Royal Trust v. Potash

Wilson J.‑‑This appeal involves the right conferred on mortgagors by statute to prepay their mortgages in certain circumstances. The provision has been part of the law of Canada for over a century but has only recently come before the courts for interpretation. Needless to say, there are two distinct lines of authority.

1. The Facts

The appellant ("Royal") and respondent ("Potash") are mortgagee and mortgagor respectively of two residential properties in Winnipeg known as 340 Church Avenue and 464 Spence Street. The dates relevant to those mortgages are as follows:

340 Church Avenue

464 Spence Street

Mortgage execution date

July 9, 1975

January 19, 1976

Original maturity date

July 15, 1980

February 15, 1981

First renewal maturity date

August 15, 1981

March 15, 1982

Second renewal execution date

July 28, 1981

March 23, 1982

Second renewal maturity date

August 15, 1986

March 15, 1987

Each renewal was made on the standard form prepared by Royal for that purpose. It was called a "Conventional Mortgage Loan Renewal (Extension of Repayment) Agreement". In each case the renewal carried a higher rate of interest than did the mortgage. The renewals stipulated that "[a]ll terms and conditions contained in the Original Mortgage" remained in effect except as "amended" by the renewal agreement. The renewals gave Potash the right annually to prepay 10% of the principal amount of the renewed loan. There was "no further right of prepayment prior to the Maturity Date of Mortgage Loan Renewal". The renewals stated that the "Original Mortgage" was "deemed" to be dated as of the maturity date of the existing loan.

Having entered into a second renewal of each mortgage, Potash made regular payments as required until June 1983. At the end of that month he tendered the principal amount due on each mortgage as at July 1, 1983 along with interest for three months. Royal refused to accept Potash's payment. Potash applied for an order of discharge of the mortgages under s. 103(1) of The Real Property Act, R.S.M. 1970, c. R30.

2. The Legislation

There is both federal and provincial legislation relevant to this appeal. The provincial enactment closely follows the federal which was the first to be passed. Other Canadian jurisdictions have modelled their provisions on the federal legislation and, beyond quoting the Manitoba section, I shall thereafter refer only to the provision in the federal Act.

Section 10(1) of the Interest Act, R.S.C. 1970, c. I‑18, reads:

10. (1) Whenever any principal money or interest secured by mortgage of real estate is not, under the terms of the mortgage, payable until a time more than five years after the date of the mortgage, then, if at any time after the expiration of such five years, any person liable to pay or entitled to redeem the mortgage 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 thereafter on the principal money or interest due under the mortgage.

Subsection (2) of s. 10 excludes corporate mortgagors from the protection conferred by subs. (1).

Section 20(6) of The Mortgage Act, R.S.M. 1970, c. M200 provides:

20(6) Subject to subsection (7), where any principal money or interest secured by a mortgage of real estate is not, under the terms of the mortgage, payable till a time more than five years after the date of the mortgage, if, at any time after the expiration of the five years, any person liable to pay or entitled to redeem tenders or pays to the person entitled to receive the money the amount due for principal money and interest to the time of the tender or payment, together with three months' further interest in lieu of notice, no further interest shall be chargeable, payable, or recoverable, at any time thereafter on the principal money or interest due under the mortgage.

As with the federal statute, subs. (7) of the Manitoba Act excludes corporate mortgagors of real property from the protection of subs. (6).

The other relevant provision is s. 103(1) of The Real Property Act under which Potash applied to the court for an order discharging the mortgages. It reads:

103(1) Where a mortgagor is entitled to redeem the mortgage by payment of the moneys due thereunder

...

(c) if the mortgagee, having been paid or tendered the amount claimed by the mortgagor to be due under the mortgage, neglects to furnish a discharge of mortgage or refuses to do so on the ground that an amount greater than that paid or tendered by the mortgagor is owing, or on any other ground;

the mortgagor may apply to the court for an order discharging the mortgage or determining the balance owing; and the costs of the application, including the taking of accounts, are in the discretion of the court.

