Ode to a farmer

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        ode to (l f(lfmef
                             Common Sense, Common Practice
                        As a fanner's daughter having been brought up
                   in the sweet rolling hills of Southwestem Ontmio,
                       and always drawn to real estate, I took pmticulm'
                    notice to Section 10 of the Interest Act when I                           BY VERNA E. CUTHBERT
                    first struted practicing law more thml 30 yem's ago.
                       Section 10 of the Interest Act, for those who m'e
                                                                                              FASKEN MARTINEAU DUMOULIN s,e,n.c.r.i., s.r.1.
                    not familim' with the same, was enacted in the
                        1880s to give relief to fmmers who were locked
                    into long telm mortgages at exorbitant rates by
                       money lenders who were "eating up the vitals of
                    yeomalllY of the counhy" (House of Common
                                  Debates, Mm'ch 31, 1880).

                                                       n essence, Section 10(1) of the Interest      there would not be any prepayment right? The            ment would be slim. However, if you consider            non-corporate entity the nominee is incapable
                                                       Act limits the time that a borrower may       fact is that due to the complexity of the Income        the increasing value of real estate and the lack        of contracting for a loan for greater than 5 years.
                                                       be prevented from repaying a real             Tax Act, a large number oftoday's lending trans-        of quality product for resale, it is not difficult to    The courts have addressed on numerous
                                                       estate mortgage loan by allowing bor-         actions are conducted through non-corporate             imagine that borrowers may be tempted to                occasions Section 10 of the Interest Act.
                                                       rowers to prepay a mortgage loan at any       entities such as partnerships or trusts. REITs          refinance their properties or to have an unen-          However, neither the Supreme Court of
                                                       time after 5 years from the date of the       (real estate investment trusts), income trusts          cumbered title available for sale.                      Canada nor the various appellate courts of
                                                       loan, by tendering 3 months interest          and limited partnerships are "the players" of             The various structures chosen by counsel to
                                                       payment plus the outstanding principal        the present real estate industry, particularly
                                                       and interest on the loan. This                         favourable with foreign investors who
                                                                                                                                                            protect lenders against the unintended impact
                                                                                                                                                            of Section 10(1) may be as simple as having the
                                                                                                                                                                                                                     L'ARTICLE 10 DE LA LOI SUR L'INTERET
                                                       Section was seen as a remedy                           wish their real estate investments to be      property held in the name of a nominee corpo-               Larticle 10 de Ia Loi slIr l'illteret a ete adopte dans Ies atlnees 1880 afin de
                                                       for farmers who were caught                            tax efficient. From a tax point of view,      ration acting for the trust or partnership or may          soulager les fermiers etouifes fin ancierement par eI(,S prNs h)pothecaires a
                                                       with 20 or 30 year mortgages                           these non-corporate vehicles are no           be much more complex. Some involve issuing                 long tenne it des taux d'interet exorbitants, En effd, I'aliicle 10(1) permet a
                                               at exorbitant rates. Some 10 years                             doubt advantageous but from a Section         a debenture by a corporation under the provi-              nil emprunteur de remhourser un pret hypotlH$caire illll110hilier en tout
                                               later after the enactment of Section                           10(2) point of view they create a dilem-      sions of a universal hypothec, delivering the              kmps, 5 ans apres la date d1l prN, Ce droit de rem boursement avant
                                               10(1), namely in 1890, Section 10(2)                           ma as trusts and partnerships under the       debenture to the lender and having the pay-                echeance et apres une periode de ,5 ans est cq1('ndant nil" am: societes par
                                               was added to limit the class of borrow-                        Civil Code of Quebec, and in many of          ment of the debenture guaranteed by a                      actions ou persollnes morales, Oll en SOllll\leS-I\ O IlS e ll 2007 ? La realite d'au-
                                               ers that may rely on the prepayment                             the common law Provinces, are not            hypothec on real property given by a non-cor-             jourd'hui est que les transactions de fillancement se concluent par Ie biais
                                                                                         VERNA E. CUTHBERT                                                                                                             cl'entites sans pe rsonnalite morale, comllle les societes ou les tJducies, qui,
                                               rights of Section 10(1). This was                               considered to be legal entities "person-     porate entity (such as a trust or a partnership)
                                               deemed an economic necessity at the time as           ne morale" and hence do not fall within the pro-       property owner. Others may involve multi lev-             selon Ie Code civil dll Quebec, ne constituent pas des personnes morales,
                                               lenders had become reluctant to provide long          tective lending ambit set out in Section 10(2).       els of transfers.                                          Par consequent, ces entites jUridiques peuvent difficil ement contracter des
                                               term financing to railway companies in the face       This in effect inhibits these vehicles from bene-        Needeless to say, these structures can be               emprunts de plus de 5 <Ins et sou\'ent Ill' ppU\"ent pas beneficier de tallx
                                               of the mandatory right of borrowers to prepay         fiting from all time low interest rates now avail-                                                               d'interet peu eleves offelis pour les prHs it long term t', Ainsi, pour satisfaire
                                                                                                                                                           complex and costly and the most frustrating
                                               their loans. Section 10(2) denies the right of a      able for long term loans. Consequently, as                                                                       les besoins des prNe urs et des elllprllnteurs et afi n d'eviter Ies repercussions
                                                                                                                                                           aspect of these mechanisms is that without a
                                                                                                                                                                                                                      de l'article 10(1) de la Lai sur "interet, les joueurs n'ont autre choix que
                                               corporation or a joint stock company, which           ridiculous as it may be, we legal counsel ,           final and binding court decision there is no cer-
                                                                                                                                                                                                                      d'etablir des stlllctures de tlnan ~e lll ent am: mecan ismes complexes qui
                                               has given a mortgage or a hypothec on real            whether acting for lender or borrower, may be         tainty that any of them work. Take for example
                                                                                                                                                                                                                     s'averent coGtetLx et incertains . A ce jour, Ies tribll naux n'ont pas pH resoudre
                                               property or has issued a debenture secured by         required to design a series of structures in order    the relatively simple structure of a nominee
                                                                                                                                                                                                                     Ies d ifficultes soule\'ees par eet article, L"auteure sou met qu'i! est grand
                                               a mortgage or a hypothec on real property, to         to ensure that borrowers and lenders obtain          corporation referred to above. It may be ar-               te mps que Ie gou\'ernement federal re~isite la Loi Stir "illten~t qui est
                                               prepay the loan under Section 10(1).                  what they bargained for, namely a long term          gued, and has been argued, that this simple                de\'enue une loi arcliaique face allx \'ehieules legallx llloclernes, et qu'il
                                                 Fast-forwarding to today, you may ask why is        loan having a term greater than 5 years.             structure does not work since a loan made to a             reconnaisse les realites du monde des prNs commerciaux, notamment Ie
                                               the impact of Section 10 of particular signifi-          To many on the outside these various struc-       nominee is really a form of mandate under                  fai t que les societes en commandi te, Ies fldllcies et autres entites sans
                                               cance in today's financing markets? Are not           tures may seem to be simply a "lawyer's game"        Quebec law and therefore it is really the princi-          personnalite jUli cliqlle n'ont pas besoin de la protection d'une Ioi cow;'lIe
                                               most commercial lending transactions con-             since, as indicated above, with interest rates at    pal through its agent that has hypothecated                un ique ment pour proteger Ie conS01l1l11ateur,
                                               ducted through corporate vehicles and hence           historical lows surely the likelihood of prepay-     the property. Consequently, if the principal is a
       48 Premieres en affaires AUTOMNE 2007
                                                                                                                                                                                                                                                                              AUTOMNE 2007   Premieres en affaires 49
ode to   Q   fQ[me[

