Prepayment of a Locked in Mortgage (#2 – A B.C. Decision) #39

By Gerry Neely
B.A. LL.B.

Column No. 38 reviewed the impact of a 1980 Ontario decision interpreting the provisions of the Ontario Mortgage Act in a way which gave a mortgagor who appeared to be locked into a high interest renewed mortgage the right to pay off the mortgage upon payment of three months' penalty. As that column was being printed, a mortgagor who had signed a mortgage on August 6, 1976, which matured on September 1, 1981 was petitioning the Supreme Court of British Columbia for an interpretation of the mortgage and a modification of it which was dated September 4, 1981. The effect of the modification agreement was to increase the interest rate payable by the mortgagor from twelve per cent to eighteen and three-quarter per cent per annum for a term ending September 1, 1986. The results were highly satisfying for the mortgagor since the reasons for judgement delivered to the Vancouver Registry on July 6, 1983, gave the mortgagor the right to pay off his mortgage by tendering the principal and accrued interest plus three month's interest in lieu of notice, pursuant to Section 10 of the Canada Interest Act.

Mr. Justice Bouck cited the facts of the Deeth v. Standard Trust Co. case, which was discussed in Column no. 38, and noted that the pattern of facts were identical to those before him. He concluded that there were no terms in the modification of mortgage agreement which prevented him from reaching the same decision as had the judge in the Deeth case. If anything, the modification agreement supported the argument of the petitioner that the mortgage dated August 6, 1976, remained in full force and effect save as modified by the terms of the modification of mortgage agreement. Among other terms of that agreement, the mortgagor covenanted with the mortgagee to perform all of the covenants, conditions and provisions contained in the mortgage dated August 6, 1976. Counsel for the Citadel Life Assurance Company argued that the effect of the modification of mortgage agreement was to merge the mortgage dated August 6, 1976, into the modification dated September 4, 1981, so the term which ended on September 1st, 1986, was for less than a period of five years after the date of September 4, 1981. That argument was rejected.

The kicker is found in the second sentence in the following paragraph taken from the reasons for judgment:

"In summary then, apart from instances when the mortgagor is a corporation, any mortgagor may pay off his mortgage in accordance with s. 10 of the Interest Act where the interval from the date of the mortgage to the date it becomes due is more that 5 years. A subsequent modification, extension or renewal agreement cannot defeat that right except perhaps where the contract specifically provides."

This sentence forecast the next argument that will be made by a mortgagee if the renewal agreement modified substantially the original mortgage. Several renewal agreements which we have examined contain provisions by which the mortgagor expressly waives any right of prepayment either under Section 10 the the Canada Interest Act or any similar Federal or Provincial legislation. Others provide that any statutory right of repayment is to take effect as if the mortgage had been dated on the date of the renewal agreement. There is a good chance that his attempt to have the mortgagor waive his rights under the Interest Act will fail as being an attempt by contract to waive the statutory rights given to the mortgagor. This argument may even prevail where the mortgagor has agreed in the renewal document that the right of repayment is to take effect as if the mortgage had been dated on the date of the renewal agreement.

As yet counsel for the mortgagee has not received instructions as to whether or not the decision in this case will be appealed. Anyone whose mortgage and renewal (or renewals) falls within these facts should jump at the opportunity to see whether or not a high interest rate mortgage can be refinanced.

No doubt the counter-attack by the lending institutions will be to refuse to renew by extending the term of an original five year mortgage. Instead, they will probably insist upon a new mortgage.

1.

Lynch v. The Citadel Life Assurance Company,S.C.B.C. 46 B.C.L.R. 354.

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