Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18 – (Mortgages — Interest — Rate of interest)

On appeal from a judgment of the Alberta Court of Appeal (2014 ABCA 234), affirming a decision of Romaine J. (2012 ABQB 411), which set aside a decision of Master Hanebury (2011 ABQB 193).

The mortgagor Lougheed Block Inc. (“Lougheed”) owned an office building and granted a mortgage to Equitable Trust, to secure a loan of $27 million. The prescribed interest rate was agreed at the prime interest rate plus 2.875 percentper annum. Lougheed was unable to pay out the mortgage when it matured on June 30, 2008. Equitable Trust agreed to extend the mortgage term by seven months. The resulting agreement (the “First Renewal Agreement”), was made effective August 1, 2008 and carried a per annum interest rate of the prime interest rate plus 3.125 percent over the first six months and then 25 percent over the seventh month.

When the First Renewal Agreement matured on March 1, 2009, Lougheed again failed to pay out. On April 28, 2009, it entered into a second mortgage amending agreement with Equitable Trust (the “Second Renewal Agreement”), made effective February 1, 2009 (that is, retroactive to a month prior to the expiration of the First Renewal Agreement). The Second Renewal Agreement provided the following: a per annum “interest rate” on the loan of 25 percent; Lougheed was required to make monthly interest payments at the “pay rate” of either 7.5 percent or at the prime interest rate plus 5.25 percent (whichever was greater); the difference between the amount payable at the stated interest rate of 25 percent and the amount payable by Lougheed at the lower rate would accrue to the loan; and if there were no default by Lougheed, the accrued interest would be forgiven.

On May 15, 2009, Lougheed defaulted and Equitable Trust demanded repayment of the loan at the stated rate of 25 percent. The master of the Court of Queen’s Bench found both renewal agreements offended s. 8 of the Interest Act. The chambers judge of the same court reversed the master’s decision, finding that both renewals complied with s. 8. The Court of Appeal was unanimous in finding that the First Renewal Agreement did not offend s. 8. A majority agreed with the chambers judge that the Second Renewal Agreement also complied with s. 8.

Held (6:3): The appeal should be allowed.

Per McLachlin C.J. and Cromwell, Karakatsanis, Wagner, Gascon and Brown JJ.:

Section 8 of the Act identifies three classes of charges — a fine, a penalty or a rate of interest — that shall not be stipulated for, taken, reserved or exacted, in a mortgage agreement, if the effect of doing so imposes a higher charge on arrears than that imposed on principal money not in arrears. Section 2 of the Act preserves a general right of freedom to contract for any rate of interest or discount, with the caveat that such freedom is subject to what is otherwise provided for by this Act.

The ordinary sense of the words that Parliament chose to include in s. 8, read together with s. 2 and considered in light of the Act’s objects, support the conclusion that s. 8 applies both to discounts (incentives for performance) as well as penalties for non‑performance whenever their effect is to increase the charge on the arrears beyond the rate of interest payable on principal money not in arrears. By directing the inquiry to the effect of the impugned mortgage term, Parliament clearly intended that mortgage terms guised as a “bonus”, “discount” or “benefit” would not as such comply with s. 8. Substance, not form, is to prevail. What counts is how the impugned term operates, and the consequences it produces, irrespective of the label used. If its effect is to impose a higher rate on arrears than on money not in arrears, then s. 8 is offended.

This appeal can be disposed of by considering the Second Renewal Agreement alone, since its operation was made retroactive to the date (February 1, 2009) on which the rate increase under the First Renewal Agreement took effect. It is clear however that an interest rate increase triggered by the mere passage of time (and not by default), such as that imposed under the First Renewal Agreement, does not offend s. 8.

