Do your loan agreements charge excessive administrative fees or step up interest rates immediately prior to maturity? If so, a recent Master’s decision in the Alberta Court of Queen’s Bench has determined such charges may be rendered null and void as they may be in breach of section 8 of the Interest Act, RSC 1985, c. I‐15.
Section 8 of the Interest Act can be summarized as prohibiting the charging of a greater rate of interest on money in arrears than that charged on money not in arrears. As an example, it is a breach of section 8 of the Interest Act to increase the interest rate from 5% to 10% when a borrower is in default under a loan. Similarly, it may be considered a breach of section 8 of the Interest Act to charge an administrative fee upon an event of default occurring under a loan. Such a fee may be deemed to be a penalty pursuant to section 8.
In the recent case, Equitable Trust Company v Lougheed Block Inc., Neil Richardson, Hugh Daryl Richardson and Heritage Property Corporation, 2011 ABQB 193, Master Hanebury in the Alberta Court of Queen’s Bench analyzed the circumstances in which section 8 is breached. She identified the following three principles that courts should consider when determining whether there has been a violation:
- Ignore clever drafting devices and consider whether the effect of the interest provision is to increase the interest on money in default over that paid on money not in default (i.e. if you step up interest rate one month prior to maturity of a loan to encourage repayment then you may be in breach);
- If the provisions does have such effect, next consider the substance of the transaction by examining the terms of the agreement and the circumstances of the loan objectively to determine if there is a legitimate business reason for such a hike in interest rates or a certain administrative fee); and
- Permit the interest provision to stand if the parties are knowledgeable and it does not appear to be coercive, unfair, abusive or a penalty.
In the event that a breach is found, interest on the remaining outstanding balance may be charged in accordance with the previously set rate.
As for the issue of excessive administrative fees, Master Hanebury found that if the business purpose of the administrative fees is not evident and appears on its face to be punitive, it will also offend section 8 and will not stand.