A Vendor May Stipulate a Higher Rate of Interest Apply if Default Occurs on the Part of the Purchaser #7
By Gerry Neely
Occasionally, a vendor who has agreed to carry part of the sale price on a mortgage, agrees to take a lower rate of interest than the current rate, because the remaining terms of the sale justify that decision. On the other hand, the vendor does not want the lower rate to be a temptation to the purchaser to delay payments. In that case, the vendor may stipulate that a higher rate of interest is to apply if default occurs on the part of the purchaser.
There is a right and a wrong way to ensure that this provision would be enforceable by the vendor/mortgagee. The wrong way is as follows:"The sum of $100,000.00, together with interest thereon at the rate of twelve (12%) per cent per annum, calculated half-yearly not in advance as well after as before default and maturity, computed from the 1st day of March, 1981; provided, however, that upon default in payment by the mortgagor, the rate of interest payable by the mortgagor shall be increased from twelve (12%) per cent per annum to sixteen (16%) per cent per annum."
The reason this would be unenforceable is found in Section 8 of the Interest Act, R.S.C. 1970, c. 1-18, which reads as follows:"8.(1) No fine or penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage of real estate, that has the effect of increasing the charge on any such arrears beyond the rate of interest payable on principal money not in arrears."
The purpose of Section 8 is to prevent a lender from obtaining from a borrower an excess amount by way of an increased interest penalty because of the default of the borrower. The effective way of enforcing this provision is shown in the following paragraph:"The sum of 5100,000.00, together with interest thereon at the rate of sixteen (16%) per cent per annum etc....; provided, however, that the rate of interest shall be reduced from sixteen (16%) per cent to twelve (12%) per cent during the month immediately preceding a payment made by the mortgagor punctually on the date when such payment was due and payable to the mortgagee (this wording assumes monthly payments made on the 1st day of each month)."
Since this provides for a reduction in the event of prompt payment, it does not offend the Interest Act. It is not unfair to the purchaser as it would be if an inadvertent delay of one day in making a payment prevented the purchaser from obtaining the benefit of the lower rate of interest for the balance of the term of the mortgage.
This question arose in a recent case where the vendors took back a second mortgage which provided that no interest would be payable during the first three months, at which time if the mortgage remained unpaid, interest would accrue at eighteen (18%) per cent due and payable on a per diem basis. Payment was not made at the end of the three month period, as had been expected, and eventually foreclosure proceedings were commenced. The purchaser argued that the imposition of interest after three months was a penalty. The Court looked upon the transaction as one in which the vendors granted the purchaser a three month period of grace within which to pay, and at the expiration of that period of grace, interest began to accrue. In reaching this decision, the Court made a distinction between a vendor who secures part of the unpaid purchase price, and a lender loaning money on mortgage security. The Court felt that Section 8 was aimed at what perhaps can best be described as the usual commercial lender transaction. While agreeing that the result is right, one should not rely upon this distinction to justify the use of the "wrong way" clause.
|1.||MacDonald v. Muncey, 13 R.P.R. 199.|
To subscribe to receive BCREA publications such as this one, or to update your email address or current subscriptions, click here.
What we do
Popular tags within Legally Speaking
Popular posts from BCREA
Housing Market Update – November 2023Nov 16, 2023
Mortgage Rate ForecastSep 21, 2023