Equitable Trust Co. v. Lougheed Block Inc. et al.,

• Judge: Hanebury
• Neutral Citation: 2011 ABQB 193
• Citation: (2011), 512 A.R. 136 (QBM),2011 ABQB 193,512 AR 136,(2011), 512 AR 136 (QBM),512 A.R. 136
• Date: 18 January 2011
• Court: Court of Queen's Bench of Alberta (Canada)

Equitable Trust Co. v. Lougheed Block Inc. (2011), 512 A.R. 136 (QBM)

MLB headnote and full text

Temp. Cite: [2011] A.R. TBEd. MR.186

The Equitable Trust Company (plaintiff) v. The Lougheed Block Inc., Neil John Richardson, Hugh Daryl Richardson and Heritage Property Corporation (defendants)

(0901 08221; 2011 ABQB 193)

Indexed As: Equitable Trust Co. v. Lougheed Block Inc. et al.

Alberta Court of Queen's Bench

Judicial District of Calgary

Hanebury, Master

March 21, 2011.

Summary:

The Lougheed Block Inc. granted Krayzel Corp. a first mortgage over its commercial property. Lougheed subsequently granted Equitable Trust Co. a mortgage in the sum of $27 million. Krayzel Corp. postponed its interest to the mortgage of Equitable Trust. The Equitable Trust mortgage was renewed. The first renewal agreement matured. Lougheed Block executed a second renewal agreement. A month later, the mortgage went into default. Equitable Trust demanded $30,180,321.35. Payment was not made. Equitable Trust commenced a foreclosure action. A consent order nisi was granted. The property was sold by judicial sale. Equitable Trust had been paid $29,147,618.37. Remaining for determination were the questions of the interest to be charged under the mortgage and whether the default fees ($10,000 per month administration fees) could be claimed.

A Master of the Alberta Court of Queen's Bench disallowed interest at 25% per annum sought pursuant to the renewal agreements. The provisions violated s. 8 of the Interest Act. The interest rate to be charged was the floating rate of prime plus 5.25% or 7.5%, whichever was higher, as set out in the second renewal. The administration fees were also disallowed.

Interest - Topic 3068

Statutory interest - Interest Act - Mortgages - Prohibition of payment of fine or penalty on arrears of principal or interest - At issue was whether s. 8 of the Interest Act rendered the increased interest rate and other charges unenforceable - Section 8(1) provided that "No fine, penalty or rate of interest shall be stipulated for ... on any arrears of principal or interest secured by mortgage on real property ... that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears " - A Master of the Alberta Court of Queen's Bench stated that "Lawyers and lenders sought ways to avoid the effect of s. 8 and included provisions in their mortgages that increased the interest rate just prior to the end of the mortgage term or forgave accrued interest. When considering such provisions the courts have struggled with the interpretation to be given to s. 8, in light of the right of commercial parties to make their own bona fide business arrangements ... This divergence in the case law can be seen in the interpretation of s. 8 found in the decisions of the courts in British Columbia, Ontario and Alberta" - See paragraphs 21, and 22 to 57.

Interest - Topic 3068

Statutory interest - Interest Act - Mortgages - Prohibition of payment of fine or penalty on arrears of principal or interest - At issue was whether s. 8 of the Interest Act rendered the increased interest rate and other charges unenforceable - A Master of the Alberta Court of Queen's Bench stated that "The legislation speaks to a fine charge or penalty that has the effect of increasing interest on money in arrears over that not in arrears. The Court should examine the substance of the transaction, not just its form, to determine if s. 8 has been contravened ... Applying s. 8 in this way retains the intent of the original legislation, while permitting lenders to deal with the present-day realities of their business" - See paragraph 58.

Interest - Topic 3068

Statutory interest - Interest Act - Mortgages - Prohibition of payment of fine or penalty on arrears of principal or interest - This application raised the question of whether a lender could collect an interest rate increase that occurred upon default and for the final month of a mortgage - The first renewal agreement increased the interest rate after the sixth month of the seven month term to 25% from prime plus 3.125% - A Master of the Alberta Court of Queen's Bench held that the provision was abusive and as a result it violated s. 8 of the Interest Act - While not unsophisticated, the borrower was in a vulnerable position due to its inability to obtain alternate financing - With a vulnerable borrower, and no apparent bona fide business reason to increase the interest rate by such a large amount just a month before the due date, the inevitable conclusion was that the lender included the large increase in the interest rate as a form of penalty - See paragraphs 67 to 73.

Interest - Topic 3068

Statutory interest - Interest Act - Mortgages - Prohibition of payment of fine or penalty on arrears of principal or interest - A mortgage was not paid out at the expiration of the first renewal agreement - The second renewal agreement provided for the calculation of interest at 25% per annum from one month before the expiration of the first renewal - However, payments were to be made at the greater of prime plus 5.25% or 7.5% - If a default occurred, interest had to be paid at 25% per annum - The mortgage went into default - A Master of the Alberta Court of Queen's Bench disallowed the increase in interest rate - The provision contravened s. 8 of the Interest Act - The effect of the provision was to increase the interest to be paid on money in arrears over that not in arrears - The interest rate increase could occur as a result of a major or a minor default - The substance of the transaction also had to be examined - Neither the documentation nor the circumstances disclosed any bona fide business purpose for the interest rate on default increasing to 25% - Further, the borrower was as, or more, vulnerable than at the time of the renewal - "The arrangement appears to be the very kind of coercive, unfair lending the case law has disallowed" - See paragraphs 74 to 82.

