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Assignments of Leases: Goodyear, A Case in Review

Goodyear v. Burnhamthorpe

Goodyear was the tenant under a long-term ground lease of part of an office building in Etobicoke, known as 10 & 21 Four Seasons Place, where the original landlords were Four Twenty-Seven Investments Limited (“427”) and Saracini Investments Ltd. (“Saracini”). When Goodyear entered into its lease in 1980, Aetna Canada held a first and second mortgage on the property, which went on in 1979. Hence, the Goodyear lease was subsequent in priority to the Aetna mortgage. When Aetna put its mortgage on the property, it wanted the owners 427 and Saracini to assign to it as collateral security for the benefit of any future leases entered into by 427 and Saracini. Goodyear was not a party to the assignment of leases at that time. Despite the assignment, Goodyear paid its rent under the original Goodyear lease to 427 and Saracini. The assignment of leases to Aetna was made in the belief that any future lease including the original Goodyear lease would be assigned to the lender as collateral security for the loan, since the original Goodyear lease was a long-term lease. Goodyear naturally wanted to protect its security of tenure and entered into a non-disturbance agreement with Aetna. According to this non-disturbance agreement, Aetna would not re-enter and take possession of the demised premises so long as Goodyear was paying rent to Aetna. The non- disturbance agreement also contained attornment language stating Goodyear would attorn to Aetna and create privity between Goodyear and Aetna.

In 1984, Saracini and 427 transferred their interest in the property to Angeles Investment Property Inc. Angeles gave afresh third mortgage to Canada Life without entering into any fresh assignment of leases with Aetna, when the rents arising under all leases were assigned by Angeles to Canada Life, including rents owing by Goodyear under the original lease.

In 1987, Angeles and Goodyear agreed to surrender the original Goodyear leases and they entered into a new lease arrangement for parts of the office facility on the property. At that time, Goodyear requested a non-disturbance and attornment agreement from both Aetna and Canada Life. Goodyear drafted the non-disturbance document and forwarded the same to its lawyers for review, when Canada Life refused to enter into the non-disturbance agreement. Thus, the new Goodyear lease was subsequent in priority to both the Aetna and Canada Life mortgages. At this point, Angeles went into default on its loan to Canada Life, following which, Canada Life appointed a receiver to operate the property and bought out (i.e. took an assignment of) the prior mortgages in favour of Aetna. So, Goodyear paid rent to the receiver. In December 1994, Canada Life dismissed the receiver/manager. Then, Canada Life entered into a management contract with the present management company, advised Goodyear that it was in possession, and wanted Goodyear to pay rent to it. Thus, from January 1995, Goodyear paid rent to Canada Life.

In August of 1995, the property manager of the Burnhamthorpe property syndicated the purchase of the property from Canada Life. Canada Life entered into an agreement of purchase and sale with the property manager on behalf of several U.S. investors, and the agreement was assigned to Burnhamthorpe Square Inc. In an unusually structured sale transaction, the Goodyear lease expressly provided that Goodyear could assign its lease at any time after the Aetna mortgage was discharged and that Goodyear would be released from its covenant to pay rent. In order to hold Goodyear to its covenant, a mechanism was needed to transfer the property to Burnhamthorpe (i.e. the new landlord purchaser), but not release the Aetna mortgage. Canada Life agreed to purchase the Aetna mortgage and commence foreclosure proceedings under the Aetna mortgage security so as to assign its mortgage and the Aetna mortgage to the purchaser, who would then complete the foreclosure proceedings and become the owner of the property. The Goodyear lease unequivocally said that Goodyear’s covenant would continue if Aetna foreclosed.

In the fall of 1995, Canada Life commenced a foreclosure proceeding under the Aetna mortgage. Notice of the foreclosure proceedings was not given to Goodyear as the major tenant of the property based on the theory that Canada Life did not want to give Goodyear an opportunity to redeem the mortgage or cut out Goodyear’s lease. The Aetna and Canada Life mortgages were assigned to Burnhamthorpe, who completed the foreclosure proceedings. Though immediate foreclosure was obtained in October of 1995, the order was not registered until the formal closing in December of 1995. Canada Life agreed to take back a mortgage for the unpaid purchase price, which had in effect secured the unpaid purchase price of the purchase by Burnhamthorpe of the Canada Life mortgage.

Thereafter, a formal closing was carried out between Canada Life and Burnhamthorpe in December 1995. In anticipation of the formal closing, Burhamthorpe requested an estoppel certificate from Goodyear confirming the status of its leases. That was when Goodyear found out the foreclosure proceedings. Goodyear confirmed the term of the existing leases, but threw a spanner in the works by qualifying the estoppel certificate. While the qualification language did not clearly show the legal position ultimately taken by Goodyear (their in-house counsel had not sought an opinion at that time as to their legal obligations), the court ultimately concluded that the estoppel certificates were not sufficiently qualified to be deemed reliable by Burnhamthorpe.

When the closing to Burhamthorpe was over, Goodyear obtained advice from counsel and took the position that as a result of Canada Life obtaining possession of the property in December of 1994 (a year before) the Goodyear lease was converted to an annual tenancy. In view of this, Goodyear gave six months’ notice to Burnhamthorpe terminating the annual tenancy.

Thereafter, an application was brought by Goodyear before Mr. Justice Ground to determine whether the Goodyear lease was terminated or not. Mr. Justice Ground observed that Goodyear’s lease was an annual tenancy as a result of Canada Life taking possession of the property in December of 1994 and that the termination notice given by Goodyear was ineffective. Goodyear appealed to the Ontario Court of Appeal, where Madame Justice McKinley upheld Mr. Justice Ground’s decision that the Goodyear lease was an annual tenancy, but benefited Goodyear with the verdict that the termination notice was valid. Consequently, Goodyear terminated its lease obligations and saved approximately $11,000,000.00 in rent.

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