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Real Estate

The Law of Lease Assignments

Earlier we have seen how Goodyear benefited from its lawsuit against Burnhamthorpe. This verdict is compared with the generally accepted good law set out in Corbett v. Plowden over one hundred years ago in Ontario. By asserting its paramount right to possession, Canada Life got the right to terminate the subsequent lease in favour of Goodyear and gave Goodyear the right to walk from its subsequent lease obligations. Such a result apparently is only possible when the mortgage has priority over the lease. So, the mortgagee would take title subject to the lease, if the Goodyear lease had priority.

Tenancy

The Goodyear lease was not terminated in December 1994 by Canada Life or Goodyear. Continuing as usual, Canada Life demanded rent, which Goodyear paid from January of 1995. Following the decision in Corbett v. Plowden, in the absence of an express agreement as to the term of the lease between the mortgagee and the tenant, the court could impose an annual tenancy on Canada Life and Goodyear, which could be terminated by six months notice. Thus, there was no dispute that the law in Corbett v. Plowden was good law in Ontario.

Issues before Mr. Justice Ground and before the Ontario Court of Appeal were

1. Whether or not there was privity of contract between Canada Life and Goodyear arising out of the assignments of rents and leases given by 427, Saracini, and Angeles to Aetna and Canada Life as security for the mortgage loans;

2.  Whether or not the non disturbance and attornment agreements given by Goodyear to Aetna created privity of contract; and

3. Whether there was privity of estate between Goodyear and Canada Life as a result of the foreclosure proceedings.

Observations

Madame Justice McKinley decided that:

1. The assignment of leases given by 427, Saracini, and Angeles to Aetna and Canada Life were not absolute assignments of future leases. Though the benefit of future leases was assigned to Canada Life, they did not assume the obligations under the future leases. As the mortgagees did not assume any obligations under the future leases, the assignment of the benefit was collateral security for the debt obligations of 427, Saracini, and Angeles and was not an absolute assignment. Since the borrower retained a right of redemption, the assignment of leases could only be made absolute by foreclosure under both the mortgage and the assignment of leases or to exercise a power of sale, sell the property, and along with the sale of the property, assign the leases to the purchaser;

2. Even without a privity of contract, the assignments of the benefit of the leases were valid and the mortgagee on default could sue Goodyear for rent;

3. Leases assigned by 427 and Saracini could not have the effect of assigning a future lease given by Angeles to Goodyear. Only Angeles could do that;

4. Goodyear’s non-disturbance and attornment agreement to Aetna referred only to the original Goodyear leases and could not form a privity of contract with respect to the subsequent leases;

5. Goodear’s negotiation, finalization and execution of a non-disturbance and attornment agreement in favour of Canada Life could not be considered a consent or give rise to privity of contract, because Canada Life had rejected the non-disturbance and attornment agreement and had not executed the same;

6. A mortgagee is not permitted to argue that the entering into of a lease with its consent creates privity of contract between the mortgagee and the tenant. Admittedly, some cases have
concluded that where a lender consents to the entering into of a subsequent lease, the lender cannot thereafter take the position that it can sell the property free of the lease because of the consent. Such consent is not creation of a privity of contract, but an estoppel against the mortgagee preventing the mortgagee from exercising its rights to terminate the tenancy. If the mortgagee consents to a subsequent lease, it is not clear whether or not that creates an estoppel against the tenant as well, stopping the tenant from exercising its right to walk if the mortgagee asserts its paramount right to possession. Consent does not create privity of contract between a tenant and the mortgagee because consent is a unilateral act. Privity of contract requires the exchange of contractual rights and obligations between two parties, a duality between the contracting parties;

7. Goodyear’s estoppel certificates were qualified and were not relied upon by Burnhamthorpe in entering into the agreement of purchase and sale and completing the transaction. Estoppel certificates do not create rights where none exists. The reliance argument has created a stir in real estate circles, because it negates the benefit of an estoppel certificate, unless the agreement is conditional on obtaining the same or fresh consideration from the lender for getting the estoppel certificate. The probability of Burnhamthorpe defaulting was not accepted; and

8. Lastly, the court dealt with the abstruse concept of privity of estate. Privity of estate primarily provides that certain covenants that touch and concern the land, between a landlord and a tenant, are binding on both the assignee from the landlord and the assignee from the tenant. It is so, because the lease includes an interest in land, and the doctrine of privity of contract is inapplicable to those benefits and obligations which touch and concern the land.

In view of the above, it was argued in Goodyear that when the mortgagee foreclosed and became the owner of the property, the obligations of Goodyear that touched and concerned the land were enforceable by Burnhamthorpe. Madame Justice McKinley accepted it, adding that the obligations that touch and concern the land were those lease obligations existing immediately prior to the foreclosure, being the annual tenancy obligations, the long-term lease having been terminated when Canada Life took possession of the property in December 1994.

Beliefs

Some people are of the opinion that the concept supporting Corbett v. Plowden was abolished when the Land Registration Reform Act of 1984 ended the legal fiction that a mortgage was conveyance of the legal title to the property with the retention by the borrower of a contractual and equitable right of redemption. Their argument is that since the mortgagee did not obtain legal title to the property but merely a charge on the property, the lender could not assert any paramount title by taking possession of the property. It has several problems, the best of which is that the western land titles jurisdictions, which never had the advantage of legal fiction, applied and considered the principles in Corbett v. Plowden. Also, the Land Registration Reform Act was not meant for introducing substantive changes in the rights of mortgagees and actually preserved all rights of mortgagees. It is possible to argue that since Corbett v. Plowden was a tenant right, the mortgagee is entitled to assert its paramount right to possession and take free of subsequent tenancies. If Section 6(3) of the Land Registration Reform Act preserves this right, so is the tenant’s right to walk.

Protect yourself. 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.

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