Court of Appeal Upholds Mortgage Exit Fee in Face of Interest Act Challenge

Section 8 of the Interest Act, R.S.C. 1985, c. I-15, prohibits any "fine, penalty or rate of interest . . . that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears." Relying on this provision, borrowers often challenge fees and charges that borrowers levy when seeking to enforce a secured debt that has gone into arrears. For the defaulting borrower, it can slow down the lender's effort to seek judgment and, if successful, can amount to relief from portions of the debt being claimed. However, what section 8 actually means and how it applies in any given case is a question that constantly bedevils courts.

Two recent decisions illustrate the practical difficulties in categorizing the nature of charges accruing to a secured debt and whether they contravene the Interest Act. Arguably, one decision, Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, does away with prior judicial distinctions that made commercial sense (though were difficult to...