Increases in Annual Rentals and Interest Rates Under the Interest Act #15

By Gerry Neely
B.A. LL.B.

Before we leave 1981, we should refer you to two columns in which the Court cases upon which the discussions in both columns were based, were either appealed or affected by a decision in a separate case. Column #6 published in June, 1981, described the use of a formula to establish increases in annual rentals by linking the first year rent and the Consumer Price Index in that year, to increases in the Consumer Price Index in succeeding years. The decision in the case upon which the column was based was reversed on appeal, the appeal court holding that it was prepared to accept the phrases "cost of living index" and "Consumer Price Index" as being synonymous. The appeal court decision does not alter the value of using the formula for Increased Rent, such as the one described in Column # 6.

Column #7 published in July, 1981, should be re-examined by anyone who decided to use the clause which allowed the borrower under a mortgage to pay a lower rate of interest in the event that a payment due under the mortgage was paid when it was due. The purpose of the clause was to encourage prompt payments on behalf of the mortgagor. The recommended conveyancing method to achieve this result has been to provide, for example, that the rate of interest shall be sixteen per cent, but if prompt payment is made, interest is reduced to twelve per cent. Reversing this clause so that a higher rate of interest is payable on arrears would contravene Section 8 of the Interest Act. This stipulation for interest at a given rate with the provision that a lower rate will be accepted if paid punctually is an equitable rule accepted by the Courts before the enactment of the Interest Act in 1880, and until 1981, it has been considered by conveyancing solicitors as not being in breach of the Interest Act.

This practice has been challenged for the first time in an Ontario case where the mortgage provided for interest at ten per cent per annum both before and after maturity and before and after default. . . with interest and principal to become due and payable on March 30th, 1980. The mortgage further provided that notwithstanding this clause, if the full amount of principal was paid on or before March 30th, 1980, interest was waived. Counsel for the borrower submitted that the effect of these two clauses was as follows: "the rate of interest before March 30th, 1980, is nil; on default it becomes ten per cent which applies retrospectively to the inception of the term of the mortgage. This. . . is a penalty." Counsel for the lender argued that on a plain reading of the mortgage it did not offend Section 8. The interest remained the same, both on principal monies not in arrears and on arrears of principal and interest. The advantage to the borrower if the principal money were paid on or before March 30th, 1980, was not a penalty, "but a benefit conferred by contract to induce prompt payment of the principal."

The Court referred to a number of decisions and textbooks which stated that there was general agreement that the rule was well settled and accepted by both Courts and conveyancers. This was so even though there was equally general agreement that the difference between what was acceptable and what was not, involved fine distinctions, which were "super subtle" or may have been founded on "a somewhat less than intelligible rule". The Court decided that the difference was a matter of semantics, that it should not take into account these fine distinctions and instead that it should look at the effect of the provision with which the Section 8 is concerned. It decided that the effect of the clause was to make the loan interest-free until the due date, and thereafter interest was imposed at ten per cent on arrears. It therefore held that interest could not be claimed by the lender.

The decision is unfortunate because it overturns what has been a well-accepted conveyancing practice which introduced some flexibility into the negotiations between vendor and purchaser. Until and unless this decision is successfully appealed, it would be imprudent now for a mortgagee to agree to a reduction in interest for prompt payment. The clause referred to in Number 7 is now a SNAFU (Simply Not Acceptable For Use).

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