1173928 Ontario Inc. v. 1463096 Ontario Inc., 2017 ONSC 588

CITATION: 1173928 Ontario Inc. v. 1463096 Ontario Inc., 2017 ONSC 588

Mortgage Action

COURT FILE NO.: 61357/09

DATE: 2017/01/24

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

1173928 Ontario Inc.

D. Kirwin for the plaintiff

Plaintiff

• and -

1463096 Ontario Inc., The Estate of Luella Ramsden and Barbara Ramsden

P. Callahan for the defendants

Defendants

CITATION: 1463096 Ontario Inc. v. Van Alphen, 2016 ONSC 588

Lease Action

COURT FILE NO.: 6074-12SR

DATE: 2017/01/24

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

1463096 Ontario Inc.

P. Callahan for the plaintiff

Plaintiff

• and -

Robert Van Alphen, Joanne Van Alphen, 1358329 Ontario Inc., 1358329 Ontario Inc. carrying on business as Nu-Co., 1732076 Ontario Limited and 1173928 Ontario Inc.

D. Kirwin for the defendants

Defendants

HEARD: February 29, March 1-4, 7, 8 and 9, June 14 and October 24, 2016.

MITCHELL J.:

REASONS FOR JUDGMENT

OVERVIEW

[1] These two actions were tried together. The first action was commenced on March 4, 2009. The second action was commenced on January 12, 2012.

[2] In the first action, the plaintiff, 1173928 Ontario Inc. (“117”) seeks to enforce a mortgage dated December 23, 2005 (the “Mortgage”) with respect to lands municipally described as 34 Storey Street, Blenheim, Ontario (the “Property”). Since the action was commenced, 117 has purported to realize on the Property as mortgagor and sell the Property under power of sale to itself, in partial satisfaction of the amounts secured by the Mortgage. The first action is proceeding, only, with respect to 117’s claim for payment of the balance of amounts owing under the Mortgage from the mortgagor, 1463096 Ontario Inc. (“146”) and the guarantors of the mortgage debt, the Estate of Luella Ramsden (“Luella”) and Barbara Ramsden (“Barbara”). The first action is referred to as the "Mortgage Action”.

[3] In the second action, 146 claims from Robert Van Alphen (“Van Alphen”), 1358329 Ontario Inc. (“135”) and 1732076 Ontario Inc. (“173”), jointly and severally, payment of arrears of rent accruing under a lease agreement dated January 1, 2007 (the “Lease”), declaratory relief relating to the purported sale of the Property by 117 to itself, rectification of title to the Property, an accounting of amounts owing under the Mortgage and related injunctive relief. The second action is referred to as the “Lease Action”.

[4] Important context for a determination of the issues in these actions is the final decision made in a related application commenced by 146 pursuant to s. 20 of the Commercial Tenancies Act of Ontario referred to as the “CTA Application”. The CTA Application was commenced on January 16, 2009. The named respondents were Van Alphen and 117. 146 sought payment from the named respondents of the then outstanding rental arrears together with injunctive relief restraining 117 from enforcing the Mortgage.

[5] Pursuant to an interim order made on January 20, 2010 in the CTA Application by the Honourable Justice Hockin, attempts were made to place both the Lease and Mortgage into good standing. Those efforts failed.

[6] The CTA Application proceeded to a final determination. The issues on the CTA Application were dealt with on a final basis by order of the Honourable Justice Hockin made August 20, 2010 (the “Hockin J. Order”). Justice Hockin ordered Van Alphen to pay to 146 the rental arrears owing under the Lease as at August 1, 2010 in the amount of $240,000.[^1] Any credits or set off to which 117, as mortgagee, might be entitled were ordered to be dealt with in the Mortgage Action. Van Alphen was ordered to pay costs of the CTA Application on a full indemnity basis and of the subsequent appeal in the aggregate amount of $46,793.80.

[7] Pursuant to the order of the Honourable Justice Thomas made August 3, 2011, Van Alphen paid the sum of $286,793.80, being the amount payable in connection with the Hockin J. Order and the appeal cost order, into court pending resolution of the Mortgage Action.

[8] Since a final determination of amounts owing to 146 under the Lease up to August 1, 2010 was made in the CTA Application, at trial of the Lease Action, 146 limited its claim for payment to the rental arrears accruing under the Lease for the period post-September 1, 2010. In addition to the respondents named in the CTA Application, Van Alphen’s spouse, Joanne Van Alphen (“Joanne”), 135 and 173 were all named as defendants in the Lease Action.

CHRONOLOGY OF EVENTS

[9] To properly appreciate the factual matrix relevant to a consideration of the issues in these actions, a review of the relationships between the parties and the history of events which bring these parties before the court is necessary. These facts are largely undisputed. The relevant timeline is as follows:

• On April 11, 1996, 117 was incorporated as a holding company. Joanne is the sole shareholder and Van Alphen is the sole officer and director of 117.

• On June 2, 1999, 135 was incorporated. Laurie Ramsden (“Laurie”) and John Ramsden (“John”) were 50/50 shareholders and the officers and directors of 135 at the time of its incorporation.

• On February 8, 2001, 146 was incorporated as a holding company. Barbara and Luella were the original shareholders, officers and directors of 146.

• On June 28, 2002, 146 acquired title to the Property. 146 proceeded to construct an industrial building on the Property with the intention of leasing the building to its related company, 135.

• On March 25, 2003, the business name “Nu-Co Plastics” was registered which registration expired on March 24, 2008.

