Leases May Not Bind Mortgagees Taking Possession Upon Default Without Prior Notice and Consent to The Lease

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Purenergy Wellness Lofts Corporation v. Home Trust Company, 2018 ONSC 4723

A tenant entered into a written agreement to rent a commercial premises. Prior to the lease, the landlord acquired a mortgage on the property that was subsequently defaulted on. The mortgagee commenced enforcement proceedings to take possession of the property. During the enforcement proceedings, the tenant and mortgagee agreed to oral lease terms. The mortgagee subsequently assigned the mortgage to Home Trust Company.

Home Trust Company later served a termination notice on the tenant. One of the issues to be decided was whether Home Trust was bound by the lease that was agreed to prior to the assignment. The Court held that the lease was not binding on Home Trust as it was a mortgagee that takes possession of the property after a default. The Court held that a lease is not be binding on a mortgagee who takes possession after a default unless the mortgagee consented and had knowledge of the lease when the mortgage was acquired.

Mortgagees ought to be careful when dealing with tenants directly (subsequent to taking possession of a property) as a Court may find that a tenancy has been created by agreement or by conduct of the parties. If not careful, a court may find that a mortgagee consented to a tenancy, including an oral one, which could negatively affect efforts to sell a property.