P.A.R.C.E.L INC. V. AQUAVIVA AND KRAYZEL CORP. V. EQUITABLE TRUST CO. Decisions & What They Mean To Mortgagees

Interest Act Parcel Mortgagee

On May 12, 2015, the Court of Appeal for Ontario released their decision in P.A.R.C.E.L. Inc. v. Aquaviva (“P.A.R.C.E.L.“) which was an appeal from summary judgment on a promissory note and mortgage. The main issue on the appeal was whether certain amounts claimed by the mortgagee based on the terms of the promissory note and the mortgage offended Section 8 of the Interest Act.

Section 8 of the Interest Act states:

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.

The Court of Appeal in P.A.R.C.E.L. confirmed that Section 8 of the Interest Act prevents a mortgagee from charging amounts and/or penalties due to a default (save and except for actual fees that were incurred by the mortgagee do to the default, such as an NSF fee from their financial institution). For example, a lender is prohibited from charging fees such as non-payment fees, missed payment fees, an increase in the rate of interest due to a default, etc. due to the fact that such penalties and/or fees offend Section 8 of the Interest Act.

On May 6, 2016, the Supreme Court of Canada released their decision in Krayzel Corp. v. Equitable Trust Co. (“Krayzel“) which was an appeal from a judgment of the Alberta Court of Appeal. The main issue again, and similar to the decision of P.A.R.C.E.L., on the appeal was whether certain of the amounts claimed by the mortgagee offended Section 8 of the Interest Act.

The Supreme of Canada in Krayzel concluded that a rate increase due to a default offends Section 8 of the Interest Act – no surprise there. However, a rate increase due to the mere passage of time does not offend Section 8 of the Interest Act. For example, using the Krayzel matter, a mortgagee would be allowed to negotiate a mortgage with the following terms:

a) an interest rate of prime plus 3.125% per annum for the first six (6) months; and
b) an interest rate of 25% per annum for the remainder of the term.

The Supreme of Canada in Krayzel concluded that such an increase in the rate of interest was permissible because the increase was not due to a default – it was due to a mere passage of time.