Issues in Mortgage Law
Foreclosure: When and Why?
It is not uncommon to combine a claim for foreclosure with a claim for the amount due under the covenants contained in the mortgage. Thus, an action for foreclosure is for the recovery of the mortgaged property itself and is a means by which the mortgagor’s equity of redemption is ended, so that the mortgagee may realize on the security without later having to justify the sale price or to account for the sale proceeds.
In Toronto, and quite a few other jurisdictions in Ontario, the foreclosure process takes place as a reference pursuant to Rules 54 and 55 of the Rules of Civil Procedure. Besides this, Rule 64 has specific application to foreclosures and sale actions. When a choice is made between power of sale or foreclosure, there are several issues to consider. Such considerations are: whether the mortgagee is an institutional or private lender; whether there are any subsequent encumbrancers or execution creditors and whether they are private or institutional; whether the economic climate is in flux, that is, falling or rising real estate market; whether or not the mortgage debt exceeds the value of the property and whether or not the mortgagee has the ability to hold the property for a period of time or sell and recognize a profit quickly, that is, value of the mortgaged property; whether or not the mortgagor is litigious; whether or not there is a likelihood of a defence to the action itself and likelihood of the delivery of a request for sale; how long it would take to obtain the final order of foreclosure; and what would be the expenses and legal fees for this decidedly costly process. There should be no doubt that the converting the foreclosure action converted to a sale action would take a lot of time and create a lot of expenses. Each such step in the process requires an attendance before a judge or master, which depends on the jurisdiction.
Sham Tenancies: Section 52 of the Mortgages Act
Residential tenants in Ontario have been blessed with extensive rights by the Residential Tenancies Act 2006. Most important among such blessings is security of tenure, which means that a tenancy can only be terminated in a limited set of circumstances. It is not possible for a landlord to terminate a tenancy just because it wishes to install a new tenant or because it wishes to raise the rent. With the exceptions of non-payment of rent, damage to the property or illegal acts, a landlord can only terminate a tenancy where it intends to personally occupy the unit, or where the property has been sold and the purchaser requires the unit for his/her own use.
The landlord’s options are still more limited when the tenant has a fixed term lease. Regardless of the situation where the landlord (or purchaser) personally requires the unit, the tenancy cannot be terminated prior to the end of the fixed term. It has the potential to create significant problems for a mortgagee seeking to realize on its security. Take, for instance, a tenanted property with a 3 year lease. If the lender wishes to sell under power of sale, and the property is tenanted, the property can only be sold with the tenant sitting there right up to the end of the term. In that event, if the rental payment is below market value, the sale price of the property would be significantly affected. Subject to the conditions of the lease, a mortgagee can move the court to set aside the tenancy agreement. According to Section 52 of the Mortgages Act, a mortgagee may apply to the Superior Court of Justice to set aside a tenancy agreement entered into in contemplation of or after default under the mortgage, with the intention of adversely affecting the mortgagee’s interest in the property. In other words, section 52 is intended to relieve a mortgagee from the burden of a fraudulent lease entered into in an attempt to prevent enforcement efforts.
The mortgagee could also get a declaration that a lease is unenforceable against the mortgagee by bringing an application based on Section 44 of the Land Titles Act. According to Section 44, a lease with more than three years to go is unenforceable against a registered encumbrancer, unless that lease is registered on title. It is, however, necessary to note that this decision is under appeal. Anyway, the ability to seek relief under Section 52 of the Mortgages Act or Section 44 of the Land Titles Act would be lost if the mortgagee attorns rents. Under Section 47 of the Mortgages Act, a mortgagee-in-possession is deemed to be a landlord (with all the concomitant obligations of a landlord under the Residential Tenancies Act, 2006). So, a mortgagee will be held to be a mortgagee-in-possession if it deprives the mortgagor of the control and management of the mortgaged property. Generally, if not always, attorning rents would be sufficient to result in a mortgagee being held to be a mortgagee-in-possession. Such perils of precipitous attornment are very lucidly explained in the decision of Justice Murray in Bank of Montreal v. Smith. It is crucial that legal counsel is aware of the terms of the tenancy before making the decision to attorn rents. The failure to do so would eliminate the capacity to set aside prejudicial tenancy agreements, and could drastically reduce the sale price of the property. It is absolutely essential for the counsel to get an agent to contact the tenants and to determine the nature of the tenancy agreement before attorning rents.