Legal Blog

Due Diligence

Reliance on the law is no substitute for solid information. A purchaser from a mortgagee learned that lesson the hard way in Pieckenhagen v. 1030553 Ontario Limited (2000), 51 O.R. (3d) 763, a decision of the Court of Appeal.

No Representations

The purchaser purchased a residential apartment building from a mortgagee in possession. The purchaser had someone inspect the mortgagee’s records before purchasing the property and had access to the rent roll. The purchaser did not request to see all of the leases and accepted an agreement to purchase the building that contained a “no vendor representation” clause.

The purchaser took possession and realised that one of the tenants was paying substantially less than market rent. Notwithstanding notices of rent increases over three years, the tenant had paid what he felt to be the appropriate amount under his lease. The purchaser finally brought an application under the old landlord-tenant regime for arrears of $17,000.

The trial judge dismissed the application. He found that the tenant had a year-to-year lease that was subject only to statutory increases and that the tenant was paying the correct rent. The Divisional Court allowed the appeal. It noted that with renewals, the lease was longer than 3 years. Accordingly, section 44 of the Land Titles Act governed and, since the lease was not registered, the lease did not bind the subsequent purchaser.

The Divisional Court raised this argument on its own initiative. It was not advanced in argument and was not in the factum of the purchaser. The tenant was taken aback but before the order became final brought the Divisional Court’s attention to sections 46 and 47 of the Mortgages Act. Section 47 states that a person who is a mortgagee in possession or who “obtains title to the residential complex by foreclosure or power of sale” is deemed to be a landlord. Section 46 states this section trumps any other Act unless that Act states otherwise.

You’re Kidding

The Divisional Court, to its credit, reviewed this new information. It did not, however, change its decision. It decided that the Mortgages Act did not apply when the purchaser had obtained title by way of purchase from a mortgagee selling under power of sale. It stated, “The mortgagee may have sold the property by exercising his power of sale rights, but in neither legal nor colloquial language is it said nor can it be said that the purchaser obtained title or acquired the property by power of sale.” The tenant appealed.

Back to You

The Court of Appeal felt that the words were sufficiently wide to embrace someone purchasing lands from a mortgagee exercising a power of sale in its mortgage. It stated, “if the words of the legislation do not convey that meaning, it is difficult to see what they do mean.”

Since the Divisional Court, having allowed the appeal on its own point of law, did not deal with the actual arguments raised by the purchaser in its factum, the Court of Appeal referred the matter back to the Divisional Court to decide the matter based on the original arguments raised before it.

Where’s the Meat

What does all of this have to do with your lead-in, we hear you ask? It should have been obvious to the purchaser that the rent for the tenant’s unit was too low. The purchaser could have insisted on reviewing the lease before entering into the agreement; it did not. It probably made a pragmatic decision, took its chances, and paid the price.  Given the loss of income, its own legal costs, and those of the tenant’s that it was ordered to pay, the price was very high.

In this case, the unit was probably one of many. This will not always be the case. Protect yourself against a “no-representation” clause so that an upset purchaser does not blame the lack of due diligence on you, its lawyer. How? Advise the purchaser of the risks; take notes; mention it in your reporting letter. Be careful out there.