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Can a Borrower in Default Prevent a Lender's Power of Sale by Leasing the Property?

This question was tested in Toronto-Dominion Bank v. Hosein.

In 2011, Toronto-Dominion Bank took a $130,000 mortgage over a townhouse condominium.  By late 2012, the borrower was in default and the bank took steps to enforce its mortgage security.  But, unbeknownst to the bank, the borrower had freshly leased the property to a tenant for five years on very favourable terms.

The bank tried unsuccessfully to get a copy of the lease and redirect the tenant’s rent payments so they could be applied to the outstanding mortgage. So, the bank  was ultimately forced to apply under the Mortgages Act (the “MA”) for a court order to set aside the tenancy.  But that application was rejected, with the court finding that the provisions of the MA were in conflict with the Residential Tenancies Act, 2006 (the “RTA”), which set out that a tenancy could be “terminated only in accordance with” its own provisions. The court found the bank could not proceed under the MA because the RTA prevailed.

The bank appealed, successfully. The provisions of the MA (in section 52) allowed a mortgagee to apply to “set aside” a residential tenancy made by a borrower “in contemplation of or after default under the mortgage” if it had the object of: (1) discouraging the mortgagee from taking possession on default; or (2) adversely affecting the value of the mortgagee’s interest.

On the other hand, the RTA (in section 37(1)) sets out how a residential tenancy can be “terminated,” and goes on to govern the manner in which a landlord can recover possession of a rented unit.

The Court of Appeal found that the MA’s use of the term “set aside” was deliberately different from the RTA’s reference to “terminated,” and that it had to be presumed that the legislature therefore intended different meanings.  Drawing an analogy to the distinction between an annulment and a divorce, the court found that to “set aside” a tenancy renders it never to have existed, while to “terminate” it means to bring it to an end.

The two Acts were therefore found not to be in conflict and could be read together harmoniously. 

Here, the bank’s application under the MA was not to terminate the lease; it was to set aside the alleged “sweetheart deal” tenancy between the mortgagor and the tenant, entered into after default and after a Notice of Sale had been issued.  This move was clearly intended by the mortgagor to thwart the bank from exercising its rights as mortgagee. Also, the bank’s remedy of setting aside the lease still conformed with other tenant-security objectives found in various MA provisions, which were also not in conflict with the RTA.

The court allowed the appeal and made an order setting aside the tenancy agreement accordingly.  See Toronto-Dominion Bank v. Hosein, 2016 ONCA 628.