In Bankers Mortgage Corporation v. Plaza 500 Hotels Ltd., the British Columbia Court of Appeal recently considered whether an "Exit Fee" payable on mortgage default to a mortgage broker (not to the lender) was a "penalty" on arrears payable on default and, therefore, prohibited under section 8 of the Interest Act. Section 8 prohibits the imposition of fines or penalties "reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears."
The court found that it was not sufficient for a default charge to be "related" to arrears secured by mortgage for it to be captured by the Interest Act. The charge must be "on" arrears secured by mortgage. The charge must also qualify as a "fine, penalty or [additional] rate of interest" on the arrears to be prohibited. Where, as here, the default charge is unsecured, a genuine pre-estimate of damages, does not inhibit the ability to payout the arrears and obtain a discharge of the mortgage, this decision suggests that the default charge will not be a prohibited penalty under the Interest Act and can be enforced. While it is important to note that in this case the default charge was payable to a broker, and not to the lender, the reasoning does not appear to turn on that fact. It should also be noted that the mortgage in this case was a commercial loan. Additional considerations apply for consumer mortgage loans due to restrictions on default charges in consumer protection legislation, such as those imposed in British Columbia under section 75 of the Business Practices and Consumer Protection Act.
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