• In April 2005 Van Alphen invested the sum of $458,125 in 135 and acquired John’s interest in 135. In addition, he received security for a portion of his loan/investment as evidenced by two general security agreements executed by 135 in favour of Van Alphen. Laurie continued to hold a minority interest in 135.

• On April 1, 2005, 146, as landlord, 135, as tenant, and Laurie and Van Alphen, as guarantors, entered into a lease of the Property (the “First Lease”).

• On December 23, 2005, 146 granted the Mortgage to InterBay Funding Corp. (“IBFC”) to secure an operating loan in the principal amount of $322,500. Barbara and Luella gave their guarantees to IBFC and 146 also provided an assignment of leases and rents and a Loan and Security Agreement (“LSA”) as additional security to IBFC. IBFC immediately assigned the Mortgage, guarantees and related security to Bayview Financial LP (“Bayview”).

• On July 17, 2006, 146 demanded payment from Van Alphen as guarantor of all rental arrears owing under the First Lease.

• On November 20, 2006, Van Alphen on behalf of 135 purported to sell all of the operating assets of 135 including its company name, “Nu-Co Plastics”, its telephone number, equipment and machinery, and inventory to Joanne for the sum of $13,600. These funds were then paid to 146 to avoid the bailiff’s termination of the tenancy of 135 under the First Lease.

• On January 1, 2007, 146, as landlord, and 135, as tenant, entered into the Lease with Van Alphen and Laurie executing the Lease as guarantors of the obligations of 135.

• On February 23, 2007, Van Alphen demanded payment from 135 of its loan obligations.

• On June 1, 2007, Van Alphen assigned the Lease from 135 to himself, personally, as permitted under the Lease and then purported to sublet the Property to 173 without the consent of 146.

• On June 5, 2007, 173 was incorporated. Joanne is the sole shareholder, officer and director of 173.

• On July 20, 2007, Van Alphen registered the corporate business name “Nu-Co Plastics” for 173.

• On March 1, 2008, 146 defaulted in its obligations under the Mortgage.

• On July 1, 2008, Van Alphen defaulted in payment of his increased rental obligations under the Lease.

• On October 16, 2008, Bayview demanded payment under the Mortgage claiming arrears owing totaling $67,244.60.

• On November 6, 2008, Bayview issued a notice of direction of rents and demand for particulars of tenancy to 135, as original named tenant under the Lease.

• On November 17, 2008, Bayview issued Notice of Sale under Mortgage to 146 and Luella and Barbara, as guarantors, claiming $368,472.41 as owing under the Mortgage.

• On January 6, 2009, 117 borrowed $230,000 by way of loan from Libro and purchased the Mortgage from Bayview for the sum of $360,705.12 being the balance then claimed by Bayview to be owing under the Mortgage. On that same date, 117 received an assignment of the Mortgage, guarantees and related security.

• On that same date, Bayview gave notice of the assignment of the Mortgage and related security to 146.

• On January 8, 2009, 117 listed the Property for sale on MLS at a listing price of $400,000.

• On January 16, 2009, 146 commenced the CTA Application.

• On January 21, 2009, the Assignment of Mortgage and Notice of Assignment of Leases and Rents to 117 are registered on title to the Property.

• On January 26, 2009, 117 assigned the Mortgage and related security to Libro as security for its loan and an absolute assignment of the Mortgage was registered against title to the Property in favour of Libro.

• On March 4, 2009, the Mortgage Action was commenced by 117.

• On June 25, 2009, 117 attempted to sell the Property via public auction but did not receive a bid at or in excess of the court-ordered reserve price set by 146 of $531,000.

• On October 1, 2009, 117 acting as mortgagee selling under power of sale, entered into an agreement of purchase and sale with itself as purchaser to purchase the Property for a purchase price of $210,000 plus unpaid municipal taxes of 29,327. 117 did not give notice of the sale of the Property to 146.

• On October 22, 2009, the defendants filed a Statement of Defence in the Mortgage Action.

• On May 27, 2010, Libro re-assigned the Mortgage to 117 and took a general security agreement from 117 in its place.

• On August 20, 2010, the Honourable Mr. Justice Hockin ordered Van Alphen to pay amounts owing under the Lease for the period January 1, 2007 through August 31, 2010 including interest fixed in the amount of $240,000 as agreed by the parties.

• By Deed of Grant dated October 6, 2010 117 under power of sale purported to again sell the Property to itself for a purchase price of $210,000.

• By Deed of Grant dated October 12, 2010 117, as owner in fee simple, purported to sell the Property to 173 for a purchase price of $213,750.

• In late 2010 Luella died and Amy acquired her shares in 146 and became an officer and director.

• On February 8, 2011, Justice Hockin orders costs of the CTA Application payable on a full indemnity basis by Van Alphen to 146 in the amount of $42,793.80.

• On March 14, 2011, 117 registered the October 2009 transfer of the Property to itself on title to the Property.

• On May 3, 2011, Van Alphen’s appeal of the Hockin J. Order was dismissed and costs of the appeal in the amount of $4000 were awarded to 146.

• On August 3, 2011, the Honourable Justice Thomas directed that all amounts owing under the Hockin J. Order totaling $286,793.80 be paid into court pending the outcome of the Mortgage Action.

• On January 12, 2012, 146 commenced the Lease Action against Van Alphen, Joanne, 135, 117 and 173.

THE MORTGAGE ACTION

[10] At the outset of trial, 117 moved for an order granting standing to 117, nunc pro tunc, to commence the Mortgage Action, without prejudice to 146 to defend the action on the basis 117 did not hold title to the Mortgage during the period January 23, 2009 through May 27, 2010. That order was granted and the trial of the Mortgage Action proceeded.

