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A Discussion about the Assignment of Leases

As the Goodyear case considered in-depth assignments of rents and leases to determine the impact on the doctrine of privity, it is necessary to discuss the assignment of leases for several reasons.

The court observed that a collateral assignment of the benefits of a contract as security for a mortgage did not result in the mortgagee assuming or becoming liable for any of the obligations under the contract. As the benefits of the contract are a chose in action, they are assigned to the lender for the sole purpose of enabling the lender to assert a right to receive the benefits through legal process. There could be no privity of contract between the non-assigning party to the contract and the assignee/lender because the obligations under the contract were not assumed by the lender.

Reading the verdict, at page 329, Madame Justice McKinley states:

“Although the assignment is specifically stated to ensure to the benefit of and be binding on successors and assignees of both the mortgagor and the mortgagee, that provision adds nothing to the rights and obligations of the immediate parties and cannot expand in any way the rights and obligations of their successors and assignees.”

So, the standard language in a lease that it is binding on assignees adds nothing to the rights of the non-assigning party and the assignee. Such rights are determined by the lease and by The Conveyancing and Law of Property Act. Such assignment operates only as an assignment of a chose in action (i.e. the debt for rental payments), which the mortgagee may be able to acquire in its own name depending on future events. For the best conveying quotes, be sure to visit a website like Compare Conveyancing Quotes to find the best deals on services for you.

Elaborating on, at page 330, Madame Justice McKinley says:

“There is nothing in the first mortgage or in the assignment of rents agreement which gives future lessees any rights over the first mortgagee, although the mortgagee clearly has the right to demand payment of rent from future lessees on default by the mortgagor… The relevant question is whether a party to a contract (here the mortgagor/lessor, Saracini) can assign its obligations under a contract (the leases) to a third party (the mortgagee), since without the existence of mutual rights and obligations there could be no privity of contract between the lessee and the mortgagee. The common law has consistently held that obligations cannot be assigned, and Burnhamthorpe acknowledged in its factum that only by novation can obligations under a contract be transferred to a third party. It fails to explain in what way novation occurred in this case.”

Novation was not a viable argument in the case because Goodyear never agreed that the landlord/owner, Saracini, would be replaced by the mortgagee. Novation is an absurd argument, when a lease is being assigned to a lender as collateral security for a debt. The crux of the matter is that the Goodyear case acknowledges that for privity of contract to exist between an assignee (here the mortgagee) and the non-assigning party (the tenant), the benefits of the contract must be assigned. The assignee must assume the obligations of the contract absolutely, not as collateral security or conditional upon the occurrence of an event. An assignee cannot enjoy benefits without obligations and expect to be in a direct contractual relationship with the non-assigning party.

The effect of an assignment of benefits under a lease as security for a loan is twofold. Firstly, it gives the lender the right to acquire the benefit absolutely (through foreclosure) or the right to transfer the benefit absolutely to a third party. Secondly, it also allows in the case of a debt, the lender to bring an action to recover the debt. In regards to the case under review, this would have given Canada Life the right to claim the benefit from Goodyear provided:

1) Canada Life did not default on its obligations under the lease such that Goodyear could terminate or offset; or

2) The landlord did not assert its primary right to possession, thereby giving Goodyear the right to give up possession and terminate the lease.

Canada Life, however, did assert its primary right to possession by becoming a mortgagee in possession when it demanded rent. Goodyear paid the rent and a new annual lease ensued.

Even when the benefits were assigned and the assignee assumed the obligations, it did not create privity of contract between the assignee and the non-assigning party under common law. That, however, has been changed, and Section 53(1) of The Conveyancing and Law Property Act statutorily provides that the assignee, upon giving notice to the non-assigning party, creates a privity of contract between himself and the non-assigning party and can sue on the contract.

Based on certain English case law, it is possible to absolutely assign a contract as collateral security for a debt with the understanding that when the debt is repaid the contract would be re-assigned to the assignor. It puts assignments of contracts in the same position as mortgages in Ontario prior to the Land Registration Reform Act. Mortgages are an absolute conveyance of legal title to the property with a contractual and equitable right to get the property back when the debt is repaid. Similarly, a contract could be absolutely assigned to the mortgagee with an obligation on the mortgagee to re-assign it when the debt was repaid. It appears from the Goodyear case that this position is no longer viable.

To separate absolute assignments of contracts from conditional assignments of contracts, English contract law made an attempt, an effort without merit, that was necessary to reconcile opposites results in English cases with similar facts. This issue has been put to rest in the Goodyear case. In fact, absolute assignments of contracts need an assignment of the benefits of the contract and assumption of the obligations of the contract absolutely, not as a sort of security.

In the Goodyear case, Mr. Justice Cory’s decision in Alberta (Treasury’s Branch) v. MNR was relied upon, which spells out the concept that an absolute assignment of a chose in action or debt cannot contemplate the existence of an equity of redemption.

“If an instrument is an absolute assignment then it is complete and perfect in itself, there cannot be a residual right remaining with the debtor to recover the assets. By definition, a complete and perfect assignment cannot recognize the concept of an equity of redemption.”

There is also an attempt to explain the fuzzy notions of privity of estate relating to obligations between the landlord and the tenant that touch and concern the land in the Goodyear judgment. Such obligations touching and concerning the land bind the assignee of the landlord and the assignee of the tenant, whether or not the lease has been assigned and whether or not there is any privity of contract.

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.