Equitable Trust Co. v. Lougheed Block Inc. et al., (2016) 482 N.R. 327 (SCC)

• Judge: McLachlin, C.J.C., Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown, JJ.
• Court: Supreme Court (Canada)
• Case Date: November 12, 2015
• Jurisdiction: Canada (Federal)
• Citations: (2016), 482 N.R. 327 (SCC);2016 SCC 18

Equitable Trust v. Lougheed Block Inc. (2016), 482 N.R. 327 (SCC)

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[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2016] N.R. TBEd. MY.009

Krayzel Corporation (appellant) v. The Equitable Trust Company (now continued as Equitable Bank) (respondent)

Lougheed Block Inc., Neil John Richardson, Hugh Daryl Richardson and Heritage Property Corporation (appellants) v. The Equitable Trust Company (now continued as Equitable Bank) (respondent)

(36123; 2016 SCC 18; 2016 CSC 18)

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

Supreme Court of Canada

McLachlin, C.J.C., Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown, JJ.

May 6, 2016.

Summary:

Lougheed Block Inc. owned an office building and granted a mortgage to Equitable Trust, securing a loan of $27 million. The interest rate was agreed at the prime interest rate plus 2.875 percent per annum. Lougheed was unable to pay out the mortgage when it matured (June 30, 2008). Equitable Trust agreed to extend the term by seven months. The "First Renewal Agreement" (effective August 1, 2008) 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 (March 1, 2009), Lougheed failed to pay out. The "Second Renewal Agreement" (effective February 1, 2009) provided 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 Loughheed 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. Equitable Trust demanded repayment at the stated rate of 25 percent. The parties applied for a determination of the amount owing. At issue was whether the 25 percent interest rate in the renewal agreements violated s. 8 of the Interest Act.

A Master of the Alberta Court of Queen's Bench, in a decision reported at (2011), 512 A.R. 136, disallowed the 25 percent interest rate, finding that both renewal agreements offended s. 8. Equitable appealed.

The Alberta Court of Queen's Bench, in a decision reported at 550 A.R. 316, allowed the appeal, finding that both renewal agreements complied with s. 8. Lougheed appealed.

The Alberta Court of Appeal, in a decision reported at (2014), 577 A.R. 179, was unanimous in finding that the First Renewal Agreement did not offend s. 8. A majority of the Court found that the Second Renewal Agreement also complied with s. 8. Lougheed appealed.

The Supreme Court of Canada (Abella, Moldaver and Côté, J.J., dissenting) allowed the appeal. "Section 8 of the Interest Act applies with equal force to mortgage terms imposing by way of penalty a higher rate in the event of default, and reserving by way of discount a lower rate in the event of no default. 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."

Interest - Topic 3068

Statutory interest - Interest Act - Mortgages - Prohibition of payment of fine or penalty on arrears of principal or interest - Section 8 of the Interest Act precluded a mortgagee from imposing terms that had the effect of charging a higher rate of interest on money in arrears than that charged on principal money not in arrears - The Supreme Court of Canada considered, for the first time, whether s. 8 was offended by terms of a mortgage agreement imposing an "interest rate" that took effect only where the mortgagor fell into default by failing to make prescribed payments at a lower "pay rate" of interest or by failing to pay out the loan upon maturity - This appeal also invited the Court to consider whether mortgage terms providing for a higher interest rate triggered solely by the mere passage of time offended s. 8 - The Court concluded that "a rate increase triggered by the passage of time alone does not infringe s. 8. That said, a rate increase triggered by default does infringe s. 8, irrespective of whether the impugned term is cast as imposing a higher rate penalizing default, or as allowing a lower rate by way of a reward for the absence of default." - See paragraph 3.

Interest - Topic 3068

Statutory interest - Interest Act - Mortgages - Prohibition of payment of fine or penalty on arrears of principal or interest - Section 8 of the Interest Act precluded a mortgagee from imposing terms that had the effect of charging a higher rate of interest on money in arrears than that charged on principal money not in arrears - The Supreme Court of Canada stated that "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. To that extent, I find myself in respectful disagreement with the majority at the Court of Appeal and with the chambers judge. I agree, however, with the chambers judge's refusal to consider whether the impugned arrangements had an underlying 'legitimate commercial purpose' ... . [I]nquiring into the "legitimacy" of the purpose underlying an arrangement that offends s. 8 not by its purpose but by its effect undermines Parliament's clearly expressed intent. ... [C]ourts may not un do by 'interpretation' what Parliament chose to do by enactment. If s. 8 reflects bad or outdated public policy, the remedy lies with Parliament, not with the courts." - See paragraphs 31 and 32.

Counsel:

G. Scott Watson and Megan V. Stoker, for the appellants;

Francis Price, Q.C., and Daina Young, for the respondent.

Solicitors of Record:

Parlee McLaws, Calgary, Alberta, for the appellants;

Reynolds, Mirth, Richards & Farmer, Edmonton, Alberta, for the respondent.

This appeal was heard on November 12, 2015, before McLachlin, C.J.C., Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown, JJ., of the Supreme Court of Canada. The following judgment and reasons for judgment were delivered on May 6, 2016, in both official languages:

Brown, J. (McLachlin, C.J.C. and Cromwell, Karakatsanis, Wagner and Gascon, JJ., concurring) - see paragraphs 1 to 38;

Côté, J., dissenting (Abella and Moldaver, JJ., concurring) - see paragraphs 39 to 61.