The Ontario Court of Appeal has ruled that a
provision of the Mortgages Act ("MA")
that allows lenders to set aside tenancy agreements for the
purpose of taking possession of real property does not conflict
with the Residential Tenancies Act, 2006 ("RTA")
and can be used by lenders to set aside "sweetheart"
tenancy agreements that are designed to discourage the lender from
taking possession or adversely affecting the value of the
lender's interest in the property.
In the instant case, the TD Bank took a mortgage on a
condominium unit in July 2011. On November 1, 2012, the owner
defaulted and made no payments since that time, nor any property
tax payments as she was required to pay under the terms of the
After the bank commenced mortgage enforcement proceedings, but
before it could take possession of the unit, the owner signed a
five year lease agreement with a tenant on terms that were
exceptionally favourable to say the least.
The first year of the lease called for rent of $300 per month.
That figure included the $281.76 maintenance fee that was payable
to the condominium corporation every month. In year two, the lease
called for $300 per month plus the maintenance fee payable
to the condominium corporation. In year three, the lease called for
$800 per month, which included the maintenance fee. Years four and
five called for the rent to be increased in accordance with the
regulated increase for Dufferin County.
The terms of the lease did not cover the monthly expenses
associated with the unit and it was also of note that comparable
rents in the same complex were $900 – $1,000 in 2013.
The lender brought an application to set aside the tenancy
agreement under section 52 of the MA. That section provides:
52. (1) The Superior Court of Justice may on application by the
mortgagee vary or set aside a tenancy agreement, or any of its
provisions, entered into by the mortgagor in contemplation of or
after default under the mortgage with the object of,
(a) discouraging the mortgagee from taking possession of the
residential complex on default; or
(b) adversely affecting the value of the mortgagee's
interest in the residential complex.
(2) In considering the application, the judge shall have regard
to the interests of the tenant and the mortgagee.
The judge hearing the application dismissed it on the basis
that, among other things, s. 52 of the MA conflicted with the terms
of the RTA by virtue of the fact that the RTA states that a tenancy
may by "terminated only in accordance with this Act."
The Court of Appeal disagreed and drew an important distinction
between the words "terminated" and "set
"Counsel for the appellant compared the situation to an
annulment of a marriage versus a divorce. This is an accurate
analogy. In the former case, the marriage is treated as never
having existed whereas in the latter case, the marriage is ended.
Likewise here, to "set aside" the tenancy agreement
indicates that the tenancy never existed; to terminate it indicates
that it is being brought to an end."
The Court of Appeal concluded that the MA and the RTA could be
read together harmoniously. The RTA is concerned with the
regulation and termination of valid tenancies whereas s. 52 of the
MA provides a remedy to have an alleged tenancy set aside with the
result that a valid tenancy never existed in the first place.
In the result, the Court of Appeal set aside the tenancy
agreement and ordered the owner to pay $15,000 in costs to the
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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.
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