Legal Blog

Sham Tenancy

A mortgagee wants to take possession of mortgaged residential premises because the mortgagor is in arrears of the payments due under a mortgage. Normally, there would be no real problem. However, if the mortgagor has leased the premises, then problems arise and the mortgagee has some additional hurdles to overcome. Toronto-Dominion Bank v. Hosein, a 2016 decision of the Ontario Court of Appeal, discusses those problems and eliminates one of them.

Legislation

In the good old days, a mortgagee had priority over a subsequent tenant and, when a mortgagee had the ability to take possession of the premises from the mortgagor, ultimately the tenant had to leave. In order to rectify that imbalance of power for residential premises, the Ontario legislature amended the Mortgages Act (“MA”) in 1991 to provide security of possession to a mortgagor’s subsequent tenants. At the same time, the legislature, realising that a financially strapped mortgagor might not necessarily be honourable, allowed a mortgagee to apply to vary or set aside a tenancy agreement if it (a) had been entered into to discourage the mortgagee from taking possession of the premises or (b) adversely affected the value of the mortgagee’s interest in the premises. In other words, sham tenants are not protected.

In general, tenants are also protected by virtue of the Residential Tenancies Act (“RTA”). The RTA limits the ability of landlords to obtain possession of leased residential property from their tenants. Landlords must meet one of a number of specified criteria (e.g. non-payment of rent, trashing the apartment, etc.) before they can demand and obtain possession of the premises.

Run Around

A mortgagor defaulted in making mortgage payments on her condominium unit in November 2012 on a mortgage given in July 2011. She also ceased to pay any property taxes. The bank did not move quickly. In July 2013, before the bank took possession of the premises, the mortgagor entered into a five-year lease with the tenant. The bank ultimately discovered the existence of the tenancy and attempted to get particulars. The tenant refused to give them, saying that her contract was with the mortgagor.

The bank then trundled off to the Landlord and Tenant Board, which ultimately ordered the tenant to produce the lease. The tenant complied and the bank learned that the rent was $300 a month, inclusive of the $281 condominium maintenance fee, for the first year; $300 a month plus the maintenance fee for the 2^nd year; $800 a month, inclusive of the maintenance fee, for the 3^rd year; and slightly more for the 4^th and 5^th years. Comparable rents in the same condominium complex in 2013 were $900 – $1,000.

The bank applied to set aside the tenancy. The application judge agreed that the lease was created with the object of discouraging the bank from taking possession of the property and found that it was “a sweetheart deal”, created after the mortgage default, that contravened the MA.

However, the application judge then reviewed the RTA and decided that she had no ability to grant relief under the MA because, she said, it conflicted with the RTA and, in case of conflict, the provisions of the RTA applied. In particular, there was no provision under the RTA that would allow possession simply because there was a sham tenancy.

Conflict

The Court of Appeal analysed the two statutes and decided that there was no conflict and that the provisions of the RTA and the MA could be read together harmoniously. The Court noted that the RTA is concerned with the regulation and termination of valid tenancies. Conversely, the MA provided a remedy to have an alleged tenancy set aside with the result that a valid tenancy never existed in the first place.

Accordingly, the Court allowed the appeal and set aside the sham tenancy. In doing so, it awarded costs of $15,000 against the mortgagor. It did not award any costs against the tenant because the bank and the tenant had entered into an agreement in which costs would not be sought. Given that only counsel for the bank attended to argue the appeal, we assume that a deal was also struck whereby the tenant agreed to vacate the premises.

Test Case

Why did the bank bother to appeal the decision of the application judge after, we presume, the tenant agreed to leave the premises? Easy answer – it did not want the lower court precedent to stand.

Image courtesy of 46birds.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.