' agreement in the objective circumstances of its creation, it is my opinion that the interest clause in this case does not offend the provisions of s. 8. [ 43 ] In the context of this case, I find nothing about this lending transaction which could be said to be unfair or tainted by abuse, coercion, intimidation, or penalty.

The loan arrangements were entered into by parties who had the benefit of independent legal advice and arose in the context of a risky development situation already complicated by legal and administrative difficulties. It is worthy of note that the Cambro respondents sought the same financing mechanism, the “bump” in addition to collateral security in the context of their even riskier arrangements. [ 44 ] I would therefor answer “yes” to both queries raised by s. 7(

a) and (

b) of the Cambro respondents’ Notice of Application. [ 45 ] With respect to the compounding issue I note that the original mortgage document under the heading “Interest Calculation Period” as specified as “Monthly” and thus the issue of compounding is expressed with sufficient clarity. [ 46 ] In the event that the parties are unable to resolve the balance owing under the petitioner’s mortgage given these determinations, they have liberty to apply. “Master Keighley”