3. The Courts Below

Potash's application was heard by Kroft J. of the Manitoba Court of Queen's Bench. Potash contended that the section permitted him to prepay both mortgages since more than five years would elapse from the "date of the mortgage" until the time each was payable. The application was dismissed by Kroft J. on the ground that whatever rights of prepayment Potash may have had, he had clearly contracted out of them in the renewal agreements. Kroft J. held that it was not against public policy for Potash and Royal to contract out of the statutory prepayment right and Potash could therefore exercise only those prepayment rights contained in the renewal agreements.

An appeal by Potash to the Court of Appeal for Manitoba was successful. Writing for himself, Hall and O'Sullivan JJ.A., Matas J.A. noted that the terms of each mortgage had originally been for just over five years. He also noted that when the extended maturity dates were considered, each mortgage was payable just over eleven years from the "date of the mortgage". Potash was therefore entitled to prepay each mortgage. Matas J.A. concluded that on the plain meaning of the section the "date of the mortgage" could only be the date of the mortgages originally given by Potash to Royal. These were the only mortgages in existence. As Matas J.A. put it:

In my view, the agreements should not be taken to be new mortgages. It was not suggested by Royal that it has given up its prior security under the original mortgages. ... The agreements by their own terms continue the original mortgages in full force and effect except as amended by the renewal agreements....The purported change in date by the "deeming clause" and the change in the repayment privileges do not undo the existence of the original mortgages.

Matas J.A. disagreed with Kroft J.'s conclusion that the parties could contract out of the statutory prepayment provision. He examined the case law in some detail and concluded that it was not possible to contract out of the prepayment right which was designed to protect the public. Everyone might at some time wish to borrow money by way of mortgage of real property and would then need the protection of the section. To permit contracting out would soon result in the section's becoming "a dead letter". Matas J.A. concluded that "the agreements, notwithstanding the `deemed date' clause and the limitation on prepayment, contravene the legislation and cannot stand".

The statutory right to prepay certain mortgages was enacted first by Parliament over a century ago. Yet it is only recently that the courts have been faced with the issue which is at the heart of this appeal. This is doubtless due to the fact that in the past decade or so interest rates have been relatively unstable. As a consequence, short term mortgages have been popular with lenders and borrowers. Many mortgages have been given for terms of five years or less and the parties have subsequently agreed to extend the maturity date. In this appeal the Court is asked to interpret and apply in a contemporary setting a section enacted in response to conditions prevailing a century ago when farmers were locked into long term mortgages at exorbitant interest rates by moneylenders who were "eating up the vitals of the yeomanry of the country": House of Commons Debates, March 31, 1880, p. 954.

As a preliminary matter it should be noted that there are many permutations of mortgage dealings which may be affected by the section. There are cases in which the original term of the mortgage will be exactly five years and the maturity date is extended for a further term. In other cases the original term of the mortgage will be for less than five years but the parties agree to extend it by a period of five years or more so that it will ultimately mature more than five years from its original date. In still other cases the original term will be for less than five years and so will the agreed upon extension but together they will make the mortgage payable more than five years from its original date. In approaching this particular case these permutations must be borne in mind.

Counsel for Royal argued that a broad and liberal interpretation should be given to s. 10. He submitted that the purpose of the section was to ensure that mortgagors are not "locked in" for more than five years without an opportunity to re‑negotiate terms. To achieve this purpose in a case where mortgages have been renewed the phrase "date of the mortgage" should be read as "date of the renewal agreement" and the phrase "the terms of the mortgage" should be read as "the terms of the mortgage as amended by the renewal agreement". In effect, counsel submitted that for the purposes of s. 10 the renewal agreements should be viewed as new mortgages. Counsel argued that a broad and liberal interpretation of the section is most in keeping with the reasonable expectations of the parties and with current commercial realities. He submitted that any other interpretation would lead to inconvenience and added expense for mortgagors. They would have to enter into new mortgages every five years. It would also result in hardship for mortgagees who would suffer from lack of the certainty necessary to their financial planning.

