Anonymised, illustrative composite. Section 10 of the Interest Act looks at who gave the mortgage, not at how big it is or what the building does — and the opco/propco split had already answered that question the wrong way.
At a glance
When the operating premises were carved out of the operating company into a propco, the propco refinanced the building with a ten-year closed-term first mortgage of $1,850,000 at 5.9%. A long closed term bought a low rate and a predictable rent for the opco, which is exactly why the group's advisers recommended it. See buying real estate alongside the operating business for the trade-offs at that stage.
Seven years later the group sold. The buyer wanted the building as well as the business, which meant the propco had to discharge the mortgage rather than leave it in place. The lender's payout statement carried a yield-maintenance charge of $214,000 on a balance of $1,560,000.
Counsel's first instinct was the familiar one: a mortgage with a term longer than five years cannot charge more than three months' further interest to be paid out after year five. On this balance that is roughly $23,010, and the gap between that number and $214,000 was large enough that the payout statement looked like a negotiating position rather than a legal one.
It was neither. The right on which the whole argument depends had been unavailable since the day the mortgage was signed, for a reason that had nothing to do with the mortgage's terms.
Balance at the discharge date $1,560,000, rate 5.9%. Three months' further interest is $1,560,000 × 5.9% ÷ 4 = $23,010. The lender's yield maintenance, calculated on the rate differential over the remaining thirty-five months of the term, was $214,000 — a spread of $190,990 on a single line of a payout statement.
On a deal where the building changed hands at $2,400,000, that spread is close to 8% of the property's value, and it fell entirely on the vendor because the discharge was the vendor's obligation. It was also not in the exit model, because the model had been built on the assumption that the statutory ceiling applied.
Interest Act s.10(1) is narrower than its shorthand in three ways at once, and only the third one decided this file.
First, it engages only where the money “is not, under the terms of the mortgage or hypothec, payable until a time more than five years after the date of the mortgage or hypothec”, and only “at any time after the expiration of the five years”. In years one to five it does nothing at all. Second, what it delivers is not an order for a discharge: on a tender of principal and interest “together with three months further interest in lieu of notice”, the consequence is that “no further interest shall be chargeable, payable or recoverable at any time after the payment on the principal money or interest due under the mortgage or hypothec”. It caps the interest, not the transaction.
Third, and decisively, s.10(2)(a) provides that subsection (1) does not apply “to any mortgage on real property or hypothec on immovables given by a joint stock company or any other corporation”. The unit the exception operates on is the mortgagor — who gave the mortgage. Not the lender. Not the size of the loan. Not whether the property is commercial or residential. A corporation that gives a mortgage is outside s.10(1) whatever else is true about it, and the propco was a corporation from the day it was incorporated for that purpose.
The exception is not entirely closed: s.10(2)(b) and s.10(3) allow the Governor in Council to prescribe further entities and classes of mortgages and debentures to which s.10(1) will not apply. That is a power to narrow the right further, not to restore it to a corporate borrower.
With no statutory ceiling to argue from, the charge became an ordinary commercial negotiation, conducted against the lender's interest in keeping a relationship with the buyer's group. It settled at $148,000, split $95,000 to the vendor and $53,000 absorbed into the price. Six weeks of correspondence produced a $66,000 improvement on a number that a different borrower would never have faced.
The group changed its standing instruction afterwards. New propco mortgages are written either with a negotiated open window after year five, or on a term of five years or less, so that the prepayment position is a matter of contract that was actually negotiated rather than a statutory right nobody checked. See refinancing the acquisition debt two years later for the same discipline applied to the operating facility, and the vendor take-back note entry for the alternative that avoids the question.
Hold the same building personally and lease it to the operating company, and the mortgagor is an individual. Section 10(2)(a) does not reach an individual, so s.10(1) is available from year five and a three-months-interest tender caps the exit cost on a long-term mortgage.
That is a real difference in a real dollar amount, and it is not advice to hold real property personally. Holding it personally moves personal liability, the tax treatment of the rent, and the availability of the lifetime capital gains exemption on an eventual sale of the shares. The point is narrower and more useful: a structuring decision taken for tax and liability reasons also silently buys or sells a statutory prepayment right, and nobody prices that at the time because the mortgage does not exist yet. Ask which entity will give the charge before the entity is chosen — the same carve-out that raises this question raises a land transfer tax question on the same day, covered in the land transfer tax on a deal nobody registered.
A payout statement whose prepayment line is an order of magnitude larger than three months' interest, on a mortgage with a term longer than five years. That gap means one of two things: the lender has made a mistake, or the borrower is a corporation. It is almost always the second. The check takes ten seconds — read the mortgagor's name on the charge and ask whether it ends in “Inc.”, “Ltd.” or a number.
A 30-minute call is enough to tell you whether AI pays for itself here.
Canadian small-business transaction data is not published anywhere, so most valuations in this country quote an American benchmark. The Deavo–Treadstone Acquisition Index is a daily record of Canadian listings built to replace that: asking-price distributions by province and city are published now, and days on market, departure rates and asking-to-sale spreads follow as the series lengthens. Leave an email and we will tell you as each measure lands.
No pitch, no listings. One email when the first report lands.
