Early termination fees, or make whole payments, as they are sometimes called, are common features in commercial lending arrangements. They serve to compensate lenders for the financial loss arising from early repayment of a loan and provide lenders with the certainty of a specified rate of return in the event that the loan is repaid before maturity. They also provide a means by which lenders may recoup upfront costs incurred in conducting due diligence investigations prior to extending a financing commitment. As such, they are an integral part of the overall economic arrangement negotiated by lenders. Therefore, lawyers advising secured lenders on strategies for recovery of their indebtedness should be aware that certain seemingly innocuous actions may jeopardize a lender’s entitlement to recover an early termination fee.
In Re Gasfrac Energy Services Inc. (“Gasfrac”), (16 July 2015), Calgary 1501 /00396 (ABQB), the Honourable Madam Justice Jo’Anne Strekaf considered whether the issuance of a Notice of Intention to Enforce Security (“NOI”) pursuant to section 244 of the Bankruptcy and Insolvency Act (“BIA”) had deprived the lender of its entitlement to an early termination fee. In that case, Ernst & Young Inc., in its capacity as court-appointed monitor in the proceedings by Gasfrac under the Companies’ Creditors Arrangement Act (“CCAA”), took the position that PNC Bank Canada Branch (“PNC”) was not entitled to an early termination fee in the amount of $1.2 million because PNC had delivered an NOI, and thereby triggered Gasfrac’s equitable right to redeem.
PNC, like most secured lenders asked to forbear from enforcing their security, sought to ensure that upon termination of the forbearance period, it would be in a position to enforce its security immediately, without having to give ten days prior notice as required pursuant to section 244 of the BIA. Because the BIA prohibits a creditor from obtaining a waiver of the ten day notice period prior to sending the NOI, PNC issued the NOI in order to ensure the effectiveness of any waiver by Gasfrac.
Justice Strekaf emphasized that the NOI was sent by PNC in the context of negotiating a forbearance agreement and was accompanied by an email explicitly explaining that the NOI should not be viewed in an adversarial manner as it was sent strictly in order to comply with the technical requirement for delivery of the NOI in advance of obtaining the waiver of the ten day notice period. Justice Strekaf therefore concluded that the issuance of the NOI by PNC did not constitute a demand for repayment or the enforcement of security that would trigger a right of redemption, so as to deny PNC’s right to enforce payment of the early termination fee.
Justice Strekaf agreed with the reasoning of Mr. Justice James Farley in Prudential Assurance Company v. 90 Eglington Ltd., (1994) O.J. No.868, in which he concluded that an NOI does not automatically trigger a right to redeem. Justice Strekof also followed the view of the majority of the New Brunswick Court of Appeal in Leby Properties Ltd. v. Manufacturers Life Insurance Co., 2006 NBCA 14, 295 N.B.R. (2d) 300, in which the court held that the issuance of the NOI does not constitute a demand for repayment or the enforcement of security, but rather simply alerts a debtor to the possibility that, with the passage of time, a secured creditor will be in a position to compel payment by enforcing its security.
In Re Dondeb Inc. (11 June 2013), Court File No. CV-12-9794-00CL, a group of companies owning a large real estate portfolio sought relief under the CCAA. Empire Life Insurance Company (“Empire”), a mortgagee of one of the debtor’s properties, together with several other mortgagees of various properties owned by the debtors, opposed the debtors’ application for relief under the CCAA, and supported an application by certain mortgagees for the appointment of a receiver. The Honorable Mr. Justice Frank Newbould held that by supporting the application to appoint a receiver over the debtors’ properties, Empire had taken steps to realize on its security, and was therefore not entitled to collect any amounts claimed on the basis of repayment prior to the maturity of its loan.
Whether a lender will be entitled to payment of an early termination fee will depend upon the specific facts and circumstances of each case and whether the lender has unequivocally sought repayment of its indebtedness by enforcing its security. Lenders who send an NOI but wish to preserve entitlement to recover an early termination fee, should be sure to convey, in explicit language, that no demand is being made for payment of the loan.
About the author
Lisa Corne is a partner in the Insolvency and Restructuring Group of Dickinson Wright LLP.
This article originally appeared in the September 30, 2016, issue of The Lawyers Weekly published by LexisNexis Canada Inc.