Interest - Topic 3068

Statutory interest - Interest Act - Mortgages - Prohibition of payment of fine or penalty on arrears of principal or interest - A lender argued that an administration fee of $100 was charged for a residential mortgage of $280,000, and therefore a fee of $10,000 was not unreasonable for this mortgage - A Master of the Alberta Court of Queen's Bench held that the fee could not stand - This was a commercial mortgage - A lender usually puts in a receiver manager to collect rents and undertake other administrative functions necessary to preserve the security - This was done in this case - There was no evidence as to the reasoning behind the calculation of the fee - The case law was clear that the administration fee could not stand - It was a penalty - Further, as the fee was only triggered on default and thereby increased the interest rate to be paid on default, s. 8 of the Interest Act had to be considered - The business purpose of a fee in that amount was not evident and it appeared, on its face, to be punitive - Therefore, it also could not stand as it offended s. 8 of the Interest Act - See paragraphs 85 to 95.

Cases Noticed:

Reliant Capital Ltd. v. Silverdale Development Corp. et al. (2006), 226 B.C.A.C. 161; 373 W.A.C. 161; 2006 BCCA 226, consd. [para. 21].

North West Life Assurance Co. v. Kings Mount Holdings Ltd., [1987] B.C.J. No. 1417 (C.A.), consd. [para. 22].

Raintree Financial Ltd. v. Bell (1993), 85 B.C.L.R.(2d) 82 (S.C.), consd. [para. 23].

Prenor Trust Co. of Canada v. Hills of Columbia Enterprises Ltd. et al., [1994] B.C.T.C. Uned. 283; 12 B.L.R.(2d) 180 (S.C.), consd. [para. 23].

Granville Savings and Mortgage Corp. v. Pekick (1995), 167 A.R. 316; 1995 CanLII 9035 (Q.B. Master), refd to. [paras. 23, 51, footnote 14].

TD Trust Co. v. Guinness et al., [1995] B.C.T.C. Uned. B95 (S.C.), consd. [para. 24].

Vancouver City Savings Credit Union v. Chambers (1975), 59 D.L.R.(3d) 753 (B.C.S.C.), refd to. [para. 24, footnote 3].

Weirdale Investments Ltd. v. Canadian Imperial Bank of Commerce (1981), 121 D.L.R.(3d) 150; 32 O.R.(2d) 183 (H.C.), refd to. [para. 24, footnote 3]; consd. [para. 40].

Chu v. Columbia River Ranches Ltd. (1986), 10 B.C.L.R.(2d) 72 (S.C.), refd to. [para. 24, footnote 3].

Vohra Enterprises Ltd. v. Creative Industrial Corp. (1988), 23 B.C.L.R.(2d) 120 (S.C.), refd to. [para. 24, footnote 3].

Langley Lo-Cost Builders Ltd. v. 474835 B.C. Ltd. et al., [2000] 7 W.W.R. 46; 140 B.C.A.C. 182; 229 W.A.C. 182 (C.A.), consd. [para. 25].

Vancouver City Savings Credit Union v. 535401 B.C. Ltd. et al., [2001] B.C.T.C. 1405; 2001 BCSC 1405, refd to. [para. 27].

Reliant Capital Ltd. v. Silverdale Development Corp. et al. (2006), 226 B.C.A.C. 161; 373 W.A.C. 161; 2006 BCCA 226, leave to appeal refused (2006), 362 N.R. 396; 242 B.C.A.C. 320; 400 W.A.C. 320 (S.C.C.), consd. [para. 28, footnote 8].

Beauchamp v. Timberland Investments Ltd. (1983), 1 O.A.C. 73 (C.A.), consd. [para. 42].

Patrician Land Corp. v. Dillingham Construction Ltd. (1985), 65 A.R. 220 (C.A.), consd. [para. 44].

746628 B.C. Ltd. v. 674566 B.C. Ltd. et al., [2006] B.C.T.C. 817; 2006 BCSC 817, refd to. [para. 45].

Paragon Capital Corp. et al. v. 395342 Alberta Ltd. et al. (2004), 350 A.R. 370; 2004 ABQB 25, folld. [paras. 46, 57].

Mraiche v. Sander et al., [2004] A.R. Uned. 382; 2010 ABQB 341, refd to. [para. 49, footnote 13].

Construction St-Hilaire Ltée v. Immeubles Fournier Inc. et al., [1975] 2 S.C.R. 2; 10 N.R. 541, consd. [para. 85].

London Loan & Savings Co. v. Meagher, [1930] S.C.R. 378, refd to. [para. 85, footnote 17].

Dial Mortgage Corp. v. Baines, [1980] A.J. No. 1003 (Q.B.), consd. [para. 86].

National Bank of Canada et al. v. Merit Energy Ltd. et al. (2001), 294 A.R. 36; 2001 ABQB 680, consd. [para. 90].

Statutes Noticed:

Interest Act, R.S.C. 1985 c. I-15, sect. 8 [para. 19].

Authors and Works Noticed:

Waldron, Mary Anne, The "Legitimate Commercial Purpose" Test Revisited - Case Comment on Reliant Capital Ltd. v. Silverdale Development Corporation (2008), 41 U.B.C.L. Rev. 101, pp. 101 to 114, paras. 2, 3 [para. 20, footnote 1].

Counsel:

Francis Price, Q.C. (Reynolds, Mirth, Richards & Farmer LLP), for the plaintiff;

Brent Mainwood (Mainwood Legal Services), for the defendant, Heritage Capital Corporation;

Scott Watson (Parlee McLaws LLP), for Krayzel Corporation subsequent Encumbrancer;

Neil Richardson was self-represented.

This application was heard in Chambers on January 18, 2011, before Hanebury, Master, of the Alberta Court of Queen's Bench, Judicial District of Calgary, who delivered the following memorandum of decision, dated March 21, 2011.