[11] 117 seeks possession of the Property and judgment for the balance due under the Mortgage together with interest and costs. Various sale transactions effected by 117 since it acquired the Mortgage on January 21, 2009 render relief in the nature of possession of the Property, moot.

[12] In its defence of the Mortgage Action, 146 pleads that 117 is estopped from enforcing the Mortgage because: (i) 146 was not provided with notice of the assignment; (ii) Van Alphen caused 146 to default under the Mortgage by failing to pay rent as and when it became due under the Lease; and (iii) Van Alphen and 117 colluded together to induce a breach of contract between 146 and Bayview.

[13] In support of the relief claimed in the Lease Action insofar as it relates to enforcement of the Mortgage by 117 and title to the Property, 146 alleges that the purported sales of the Property were invalid on a number of grounds. First, on the ground 117 did not own the Mortgage once it was assigned to Libro by way of bare assignment. Second, on the ground the sale of the Property to itself under power of sale was unlawful. Last, on the ground 117 failed to comply with its statutory obligations pursuant to the Mortgages Act.[^2]

[14] In order to determine the balance remaining due under the Mortgage if any, and the rental arrears owing under the Lease, if any, a preliminary issue must be determined, that is, whether the sale by 117 to itself under power of sale either on October 1, 2009 or on October 6, 2010 was valid. The validity of each of these transactions involves consideration of different legal principles and so each transaction will be considered separately.

Was the sale of the Property by 117 to 117 under power of sale on October 1, 2009 valid?

[15] The title documentation for the Property evidences the fact 117 did not own the Mortgage when it purported to transfer title to the Property to itself under power of sale on October 1, 2009. A bare assignment of the Mortgage from 117 to Libro was registered against title to the Property on January 23, 2009. 117 asks that I disregard the title documents and give effect to what the parties to the loan transaction intended.

[16] Van Alphen testified that 117 intended to grant only a security interest in the mortgage receivable and not ownership of the Mortgage proper to Libro. Frank Kennes, on behalf of Libro testified and was unequivocal in his testimony. He testified that:

(i) Libro intended to take a bare assignment of the Mortgage.

(ii) Libro did not have knowledge of nor consent to the sale by auction or sale in October 2009.

(iii) Libro transferred the Mortgage back to 117 in May further to a request from Van Alphen. Mr. Kennes understood that Van Alphen wanted to commence power of sale of the Property and Libro wanted no involvement in enforcing the Mortgage.

(iv) He authorized the bare assignment to be registered against title to the Property and believed the document was correct in all respects.

(v) He was unaware whether notice of the assignment of the Mortgage to Libro was given to 146; however, had it been provided he would have known.

(vi) Libro stepped into the shoes of 117 at the time of the transfer.

(vii) Libro did not consent to:

(a) the action being commenced in March 2009;

(b) the auction being conducted in June 2009;

(c) the listing of the Property in 2009; and

(d) the sale of the Property by 117 to 117 in October 2009.

(viii) Libro was unaware of the sale of the Property in October 2009. Had Libro been aware it would have objected to the sale.

[17] 117 argues that its former counsel made an error when a bare assignment of the Mortgage, rather than a notice of security interest in the Mortgage as was intended by Libro and 117, was registered. However, the testimony of Mr. Kennes and the documentation does not support this finding. The Libro loan file was not produced by 117. 117’s counsel at the time the Libro loan was put in place and the assignment registered did not testify. Regardless of what was intended, rectifying title to correct a purported error as between the parties to the loan transaction (117 and Libro) cannot be granted in circumstances. To do so would affect the interests of a stranger to that transaction, namely, 146.

[18] Insofar as its ability to deal with the Mortgage during the period of Libro ownership, 117 had no such right vis a vis 146. It did not own the Mortgage when it renewed the listing of the Property; when it attempted to auction the Property in June 2009; and, most importantly, when it purported to sell the Property to itself on October 1, 2009. It was not acting as agent for Libro. All of these dealings with the Property were undertaken by 117 unbeknownst to Libro and without its authority.

[19] I find that the purported sale of the Property by 117 to itself on October 1, 2009 is void and of no effect.

Was the sale of the Property by 117 to 117 under power of sale on October 6, 2010 valid?

[20] On May 27, 2010 117 reacquired title to the Mortgage by way of an assignment of Mortgage granted by Libro. As now owner of the Mortgage, 117 purported again to sell the Property to itself under power of sale on October 6, 2010.

[21] Counsel for 117 referred me to s. 41 of the Conveyancing Law of Property Act[^3] which permits the sale of land by a person to itself. Section 41 provides:

41. A person may convey property to or vest property in the person in like manner as the person could have conveyed the property to or vested the property in another person.

[22] Counsel for 117 also pointed to para. 4.1(i) of the LSA which states:

At any public sale, and to the extent permitted by Applicable Law on any private sale, bid for and purchase any or all of the Collateral offered for sale and, upon compliance with the terms of such sale, hold, retain and dispose of such Collateral without any further accountability to Borrower or any other Person with respect to such holding, retention or disposition, except as required by Applicable Law. In any such sale to Lender, Lender may, for the purpose of making payment for all or any part of the Collateral so purchased, use any claim for Obligations then due and payable to it as a credit against the purchase price.

