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Tag: tenant

The Ontario Real Estate market meets its April 2017 Budget; are we in crisis?

April 2017 will possibly go down as the turning point in Ontario/Canada’s economy. Although the brunt of the straws that broke the camel’s back were dropped in Ontario, it’s obvious that this province is Canada’s strongest at the moment. Remember presently, Real Estate, Construction and Mortgage/Finance are pretty much the only above positive performing industries in Canada. To recap collectively what transpired in April here are the following in layman terms (excuse my spelling and grammar, can’t be bothered):1) 15% foreign real estate buyer tax, essentially taxing well to do non-citizens and non-permanent residents investing in real estate in the better part of Ontario. These dollars will no doubt be diverted elsewhere away from real estate entrepreneurs, retirees looking to down size and leave an inheritance to their kids and grandchildren looking to get into real estate themselves, real estate developers employing tens of thousands of contractors and sub-trades, contractors and sub-trades busy building homes for which their contracts will dwindle, tens of thousands of realtors making a living helping others buy and sell real estate, tens of thousands of mortgage brokers helping buyers borrow money, and much more

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Resulting and Constructive Trusts: A Case in Point

Constructive Trusts Without Unjust EnrichmentIn a majority judgment in Soulos v. Korkontzilas, the Supreme Court of Canada noted that a constructive trust arose in the absence of a finding of unjust enrichment to the benefit of the appellant real estate broker. In 1984, Mr. Soulos selected a building where his banker was a tenant and asked Mr. Korkonztilas to enter into negotiations on his behalf.  The vendor rejected Mr. Soulos’ initial offer of $250,000 and instead, made and tendered a counter-offer of $275,000. Mr. Soulos rejected this offer, but “signed it back” with an offer of either $260,000 or $265,000. The vendor accepted the higher price of $265,000, which Mr. Korkonztilas did not convey to his client. The property was instead purchased for his wife under her maiden name where she later transferred it to her and her husband jointly. Mr. Korkontzilas, however, told Mr. Soulos to “forget about” the property as the vendor was no longer interested in selling and added that he would find him a better property. The matter came to light in 1987 when Mr. Soulos learned that Mr. Korkontzilas had purchased the property for himself . Thereafter, Mr. Soulos brought an action, alleging breach of fiduciary duty giving rise to a constructive trust.  As a further reason for his action, Mr. Soulos said that the property held a special value to him because his banker would be his tenant.  Since having one’s banker as a tenant was a source of prestige within the Greek community to which he belonged, Mr. Soulos wanted it desperately.

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Resulting and Constructive Trusts: All About Constructive Trusts

The Constructive TrustA constructive trust is formed by operation of law. It is considered an equitable remedy so as to prevent unjust enrichment, which is when the law imposes an obligation upon one party to hold specific property for another. The person so obligated becomes a constructive trustee towards the person to whom he owes performance of the obligation.  Although the application of the constructive trust has been treated as an equitable remedy to prevent unjust enrichment in Canada, recently, constructive trust has been applied as a remedy to wrongful acts in the absence of enrichment and corresponding deprivation on the basis of the good conscience doctrine. There are two situations described by the Supreme Court of Canada when a judge would decide whether good conscience requires the imposition of a constructive trust.  These two conditions are:Ill-gotten property obtained by a wrongful act of the defendant, notably breach of fiduciary obligation or breach of duty of loyalty; andSituations where the defendant has not acted wrongfully in obtaining the property, but would    be unjustly enriched to the plaintiff’s cost by keeping the property.

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Resulting and Constructive Trusts: The Various Types

Resulting Trusts Arising from Mortgage FraudThe Alberta Court of Appeal observed in Luitenko v. McAleer that a resulting trust arose out of mortgage fraud. The respondent, Erika Luitenko, who was ineligible for a mortgage, purchased a house by committing fraud with help from her friend Lada McAleer and Lada’s husband. The purchase price of approximately $185,000 was given by Ms. Luitenko as a down payment as well as the lawyer’s fee to complete the transaction. It was placed in the joint names of the McAleers and their son. Ms. Luitenko lived in the house for over two years starting October 2005, paying the appellants $1,150 per month to cover the cost of the mortgage payments, municipal taxes, and home insurance. She also paid all utilities, renovation, and general upkeep costs for the home.The value of the home continued to increase in a very short amount of time and by 2008 stood at $323,000.

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The Lesson Learned from a Leasing Arrangement

In the previous installment, we reviewed a scenario when the lender can attorn rents and the tenant has to pay rent to the lender. Assuming that the tenant and lender have a non disturbance agreement and that the tenant chooses to stay and pays rent to the lender, the non disturbance agreement creates a monthly tenancy continuing as long as the tenant pays rent. With an existing non disturbance agreement, the tenant paying rent to the lender is not subject to an annual tenancy. Nor is the tenant bound by the original terms of the lease either. These are real benefits to the tenant, allowing the tenant to stay or go as it deems fit.However, a non disturbance agreement does not mean that the tenant has agreed to stay forever. There is always the option to leave. On the basis of the Goodyear case, the tenant can leave once the lender takes possession. So, the non disturbance agreement is one sided here. Opposite to this, an attornment agreement creates mutual obligations between lender and tenant. The tenant agrees to become the tenant of the lender and the lender agrees to become the landlord of the tenant, thus creating a tenancy stitching together both. It binds the lender to give the tenant possession and the tenant to pay rent.

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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.TenancyThe 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.

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Assignments of Leases: Goodyear, A Case in Review

Goodyear v. BurnhamthorpeGoodyear 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.

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Assignment of leases, rents, non-disturbance, and attornment

Assignment and Assumption of Contracts General RulesThe lease is a mixture of benefits and obligations, which can be unilateral or bilateral.  The “assignor”, or a party to a lease, can assign the benefits to a third party, the “assignee” but cannot assign the obligations without the consent of the other contracting party or the non-assigning party. The assignee can assume the obligations without the consent of the non-assigning party, but this does not relieve the assignor of its primary liability for the obligations. Nor does it enable the non-assigning party to sue the assignee for a default. In the event of default, the non-assigning party can sue the assignor who could in turn sue the assignee who had assumed the obligations and either expressly or by implication agreed to indemnify the assignor for the assumed obligations. The point here is that benefits can be assigned without consent of the non-assigning party, but obligations cannot. Nonetheless, if the benefit is expressly not assignable or because of its nature is not assignable, or if the lease provides a mechanism for its assignment, then these express provisions would modify the right of the assignor to assign a benefit. This is known as the Doctrine of Privity of Contract, and it has value in some instances, like other contractual rules, but causes unnecessary complexity and rigidity in relation to assignments.

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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.

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ASSIGNMENTS OF LEASES, RENTS, NON DISTURBANCE AND ATTORNMENT: An Introduction

Leases and tenancies of a secured property are of great interest to a commercial lender for the following reasons:1. The borrower could pay the debt from the rent obtained from the tenant;2. For valuation of the property based upon a cap rate, the rent could be used as the basis;3. The rent would determine whether or not the borrower could liquidate the property to repay the debt or get replacement financing to repay the debt, namely the voluntary exit strategy;4. It would also indicate whether or not the lender could liquidate the property using mortgage remedies to repay the debt or could sell security to another lender, namely the involuntary exit strategy;

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