With respect to the Second Renewal Agreement, its effect is to reserve a higher charge on arrears (25 percent) than that imposed on principal money not in arrears (7.5 percent, or the prime interest rate plus 5.25 percent). The labelling of one charge as an “interest rate” and the other as a “pay rate” is of no consequence, given s. 8’s explicit concern for substance over form. It follows that the 25 percent per annum rate of interest set by the Second Renewal Agreement is void. The interest rate in force under the Second Renewal Agreement as of February 1, 2009 shall be set at the higher of 7.5 percent and the prime interest rate plus 5.25 percent.

Per Abella, Moldaver and Côté JJ. (dissenting):

The provisions of the Second Renewal Agreement are clear. The “rate of interest payable on principal money not in arrears” was set at 25 percent throughout the entire term of the agreement, and was to be applied consistently to both principal money not in arrears and principal money or interest in arrears. Interest charges were to be paid each month through actual disbursements and additional financing from the lender. In other words, interest charges calculated on the basis of the 25 percent rate were to be paid monthly, and not simply “taken, reserved or exacted” in the event of default. As a result, the Second Renewal Agreement cannot be said to have had the “effect” of increasing the charge on arrears, which means that s. 8 is not engaged.

Alternatively, the appeal could be dismissed on the basis that s. 8 of the Interest Act does not prohibit forgiving discounts — that is, a discount which provides the borrower with some relief from a rate of interest that is chargeable under an agreement, as is the case for the Second Renewal Agreement.

Section 8 sets out an exception to the foundational principle of freedom of contract by prohibiting increased charges on arrears. However, it does not expressly prohibit discounts. The absence of the term “discount” from s. 8 — and its corresponding presence in s. 2 — must inform the Court’s interpretation. Moreover, given that s. 8 establishes an exception to the general rule that discounts are permitted, it must be read narrowly and limited to what is necessary to fulfill its purpose. Not all discounts, viewed in their commercial context, will undermine the intended protection for struggling debtors. “Relieving” or “forgiving” interest rate discounts will generally make it easier for struggling mortgage debtors to meet their payment obligations. If s. 8 is interpreted as prohibiting discounts of this nature, lenders could in the future be discouraged from relieving the interest burden on struggling debtors, a disturbing irony given the purpose for which s. 8 was enacted. The British Columbia Court of Appeal concluded that such a discount does not offend s. 8 in North West Life Assurance Co. of Canada v. Kings Mount Holdings Ltd. (1987), 15 B.C.L.R. (2d) 376, a decision the majority agrees was correctly decided.

In the instant case, the Second Renewal Agreement, viewed in light of the circumstances in which it was agreed upon, provided Lougheed with a less onerous path to fulfill its payment obligations that were then due under the First Renewal Agreement. Holding that the 25 percent interest rate provided for in the Second Renewal Agreement is invalid would not give effect to Parliament’s protective purpose; rather, it would reward Lougheed with an unmerited windfall, while Equitable Trust would be denied the interest charges due to it under its agreement even though it has not benefited from prompt payment.

Reasons for judgment by Brown J.

Dissenting reasons by Côté J

Neutral citation: 2016 SCC 1

Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19 – (Personal property security — Real property)

On appeal from a judgment of the Alberta Court of Appeal (2014 ABCA 427), setting aside a decision of Jeffrey J. (2013 ABQB 209), which affirmed a decision of Master Laycock (2011 ABQB 269)

Lougheed Block Inc. (“Lougheed”) was the owner of the Lougheed Building, located in downtown Calgary, when it was designated a “Municipal Historical Resource” under the Historical Resources Act (“HRA”) in 2004. In order to compensate Lougheed for any decrease in economic value due to the designation and for expenses incurred in carrying out rehabilitation work to the building, the City of Calgary agreed to pay Lougheed $3.4 million in 15 annual installments (“Incentive Payments”). The agreement (“Incentive Agreement”) between Lougheed and the City, which also imposed certain restrictions on the owner of the building in respect of its use, was registered by caveat on title to the land.