Counsel for Royal did not suggest that it had lost its priority under the mortgages by reason of the renewals. They were not new mortgages in that sense. Indeed, they expressly recognized the continuing validity of the original mortgages and purported only to amend certain specified terms. The original mortgages contained the only grants of land as security for the loans so that Royal's priority vis‑à‑vis third parties was not at issue. There was therefore no inconsistency in Royal's position that the renewals might be viewed as new mortgages for purposes of s. 10 as between borrower and lender while affecting not at all the priority of the mortgage vis‑à‑vis third parties arising from the original grant of the land as security. This was merely a reflection of the dual aspect of a mortgage.

Counsel for Potash contended that Royal was asking the Court to read words into the section, something that could not be done when the section's meaning is clear on its face. Counsel argued that the Court cannot interpret legislation so as to adapt it to changing commercial conditions. The intention of the legislature at the time the section was enacted is the only relevant one. The meaning of the section is perfectly clear. Any changes to the legislation should be made by the legislatures and not by the courts. Counsel also argued that Royal could not have it both ways. It could not maintain that the renewals were new mortgages for purposes of s. 10 but remained the original mortgages for purposes of priority of the security.

Each of the mortgages given by Potash to Royal was renewed twice. The renewal agreements in each case purported to amend the original mortgages, leaving most of their "terms and conditions" unchanged and affirming their ongoing validity. The second renewals extended the maturity date of each mortgage loan by exactly five years from the maturity date on the first renewals. One crucial amendment concerned the "date of the mortgage" which was "deemed" to be the maturity date of the existing loan.

In determining the applicability of the section to any particular mortgage, one must ascertain both the "date of the mortgage" and the duration of the mortgage "under the terms of the mortgage". There is no problem when the mortgage remains in its pristine form unamended. The problems arise when the parties have purported to change the date of the mortgage or the terms of the mortgage or both in a subsequent renewal agreement. This is what happened in this case.

What is meant by the phrases "date of the mortgage" and "terms of the mortgage" in a case where the parties have entered into a renewal agreement? The Ontario Law Reform Commission in its Report on Section 16 of The Mortgages Act (1971), had this to say at p. 14:

Some lenders are of the opinion that the renewal represents a new agreement and that the five‑year period must therefore be re‑calculated from the date of renewal. Others assert that there is no right to prepay if on the face of the mortgage document the term of the mortgage is not for more than five years. These views, however, ignore the facts that by the terms of the legislation the five‑year period runs from the date of the mortgage, in other words from the date that the conveyance to the mortgagee of the original mortgagor's interest was made, that renewal in this context merely alters the date for termination, and that if renewal truly effected a new mortgage contract there would be doubt as to whether priority for the principal debt over second and later encumbrances could be preserved. In this last instance no renewal could safely be made without getting subsequent encumbrancers to agree to the postponement of their interests.

There are no reported cases on these points but from a careful reading of subsection 1 it appears that renewal or extension does not interfere with the running of the time whereby the right to prepay is determined and that it makes no difference how the renewal or extension is effected. Any other decision could lead to a constantly renewed mortgage contract which would negate the policy of subsection 1, that all private (as opposed to commercial) mortgages should be open after their first five years.

(Emphasis added.)