             It is time to bring cel1ainty to our lending transactions
                         so that both borrowers and lenders can be assured that
              they obtain what they bargained for.
                        numerous provinces have been able to resolve        There are no absolute answers to these myriad
                        completely the Section's difficulties through       of questions but, as legal counsel to many
                        their respective interpretations. Hence, for        financial institutions over the years, I can assure
                        more than 20 years, we have been dealing on a       you that we legal counsel have well reasoned
                        very real day-to-day basis with the implications    and thoroughly researched opinions on these
                        of Section 10 of the Interest Act.                  matters.
                          Today, a borrower's counsel and a lender's          So where does that leave us? I suggest it is
                        counsel need to address a myriad of thorny          time for the federal government to clarify
                        issues. For example,                                Section 10 of the Interest Act. It is time to re-
                        • does the fact that th~ lender is aware that the   cognize the realities of the commercial len-
                        loan is really being made to a non-corporate        ding world, namely that limited partner-
                        entity render any structure useless when faced      ships, trusts and other non-corporate tax
                        with legislation that is of public order?           designed vehicles have no need of consumer
                        • does the contemporaneous giving of an "off-       protection legislation. It is consumers (and of
                        title" hypothec or mortgage by the non-regis-       course our farmers) who arguably require such
                        tered owner or the intervention of an unregis-      protection (although even for them given the
                        tered owner in the hypothec or mortgage             low interest rate environment, it may be
                        "taint" the transaction?                            questionable as to whether it is in their
                        • would a structure, where there is a subse-        interest to deny access to long term rates). It is
                        quent almost contemporaneous transfer of the        time to bring certainty to our lending transac-
                        property to and the assumption ofthe loan by a      tions so that both borrowers and lenders
                        non-corporate entity, lead the court to look        can be assured that they obtain what they
                        through the transaction as a loan being made        bargained for. It is time to make common sense
                        to a non-corporate entity?                          common practice! 0