Sweetheart Tenancy Agreement Annulled By Mortgages Act - No Conflict with Residential Tenancies Act
Sometimes legal relationships are formed to create problems rather than solve them. This can be the case when a home owner is about to default on their mortgage and enters into a sweetheart tenancy agreement at ridiculously favorable terms in order to discourage the lender/mortgagee from taking possession of the home. Recently, the Ontario Court of Appeal looked at such a situation and ruled that the Mortgages Act allows such a sweetheart deal to be annulled or set aside as if it never existed. As such, the tenancy is not being terminated preventing any conflict with the Residential Tenancies Act.
The situation before the court involved a condo unitholder who had purchased her unit in July 2011. In order to pay the purchase price a mortgage was arranged with a bank. In November 2012, the unitholder stopped making mortgage payments and also stopped paying property taxes as was required by the mortgage.
When the bank moved to take possession, the unitholder entered into a tenancy agreement at ridiculously favorable terms. The agreement stipulated a lease term of five years, with rent the first 11 months being $300.00/mth and including a $281.00 maintenance fee. A free month followed. The next year, rent was to be $300.00/mth plus the maintenance fee, followed by a free month. In the third year, rent was to be $800.00/mth plus the maintenance fee. After this, increases were to be in accordance with the regulated increase for the county. Comparable units in the building rented for $900 to $1,100 a month.
The bank applied to the court to have the tenancy set aside under the Mortgages Act. However, the application judge decided against the bank ruling that the tenancy had been created with the purpose of discouraging the bank from taking possession of the defaulted property. Despite this, the judge determined that the tenancy could not be set aside because terminating the tenancy conflicted with the Residential Tenancies Act. The bank appealed.
The Court of Appeal allowed the appeal ruling that no conflict existed. It analogized the relationship to one of marriage and whether the marriage was annulled or divorced. If an annulment took place, it was like the relationship never existed. If a divorce, then an existing relationship was terminated.
In the case of the tenancy, the Mortgages Act creates a regime whereby if a mortgagor (the borrower) wants to rent out it property, it becomes landlord even though legally the mortgagee (the lender) is the title owner. This legal regime protects a legitimate tenant from being evicted if the mortgagor fails to make payments.
However, if a sweetheart deal, designed to discourage the lender from taking possession of a defaulted property, the deal can be set aside under the Mortgages Act. In that case, it was like the tenant/landlord relationship had never existed. Because the relationship never existed, the Residential Tenancies Act, which deals with termination of tenancies does not apply.
Toronto Dominion Bank v Hosein, 2016 ONCA 628 https://www.canlii.org/en/on/onca/doc/2016/2016onca628/2016onca628.pdf
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