This view has been subjected to criticism by a number of commentators on the ground that the Commission's interpretation, although consistent with the words of the section, is not compelled by them: see B. J. Reiter, Annotation: Deeth v. Standard Trust Co. (1980), 12 R.P.R. 158; D. Stevens, Case Comment: Potash v. Royal Trust Co. (1985), 33 R.P.R. 122; J. Swan, Annotation: Potash v. Royal Trust Co. (1985), 33 R.P.R. 130 (C.A.) It is pointed out that such an interpretation can create hardship for both mortgagors and mortgagees. Completely new mortgages would have to be entered into at the end of each five‑year period. As a consequence mortgagees will lose their priority vis‑à‑vis subsequent encumbrancers unless they can obtain postponement agreements. If this costs them something, or if they are unable to obtain such agreements, their costs will be passed on to the mortgagor. It will be more difficult and more expensive for mortgagors to refinance their mortgages with the same mortgagee. Mortgagors will also be put to added expense in the form of solicitor's fees, registration fees and perhaps insurance costs. These not inconsiderable costs will run every five years over the time usually required to satisfy the purchase price of a home, eventually adding up to a substantial sum.

An alternative interpretation is suggested, namely that the purpose of s. 10(1) is not to ensure that a mortgage remain open after the first five years but to ensure that a mortgagor can, if he wishes, redeem his mortgage at least once in every five‑year period. On this approach a mortgagee could not enforce against a mortgagor a term in excess of five years. Nevertheless, a mortgagor having the statutory right to redeem available to him at the end of the five‑year period may decide not to exercise it but instead to renew for another term. This interpretation accommodates the notion that the mortgagor cannot be "locked in" to a mortgage for more than five years as contemplated by the section but upholds his freedom to choose to either pay or renew for a further term of not more than five years. Both interpretations of the section find support in the authorities.

6. The Authorities

In Re Hodgson and Raskin (1974), 47 D.L.R. (3d) 518 (Ont. H.C.), Goodman J. (as he then was) held that s. 10 does not apply if the original term of the mortgage is not for more than five years. The section, he concludes, is not triggered by an extension agreement which postpones the maturity date beyond the five‑year period. The section, in his view, addresses only the original mortgage and, if it does not offend the section, the application of the section is spent and the parties are free to extend the term by any period they choose. The section on its plain meaning does not apply to renewal agreements.

Goodman J.'s judgment has been subjected to severe criticism on the basis that it could have the effect of totally defeating the purpose of the legislation as that purpose is perceived by the Ontario Law Reform Commission, namely that mortgages are to be open after the first five years: see Falconbridge on Mortgages (4th ed. 1977) at pp. 45‑46. Goodman J.'s interpretation would also, by failing to address mortgage renewals at all, defeat the purpose of the section as perceived by commentators such as Stevens. I think the criticism is valid. I do not believe the legislature could have intended the very restrictive interpretation put upon the section by Goodman J.

In Deeth v. Standard Trust Co. (1980), 12 R.P.R. 157, the term of the mortgage was just over five years. The parties entered into a renewal agreement extending the maturity date. The Ontario Divisional Court endorsed one aspect of Goodman J.'s reasons in Hodgson and Raskin. Van Camp J. agreed that the "date of the mortgage" within the meaning of the section was the date of execution of the original mortgage because, as she put it, it was "the only mortgage which is in existence" (at p. 165). I take no issue with the conclusion of Van Camp J. No attempt was made in Deeth (as in the present case) to create a new mortgage date from which a new five‑year period would start to run. The parties simply extended the original term.

In Re Lynch and Citadel Life Assurance Co. (1983), 149 D.L.R. (3d) 316 (B.C.S.C.), the term of the original mortgage was again just over five years. The parties entered into a renewal agreement for exactly five years and the renewal agreement provided that the original mortgage was to continue in full force and effect except as modified by the renewal. Bouck J. followed the decision of the Ontario Divisional Court in Deeth and held that for purposes of s. 10 the "date of the mortgage" was the execution date of the original mortgage. There was again no attempt in the renewal agreement to "deem" a new "date of the mortgage" and Bouck J., in stating that a subsequent renewal does not automatically change the "date of the mortgage" for purposes of the section, left open the question whether the result might not be different if the renewal agreement expressly provided for a new date.

