Subsection 10(1) of the Interest Act (RSC 1985 c I-15) (the « Act ») stipulates that when a loan (principal or interest) guaranteed by a hypothec on immovables or real property becomes payable more than five years after the date of the hypothec, the debtor has the right, at any time following the expiry of the said five year period, to reimburse to the creditor the principal amount of the loan along with the interest then accrued and owing and a sum equal to three months’ interest in lieu of notice.
“10(1) Whenever any principal money or interest secured by mortgage on real property or hypothec on immovables 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, then, if at any time after the expiration of the five years, any person liable to pay, or entitled to pay in order to redeem the mortgage, or to extinguish the hypothec, tenders or pays, to the person entitled to receive the money, the amount due for principal money and interest to the time of payment, as calculated under sections 6 to 9, together with three months further interest in lieu of notice, 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.”
Subsection 10(2) of the Act stipulates the following exceptions to Subsection 10(1):
“10(2) Subsection (1) does not apply:
(a) to any mortgage on real property or hypothec on immovables given by a joint stock company or any other corporation, nor to any debenture issued by them, for the payment of which security has been given by way of mortgage on real property or hypothec on immovables; or
(b) to any prescribed mortgage on real property or prescribed hypothec on immovables given by a prescribed entity, nor to any prescribed debenture issued by it, for the payment of which security has been given by way of mortgage on real property or hypothec on immovables.”
Subsection 10(3) clarifies the use of the term “prescribed” in paragraph 10(2)(b):
“10(3) For the purposes of paragraph (2)(b), the Governor in Council may, by regulation,
(a) prescribe entities; and
(b) prescribe classes of mortgages and hypothecs given by those entities and classes of debentures issued by them.”
Prior to October 2011, no such regulation had been adopted and since a limited partnership or a commercial trust is not a joint stock company or a corporation, the exceptions of 10(2) did not apply to them.
However, on October 20, 2011, the Governor in Council enacted the Prescribed Entities and Classes of Mortgages and Hypothecs Regulations which define the “prescribed entities” of paragraph 10(3)(a). These include, namely, “partnerships” and “trusts settled for business or commercial purposes”, which consequently became subject to the exclusions of paragraph 10(2)(b).
Following the enactment of these regulations, it has become possible for lenders to grant loans having a term exceeding five years to partnerships without the borrower having the right to avail itself of the provisions of subsection 10(1) of the Act to reimburse the loan after five years.
But the question remains: does the term “partnership” include general and limited partnerships?
The answer is YES. In Québec, three forms of partnership may be established under the Québec Civil Code: a general partnership, a limited partnership and an undeclared partnership.
The partnership is created pursuant to a contract under the terms of which the parties (partners) agree to carry on activities, to contribute to the partnership by pooling their assets, knowledge or activities and to share in the benefits derived therefrom.
The general partnership and the limited partnership have the obligation to register with the Registraire des entreprises.
However, it is important to mention that the registration of a name does not necessarily imply that the persons having registered this name have formed a partnership. A lender should ascertain, before making a loan whose term exceeds five years to a group of individuals, that these individuals are in fact partners in a partnership, otherwise they will be able to repay the loan after five years upon payment of three months’ interest in lieu of notice.
By Jean Proulx