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Posted on March 29, 2012 | Posted in Lawyers' Issues

Assuming that the terms of a mortgage deny a mortgagor the right to lease a mortgaged property without the mortgagee’s consent, what can happen to the mortgagor when he leases the property without that consent and what happens when the mortgagee’s actions cause the mortgagor to lose his tenant? These questions are canvassed in Valenti v. Equitable Trust Co. (2011) 8 R.P.R. (5th) 229 (Ont. S.C.J.).


 In May 2008, a mortgagor mortgaged his home for $1.7 million for a one-year term at an interest rate of 8.99%. The mortgagor signed a statutory declaration stating that he would be the owner occupier and would not lease the property. The mortgage also stipulated that the mortgagor needed the mortgagee’s consent to any lease and that failure to obtain the consent constituted a breach of the mortgage.

 Four months later, the mortgagor asked the mortgagee for its consent to a proposed lease of the property. The annual rent was to be $144,000, which, although significant, was less than the interest due on the mortgage. The tenant was to pay half of the annual rent in advance on the 1st day of the lease and the other half on February 27, 2009. The lease contained an option to renew for one year and a right of first refusal to purchase the property. The mortgagee refused its consent. On October 1, 2008, the mortgagor leased the property regardless.

 The mortgagee did not react adversely until the mortgagor failed to make the January 1, 2009 mortgage payment. At the end of January, the mortgagee called the tenant and obtained assurances that the tenant would not make the second instalment of rent until further notification. The mortgagor failed to make the February mortgage payment and the mortgagee issued an application against the mortgagor and the tenant to set aside the lease, obtain a writ of possession, and enjoin the tenant from paying the second rent instalment to the mortgagor.

 Two days later, the mortgagee served a notice of breach of covenant and demanded that the mortgagor deliver a notice of surrender of lease within two weeks. Four days after that, the mortgagee served its notice of application on the tenant and demanded that the tenant not pay the February 27 rent instalment. Not surprisingly, the tenant complied with that request and ultimately terminated its tenancy with the mortgagor on April 1, 2009 (i.e. half way through the lease term).

 In March 2009, the mortgagor sold the property with a closing date of June 1, 2009. The mortgagee held off on its power of sale proceedings, but, in addition to the money otherwise due under the mortgage, the mortgagee demanded and received a three-month interest bonus to discharge its mortgage.


 The mortgagor was not pleased. He commenced an action against the mortgagee claiming damages for inducing breach of contract, wrongful interference with economic relations, and repayment of the three-month interest bonus.

 The mortgagee brought a motion under Rule 21 claiming that the mortgagor had no cause of action, even assuming everything it alleged in the statement of claim was true.

 The judge dismissed the mortgagor’s action. Although the reasons were different for each cause of action, the underlying theme remained the same. The mortgagor could not complain about the mortgagee’s negative response to its lease and the mortgagee’s actions in forcing the tenant to vacate the premises early because the mortgagor had no right from the outset to have entered into the lease. To allow the mortgagor’s action to succeed, would allow the mortgagor to breach his mortgage and then claim damages against the mortgagee for enforcing its rights arising out of that breach.

 Causes of Action

 As to the tort of inducing breach of contract, the mortgagor must first have had a contract to be breached. Although the mortgagor may have had an enforceable lease against the tenant, it did not have a valid lease by which the mortgagee was bound (see footnote 1). Further, as against the mortgagee, the mortgagor did not incur damages arising out of the breach of the lease because the mortgagor had contractually covenanted with the mortgagee that the mortgagor would have no lease; without a lease, there could be no loss of rent.

 Even if elements of the tort had been proven, the judge still felt that the mortgagee was justified in taking the actions it took: the mortgagor was not entitled to have entered into the lease; the mortgagor knew that he had not received the mortgagee’s consent to the lease; the mortgagor had missed two mortgage payments; and the Mortgages Act allowed the mortgagee to take the actions that it took.

 As to the tort of wrongful interference with economic relations, the conduct of the mortgagee was not intended to cause damage to the mortgagor; rather, it was intended to protect the mortgagee’s legitimate economic interests.

 Finally, as to the return of the three-month interest bonus, the judge noted that the tenant failed to make the payment of the full money due by the date specified in the mortgagee’s power of sale. Therefore, the bonus was due under the terms of the Mortgages Act and the mortgage.


 The mortgagor had also claimed that the mortgagee had acquiesced to the lease because, after it had refused its consent to the lease and the mortgagor had entered into the lease anyway, the mortgagee did nothing about it for four months.

 In order to have estoppel by acquiescence, the mortgagor had to have made a mistake in his legal rights; the mortgagor must have expended money or done something as a result of that mistake and been encouraged by the mortgagee in doing so; the mortgagee must have known of its own rights that were inconsistent with those of the mortgagor’s; and the mortgagee must have known of the mortgagor’s mistake about his rights.

 It is easily apparent that the facts did not fit the legal requirements. Further, the judge relied on Falconbridge for the proposition that a mortgagee is not bound by a lease merely because it fails to object to it.

 Accordingly, the judge stated that the doctrine of estoppel by acquiescence was inapplicable.


 The mortgagor was the author of his own misfortune. He had snubbed his nose at the terms of the mortgage and would have gotten away with that snub, but for his failure to make his January mortgage payment. Once he missed that payment, he awakened the wrath of the sleeping giant, who realised its security was being threatened and acted accordingly and fully within the considerable powers available to it under the mortgage.

 Note 1: actually, the lease, being a fixed term lease, did bind the mortgagee. Section 51(2) of the Tenant Protection Act trumps section 53(4) of the Mortgages Act: see Canada Trustco Mortgage Co. v. Park (2004), 188 O.A.C. 384 (C.A.). However, we suspect that, even if this error were drawn to the attention of the trial judge, he would not have changed the result. The real issue was not whether the mortgagee could have turfed the tenant before the end of the one-year fixed term, but whether the mortgagor could complain that the tenant agreed to vacate because of the mortgagee’s pressure.


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