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Interest - Mortgage. Rabinowitz v. 2528061 Ontario Inc.
In Rabinowitz v. 2528061 Ontario Inc. (Ont CA, 2026) the Ontario Court of Appeal dismissed an appeal, here brought against two dismissals of actions for specific performance in a failed commercial APS context.
Here the court considered a mortgage rate of interest issue [under Interest Act s.8]:[17] The six-month mortgage was given interest-free in consideration of the respondent agreeing to allow an extension of time for the appellant to conduct due diligence with respect to the subject property and the appellant’s advance of $600,000 by way of the release of the purchase deposit of $250,000 and advancement of a further $350,000 to the respondent. On closing, the $600,000 advanced under the mortgage would be deducted from the purchase price. With respect to interest, the mortgage agreement stipulated as follows (“the interest clause”):The Interest Rate of the Charge shall be 0% until the Balance Due Date on July 10, [2018][1]. Beginning July 10, [2018], the Interest Rate of the Charge shall be 12.0%, calculated monthly, not in advance, until the payment of the Charge in full. [18] There was no tying of the increase of the mortgage interest to any default. It was common ground that the mortgage was not in default on July 10, 2018.
[19] The trial judge interpreted the interest clause to mean that 12% interest would start to run on the first day of default on July 11, 2018. As such, she reasoned, the 12% interest provision offended s. 8 of the Interest Act, which prohibits the charging of interest on arrears of principal or interest that exceeds interest charged on the mortgage prior to default.
[20] It is well established that ordinary commercial contracts must be interpreted in accordance with their plain language as understood by a reasonable business person, and in a way to avoid commercial absurdity: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 47-48; Kentucky Fried Chicken Canada v. Scotts Food Services Inc. (1998), 1998 CanLII 4427 (ON CA), 114 O.A.C. 357 (C.A.), at para. 27.
[21] Moreover, s. 8 of the Interest Act must be read “in light of, and harmoniously with s. 2” of the Interest Act that allows for parties, subject to any other provision, under the Interest Act or other Act of Parliament, to “stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on”: Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, [2016] 1 S.C.R. 273, at para. 26.
[22] The trial judge did not apply this analysis, which is an error in principle. As a result, her interpretation is not entitled to appellate deference.
[23] We accept that the trial judge erred by failing to give effect to the clear words of the parties’ mortgage agreement, which were commercially reasonable in the circumstances of this case. It was significant that the interest rate commenced prior to the mortgage being in default, as it was consistent with the parties’ agreement with respect to the purchase of the property. The six-month interest-free mortgage became part of the purchase agreement between the parties and was premised on the completion of the purchase agreement. If the agreement did not close, then there was no further rationale for the interest-free mortgage. Rather, the mortgage would stand independently at a 12% rate of interest to which the parties agreed with the benefit of legal advice. There was no basis to disturb that agreement. . Alleghe Mortgage Fund Ltd. v. 1988758 Ontario Inc.
In Alleghe Mortgage Fund Ltd. v. 1988758 Ontario Inc. (Div Ct, 2021) the Divisional Court considered an issue of s.8 of the Interest Act:[17] We find that the motion judge erred in finding that the interest rate provision in the mortgage commitment breached s. 8 of the Interest Act.
[18] Section 8 of the Interest Act provides: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. [19] For mortgages and other loans secured by real property, “default rates” of interest, whereby a higher rate of interest is triggered by default, effectively reserving a higher charge on arrears than that imposed on principal money not in arrears, are prohibited by section 8 of the Interest Act.
[20] The motion judge found that the First Interest Rate Provision – which provided that the interest rate is 8.25% for the first six months, and 18% per annum thereafter, unless the mortgage is renewed or discharged, or after the second renewal term has expired – breached s. 8 of the Interest Act, R.S.C. 1985, c. I-15. He said the following:In accordance with the [First Interest Rate Provision], interest will be payable at 8.25% for the first six (6) months and will increase to 18.00% for the seventh (7th) month, unless the mortgage is renewed or discharged at the end of that month. If it is renewed so that the principal does not come due, then the interest will remain at 8.25%. But if it was neither renewed or if it was not paid on the date of maturity, then interest will go to 18.00%. If it was renewed and at the end of the second renewal not paid on the date of maturity, again the interest would increase to 18.00%. [21] Although he acknowledged that the Supreme Court, in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18 (CanLII), [2016] 1 S.C.R. 273 found that an interest rate will not breach s. 8 of the Interest Act if the interest increases with time, and not with default, the motion judge went on to say the following:Here, however, just like in the case of Lee v. He, with a bit more verbiage perhaps in this case, in all circumstances, if the mortgagor pays the principal on time, then its interest rate is 8 percent. And if it defaults in repaying principal when it falls due, the interest rate becomes 18 percent. In my view, it is a plain breach of section 8 for interest to increase simply because money was not paid on the due date, and therefore the clause in this case cannot stand. Interest is chargeable at 8.25 percent, therefore, throughout the mortgage. [22] In Krayzel, the Supreme Court considered two different loan agreements. The first agreement established one rate of interest (prime plus 3.125% per annum), that applied for most of the term of the loan, and a second higher rate (25.00%) that became effective in the final month of the term. These are the facts of this case.
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