The relationship between the hypothecary creditor of an
immovable and the tenant begins when the tenant negotiates his
commercial lease, because it contains provisions which, in
principle, are intended to satisfy the requirements of a possible
hypothecary creditor. The tenant's top priority is to ensure
that the creditor cannot terminate the lease if he exercises his
hypothecary recourses against the immovable. For it is only when
the creditor exercises his recourses that he and the tenant will
have a direct relationship as well as rights and obligations toward
Knowing that he can be bound by a lease published in the land
register, the creditor will seek to avoid having his borrower sign
a lease, or an amendment to a lease, that might have a negative
impact on the realizable value of the immovable. In order to do so,
the creditor will require an undertaking from his borrower not to
amend the leases and not to enter into any new leases without his
consent. However, such stipulation cannot be enforced against the
tenant since he is not a party to the financing contract made
between the lender and the landlord.
That being so, the lender can nevertheless take steps to
exercise rights against the tenant. The best solution, but not
necessarily the easiest to put in place, is to obtain, directly
from the tenant, an undertaking not to amend his lease without the
prior consent of the creditor. The tenant may be reluctant to sign
this kind of undertaking which gives rise to obligations of the
tenant to the hypothecary creditor of the landlord. Thus, this
technique is used especially in cases where all or a major part of
the immovable is leased to a single tenant, since the risk
associated with an unfavorable amendment to the lease is much
If a direct undertaking cannot be obtained from the tenant, the
lender can always serve notice on the tenant that the owner has
undertaken toward the lender not to amend the leases for the
immovable without the prior consent of the latter. Indeed, although
in principle a contract binds only the parties who have signed it,
it may nevertheless be enforced against a third party who knowingly
participates in a breach of the contract. Thus, if a tenant signs
an amendment to the lease with the owner of the immovable, knowing
that this act constitutes a breach of the loan agreement between
the creditor and the landlord, the tenant runs the risk of a claim
for damages being filed by the injured creditor.
In fact, it is not so much the prospect of a claim in damages
against a tenant that the creditor is seeking, but rather that a
tenant, once he has been informed of the landlord's undertaking
not to sign an amendment to the lease without the creditor's
consent, comply with this requirement and inform the creditor
before signing an agreement with the landlord for fear of being
sued in damages by the creditor.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).