[23] However, the Property was not sold pursuant to the LSA. The Notice of Sale under Mortgage refers only to the Mortgage. The LSA and any interest granted in real property thereunder were not registered on title to the Property. Regardless, 117 as lender did not purport to purchase the Property at the auction – it made no bid. Rather it purported to purchase the property privately. Pursuant to the terms of the LSA, 117 was permitted to purchase the Property on a private sale subject to it complying with all “Applicable Law”. That term is defined in the LSA to mean: “… Any existing or future law, rule, statute, regulation, order, judgment, decree, treaty, directive or other requirement having the force of law ... and shall also include any interpretation thereof by any person having jurisdiction over it or charged with its administration or interpretation”.

[24] The common law and obligations of 117 pursuant to the Mortgages Act comprise the law applicable to the purported sale by 117 to itself on October 6, 2010.

[25] The general legal principle applicable to a determination of whether a mortgagee can sell mortgaged property to itself dates back to the 1888 English decision of Farrar v. Farrars[^4]. In Farrar the Court summarized the basic proposition as follows:

A mortgagee cannot sell to himself, nor can two mortgagees sell to one of themselves nor to one of themselves and another. The reasons for this are obvious, and are not merely formal but substantial. A man cannot contract with himself, and in the cases supposed there cannot be any independent bargaining as between opposite parties. For similar reasons, a mortgagee cannot sell to a trustee for himself; he cannot buy in the name of another.”

[26] Section 41 is a general statutory provision applicable to all transfers of property however is subject to the more restrictive statutory provisions and common law principles imposed on mortgagees as transferors. The rule in Farrar is such law. It is acknowledged that the presumption which arises when a mortgagee purports to transfer to itself is rebuttable in certain circumstances. For example, where the mortgagor can establish it acted in good faith and took reasonable precautions to obtain a proper price.[^5]

[27] Here, 117 did not attempt to disguise the sale as anything other than a sale to itself. 117 did not sell the Property to a related corporation. It purported to sell the Property to 173 only after it purported to acquire title to the Property in fee simple from itself days earlier.

Did 117 act in good faith when it purported to sell the Property to itself?

[28] It is clear from the chronology of events set forth earlier in these reasons, that Van Alphen has a long history of self-help and self-dealing when it comes to dealing with the Ramsdens and in particular, 146. Consider the following:

(a) Van Alphen, as majority shareholder of 135, purported to sell all of the operating assets of 135 to his spouse’s company without compliance with the Bulk Sales Act and without shareholder consent (or knowledge). The sale took place at the nominal purchase price of $13,600 unsupported by an appraisal. If the sale was made pursuant to Van Alphen’s interest as secured creditor, he failed to comply with the notice provisions under either the Bankruptcy and Insolvency Act and the Personal Property Security Act;

(b) Van Alphen repeatedly paid rent in excess of 5 days’ late in default of his obligation under the Lease which permitted rent to be paid to a maximum of 35 days late on one occasion, only, and thereafter to a maximum of 5 days.

(c) Despite the provision of the Lease prohibiting any form of set-off against payment of rent, Van Alphen did not pay the increased rental amount of $9,800 due on July 1, 2008.

(d) Van Alphen did not pay municipal taxes for the Property as required under the Lease.

(e) 117 caused the related tenant of the property, 173, to default in payment of amounts due under the Lease for rent and municipal taxes thus inflating the amount required by 146 to pay out the Mortgage.

(f) 117 did not give notice of its assignment of the Mortgage to Libro to 146.

(g) Libro did not give notice of the re-assignment of the Mortgage to 117 to 146.

(h) 117 purported to terminate the Lease with 173 and enter into a new Lease on significantly more favourable terms in an effort to reduce the rental credit to which 146 was entitled as mortgagor.

(i) Despite the receipt of rent and other amounts due under the Lease from 173 since January 2009, 117 did not issue a fresh Notice of Sale under Mortgage to reflect the amended mortgage balance prior to the purported sale to itself on October 6, 2010.

(j) The purported transfer of the Property to 117 in October 2010 was not registered on title to the Property until March 2011.

[29] Taken together, this conduct evidences a lack of good faith on the part of 117. 117 surreptitiously went about acquiring the Property at a time when the Mortgage Action and CTA Application were outstanding. It gave no notice of the bare assignment to Libro, to 146. It provided no updated statement of account to 146 to reflect the significantly reduced Mortgage balance. The original Notice of Sale under Mortgage did not reflect the correct amount needed to redeem the mortgage. The evidence of Dennis Asher makes it clear Bayview did not provide credits for amounts held in Escrow and insurance premiums paid by 146. No efforts were made by 117 to facilitate 146’s redemption of the Mortgage or enable 146 to place the Mortgage back into good standing despite the repeated requests by 146 for a proper statement of account.

[30] In addition, s. 22 of the Mortgages Act requires that, upon receipt of notice in writing from the mortgagor, a mortgagee must provide a statement in writing setting out the amount of principal or interest with respect to which the mortgagor is in default, the nature of the default or the non-observance of the covenant and the amount of any expenses necessarily incurred by the mortgagee. Subsection 22(3) of the Act suspends the mortgagee’s rights to enforce the mortgage if the statement is not provided or is incomplete or incorrect.

[31] Section 31 of the Mortgages Act prohibits the exercise of a power of sale unless Notice of Sale under Mortgage in prescribed form is first provided to the mortgagor, among others. While it is not disputed an assignee of a mortgage may sell under power of sale in reliance upon a Notice of Sale under Mortgage issued by the assignor[^6], the notice must have been correct in all material aspects. An assignee acquires no higher rights than its assignor.

