Lenders are advised to review demand loan documents in light of new 2-year limitation period, Autumn 2008

Those lending monies on an interest free/deferred interest/demand basis need to be aware of the recent reduction in the limitation period under The Limitations Act, 2002 (Ontario) and its implications in the enforcement of such loans. Under the former Limitations Act (in force before Jan./04) and its interpretation by the Courts, the limitation period for demand loans began running not when the borrower failed to pay on demand but when the lender advanced the money.

It had been hoped that under the new Act, with its emphasis on claims and discoverability, the limitation period for a demand loan would start only when demand was made. Unfortunately, the Ontario Court of Appeal in Hare v. Hare (2006) held that the former rule for demand loans still applied, with the result that the new shorter limitation period of two years runs from the date when the funds are advanced by the lender under a demand loan.

Therefore, if it is intended that interest will not be paid within two years of the date of the demand loan advance, it is necessary to ensure that the promissory note evidencing the loan specifically provides that the principal amount due shall be payable only after actual demand by the lender in writing. The document can also provide that the limitation period with respect to this loan shall be “x” years (up to 15 years).

Existing demand loans that are acknowledged by a promissory note stating that the loan is payable on demand where the loan was advanced at any time after Jan. 1/04 and where no interest has been paid on the loan, may now be unenforceable two years after the loan was advanced. Where the loan is not yet unenforceable, the holder of the note should, prior to the expiry of the two year period, make a formal demand for payment. The borrower should then be required to execute a new promissory note with the additional language suggested above.