In November 2006, Lougheed borrowed money from Equitable Trust. The loan was secured by, among other things, the assignment of the Incentive Agreement. In May 2007, Lougheed obtained additional financing from Heritage Capital Corporation and also assigned to it, as security for the loan, its right to the Incentive Payments. In May 2009, Lougheed defaulted on Equitable Trust’s loan. The latter then commenced an action to enforce some of its security. As a consequence, the Lougheed Building was advertised for judicial sale. The parent company of 604 1st Street S.W. Inc. (“604”) presented an offer (“604 Offer”), which was accepted in July 2010.

Shortly before the sale’s closing date, Lougheed applied to a master of the Court of Queen’s Bench for a declaration that the Incentive Payments were not an interest in land and were not included in the assets being sold to 604 in the judicial sale. The master issued the requested declaration. On appeal by 604, a chambers judge of the same court upheld the master’s declaration, finding that s. 29(3) of the HRA did not operate such that the Incentive Payments could run with the land as a positive covenant. On further appeal by 604, the majority of the Court of Appeal allowed the appeal, holding that the HRA creates sui generiscovenants that displace the common law rule that positive covenants do not run with the land.

Held (9:0): The appeal should be allowed.

Correctness is the appropriate standard for reviewing the chambers judge’s interpretation of the common law, as well as of the HRA given that statutory interpretation is a question of law. The palpable and overriding error standard applies to the chambers judge’s interpretation of the Incentive Agreement and the 604 Offer, since contractual interpretation is a question of mixed fact and law.

Section 29 of the HRA does not completely displace the common law rule that positive covenants do not run with the land. Rather, s. 29 limits the positive covenants that may run with the land to those that are in favour of the person or organizations listed at s. 29(1), namely: the Minister; the council of the municipality in which the land is located; the Alberta Historical Resources Foundation; or an historical organization that is approved by the Minister. It does not permit positive covenants in favour of an entity not listed in s. 29(1) to run with the land. An application of the relevant principles of statutory interpretation leads to the conclusion that the exception to the common law rule provided for in s. 29 of the HRA should be limited by the precise language of the provision and the underlying purpose of the HRA. Had the legislature intended to completely displace the common law rules regarding positive covenants and create sui generis covenants and conditions that are enforceable by both the City and the landowner, it would have said so expressly. Section 29 is intended to permit governments and public interest bodies that have no interest in the land or building to enforce covenants and conditions that are in their favour. The chambers judge properly interpreted the HRA.

In the case at bar, the right to the Incentive Payments did not become an interest that runs with the land by virtue of the HRA. Although the City falls under the organizations listed in s. 29(1), the covenant to pay the Incentive Payments is not in its favour. Therefore, the Incentive Payments do not run with the land under the HRA. Furthermore, the Incentive Agreement itself does not reveal an intention that the Incentive Payments would run with the land. Nothing in the Incentive Agreement indicates that the parties to the agreement intended the payments to go to a future owner; rather, a reasonable interpretation of the agreement is that all the Incentive Payments were intended to go to Lougheed. Therefore, even if the common law rule could be circumvented in the case at bar, 604’s claim to the payments would still fail. There is no basis on which to disturb the chambers judge’s findings with respect to the contractual interpretation of the Incentive Agreement.

The Incentive Payments were not sold in the judicial sale of the Lougheed Building to 604. The chambers judge’s conclusion to that effect is well supported by the evidence, and he did not make a palpable and overriding error in his interpretation of the 604 Offer. There was no indication, express or otherwise, in any of the documents related to the sale that the court intended to sell, or 604 intended to buy, the Incentive Payments.

The Incentive Payments were assigned as security and the order of priorities is therefore governed by the Personal Property Security Act (“PPSA”). As set out in s. 3(1)(a), the PPSA applies to every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral. The Incentive Payments are a chose in action, as the right to the payments is merely contractual and is not an interest that runs with the land or that is ancillary to the real property. Therefore, any interests in the payments are not exempt from the PPSA. If the parties disagree about the order of priorities under the PPSA, this issue alone should be remitted to a master to be decided.

Reasons for judgment by Gascon and Côté JJ.

Neutral citation: 2016 SCC 19