[32] Here, as admitted by Van Alphen, we have extensive rent payments received by 117 in reduction of the mortgage debt since the Notice of Sale was issued by Bayview in November 2008. The amount required to redeem the Mortgage was considerably less in August 2010 than in November 2008. At the time of the purported sale of the Property on October 6, 2010, the original notice no longer met the requirements of s. 31 of the Act. A change of accounts rendered the original notice invalid.[^7]

[33] Van Alphen was candid in his testimony – acknowledging he had every intention of acquiring the Property for himself. His intention is not evidence of bad faith. His intention was lawful so long as 117 complied with the law. As has been established by its conduct, 117 failed to abide by the applicable law.

Did 117 make reasonable precautions to obtain a proper price?

[34] Having found an absence of good faith, it is not necessary to consider this issue; however, a review of the evidence further supports the finding of a lack of good faith on the part of 117.

[35] After purchasing the Mortgage in January 2009, 117 took the following steps to market and sell the Property:

• The day after taking an assignment of the Mortgage (January 8, 2009) 117 listed the Property for sale with a commercial realtor by the name of Brandy Robertson for a listing price of $400,000. 117 used an appraisal of the property obtained by Libro in December 2008 wherein the value of the property was appraised at $360,000. To that figure he added 10 percent to arrive at the listing price.

• The Property was on the market for three months and during that time the agent put up signs on the Property and it was listed on the multiple listing service.

• During the listing period, 117 received one offer to purchase the Property for $250,000 from an individual by the name of Fred Naclerio on March 6, 2009.

• 117 attempted to sell the Property via public auction in June 2009. Newspaper advertisements were placed in the Windsor Star, the London Free Press, the Chatham Daily News and the Pennysaver for approximately three weeks prior to the auction.

• The terms and conditions of sale were read out to the persons in attendance at the auction by Mr. Gardner prior to the auction commencing. Prospective bidders were advised the Property did not include assets owned by 135 which included the switch gear needed to operate the electrical system and light fixtures[^8].

• 10 to 12 people attended the auction and six bidders registered. A sale did not take place because the auction included a reserve bid of $571,000 requested by 146 and ordered by the court. The highest bid at the auction was $210,000.

• On August 26, 2010, Van Alphen again listed the Property for sale this time at a listing price of $225,000. The listing expired two months later on October 26, 2010. During the listing period, no offers were received.

[36] Two appraisers testified at trial. Mr. George Canning on behalf of 117 and Mr. Jason Otto on behalf of 146. Both experts were qualified and accepted as experts in the valuation of commercial real estate in southwestern Ontario.

[37] Mr. Canning’s report indicated that the market value for the property as at October 1, 2009 and July 30, 2010 was $203,000 and $234,000, respectively. In contrast, Mr. Otto valued the property as at October 1, 2009 to be $380,000 and as at March 14, 2011 to be $395,000.

[38] Mr. Canning valued the property on a comparison basis. Mr. Otto used an income approach to valuation.

[39] 2009 was a notable year in that it signaled the collapse of the financial markets in North America and abroad. As a result, manufacturing in Ontario was negatively impacted. Presumably, the value of properties housing manufacturing tenants was similarly negatively impacted. I have no doubt the value of the Property bore no semblance to its then assessed value of $574,000. However, the Property was subject to a 5 year lease with guaranteed income from 135/Van Alphen/173 to December 31, 2011 and likely beyond. The income stream was not taken into consideration by Mr. Canning and I find it should have been.

[40] Accordingly, I find that the value of the Property on October 6, 2010 was likely within the range of the Otto appraisals and far in excess of the purchase price paid by 117. 117 chose to ignore any evidence of value in excess of the amount of the single bid received at the auction in June 2009. It chose to ignore the decision of MPAC from August 2010 reassessing the value of the Property at $371,000. 117 took few, if any, reasonable precautions to obtain a proper price when it sold the Property to itself on October 6, 2010.

[41] Counsel for 117 asks that, rather than set aside the transaction, I remedy any harm caused by violation of the rule in Fararr simply by increasing the purchase price to reflect fair value. I am not prepared to do so. Fairness and equity dictate that in all of the circumstances, the purported transfer of the Property by 117 to itself on October 6, 2010 be declared void. As an aside, the process by which a mortgagee can acquire title to mortgaged lands is by way of foreclosure proceedings. Foreclosure permits a mortgagee to take title to mortgaged property on proper notice to and rights of due process afforded the mortgagor. Had 117 followed the foreclosure process, its efforts would have been supported by the court. Instead, 117 attempted to acquire title to the Property without respecting the rights of 146 as mortgagee. The court cannot condone this type of conduct.

[42] 117’s attempt to sell the Property to itself pursuant to power of sale on October 6, 2010 was ineffective in transferring title by virtue of the application of the rule in Farrar and the failure to comply with the Mortgages Act. Since 117 did not acquire title to the Property on October 6, 2010, the subsequent purported sale of the Property by 117, as owner in fee simple, to 173 on October 12, 2010 must also fail.

[43] Since there were no valid transfers of the Property by 117, as mortgagee, 117 remained holder of the Mortgage until the mortgage was paid in full from the receipt of rents. The evidence of Van Alphen establishes that at no time did 117 go into possession of the Property; rather, 117 allowed 173 to operate its auto parts manufacturing business from the premises, as tenant. His evidence further establishes that 173 paid all rental amounts and municipal taxes as called for under the Lease to 117 pursuant to the Direction of Rents issued by Bayview (and acknowledged by 146) and assigned to 117, from January 6, 2009 onward.

[44] The receipt of rent from and payment of municipal taxes by 173 reduced the mortgage balance monthly. Accordingly, for purposes of determining the date on which the Mortgage was paid in full, interest on the mortgage balance must be calculated monthly on the declining balance.

