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Bridge Beat

Feb 17, 2017

The Sweetheart Deal and the Lease that Never Was

Here's a lovely little case involving a sweetheart deal that, in the end, just never happens.  

Here's the story: You're a lender and you’ve loaned money to a home owner (the "Sweetheart Owner"). The Sweetheart Owner defaults on your loan and, as you are negotiating an exit strategy, enters into a really awesome lease with a tenant (yes, the "Sweetheart Tenant"). So are you stuck with this Sweetie Lease when you enforce?

This was the question before the Court of Appeal in TD Bank v. Hosein ((2016 ) ONCA 628). The Sweethearts said that the Lease was effective and could only be terminated in accordance with the Residential Tenancies Act. As readers will know, that's not easy. You, our lender, are miffed since you are not interested in selling the house with a tenant who has a sweetheart lease. You look to the Mortgages Act which says a lease entered into in a default situation can be set aside by the Court.  But the RTA also says that it prevails over any other Act in the event of a conflict. So how does this get resolved?

In this case, its in the language – you would be forgiven for blowing past the difference between "terminating" a lease and "setting aside" a lease. After all, the impact on the Sweetheart Tenant is the same – eviction. But the different language here sunk the Sweetheart lease. The court found that "setting aside" a lease meant it never happened. If the lease never happened, it can't be terminated. Therefore the RTA does not apply. And the Sweetheart Tenant needs  a new place to live. Confused?  Its like the difference between annulling a marriage and a divorce. In the first case, the marriage is annulled – as though it never happened. In the second, the marriage is ended. Got it? So if you are a lender, put this case in the back of your mind for future reference.

By the way – for those of you who are bilingual, this case is an example of the French drafting of a statute influencing the English language outcome. The use of the French verb "Annuler" informed how the court interpreted "setting aside". Mais Oui.

Happy Family Day.

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