Simon's Megalomaniacal Legal Resources

Interest - Penalties [Interest Act s.8]

. Greenpath Capital Partners Inc. v. 1903130 Ontario Ltd.

In Greenpath Capital Partners Inc. v. 1903130 Ontario Ltd. (Ont CA, 2023) the Court of Appeal considered an Interest Act 'penalty' [s.8] issue, here where a first mortgagor attempted to justify excessive charges under a separate 'forbearance agreement':

(2) Did the application judge err in finding that the Disputed Amounts constituted a prohibited penalty pursuant to s. 8 of the Interest Act?

[28] It is useful to set out s. 8(1) of the Interest Act:

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.

[29] This provision serves a protective purpose: P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331, 126 O.R. (3d) 108, at para. 50, citing Reliant Capital Ltd. v. Silverdale Development Corp., 2006 BCCA 226, 270 D.L.R. (4th) 717, leave to appeal refused, [2006] S.C.C.A. No. 265. As held by the British Columbia Court of Appeal in Reliant Capital, at para. 53, Parliament intended for mortgages on real estate to be treated differently than other loans:

Parliament has singled out mortgages on real estate for special treatment, or at least treatment that differs from loans that are not secured on real property. 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.

[30] This passage was endorsed by the Supreme Court in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, [2016] 1 S.C.R. 273, at paras. 20-21.

[31] In P.A.R.C.E.L., at paras. 53-56, Cronk J.A., writing for the court, outlined the criteria to be applied in determining whether an amount constitutes a violation of s. 8. The criteria may be summarized as follows:

1. The covenant in question must impose a “fine”, “penalty” or “rate of interest”. If it does not, then s. 8(1) is not engaged.

2. The “fine”, “penalty” or “rate of interest” must relate to “any arrears of principal or interest secured by mortgage on real property” (emphasis omitted), whether the arrears arose on default occurring before or after maturity of the relevant debt instrument.

3. The covenant must have the prohibited effect of “increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears”.

4. The arrears of principal or interest must be “secured by mortgage on real property”.

[32] The application judge found that the Disputed Amounts could not be recovered by the First Mortgagee from the proceeds of sale for two reasons.

....

[35] In P.A.R.C.E.L., at para. 96, this court made it clear that the onus is on the mortgagee claiming the amounts following default to prove that they “reflect real costs legitimately incurred by the [mortgagee] for the recovery of the debt, in the form of actual administrative costs or otherwise”. There, the creditor respondents were claiming certain late payment charges and default fees. With respect to the charges for these fees, Cronk J.A. stated the following at paras. 95-96:

The respondents point to no evidence on the record before this court demonstrating that they incurred any actual losses as a result of late or missed payments under the Mortgage, apart from the amount of the non-payment itself. This is not a case where it is alleged that payments made by or on behalf of Parcel under the Mortgage were returned “NSF” or otherwise rejected for payment, giving rise to administrative costs for the respondents.

In the absence of evidence that the charges in question reflect real costs legitimately incurred by the respondents for the recovery of the debt, in the form of actual administrative costs or otherwise, the only reason for the charges was to impose an additional penalty or fine, apart from the interest otherwise payable under the Mortgage, thereby increasing the burden on the appellants beyond the rate of interest agreed upon in the Mortgage. The courts have not hesitated to disallow similar charges on the basis that they offend s. 8 of the Interest Act. [Footnotes omitted.]

[36] In light of this well-established onus, the application judge dealt with the prepayment and default fees separately.

[37] Citing We Care Funding Limited Partnership v. LDI Lakeside Developments Inc. et al, 2021 ONSC 7466, the application judge found that given the absence of any evidence that the prepayment fee was an actual expenditure on the part of the First Mortgagees, or any requirement that the First Mortgagees pay the fee to Trilend, the prepayment fee represented an increase in the interest rate pertaining to monies in default, in excess of the interest rate payable upon monies not in default, contrary to s. 8 of the Interest Act: at para. 67.

[38] Likewise, the application judge found that the First Mortgagees’ arguments with respect to the default fee were neither borne out of the evidence nor supported in law. Though the First Mortgagees argued that the fee corresponded to three months’ interest in accordance with s. 17 of the Mortgages Act, R.S.O. 1990, c. M.40, the application judge found there was no evidence that the fee was calculated in accordance with s. 17, nor that the amount in the Forbearance Agreement included an amount arising from s. 17. The application judge also referred to the finding in We Care that, once a mortgagee undertakes enforcement proceedings, it can no longer collect a three-month interest bonus as doing so would constitute a penalty and therefore offend the Interest Act: at para. 71. I would also note that the First Mortgagees have not adduced any evidence to support their argument that the default fees should be treated as anything other than what they were labelled as, i.e., default fees.

[39] The bottom line is that the absence of any evidence to support the appellants’ position that these were valid costs incurred is fatal, as the only reasonable inference is that they, in effect, increased the interest owing on the entire principal amount, even that which was not in arrears. I see no error on the part of the application judge in his analysis and conclusion that the disputed fees effectively constituted prohibited interest charges under s. 8 of the Interest Act.