[45] An issue arose at trial as to the applicable interest rate to be charged on the Mortgage obligations. 117 claimed it was entitled to compound interest monthly as provided for under the LSA. The Notice of Sale under Mortgage issued by Bayview refers only to interest at the rate provided for under the Mortgage and accordingly the Mortgage governs. The interest rate is stated as:

Variable Rate Mortgage Loan: 7.99% fixed for the two years (24 months) of the term, compounded semi-annually, not in advance; thereafter, on the first day of the third year of the term and every 180 days thereafter, the Interest Rate on the mortgage will be adjusted to InterBay Funding Corp.’s (the “Chargee”) then current Canadian Dollar Loan Prime Lending Rate, as then most recently announced by InterBay (the “Prime Lending Rate”), plus 3.99%, provided that the Interest Rate may not be increased by more than 1% over the Interest Rate in effect immediately prior to any such adjustment.

[46] I find that title to the Property remained at all times in 146 and further find that the Mortgage was redeemed by 146 on the date of payout of the Mortgage balance (the “Mortgage Payout Date”). I have no doubt that date precedes the date of this decision. However, the challenge will be to determine the Mortgage Payout Date.

Disposition

[47] Since all amounts owing under the Mortgage have been paid in full, 117 has no further rights under the Mortgage or related security and the Mortgage Action is hereby dismissed. 117 shall take all steps reasonably required to discharge all security it presently holds as acquired from Bayview, including the Mortgage, Assignment of Leases and Rents Agreement and the LSA.

THE LEASE ACTION

[48] In the Lease Action, 146 seeks:

(a) judgment against 135 and173 in the amount awarded against Van Alphen pursuant to the Hockin J. Order made in the CTA Application;

(b) judgment against Van Alphen, 135 and 173 for all rental arrears under the Lease post-September 1, 2010 and as an over-holding tenant plus pre-judgment interest calculated in accordance with paragraph 2 of the Lease;

(c) a declaration that the sale of the Property by 117 under power of sale is invalid;

(d) rectification of the title documents for the Property to reflect 146 as the owner of the Property; and

(e) post-judgment interest and costs on a substantial indemnity basis.

The Lease Terms

[49] Section 2 of the Lease obligates the tenant to pay rent for the five-year term as follows:

“(1) Rent means the amounts payable by the Tenant to the Landlord pursuant to this Section and includes Additional Rent.

(2) the Tenant covenants to pay to the Landlord, during the Term of this Lease, base rent as follows:

(a) During the five (5) years of the Term, the sum of $54,000 per annum plus GST, payable monthly in advance in equal instalments of $4,500.00 plus GST on the first day of each and every month, commencing on the first day of January, 2007, the Term.

(3) The Tenant further covenants to pay all other sums required by this Lease to be paid by it and agrees that all amounts payable by the Tenant to the Landlord or to any other party pursuant to the provisions of this Lease shall be deemed to be additional rent (“Additional Rent”) whether or not specifically designated as such in this Lease.”

[50] At the time of entering into Lease, the tenant was in arrears of rent under the First Lease (the “Arrears”). It was agreed by the parties that the Arrears would be repaid to the landlord by the end of the term of the Lease. In this regard, Schedule B to the Lease provided as follows:

“Notwithstanding any other term of this Lease to the contrary and whereas this Lease replaces a previous Lease between the parties herein, the Landlord and the Tenant further agree that the Tenant is presently in arrears of Rent, including Additional Rent, in the amount of $89,766.32. The Landlord and the Tenant agree that the Tenant shall promptly pay the following payments in order to maintain this Lease in good standing:

Partial rental payment of $4,800 plus GST on the 1st day of each and every month commencing January 1, 2007 up to and including the f1st day of December, 2007.

Partial monthly rental payments $5,800.00 per month plus GST for the next 6 months, commencing January 1, 2008 and ending July 1, 2008.

Monthly instalment rental and arrears payments of $9,800.00 plus GST for the next 42 months of the term, commencing July 1, 2008 and ending December 1, 2011.

[51] The Lease further provided for the repayment of arrears of rent as follows:

“The Landlord and the Tenant agree that the rent payable in accordance with the terms of this Lease and the existing arrears of $89,766.32 and the balance of the Rent accruing during the first 18 months of this term of the Lease will be repaid during the last 42 months of the term of this Lease.

The Tenant will provide proof of Tenant’s insurance to the Landlord at the time of the execution of this Lease.

Notwithstanding any other term of this Lease to the contrary, the Landlord and Tenant confirm that no reentry by landlord will take place unless the monthly payment is in default for 35 days, on one occasion only, and thereafter if the monthly payment is in default for 5 days Landlord shall have the option to exercise its rights of re-entry, or following 30 days written notice of any other default in the Tenant’s obligations under the Lease and such default has not been remedied, Landlord shall have the option to exercise its rights of re-entry.” (Emphasis added)

[52] The Lease provided that it would be entirely carefree to the landlord, except as to structural repairs and building insurance, and that the tenant would be responsible for all other expenses associated with the premises, as follows:

the Landlord and the Tenant agree that it is their mutual intention that this Lease shall be a carefree lease for the Landlord, save and except for structural repairs and building insurance, and that the Landlord shall not, during the term of this Lease, be required to make any payments in respect of the premises other than charges of the kind personal to the landlord such as income and estate taxes and mortgage payments:

(a) and to effect the said intention of the parties, the Tenant promises to pay the following expenses related to the premises as Additional Rent:

(i) business taxes and licenses;

(ii) utilities including but not limited to gas, electricity, water, heat, air conditioning;

(iii) services supplied to the Premises provided that this does not in any way obliged the Landlord to provide any services unless otherwise agreed in the Lease;

(iv) property taxes and rates, duties and assessments;

(v) maintenance but not including structural repairs;

(vi) sales tax, and any other taxes imposed on landlord respecting the rent;

(vii) all other charges, impositions, costs and expenses of every nature and kind whatsoever.” (Emphasis added)

[53] Last, Section 2(8) of the Lease provides that: “the Tenant acknowledges and agrees that the payment of Rent and Additional Rent provided for in this Lease shall be made without any deduction for any reason whatsoever unless expressly allowed by the terms of this Lease or agreed to by the Landlord in writing.”

