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No Default by Borrower, Yet Bank Entitled to Make Demand for Entire Loan

In a recent Ontario decision, the court held that a creditor Bank was entitled to demand the entire loan amount, even though the borrower was not in default on its monthly payments.

The borrower was Ocean Sands, to whom the lender Bank had advanced $3,120,000 under a demand loan which was guaranteed by a third-party developer. Although Ocean Sands was current on its loan payments, the Bank nonetheless made a demand before the loan’s 5-year term had expired. Both Ocean Sands and its guarantor failed to pay, so the Bank launched an action for summary judgment against both of them.

In court, the Bank justified its actions by pointing out that its right to enforce the loan and make a demand was not predicated on an actual breach of the loan commitment; rather, the Bank had broad discretion since the repayment terms stipulated that “payments in full” must be made “on demand”. The borrower, while conceding this point, countered that the Bank should not be allowed to exercise that discretion unreasonably.

The court found in the Bank’s favour. After reviewing the agreement’s specific terms, it concluded that there was nothing to prevent the Bank from making a demand prior to the end of the term. But even if a triggering event was required, in this case Oceans Sands and its guarantor had breached various covenants in the loan commitment, relating to statutory declarations, the debt service ratio, and diverting the income stream, among other things. These non-financial defaults by the borrower were enough to trigger the Bank’s right to make the demand. As the court explained:

I also disagree … that there must be something more than simply a demand made by the Bank where the borrower was otherwise in complete compliance without any financial breaches of the facility letter or security given. While I agree that this is somewhat an unusual debtor/creditor case because the debtor is in good standing with its ongoing financial commitments, I also find that it is reasonable not to constrain commercial lenders to lend to borrowers whom they no longer trust or with whom they no longer wish to do business. Bank of China (Canada) v. Ocean Sands Developments Ltd., 2013 (ONSC).