Interest Act - 2008 Report

Section 10

[75] Subsection 10(1) reads as follows:

10. (1) Whenever any principal money or interest secured by mortgage on real property or hypothec on immovables is not, under the terms of the mortgage or hypothec, payable until a time more than five years after the date of the mortgage or hypothec, then, if at any time after the expiration of the five years, any person liable to pay, or entitled to pay in order to redeem the mortgage, or to extinguish the hypothec, tenders or pays, to the person entitled to receive the money, the amount due for principal money and interest to the time of payment, as calculated under sections 6 to 9, together with three months further interest in lieu of notice, no further interest shall be chargeable, payable or recoverable at any time after the payment on the principal money or interest due under the mortgage or hypothec.

Origins of Section 10

[76] Section 10 is an illustration of the wide discrepancy between Parliament’s original purpose in 1880 in relation to mortgage repayment rights and modern mortgage lending practices of today. Section 10 provides for a mortgage repayment right after 5 years and the provision was enacted in 1880 to deal with long term mortgages. In the late nineteenth century the term of the mortgage frequently matched an equally long amortization period. Without statutory protection, borrowers had to pay an enormous penalty to repay the mortgage in advance. Since there was no right under common law or equity relating to the right to prepay a borrower might be unable to pre-pay at all. If a lender did stipulate for a repayment right it could insist on any amount of liquidated damages up to all the interest that would have been earned over the balance of the term. Section 10 enabled the borrower to repay after 5 years by paying 3 months interest in advance.[56]

[77] By 1890, however, Parliament recognized that section 10 had created difficulties for corporate borrowers in obtaining long term financing and in that year, subsection (2) was added to limit the scope of the section to individual borrowers. [57]

[78] Modern lending practices have shifted to short term mortgages of 6 months to 5 years with long amortization periods.[58] Could section 10 be of any relevance to a short term mortgage? What if the borrower renewed or extended the original mortgage? When might the five year repayment right begin? A plain reading of section 10 does not provide an answer to questions arising from modern lending practices.

Judicial Interpretation and the New Meaning of Section 10

[79] The 1986 Supreme Court of Canada decision in Potash v. Royal Trust Co.[59] redefined the purpose of section 10 in light of these modern practices. The Supreme Court acknowledged that Parliament adopted section 10 in light of nineteenth century practice. That did not prevent the court from “giving it an interpretation consonant with today’s commercial reality if such an interpretation is equally compatible with the legislative language.”[60]

[80] The Court established that where the borrower had entered into a mortgage which was longer than five years (the situation to which the section originally applied), the borrower could pay off the mortgage at the end of five years. Where the mortgage was for a term of five years or less and there is an extension of the mortgage (without altering the date of the original mortgage), the five year repayment period will begin from the date of the original mortgage.

[81] Where the borrower has not exercised section 10 rights and entered into a renewal (the terms of which deem the date of the mortgage to be the date of maturity), the borrower cannot pay off the mortgage until five years of the renewal period have elapsed. In other words, re-dating of the mortgage starts the five year period again. For example, an initial five year period which is renewed for a further five years (with the mortgage redated) will not permit the borrower to pay off the mortgage until the end of the five year renewal period.[61] It is the working group’s understanding that Potash sets the standard in residential real estate mortgage practice.

Continued Utility of Section 10 and the Need for Consultation

[82] Given that the wording of section 10, as interpreted by the Supreme Court of Canada in the Potash decision, still has relevance today, the working group will be consulting with the legal profession as well as financial institutions on possible reform recommendations. The Working Group has no tentative or firm recommendations at this time and we will undertake a consultation before making specific recommendations on section 10.

[83] We also note that section 10 overlaps with provisions found in at least two other provincial statutes. The Ontario Mortgages Act[62] and the Manitoba Mortgage Act[63] both offer a similar repayment right to what is found in section 10 of the Interest Act. Our consultation would seek input on how this overlap might be best resolved.

Next Annual Meeting

2020 Annual Meeting

Place to be Announced

August 9 – 13, 2020