News & Views

Mortgagees vs. Tenants: S. 52 Applications and Setting Aside Sweetheart Deals
September 24, 2019

Mortgagees vs. Tenants: S. 52 Applications and Setting Aside Sweetheart Deals

Written by Liliana Ferreira

Privity of contract is a common law principle which provides that only the parties to a contract are bound by that contract. When applied to a mortgage contract, it means that only the mortgagor(s) (the borrower) and the mortgagee (the lender) are bound by the terms and conditions of the mortgage. These terms and conditions, usually referred to as Standard Charge Terms, contain default provisions which allow the mortgagee to take possession of the mortgaged property upon an event of default (provided the appropriate enforcement steps have been taken). While the mortgagor is clearly bound by the Standard Charge Terms, and therefore obligated to give up possession of the property, it becomes a little less clear when there are other occupants, especially where those occupants may be classified as “tenants” under the Residential Tenancies Act (the “RTA”).

Under the RTA, tenants are afforded extensive protections and rights, particularly with regards to when a tenancy can be terminated. These rights and protections were recently expanded, and while a complete discussion of the changes is beyond the scope of this article, one of the circumstances in which a tenancy can be terminated is if the landlord or future owner, or their immediate family, wants to reside in the property.

However, a landlord or owner can only rely on this ground for termination if the tenant does not have a fixed term lease. If the tenant has a fixed term tenancy, for example a two-year lease, a landlord or owner cannot terminate the lease for their own use until the end of the current lease term. The tenant will have the right to remain in the property for at least a period of two years (following which their lease automatically becomes a month-to-month tenancy).

This has practical implications for a mortgagee seeking to sell the property under power of sale. If the property is tenanted, the tenants have the legal right to remain in the property until the end of the current term of their lease. If a mortgagor believes they are at risk of losing their home, they may be tempted to enter into a lease agreement as a strategy to delay or dissuade a mortgagee from proceeding with a sale under a power of sale. If a mortgagee proceeds with a power of sale they automatically step in as the new landlord and, thus, inherit all the obligations and responsibilities of same. This can be particularly onerous on a mortgagee as selling a tenanted property can sometimes be very difficult, particularly where the rent is below market rent or the term of the tenancy is for a lengthy period.

And so, what options are available to a mortgagee that needs to proceed with mortgage enforcement proceedings where the property is tenanted?

Enter s. 52 of the Mortgages Act. Section 52 can be a useful tool for mortgagees where a mortgagor appears to have entered into a ‘sweetheart deal’ for the purposes of hindering or frustrating enforcement efforts. Pursuant to section 52 of the Mortgages Act, the Court may vary or set aside a tenancy agreement where it appears to have been entered into by the mortgage in contemplation of, or after default of, the mortgage with the object of discouraging the mortgagee from taking possession of the property, or adversely affecting the value of the mortgagees interests in the property. In assessing whether or not to set aside a tenancy agreement under section 52 of the Mortgages Act, the Courts consider whether or not the tenancy agreement constitutes a “sweetheart deal or scheme”, to be inherited by the mortgagee in possession. Key factors considered to be indicators of a “sweetheart deal or scheme” include a below fair market rent, and the proximity of the formation of the tenancy agreement to the mortgagor’s default on the mortgage.

To determine whether the tenancy agreement could qualify as a sweetheart deal, the mortgagee can, pursuant to section 50(2) of the Mortgages Act request a copy of any written tenancy agreement from the tenant or the mortgagor, or the particulars of the tenancy agreement where there is no written agreement. If either the mortgagor or the tenant fail to comply, the mortgagee may apply to the Court for an order demanding compliance or, failing same, the mortgagee can apply for an order from the Landlord and Tenant Board to terminate the tenancy on the basis that failure to provide particulars is a form of interference with the mortgagee’s lawful right, privilege or interest (s. 64 of the RTA).

While a section 52 application is not the only remedy available to mortgagees where a mortgagor has defaulted on a mortgage and the secured property is tenanted, it can be an efficient tool to tip the balance of the scales in favour of the mortgagee.

If you have any questions regarding land transfer tax or need assistance with the sale, purchase or refinancing of your property do not hesitate to contact Liliana Ferreira directly at [email protected] or at 905 763 3770 x 242. 

*The material provided in this article is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.

About the Author:

Liliana Ferreira's practice encompasses commercial and estate litigation. She advises individual and corporate clients on a range of legal issues such as employment and contract disputes, construction matters and debt recovery claims.

Understanding Land Transfer Tax Before Purchasing a Home
August 22, 2019

Understanding Land Transfer Tax Before Purchasing a Home

Written by Maanas Rautela

Purchasing a home is one of the biggest investments you can make in your lifetime. When it comes to purchasing property, people focus on the purchase price, legal fees, and realtor’s commission in terms of closing costs among other thing, however, you would be surprised how many purchasers are unaware of the land transfer tax (yes, not surprisingly you have to pay the tax collector on a property purchase).

The land transfer tax is generally based on the purchase price of the property. In some cases, fair market value of the property is used to calculate the land transfer tax where there is  transfer of a lease with a remaining term that can exceed 50 years, or in the event of transfer of property from a corporation to one of its shareholders, or the transfer of land to a corporation, if shares of the corporation are issued.

You have to pay land transfer tax when you purchase or acquire any beneficial interest in a property. The land transfer tax is payable to the Provincial government, however, certain municipalities like Toronto have an additional land transfer tax similar to that of the Province. There is some financial relief in the form of a refund if you are a first-time homebuyer. To qualify for the first-time homebuyers tax refund, you must be a Canadian citizen or permanent resident of Canada, you must be at least 18 years of age, you cannot have owned  or had an interest in a property anywhere in the world, and your spouse cannot have owned or had an interest in a property anywhere in the world while he or she was your spouse. Previous ownership in a home disqualifies you for the land transfer tax first-time homebuyers refund.

Purchasers who are not Canadian citizens or permanent residents of Canada when the purchase of the property closes but are otherwise qualify for the first-time homebuyers tax refund, have 18 months following registration of title to the property to become eligible. Upon obtaining Canadian citizenship or permanent resident status, these purchasers may apply for the refund within the 18 month period following registration of the conveyance.

Contrary to popular belief, land transfer tax is payable even when the property is transferred between persons related by blood or not at arm’s length. The only exception is if the property is transferred between spouses.

The maximum refund you can qualify for is about $4,000, and a similar refund is available if there is an additional municipal land transfer tax like the one in the municipality of Toronto.

If an agreement of purchase and sale is entered into after November 14, 2016, and registration or the disposition occurs on or after January 1, 2017, the tax rates on the value of the consideration are as follows:

  1. Amounts up to and including $55,000: 0.5%
  2. Amounts exceeding $55,000, up to and including $250,000: 1.0%
  3. Amounts exceeding $250,000, up to and including $400,000: 1.5%
  4. Amounts exceeding $400,000: 2.0%
  5. Amounts exceeding $2,000,000, where the land contains one or two single family residences: 2.5%

If you have any questions regarding land transfer tax or need assistance with the sale, purchase or refinancing of your property do not hesitate to contact Maanas Rautela directly at [email protected] or at 905 763 3770 x 232. 

About the Author:

Maanas Rautela's primary area of practice is in commercial and residential real estate law, while also practicing in the areas of corporate law, as well as will & estate planning matters. Maanas brings with him a solid transactional foundation in residential & commercial real estate, and franchise law.