Mortgage Defaults and “Sham Tenancies”: Taking Possession of a Mortgaged Property When There is a Tenant Living There

Generally, when there is a default on a mortgage and a lender wants to take possession of the mortgaged property, the lender can do so. What happens, however, if the property is residential and there is a tenant living in it? The Ontario Court of Appeal addressed this very issue and provided some clarity.

What Happened?

On July 19, 2011, a mortgage of $130,000 was registered on a townhouse condo owned by the property owner. The property owner subsequently made no mortgage payments nor did she pay her property taxes, defaulting on the agreement. The bank commenced mortgage enforcement proceedings.

In the meantime, and before the bank could take possession of the property, the property owner leased the property to a tenant on a five-year lease agreement. The bank tried, unsuccessfully, to obtain a copy of the lease.

When unable to do so, the bank applied to the Landlord and Tenant Board to terminate the tenancy and evict the tenant on the grounds that the tenant had “substantially interfered” with the bank’s “right, privilege of interest” by failing to provide the bank with a copy of the lease agreement.

The tenant was ordered to produce her lease in September 2013, which indicated as follows:

  • From July 1, 2013 to May 1, 2014, the rent is $300 per month. This includes the $281.76 maintenance fee payable to the condominium corporation;
  • From July 1, 2014 to May 1, 2015, the rent is $300 per month plus the  maintenance fee payable to the condominium corporation;
  • From July 1, 2015 to May 1, 2016, the rent is $800 per month, which includes the maintenance fee payable to the condominium corporation.
  • For the remainder of the lease, the rent is to increase in accordance with the regulated increase for Dufferin County.

These amounts were substantially lower than comparable rents in the same condominium complex (which were $900 to $1,000 in 2013).

The bank applied to the Superior Court to set aside the tenancy.

Superior Court Decision

The Superior Court judge found that the property was leased under a “sweetheart deal” between the property owner and the tenant following the mortgage default, with the sole purpose of discouraging the bank from taking possession of the property.

The Court concluded that this was a violation of the Mortgages Act which technically gave the court the power to set aside or vary a tenancy agreement. However, the court went on to say that such relief could not be granted because s. 52 of the Mortgages Act conflicts with the Residential Tenancies Act and, that the provisions of the Residential Tenancies Act applied in the case of such conflict.

Since there was no provision in the Residential Tenancies Act allowing possession (and eviction) in the case of a “sham” tenancy such as this, the Superior Court had no jurisdiction to make an order requiring the tenant to vacate the premises.

The bank appealed the decision. The sole issue on appeal was whether there was a conflict between the Residential Tenancies Act and the Mortgages Act.

Appeal Decision

The Court of Appeal allowed the appeal noting that the Mortgages Act incorporates the objective of protecting a tenant through providing that the court have “regard to the interests of the tenant and the mortgagee.”

As such, there is a recognition of the interests of the tenant as well as the interests of the lender seeking to “set aside” a tenancy, and a balancing of both. Therefore, the Mortgages Act and the Residential Tenancies Act can be read together harmoniously: the Mortgages Act provides a remedy to have an alleged tenancy set aside with the ultimate result being that there was never a valid tenancy to begin with, whereas the Residential Tenancies Act regulates (and provides for the termination of) valid leases.

In addition, the court noted that the relevant provision in Mortgages Act would have no meaning or possible application if the lender (i.e. the bank) could only apply to terminate the tenancy under the Residential Tenancies Act rather than setting it aside under the Mortgages Act.

The court set aside the lease and the property owner was ordered to pay $15,000 in costs to the bank, which the court noted could be added to the mortgage arrears and enforced.

If you are involved in a mortgage dispute or would like to commence mortgage enforcement proceedings, contact the Toronto real estate lawyer Eli Karp at Financial Litigation.

We are a boutique firm with a unique focus on solving our clients’ biggest financial dilemmas. We draw on our in-depth knowledge in real estatebreach of contract, and collection actions to provide thorough and pragmatic advice and solutions.

Respond to your mortgage crisis with Financial Litigation and let our unique experience guide you through your dispute. Schedule your consultation online, or by calling us at 416 769 4107 x1.