Bouck J. did not have long to wait for a renewal agreement which did expressly "deem" a new date for the mortgage. The facts in Kaltenbach v. Royal Trust Co. (1983), 30 R.P.R. 69 (B.C.S.C.), are very similar to the present case. The parties renewed a mortgage that had originally been for just over five years. It was renewed for exactly five years from the "deemed" date of the mortgage which the parties had agreed upon. Bouck J. concluded that, because the parties had agreed to a new "date of the mortgage", the five‑year period started to run for the purposes of the section from that date. He said at p. 76 of his reasons:

Because of the "redating clause", I do not think it is necessary for me to decide whether the mortgagors can waive the protection of the Interest Act. What happened in this case is that on June 29, 1982, the parties in effect entered into an agreement whereby they contracted to continue with their relationship as mortgagors and mortgagee on certain terms. One of these terms is that the mortgage relationship was to commence on July 15, 1982 and end on July 15, 1987. That interval of time is not more than five years after the date of July 15, 1982. Therefore, the agreement between the parties does not trigger the provisions of s. 10 of the Interest Act allowing the mortgagors the right to prepay prior to July 15, 1987.

Bouck J. did not appear to view the deeming of a new "date of the mortgage" as itself a form of waiver or contracting out. In his view, the parties could change the "date of the mortgage" as referred to in s. 10 at will.

In Butcher v. Royal Trust Co. (1984), 33 R.P.R. 178 (Sask. Q.B.), Wright J. also found that the renewal agreement created a new "date of the mortgage". The mortgage was originally for five years but it was renewed for a further five years. Wright J. noted what Bouck J. had said in Lynch (Kaltenbach was still under reserve) and held that the renewal agreement before him contained the contractual provisions necessary to create a new "date of the mortgage". He also held that, where a mortgagor has the right to prepay the original debt under s. 10, if he does not do so but instead enters into a renewal agreement, s. 10 then applies only to the new term. He said at pp. 187‑88:

In my respectful view, s. 10 gives a person other than a corporation an absolute right to tender or prepay in the manner prescribed by its wording.

There is an important corollary to that principle, however. If the borrower chooses to extend or renew his agreement with a lender for a further term, even though there is no change in the terms of the new arrangement save for the new dates for payment, then s. 10 only applies to the new term. It would be illogical and manifestly unjust if a mortgagor could renew an existing mortgage and then immediately retire his debt by simply paying the principal, interest and a sum equivalent to three months interest. He, not the lender, determines if he will pay his original obligation when it falls due. If the original term was for more than five years then he is assured of his right to pay off that indebtedness after the five year interval. If the borrower therefore avails himself of a new arrangement he cannot escape the consequences by arguing either that the original mortgage is for more than five years (Potash v. Royal Trust situation) or that the original term and the new term total more than five years and he is therefore entitled to pre‑pay. Section 10 is not intended to provide consumers with an escape hatch that would not be available to them if they signed a new formal instrument. A renewal or extension is a new mortgage for the purpose of determining the application of s. 10 in my respectful view.

(Emphasis added.)

Bouck J.'s approach in Kaltenbach was followed by Scott Co. Ct. J. in Shaw v. Royal Trust Co. (1984), 33 R.P.R. 148 (Ont. Co. Ct.), and by Brennan J. in Re MacDonald and Royal Trust Corp. of Canada (1984), 8 D.L.R. (4th) 448 (Alta. Q.B.). However, his approach was not adopted by either of the appellate courts of the provinces which have dealt with the issue to date. The Manitoba Court of Appeal did not adopt the Kaltenbach approach in this case (noting, perhaps mistakenly, that it was under appeal) and the British Columbia Court of Appeal rejected it in Re Turner and Royal Trust Corp. of Canada (1985), 23 D.L.R. (4th) 746, not because it disagreed with the result, but because it thought that only the legislature could achieve it. In other words, it considered it incompatible with the words of s. 10.

