Legal Blog

Subterfuge

An owner of a property has rented it to a tenant; a purchaser submits an offer to purchase the property, but only with vacant possession so that the purchaser can occupy the property. The owner can deliver that vacant possession with ease, simply by serving on the tenant a notice terminating the tenancy on behalf of the purchaser. But is it that simple? Given the decision of the Ontario Court of Appeal in Elkins v. Van Wissen 2023 ONCA 789, probably not.

Legislation

An owner cannot terminate a tenancy merely on a whim. The owner has to fit within one of the termination provisions of the Residential Tenancies Act (the “Act“) that allow a termination. One of these provisions is found in s. 49(1) of the Act. This section empowers an owner, on behalf of the purchaser, to give a tenant a notice terminating the tenancy if the purchaser “in good faith requires possession of the residential complex or the unit for the purpose of a residential occupation by the purchaser” or the purchaser’s spouse, parent, or child.

When a tenant receives that notice, the tenant is obliged to vacate the premises. Upon receipt of the notice, a tenant would have no knowledge whether the purchaser requires possession in good faith. But, if the owner or purchaser is playing fast and loose, the tenant is not without a remedy. A tenant may apply to the Landlord and Tenant Board (the “Board“) alleging that the owner gave the notice of termination in bad faith and that no person occupied the premises within a reasonable time after the tenant vacated the rental unit.

If, under s. 57(1) of the Act, the Board agrees with that allegation, then under s. 57(3) the Board has wide-ranging powers requiring the owner or purchaser or both to pay money to the tenant and pay an administrative fine not exceeding the monetary jurisdiction of the Small Claims Court (currently $30,000).

Section 202(1) of the Act authorises the Board to ascertain the real substance of all transactions and the good faith of the participants and, in doing so, may disregard the outward form of the transaction or the separate corporate existence of participants and have regard to the pattern of activities relating to the complex or the residential unit.

In essence, the legislation allows for a quick termination of a tenancy, but also allows the tenant compensation if the owner and purchaser have abused the rights given to them in the first instance.

Termination

On March 5, 2018, purchasers and vendors signed an agreement for the sale of a tenanted property with a closing date of June 1, 2018. The agreement required the vendors to deliver vacant possession of the property. Because one of the purchasers was a real estate salesperson, he had to divulge that information to the vendors and, when doing so, stated ” being a partner, we are buying this property as a future development.”

On March 7, 2018, the vendors, on behalf of the purchasers, served the tenants with a notice to end tenancy as of May 31, 2018, stating that the purchasers required possession of the premises and intended to move into the premises. The tenants duly vacated the premises in accordance with that notice.

On May 22, 2018, just before closing, the purchasers’ lawyer notified the vendors’ lawyer that title to the property would be taken by a corporation. As it happened, the directors of the corporation were the purchasers and two other people. The agreement closed as scheduled on June 1, 2018.

After closing, the premises remained vacant. Towards the end of 2018, the son of one of the purchasers moved into the premises, but stayed for only approximately 25 days. The corporation then rented the premises to a third party for a higher amount than what the tenants had been paying.

Odyssey

It would seem that the tenants were not oblivious to the goings-on relating to the property because, on March 8, 2019, the tenants filed an application alleging that the termination notice was given in bad faith and that the purchasers did not want the premises for their own use.

The Board dismissed the application. The tenants appealed to the Divisional Court and lost that appeal. The tenants then sought leave and were granted the right to appeal to the Ontario Court of Appeal.

The application involved the purchasers, the corporation, and the vendors. Although the vendors were represented at the hearing, the vendors took no position, filed no materials, and made no submissions. We suspect that there was a deal between the purchasers and the vendors that the purchasers would take the risk of any adverse decision.

Vendors’ Bad Faith

The vendors had argued before the Board that they had not acted in bad faith in delivering the notice because they had no reason to disbelieve that it was the purchasers’ intention for a family member to move into the premises.

The Court agreed that there may not have been bad faith at the time the notice was delivered, but held that, in this case, the correct time to determine whether there was bad faith could extend to the date of closing. By that time, the vendors knew that title would be taken in the name of a corporation. The Court held that a corporation cannot personally occupy a residence for residential purposes. Accordingly, the vendors knew, before the tenants vacated the premises, that the notice of termination they had given was incorrect. The Court held that this was bad faith. Lawyers for a vendor, beware of this development.

Purchasers’ Bad Faith

Section 49(1) of the Act specifically requires that the purchasers must require possession of the premises in good faith. Accordingly, even if the vendors had been acting in good faith at the time, it is insufficient for the Board to assess only whether the vendors were acting in bad faith in giving the notice. The Court held that the Board also had to assess whether the purchasers were acting in good faith and then determine what orders had to be made against each of the vendors and the purchasers. In effect, the Court considered that the conduct of the vendors was linked to the conduct of the purchasers. The Court referred again to s. 202(1) that requires the Board to ascertain the real substance of all transactions and the good faith of the participants.

Accordingly, the Court held that even if the Board finds that an owner did not act in bad faith but the purchaser did, the Board has the power to make appropriate orders against the purchaser. The Court held that this was necessary to give teeth to a purchaser’s good faith requirement set out in s. 49(1).

The Court did not decide the issue of whether the purchasers had actually acted in bad faith, but held that there was sufficient evidence on the issue to remit the matter to the Board for a re-determination in accordance with the reasons of the Court.

Odyssey Continues

So the tenants are going back before the Board. However, this time we suspect that the Board is going to be finding bad faith against the purchasers and will be compensating the tenants for, in effect, their improper eviction. The Board may also issue administrative penalties against the purchasers. As already stated, we also suspect that the purchasers will be indemnifying the vendors for any award the Board may make against the vendors.

 

Image courtesy of nhanhmaimoi.

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