The plaintiffs loaned $458,488.07 to the defendants. The repayment of the loan was secured by a promise to pay set out in a promissory note. That note was secured, in turn, by a mortgage on real property in the same amount. Both the promissory note and the mortgage provided for an interest rate of 0.75 per cent per annum. The promissory note (but not the mortgage) provided for the escalation of the interest rate to 10 per cent per annum after default. The mortgage provided for a late payment charge of $10 per day and a missed payment fee of $300 for each missed or late instalment. When the defendants stopped making payments under the note and the mortgage, the plaintiffs sued. They obtained summary judgment for the outstanding principal, plus interest at the rate of 10 per cent per annum, plus rate payment charges of $7,200 and default fees of $11,110. The defendants appealed.
Held, the appeal should be allowed in part.
Section 8 of the Interest Act applied to the promissory note. The application of s. 8 is not restricted to a “fine, penalty or rate of interest” imposed directly under the terms of a mortgage on real property. Section 8 can also apply in cases in which the prohibited charges are provided for in a debt instrument that evidences and secures a loan and that is secured by a mortgage on real property. Where, as here, the debt instrument and the mortgage that secures it are for the same principal amount and provide for the same payment terms, and where payment of one is payment of the other, the mortgage is not a true collateral or accessory security; the two instruments secure repayment of the original or principal liability — here, the single loan — and s. 8 applies to both. The escalated interest provision in the note ran afoul of s. 8 and could not be given effect.
The late payment charges and default fees provided for in the mortgage constituted fines or penalties prohibited under s. 8 of the Interest Act in the absence of any evidence that the charges in question reflected real costs legitimately incurred by the plaintiffs for the recovery of the debt.
Section 8 of the Interest Act provides:
(1) No fine, penalty or rate of interest shall be stipulated for, taken, 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.
(2) Nothing in this section has the effect of prohibiting a contract for the payment of interest on arrears of interest or principal at any rate not greater than the rate payable on principal money not in arrears.
*source: Ontario Reports