The facts in Turner differ from the facts in this case. The original term of the mortgage in Turner was two years; there was a one‑year renewal followed by a second renewal for four years, a period chosen by the mortgagors. Hutcheon J.A., on behalf of a five member panel of the British Columbia Court of Appeal, held that the "date of the mortgage" as referred to in the section is the date of the original mortgage, a date which could not be changed by the parties "deeming" a new "date of the mortgage" by way of amendment to the mortgage. Hutcheon J.A. seems to have concluded also that the parties could not amend the "terms of the mortgage" as that phrase is used in the section. In view of this the result in the case was governed by Re Hodgson and Raskin and by Deeth. Since the original term of the mortgage was for less than five years, the statutory prepayment right was not available to the mortgagors. Hutcheon J.A. considered the language of the section to be clear. Although he recognized that the interpretation urged by the mortgagee was the "sensible" one, he felt that the legislature would have to step in in order to achieve it.

With respect, I do not think the legislature could have intended the section to have the narrow, literal meaning Hutcheon J.A. attributed to it. The language certainly does not compel that interpretation and I do not think therefore that we can fairly lay it at the door of the legislature. The words of Laskin C.J. in United Trust Co. v. Dominion Stores Ltd., [1977] 2 S.C.R. 915, seem apt. He said at p. 937 that "the Courts must take the responsibility, since it would be their interpretation, by no means a compelled one, which produces it" (the result).

While there is no doubt that the legislature at the time it enacted s. 10 did so in light of the commercial practices of the day, I do not believe that this precludes the Court from giving it an interpretation consonant with to‑day's commercial reality if such an interpretation is equally compatible with the legislative language. In the late nineteenth century when the section was first enacted the term of a mortgage and its amortization period coincided. To‑day this is seldom the case, most residential mortgages being for less than five years but amortized over twenty or thirty years. This was a situation not envisaged by legislatures in the 1880's and 1890's. It would have made no difference therefore to the early draftsman whether the objective of s. 10 was stated as being to make mortgages open after five years or to ensure that mortgagors were never locked in for more than five years. This distinction is only relevant in to‑day's commercial setting because of the bifurcation of amortization and term to maturity. Consequently, the Court is not faced with making a choice between two interpretations or policies only one of which was intended by the draftsman. Both are equally consistent with Parliamentary intent and the only basis for choosing between them, it seems to me, is to ask which is more in keeping with common commercial practice.

It seems fairly clear from the mortgage loan renewal agreement that what is being renewed by the document is the loan and not the security. If the mortgagor wishes to pay off the loan on the maturity date of the original mortgage or of the first renewal, then he may do so and is then entitled to the return of his security. Royal offered to carry Potash's debt for a further period on new terms if he wished to do so rather than redeem his security but specified that he must accept the offer prior to the maturity date of the existing loan. By signing the renewal agreement Potash accepted the offer. The new repayment terms and interest rate are set out in the agreement. It provides that the original mortgage is deemed to be dated as of the maturity date of the existing loan. All the other terms and conditions remain in full force and effect.

It seems to me that as a matter of pure contract law the parties are free to renew the terms of their loan in this manner. Nor can I see any restriction on their doing so in equity provided the mortgagor is fully aware of his rights, there is no fraud or misrepresentation on the part of the mortgagee and the transaction is not otherwise unconscionable. The right of the mortgagor with which we are concerned in this case is, of course, his right under s. 10(1) to pay off the loan at the end of the five‑year period. Potash was advised by Royal in the case of both mortgages that they were coming up to their maturity dates and that they were prepared to renew if he so desired. They gave him a number of options as to terms. No specific reference was made to Potash's s. 10 right.

Potash testified that he was confused about the effect of the second renewal agreements. He did not read them and thought that, like the previous ones, they were renewals for one year and not five. He did, however, acknowledge that he knew that he could pay off the mortgages rather than renew them with Royal and that he could then enter into new mortgages with a different mortgagee "if he could find one". His evidence was, however, that his intention was to renew with Royal for one year. The trial judge stated: "I have no comment to make on his evidence in this connection". The trial judge did, however, go on to observe that Mr. Potash was "an experienced builder and a frequent dealer with mortgage companies" (a finding which Potash's own testimony amply supports) and that he should be bound by the agreements he had signed. While he was perfectly free to argue about what they meant, once that was determined, Kroft J. held, he could not escape their impact. The Court of Appeal did not deal with this issue. In their view, it was academic since Potash could not contract out of or waive his s. 10 right in any event.