Standing of 146

[54] For the reasons provided in connection with the Mortgage Action, 146 is entitled to the relief requested in paragraph [48] (c) and (d) above. Turning to the issue of 146’s claim for payment of rent arrears under the Lease.

[55] A preliminary issue must be addressed. Did 146 have standing to commence the Lease Action? The Hockin J. Order and the calculation by the parties of the amount owed to 146 under the Lease as at August 1, 2010 presumes 146 had standing and ignores the enforcement of the Assignment of Leases and Rents by Bayview, and subsequently by 117.

[56] Pursuant to section 1.1 of the Assignments of Leases and Rents Agreement, 146 granted a security interest in the Lease to Bayview, including the benefit of all covenants and obligations of the tenant under the Lease, including the benefit of any right to renew or extend the Lease. In addition, 146 granted a security interest in all rents, additional rents, and all other amounts payable under the Lease to Bayview. Last, 146 granted full power and authority to Bayview to demand, collect, sue for, recover, receive and give receipts of the rents in the name of 146 as Bayview may determine in its sole discretion.

[57] These rights were suspended for so long as the Mortgage was in good standing. However, upon default, Bayview was permitted to exercise its rights under the Assignment of Leases and Rents Agreement and enforce the security interests granted thereunder. Bayview did just that. On November 6, 2008 Bayview issued a Notice of Direction of Rents. As of that date, all rental amounts payable under the Lease were payable to Bayview and, following assignment of the Assignment of Rents in January 2009, to 117. 146 acknowledged the entitlement of Bayview to be paid the rents owing under the Lease when it issued notice to Van Alphen and 135 on November 20, 2008.

[58] Default under the Mortgage was never remedied by 146 such that when 146, as landlord, commenced the CTA Application and later the Lease Action, it ignored the fact that as defaulting mortgagor, it was not entitled to claim payment of rent for the period commencing on the date on which Bayview issued its Notice of Direction of Rents on November 6, 2008.

[59] However, all is not lost for 146. 146, as mortgagor, receives the benefit of the rent payable under the Lease in reduction of the Mortgage balance. Once the amounts secured by the Mortgage are paid in full, 146, as landlord, is entitled to payment of rental arrears for the period following the Mortgage Payout Date.

Liability for Payment of Rental Arrears

[60] Presently, 173, a company solely owned by Joanne, carries on business as an injection mould assembly parts manufacturer from the Property. Presumably, 173 acquired the former operating assets of 135 from Joanne after she acquired these same assets from 135 in November 2006. No evidence was provided at trial to evidence this transaction. As earlier noted, Van Alphen, without the consent of 146, sublet the Property to 173.

[61] The effect of the sale of the assets of 135 to 173 and the subsequent assignment of the Lease by Van Alphen to 173 is that 173 stepped into the shoes of 135. At present, 173 operates the business of 135 including maintaining its customers and using its name, “Nu-Co Plastics” and its operating assets.

[62] Van Alphen admitted he entered into the Lease on behalf of 135 and is personally liable as both tenant and guarantor. Van Alphen made all required rental payments for the period March 2008 to June 2008. For the period July 1, 2008 through October 2008, Van Alphen continued to make rental payments of $5,800 plus GST per month rather than the required increased amount of $9800 plus GST per month. Van Alphen testified that the balance of the monthly rent due of $4,000 per month was paid to his solicitors to be held in trust for payment of municipal taxes. Van Alphen admitted he defaulted in payment of the increased rental amount to 146 due under the Lease commencing July 1, 2008.

[63] 146 asks that judgment be granted against both 135 and 173 in the same amount awarded against Van Alphen for the period January 1, 2007 through August 31, 2010. As earlier noted, 146 has no standing to claim any amount on account of rent due under the Lease until after the Mortgage Payout Date. As established by Van Alphen’s evidence, 173 as tenant did, in fact, make payment of all amounts due under the Lease to 117 when and as they came due. These amounts are deemed to have been applied by 117 in reduction of the Mortgage balance, including proper costs of enforcement, in accordance with the obligations of 117 pursuant to the Assignment of Leases and Rents agreement assigned by Bayview to 117.

[64] 135 is the original named tenant under the Lease and the assignor of the lease to Van Alphen. As the original tenant under the Lease, 135 is therefore liable for all obligations under the Lease. Although 173 and 135 are separately owned and operated, their respective owners, Van Alphen and Joanne are spouses of one another. 173 is a purported subtenant under the Lease although Van Alphen did not receive the consent of 146 to the subtenancy as required under the terms of the Lease.

[65] 173 is not a signatory to the Lease and was a stranger to the contract until 117 acquired the Mortgage and the Assignment of Leases and Rents Agreement. Once 117 became mortgagee and assignee of the rents and other rights under the Lease, 117 is presumed to have had knowledge of and consented to the subtenancy of 173. 173 and 117 are related parties. Accordingly, 135, Van Alphen and 173 are jointly and severally liable for payment of amounts owing under the Lease for the period commencing on the Mortgage Payout Date and ending on the date on which 173 vacates the Property or negotiates a new lease of the Property with 146.

