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What happens when two innocent parties are implicated in the default of a mortgage? This was the issue in a recent case before the Ontario Superior Court of Justice. When a mortgagee defaults, but has tenants living on the property, the mortgagor cannot simply repossess the property. The tenants’ interests must be taken into consideration as well. 

The borrower defaulted on the loan so the lender sought to possess the property

The case of Canadian Imperial Bank of Commerce v. Pena concerned an application for the possession of property. The applicant was Canadian Imperial Bank of Commerce (“CIBC”), which was the respondent’s lender in a Line of Credit and Mortgage Loan Agreement. The Agreement was dated February 15, 2017. In November 2021, the respondent defaulted on the repayment of the loans.

Under the terms of each of the loans, if the borrower was to fall in default, the entire balance of the loans would become payable. On March 30, 2022, the bank demanded full payment for a total of $331,341.05. The respondent had given the applicant a Charge/Mortgage of Land on the property in question as collateral security for the loans. Under the terms of the Charge, it was provided that:

“THE Chargee, on default of payment by the Chargor for at least fifteen (15) days, may, on at least thirty-five (35) days’ notice enter on and lease the land or on default of payment by the Chargor for at least fifteen (15) days, may, on at least thirty-five (35) days’ notice enter on and sell the land. The Chargee may lease or sell the land without entering into possession thereof.”

The respondent had brought tenants onto the property after enforcement proceedings had commenced

The respondent was served a Notice of Sale Under Mortgage and a Notice of Intention to Enforce Security on April 12, 2022. In response, the respondent threatened to call the police. He claimed, by email, that he was out of the country and that his family resided in the property. As it turned out, however, the respondent was renting the property out to individuals who were not his family.

The tenants had paid $30,000 in advance to secure the property as residence for the year. They had obtained their lease in July 2022. They were unaware of the circumstances that had arisen in relation to their home. 

In this case, there were two innocent parties who had been defrauded by the respondent, which sometimes calls for equitable relief.

The defence against an application for possession of property

Generally, courts will not take property from a purchaser who has made a purchase with considerable money upfront without notice. This is a defence to an application for possession of property. In i Trade Finance Inc v Bank of Montreal, the Supreme Court of Canada explained:

“The effect of the defence is to allow the defendant to hold its legal proprietary rights unencumbered by the pre-existing equitable proprietary rights. In other terms, where the defence operates, the pre-existing equitable proprietary rights are stripped away and lost in the transaction by which the defendant acquires its legal proprietary rights.”

To analyze a case under the doctrine, a court must compare each of the innocent parties’ equities. 

The applicant and the tenants’ interests both had to be weighed

In this case, the lease had been entered into after the enforcement proceeding had commenced. The tenants had done everything they reasonably could have done to obtain the property, as there was no record on the title that indicated the default on the mortgage or enforcement efforts. However, the applicant was slow to take action in its enforcement proceedings after the respondent defaulted. So, the Court decided that the tenants were the slightly more innocent parties between them and the applicant bank.

The bank relied on section 52(1) of the Mortgages Act, which allows a court to set aside a tenancy agreement on default of the mortgage. However, it ignored in its argument section 52(2) which reads: “In considering the application, the judge shall have regard to the interests of the tenant and the mortgagee.”

The Court held that, because of section 52(2), both the tenants and the lender’s interests must be taken into account. The tenants had approximately half of their lease term remaining and risked losing their home.

Court grants possession of property to applicant

In contrast, if the tenants were allowed to stay in the property until the end of their lease, the lender would be able to collect interest on the respondent’s default to recoup its loss. The applicant, having the property itself as security, has a remedy for the losses it faced. The tenants do not. 

The Court decided that the tenants were allowed to stay in the property until the term of the lease expired. The Court also allowed the applicant to add the $30,000 collected in rent by the respondent to the debt owed in addition to any other delinquent expenses on the property. 

The applicant was given possession of the property. It would become the effective landlord at the end of the lease agreement, and could obtain possession of the unit in accordance with the Residential Tenancies Act.

Contact the Real Estate Lawyers at Bader Law for Help with Legal Disputes

Bader Law represents individual and corporate buyers in real estate transactions in Mississauga and throughout the Greater Toronto Area. Our experienced real estate lawyers take strategic action to reduce risk, secure clients’ interests, and protect their financial investments. Our team reviews Agreements of Purchase and Sale, handles title insurance matters, and assists with mortgages and refinancing.

Bader Law ensures your real estate matters are tended to in a timely and professional manner. To schedule a consultation, contact us online or call 289-652-9092.