On either interpretation of s. 10 it was open to Potash to repay the mortgage loans and redeem his security at the expiration of five years from the date of the original mortgages. Both were for terms slightly in excess of five years. He could then have entered into new mortgages with a different mortgagee. Alternatively, he could do what he did and renew with Royal. It is clear from his testimony that he had no desire to redeem either on the original maturity date or on the expiry of the first renewal term. He made no effort to tender the monies owing on either occasion. He did, however, tender them two years after entering into the second renewal agreement. His evidence was that he did so when he found out through his accountant that he had signed five‑year renewals in mistake for one‑year renewals.

I agree with Kroft J. that Potash is bound by the agreements he signed. Whether or not he could have them set aside on grounds of unilateral mistake is not before us. The key question is whether he could bring them to an end prior to maturity by prepayment under s. 10.

I have no difficulty in reading the word "mortgage" in s. 10, in circumstances where renewals have been entered into, as the mortgage as amended. I do not believe that this puts any undue strain on the language or the sense. Accordingly, the phrase the "date of the mortgage" would mean in such a case the date of the mortgage as amended and the phrase "under the terms of the mortgage" would mean under the terms of the mortgage as amended. I believe that it is unnecessary to characterize the mortgage as a "new mortgage" for this purpose. The opening part of s. 10(1) would then, in a case where there have been amendments to the original mortgage, be interpreted as if it read:

Whenever any principal money or interest secured by mortgage of real estate is not, under the terms of the mortgage (as amended), payable until a time more than five years after the date of the mortgage (as amended), then, if at any time ....

This would have the effect of permitting the mortgagor to pay the mortgage off at the end of each five‑year renewal period which, in my view, is what the legislature intended. It would also avoid the manifest injustice referred to by Wright J. in Butcher of permitting a mortgagor to collapse a mortgage immediately after executing a renewal agreement with full knowledge and intent. It is this consequence of the Ontario Law Reform Commission's interpretation which has caused judges and commentators alike to seek out an interpretation which would give a greater degree of business efficacy to the renewal agreement entered into by the parties. The real question is whether in giving this degree of business efficacy to renewal agreements the Court would be permitting mortgagors to contract out of or waive their s. 10 rights and, if so, whether this would violate the long standing principle that parties cannot contract out of statutory provisions enacted in the public interest.

7. May a Mortgagor Contract out of or Waive the Section's Benefit?

Consistent with its position on the first issue, it was the submission of Royal on the second issue that mortgagors could waive or contract out of their statutory prepayment rights. Contracting out of or waiving statutory provisions for one's benefit, counsel argued, is perfectly permissible unless the statute expressly or impliedly prohibits it or unless it is contrary to public policy to do so. There is no prohibition against waiver or contracting out in the statute. Nor, he alleged, does public policy prohibit it. The provision, he submitted, protects only a limited class, not the public as a whole. Corporations are excluded from its ambit; only individual mortgagors are protected. Furthermore, only where the statute contains mandatory prohibitions is contracting out foreclosed. This section does not prohibit mortgages for more than five years. It merely confers on mortgagors a prepayment right which they may or may not choose to exercise. In the absence of a statutory prohibition against contracting out or waiver, counsel submitted, the only constraints are those imposed by public policy and no head of public policy is offended by a waiver of the mortgagor's s. 10 right.

