ASSIGNMENT OF LEASES, RENTS, NON DISTURBANCE AND ATTORNMENT: How To Differentiate Between Them

The argument of Canada Life in the Goodyear case was that the assignment of future leases from Angeles to Canada Life operated to create privity of estate between Canada Life and Goodyear from day one. This was rejected by Madame Justice McKinley on the basis that the only way privity of estate could be created between Canada Life and Goodyear was if the reversionary interest of Angeles in the property was transferred to Canada Life, which could only occur after a foreclosure.

In this context, Madame Justice McKinley also dealt with the situation where a lease is absolutely assigned by the owner of land but the reversionary interest in the land is not transferred to the assignee. Though it is not clear how the owner of land could keep the reversionary interest while assigning absolutely the benefit and obligations under the lease to a third party, Madame Justice McKinley commented that if that was possible there would be no privity of estate between the assignee and the non-assigning party since the reversionary interest remained in the landlord. The point is that privity of estate can only apply between the parties who hold the estate or interest in the land, the fee simple and the leasehold estates. Further on, at page 336, Madame Justice McKinley stated:

“To the extent that he may have inferred that an absolute assignment of leases would have created privity of estate between the lessor and the mortgagee, I would not agree, unless that absolute assignment amounted to an assignment of the lessor’s reversionary interest in the land.”

Choses in Action

To understand the concepts arising out of assignments of rents, to follow some of the case laws in this area, and to comprehend the impact of Section 53(1) of The Conveyancing and Law of Property Act, it is necessary to understand what a chose in action means. It is a right arising out of a contract, which is enforced by the courts. However, a chose in action is not a physical thing, such as real property, chattels or equipment. It is basically every right or promise set out in a contract, such as a non-physical benefit or right.

There are two kinds of choses in action, legal and equitable. A legal type is a chose in action which was enforced by common law courts prior to the amalgamation of common law and equity courts. The equitable type is a chose in action which was enforced by the courts of equity before the amalgamation of common law and equity courts. The equitable chose in action is a promise or benefit arising out of a trust or fiduciary relationship. If a beneficiary had a trustee to convey an asset, such as real property, to it in certain circumstances, the right or benefit to have the asset conveyed to the beneficiary from the trustee would be an equitable chose in action. For this reason, the courts of equity always permitted an equitable chose in action to be enforced by assignees.

On the other hand, an assignment of rents is a legal chose in action. Traditionally, common law courts did not permit a legal chose in action to be enforced by assignees, and this created the doctrine of privity of contract. Thus, historically, an assignment of rents could not be enforced by the lender. To enable an assignee to enforce a legal chose in action, to get the benefit of the rents, the courts of equity intervened so that the assignor or the landlord/borrower could enforce the contract on behalf of the assignee, also known as the lender. Then, the assignor would in effect operate as a trustee for the assignee, which required a two-step litigation process. Firstly, the assignee would bring a claim in the courts of equity for an order requiring the assignor to enforce the contract. Secondly, with that order in hand, the assignee would ask the assignor to sue in the common law courts. Then, the legal chose in action in favour of the assignor would be enforced by common law courts and the doctrine of privity of contract would remain intact.

With the amalgamation of common law and equitable courts, these distinctions were eliminated and the courts permitted the assignee to sue the non-assigning party directly. It was introduced in Ontario following Section 53(1) of The Conveyancing and Law of Property Act and changes in the Rules of Practice. Section 53(1) states that a legal chose in action is enforceable by an assignee provided that

1) It is an absolute assignment and not a collateral assignment for security;

2) The assignment is in writing; and

3) Notice has been given to the non-assigning party.

Subject to these conditions, the assignee can enforce the contract on the non-assigning party. There are also Rules of Practice for assignees to proceed against a non-assigning party for recovery of a chose in action. Actually, the assignee can sue in its own name and not in name of the assignor. When the assignor retains a right of re-assignment, the assignor has to be a party to the claim because it continues to have a residual right in the chose in action.

Considering that an assignment of rents given as collateral security is not an absolute assignment, the lender cannot sue for rents until it becomes absolute. It becomes so when there is a default by the landlord/borrower and the lender takes steps to enforce the assignment of rents by taking possession, appointing a receiver, or demanding the rents through an attornment of rents.

Attornment Agreement vs. Non Disturbance Agreement

The differences between an attornment agreement and a non disturbance agreement are brought out in the Goodyear case. Both of them create privity of contract between the lender and the tenant, but a non disturbance agreement is one sided. It says that if the tenant pays rent to the lender, the lender will not kick the tenant out, but it cannot force the tenant to pay rent to the lender. Should the lease be first and the mortgage second, then the lender can take possession and ask the tenant for rent as either an agent of the landlord or as a mortgagee in possession. The lender can also do so upon acquiring the reversion through foreclosure or sale. The lender can attorn rents and the tenant has to pay rent to the lender. Should the lease be after the mortgage, then the Goodyear precedent is that:

1) The lender can ask the tenant to leave;

2) The tenant can leave on its own volition;

3) Should the lender allow the tenant to stay and the tenant stays, then:

(a) If the terms of the tenancy are not agreed upon, the tenant is an annual tenant on the same terms as the original lease; and

(b) If the parties agree on a different tenancy, then that agreement prevails.

4) If the tenant remains and does not pay rent, it does so at the sufferance of the lender; and

5) If the tenant stay put without any agreement, but the lender accepts rent, then an annual tenancy is created.

Know your legal rights as a tenant or a landlord. For more information about renting in Toronto, and how you or your business can use Ontario law to your advantage, contact the lawyers at Levy Zavet PC (Levy Zavet) in Toronto, Ontario.