Mortgagee sets aside mortgagor's "sweetheart deal" tenancy agreement

Mortgagors facing mortgage enforcement proceedings frequently try to create obstacles for their mortgagees. One such obstacle is the granting of a very favourable or "sweetheart" tenancy agreement to a third party tenant. In Toronto-Dominion Bank v. Hosein, 2016 ONCA 628[1], the Court of Appeal recently considered the interplay between s. 52 of the Mortgages Act[2] and the Residential Tenancies Act, 2006[3] and fortunately upheld the right of a mortgagee to set aside offending tenancy agreements without resorting to the termination provisions of the Landlord and Tenant Board.

S. 52 allows a mortgagee to bring an application to set aside a tenancy that was entered into by a mortgagor as a means of discouraging a mortgagee from taking possession of a property or adversely affecting the value of the property. The tenancy in this case was clearly one that contravened s. 52: it was a five-year fixed term lease providing for rent in the first year of $300/month which amount included a $281.76 condominium maintenance fee, rent of $300/month plus the maintenance fee in the second year, rent of $800/month in the third year inclusive of the maintenance fee and increases for the remainder of the lease in accordance with regulated increases. Market rent for comparable units was $900 to $1,000/month. Moreover, the lease was entered into after default under the bank's mortgage had occurred and after the bank had already attempted to take possession of the property.

The bank brought an application to have the tenancy set aside under s. 52. The application judge agreed that the lease contravened s. 52 and was a "sweetheart deal" but declined to set aside the tenancy for several reasons. One reason was that the bank had brought a termination proceeding to the Landlord and Tenant Board and the order given by the Board included a finding that the bank was a landlord. As a landlord, the bank would be subject to the provisions of the RTA. A second reason was that s. 52 was in conflict with the provisions of the RTA. The application judge found that since the RTA states that a tenancy may be "terminated only in accordance with this Act", s. 52 was in direct conflict with the RTA and, in the event of a conflict between the RTA and the MA, the provisions of the RTA apply.

On appeal, the Court of Appeal held that s. 52 was harmonious with the provisions of the RTA. The Court held that while the RTA is concerned with the regulation and termination of valid tenancies; s. 52 provides a remedy to have a tenancy set aside with the result that a valid tenancy never existed in the first place. Central to the Court's analysis was a distinction between the uses of the phrase "set aside" in s. 52 and "terminate" in the RTA. Accordingly, it was immaterial whether the bank was deemed to be a landlord since the relief available under s. 52 would be available in any event. As a result, the bank's appeal was granted and the tenancy was set aside.

This decision reinforces the ability of a mortgagee to utilize s. 52 as an important tool to set aside tenancy agreements that were entered into by the mortgagor as a means of interfering with the mortgagee's enforcement rights. Whether or not a mortgagee is deemed to be a landlord under the RTA, the mortgagee has recourse to s. 52 to set aside an offending tenancy agreement.