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Assignment of Rents: Potential Conflicts and Exceptions

In the previous instalment, we discussed the difference between lease and rents and left open the manner of their registration. It is a fait accompli that an assignment of rents could be registered in Land Titles. As the right to get rents is a chose in action, it has to be registered under the P.P.S.A. With regard to an assignment of leases, it could and should be registered normally, because the lease is a property interest. It follows therefore that it cannot be registered under the P.P.S.A.

Conflicts

So, the question is whether or not to register an assignment of rents against the land. That is when conflicts with the P.P.S.A. begin. Because an assignment of rents is a chose in action and the right to receive rent is personal property, it can be registered under the P.P.S.A. Theoretically, under the P.P.S.A,  an assignment of leases being an assignment of a contract as security for a loan can also be registered.  This is contradicted in Section 4(1) of the P.P.S.A., which states that it does not apply to an assignment of an interest in real property, including a lease of real property. Hence, an assignment of leases cannot be registered under the P.P.S.A. and priority would not be affected by such registration if carried out after all. Priority would be affected by land registrations only.

Exceptions

There is an exception in Section 4(1) of the P.P.S.A., namely: “an assignment of a right to payment under a…lease where the assignment does not convey ….the assignor’s interest in the real property.” It refers to an assignment of rents, not quite elegantly stated. If the wording of the exception means that the assignment of rents does assign the assignor’s interest in the lease, then it cannot be registered under the P.P.S.A. The assignor here is the mortgagee. If so, what are the circumstances when an assignment of rents conveys the landlord/borrower’s interest in real property? One argument is that it applies only where the assignment of rents also assigns leases that are hybrid documents. In that event, it is treated as an assignment of leases for the purposes of the P.P.S.A. If, however, it is a bald assignment of rents, then it should be registered under the P.P.S.A. The alternative is that an assignment of rents is always an interest in real property being a covenant in a lease. So, the question is whether the assignment is collateral to a loan or is it an absolute. If it is collateral, it does not assign the assignor’s interest in the lease until it becomes absolute. If it is absolute, or becomes absolute, then the P.P.S.A. does not apply and priority is determined by the Land Titles Act.

It is also necessary to look at Section 36(1) of the P.P.S.A. stating:

“36.-(1) A security interest in a right to payment under a lease, to which this Act applies, is subordinate to the interest of a person who acquires for value the lessor’s interest in the lease or in the real property thereby demised if the interest, or notice thereof, of the person is registered in the proper land registry office before the interest, or notice thereof, of the secured party is registered in the proper land registry office.”

It means that an assignment of rents registered under the P.P.S.A. competes for priority with other personal property security governed by the P.P.S.A. As the first to register has priority, two competing assignments of rents or a GSA and an assignment of rents will be judged for priority purposes by who registered first under the P.P.S.A. Land Titles registrations are not relevant here, but if a person or one of the lenders acquires the real property or takes an assignment of the lease, then the P.P.S.A. does not apply and priority is governed by the land registration system. Hence, a notice of assignment of rents should be registered under both the land registration provisions and under the P.P.S.A. so as to have priority.

The query then becomes, what does “acquire an interest in the real property or the lease” mean. Obviously, sale or foreclosure is the answer. Does taking possession, appointing a receiver, attorning rents, or merely taking the security by way of mortgage security also satisfy? This point is crucial because it means a move from P.P.S.A. priorities to real property priorities with possibilities as follows:

1. Mortgage itself constitutes “acquiring the interest of the borrower in the real property” for the purposes of the P.P.S.A. It is not in real property law but is adequate for Section 36(1) of the P.P.S.A.;

2. Taking possession constitutes “acquiring the interest of the borrower in the real property” for the purposes of the P.P.S.A. Once more, it is contrary to mortgage law but suitable for Section 36(1) of the P.P.S.A. There are serious reservations against it.

3. Lastly, a mortgagee in possession is obliged under law to collect and apply rents. This duty strongly supports Section 36(1) of the P.P.S.A. even though it has its challenges.

Assuming that these arguments are valid, then priority as against rents is determined by the P.P.S.A. Land Titles until sale or foreclosure have no role there. Summing up, therefore, an assignment of leases cannot be registered under the P.P.S.A. and it is necessary to do so under the land registration statutes.

Assignment of rents is to be registered under the P.P.S.A. and the Land Titles. Until the mortgagee forecloses, or sells under power of sale, priorities are governed by the P.P.S.A., such as between two lenders, each of whom has an assignment of rents. After the mortgagee sells or forecloses, or if a purchaser acquires the real property, priority is determined by the time of registration under real property regime. It could be that the P.P.S.A. ceases to apply at an early stage when the mortgage is taken out or when possession is taken. The safe course is to ensure that the assignment of rents has priority under the, P.P.S.A. by obtaining subordination from other P.P.S.A. holders.

Also, rents can be assigned to a lender under the terms of the mortgage, under a debenture, under a GSA, under a general assignment of rents and under a specific assignment of rents. Even if the mortgage is silent about assigning rents, the right to receive rents being an incidence of ownership, will be included in a mortgage. After the lender has taken possession, the lender would be entitled to the rents from the property. It is possible that a succeeding lessee cannot be compelled to pay rent, but will have to give up possession of the secured property if the prior lender takes possession.

Know your legal rights as a tenant or a landlord. For more information about leasing and 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.

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