[66] From the Mortgage Payout Date to the date on which 173 vacates the Property or enters into a new lease with 146, 146 as landlord is entitled to payment of rent (including additional rent) in accordance with the terms of the Lease insofar as they relate to an over-holding tenant pursuant to para. 11 of the Lease. That amount is $4,500 plus HST per month plus Additional Rent comprised of among other amounts, municipal taxes.

[67] As agreed by the parties, Additional Rent during the over-holding period includes municipal taxes calculated at the rate of $18,000 per annum ($49.32 per diem). However, 173, as tenant, has paid amounts on account of municipal taxes following the Mortgage Payout Date. 117 is entitled to credit for these payments against rental arrears found owing to 146 after the Mortgage Payout Date.

Disposition

[68] Judgment shall issue in the Lease Action as follows:

1. the parties are hereby directed to calculate the Mortgage Payout Date having regard to the following:

(a) The starting date is January 6, 2009 (save and except for the $16,000 paid to Harrison Pensa LLP, in trust for the period July through October 2008) and the starting amount is the amount paid by 117 to Bayview to acquire the Mortgage being the amount of $360,705.12 (“Mortgage Balance”).

(b) 117 is deemed to have received all Rent and Additional Rent (i.e., municipal taxes) as and when same became due under the Lease (monthly), including the $16,000 paid to Harrison Pensa LLP, in trust, for the period July through October 2008, and the Mortgage Balance shall be reduced by all such rental receipts;

(c) Pursuant to the terms of the Lease, 117 was entitled to payment of the sum of $9,800 plus HST per month for the period January 1, 2009 through December 31, 2011 (the end of the term of the Lease) plus $4500 plus HST per month for the period January 1, 2012 to the Mortgage Payout Date.

(d) Interest on the Reducing Mortgage Balance shall be calculated in accordance with the terms of the Mortgage (not in accordance with the LSA);

(e) 117 as mortgagee is entitled to add to the Mortgage Balance its legal fees and disbursements relating to enforcement of the Mortgage including its legal fees and disbursements relating to taking an assignment of the Mortgage from Bayview until January 23, 2009 when it assigned the mortgage to Libro, and its reasonable legal fees and disbursements and other costs of enforcement following reassignment of the Mortgage from Libro to 117 on May 27, 2010; however, 117 is not entitled to recover its legal fees and disbursements relating to the purported sale of Property to itself and thereafter to 173 in October 2010 and any costs incurred relating to the prosecution of the Mortgage Action and the defence of the Lease Action. Those costs are in the discretion of the court.

(f) If the parties are unable to determine the Mortgage Payout Date they may return before me on a motion for advice and direction on a date to be arranged with the trial coordinator.

2. Van Alphen, 135 and 173, jointly and severally, shall pay to 146 an amount equal to the rental arrears calculated at the monthly rate of $4,500 plus HST per month plus additional rent, for the period commencing on the Mortgage Payout Date and ending on the date on which the Lease is renegotiated or the current tenant vacates the Property.

3. Van Alphen, 135 and 173, jointly and severally, shall pay to 146 pre-judgment and post-judgment interest on the amount in 2. at the rate and in the manner provided for in subparagraph 2(7) of the Lease.

4. The amount presently held by the Court, totaling $286,793.80, shall be paid as follows:

(a) First, to 146 the sum of $46,793.80 representing the costs awards payable to 146 in connection with the CTA Application and the related appeal;

(b) The balance, totaling $240,000 (plus any accrued interest), to 146 in partial or full satisfaction of the amounts payable to 146 pursuant to paragraphs 2. and 3. of this Judgment; and

(c) The remaining balance, if any, to Van Alphen.

5. the purported sales of the Property by 117 to itself under power of sale on October 1, 2009 and October 6, 2010 are hereby declared invalid;

6. the purported sale of the Property by 117 to 173 on October 12, 2010 is hereby declared invalid; and

7. the title documents for the Property shall be rectified to reflect 146 as the owner of the Property.

COSTS

[69] If the parties are unable to reach an agreement on costs:

(a) The defendants in the Mortgage Action may serve and file written cost submissions with respect to both the Lease Action and the Mortgage Action, not to exceed five pages in length (exclusive of any bill of costs, case law, time dockets or costs outline), within 14 days of the release of this decision;

(b) The defendants in the Lease Action may serve and file responding written cost submissions with respect to both the Lease Action and the Mortgage Action also not to exceed five pages in length (exclusive of any bill of costs, case law, time dockets or costs outline) within 14 days thereafter; and

(c) The defendants in the Lease Action, within 7 days thereafter, may file written reply cost submissions not exceeding two pages in length.

“Justice A. K. Mitchell”

Justice A. K. Mitchell

Released: January 24, 2017

[^1]: As agreed by the parties.

[^2]: R.S.O. 1990, c. M-40, ss. 22 and 31.

[^3]: R.S.O. 1990 c. C-34.

[^4]: (1888) 40 Ch. D 396.

[^5]: See Ostrander v. Niagara Helicopters Ltd. 1973 CanLII 467 (Ont. H.C.J.).

[^6]: See Re 2272045 Ontario Inc. 2011 ONSC 3051.

[^7]: Re Botiuk and Collison et al. (1979) 1979 CanLII 2060 (ON CA), 26 O.R. (2d) 580 (C.A.) at p. 10. See also Munro v. Page Developments Ltd. [1979] O.J. No. 4362 (HCJ) at para. 8.

[^8]: Subsequently transferred to 173.