In response to this argument, counsel for Potash acknowledged that there was no express prohibition in the statute against contracting out of the section. But he submitted that by necessary implication the section prohibits it. He noted that the section presupposes the existence of a mortgage for more than five years. The section also clearly overrides certain terms of such a mortgage by making it prepayable. It would be absurd if by contract the parties could negate the very statutory provision which overrides the terms of the mortgage for the mortgagor's protection. Counsel also referred to cases dealing with other sections in the Interest Act which prohibit certain terms in contracts. He submitted that this section is designed for the protection of the public, any or all of the members of which may at one time or another require its protection when they borrow against mortgage security. To permit contracting out would defeat the whole purpose of a legislative provision enacted in the public interest.

I agree with counsel for Potash that s. 10(1) was enacted in the public interest and that the long standing rule against contracting out or waiver should apply to it. The question, however, is whether the mortgagor has purported to contract out of or waive his prepayment right in these renewal agreements.

8. Did the Mortgagor Contract Out of or Waive his s. 10 Right in this Case

It seems to me that the answer to this question depends upon what the right is, i.e., which interpretation of s. 10(1) is the correct one. I find it difficult to conclude that when a mortgagor is presented by a mortgagee with an option to pay off the mortgage at the end of a five‑year period or to renew for another five‑year period and opts for the latter that he has thereby contracted out of his right to repay. It seems to me that what he has done is decide not to exercise it. I say this, of course, on the assumption that the mortgagor makes a conscious decision with full knowledge that the option is his. Contracting out or waiver, it seems to me, envisages a mortgagor's agreeing or acknowledging at the commencement of a five‑year period that he has no option, that only one route is open to him and that is to renew with the same mortgagee. He is then, so to speak, in the hands of the mortgagee, the very thing the section is designed to prevent. But this is not the case here. Potash did not have to sign any renewal if he did not want to. He did not contract out of his right to repay; he made a free choice not to exercise it. He chose to postpone his obligation for a further five‑year term. Having done so he cannot, in my opinion, renege on his promise on the basis that what he has done involves an illegal contracting out or waiver of his rights. I agree with Wright J. that s. 10 was not intended to provide "an escape hatch" for mortgagors who simply change their minds. The statute gives them a right which they may or may not choose to exercise. Once they have made their choice, then, absent fraud or misrepresentation by the mortgagee or unconscionability in the transaction itself, they should be bound by it.

9. Conclusions

1. The purpose of s. 10(1) of the Interest Act and s. 20(6) of the Manitoba Mortgage Act is to ensure that mortgagors have the right to pay off their mortgages at the end of each five‑year period. They cannot be "locked in" for more than five years.

2. Where the original term of a mortgage exceeds five years, the mortgagor has the right to pay it off at the end of five years in compliance with the section (see Deeth).

3. Where the original term of the mortgage is for five years or less and the term is extended by agreement beyond the five‑year period (the "date of the mortgage" remaining unchanged), the mortgagor has the right to pay it off at the end of five years (see Deeth and Lynch).

4. Where a mortgagor elects not to exercise his right under s. 10(1) but instead enters into an otherwise valid and enforceable renewal agreement which "deems" the date of the original mortgage to be the date of maturity of the existing loan, and the term of the renewal agreement does not itself exceed five years, he cannot pay off the mortgage until the end of the five‑year renewal period (see Kaltenbach, Butcher and Shaw).

5. When a mortgagor makes a conscious decision on the basis of full knowledge of his statutory right to repay at the end of a five‑year period not to do so, he does not "contract out of" or "waive" his statutory right. He simply decides not to exercise it. If, however, he purports in a mortgage or renewal agreement to relinquish his right to pay off the mortgage at the end of any given five‑year period, such a provision could not be enforced against him at the instance of the mortgagee. He would still be free to pay off the mortgage on compliance with the statute.

10. Disposition

I would allow the appeal, set aside the order of the Court of Appeal of Manitoba and restore the order of Kroft J. dismissing the application of the respondent. The respondent is, however, entitled to his costs of the appeal and of the application for leave to appeal in accordance with the order of this Court dated July 16, 1984.