LING 530 Lecture Notes - Lecture 4: Unbanked, Prime Rate, Neurosurgery
27 Jun 2018
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March 13, 2018
Activity: Compare the prepayment language in Sherry and the RBC mortgage
Two elements of discretion granted to the lender:
o1) Calculation discretion:
“Using a method determined by us by our discretion” + method is stated in Schedule 1 =
over prudent.
In Sherry’s case, the penalties were high because of the differential: she had a 10 year
term loan that she wanted to repay after 2 years. They calculated an interest rate
differential on a period of 7 years, which was very high.
The second amount (interest rate differential amount) has more discretion to be
exercised. As you go down the formula, every element is filled with discretion.
In particular, what is the “prevailing rate” on a comparable loan?
oWhich length of time do you pick if someone reimburses their loan and there
remains 4 years and 1 month, for example. There is no exact matching duration
of time. You have to approximate. How? It is in the bank’s discretion. The bank
can round up or down (most likely up).
oWhat is a comparable loan? What if there isn’t a closed loan for the period of
time. What if there is a hybrid form of loan, e.g. closed but has an option for
openness. There is a huge amount of discretion to be exercised in picking the
comparable loan.
There is a page and a half of drafting and it continues to leave discretion.
There is however a formula that they are following. In applying the formula, they can
use the discretion.
o“If you want to prepay more than what is allowed in section 4.11 above in a
mortgage year, a prepayment charge will apply. This prepayment charge will be
payable in addition to regular interest at the rate specified in your mortgage. The
prepayment charge will be the higher amount of the following two amounts,
each of which will be calculated by us using a method determined by us from
time to time at our discretion”
This is overbroad. In calculating the formulas, the bank can use its
discretion.
You don’t find this lengthy expression in corporate agreements.
How does this differ from RBC? See 7.6(b):
The prepayment charge will be the greater of:
(i) Three months’ interest on the amount prepaid, at the Interest
Rate; or
(ii) Interest for the remainder of the Term on the amount prepaid
calculated using the “interest rate differential”. The interest rate
differential is the difference between the Interest Rate and the
Posted Rate on the prepayment date for a hypothecary loan with
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a term similar to the time remaining in the Term and having the
same prepayment options. If you received a rate reduction below
our Posted Rate when you granted us the Hypothec, we will
deduct the amount of this rate reduction from the Posted Rate
before calculating the difference between the interest rates.
You do not see the word “discretion”. However, you do see a chart which indicates how
the bank calculates the term.
Section 7.6(3): if you prepay after the renewal, which interest rate do you use? On the
original or on the renewal? These are the type of questions that arise when lenders and
borrowers want to apply this language to given situations.
Say, you want to prepare the whole loan. You are entitled to 10% prepayment without
penalty. You go to the bank and prepay the 10% which you can do without penalty.
Then, you go the next day to repay the full – without being panelized with the 10%. But,
the clause says you lose the ability to pay 10% without the penalty.
Sum of differences:
o1) Don’t see the word discretion in RBC
No point in writing “discretion” because of the Sherry case and other
previous cases. The word discretion in the contract triggers red lights. If
you exercise discretion in a bad way, there will be legal consequences. In
Houle, that was ultimate discretion: loan repayable on demand at the
discretion of the lender. This is the ultimate discretion. SCC said that
discretionary clauses have to be exercised reasonably, which depends on
the circumstances (i.e. what would a reasonable person do). If you use
the word, then you get into debates about whether this is done
reasonably.
Prof thinks the word discretion is avoided for this reason.
Question: even though the word is absent, does the bank use its
discretion in practice, or it tries to be as mechanical as possible so
that in practice it doesn’t actually use any of its discretion.
We have come full-circle from complete discretion to complete
mathematical formula.
What purpose does adding the word discretion add? It doesn’t when you
include all the variables anyways.
o2) Table: circumnavigate the difficulty in choosing term of comparable period
Sherry Appeal
Four arguments:
(1) Provision was void for uncertainty: The two provisions that called for the method to
be used at the discretion of the lender and the term of the loan for a comparable loan to
be selected at the discretion of the lender claimed to be void for uncertainty. The
question then is how much is sufficient for certainty?
oProf gave example about jumping into taxi and tariff.
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find more resources at oneclass.com
Document Summary
Activity: compare the prepayment language in sherry and the rbc mortgage. Two elements of discretion granted to the lender: 1) calculation discretion: Using a method determined by us by our discretion + method is stated in schedule 1 = over prudent. In sherry"s case, the penalties were high because of the differential: she had a 10 year term loan that she wanted to repay after 2 years. They calculated an interest rate differential on a period of 7 years, which was very high. The second amount (interest rate differential amount) has more discretion to be exercised. As you go down the formula, every element is filled with discretion. In particular, what is the prevailing rate on a comparable loan: which length of time do you pick if someone reimburses their loan and there remains 4 years and 1 month, for example. There is no exact matching duration of time.
