COURT FILE NO.: 1520/19 DATE: 2019-05-31 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

DUCA FINANCIAL SERVICE CREDIT UNION LTD. Applicant – and – OYINLOLA OSUNDINA, ADEOLA OSUNDINA, JOANNE MARIE and all other Tenants/Occupants of the premises known municipally as 445 TANSLEY STREET, SHELBURNE, ONTARIO, L9V 2S6 Respondents

James M. Butson, for the Applicant Anita Sol-Edeigba, for the Respondents

HEARD: May 30, 2019

Gray J.

[1] This is an application pursuant to s.52 of the Mortgages Act, seeking an order setting aside a tenancy made by the respondents Oyinlola Osundina and Adeola Osundina. The applicant is a mortgagee of a property owned by the Osundinas.

[2] For the reasons that follow, the application is dismissed.

Background

[3] The respondents Oyinlola Osundina and Adeola Osundina (the “respondents”) are the owners of property at 445 Tansley Street, Shelburne, Ontario. On October 17, 2017, a mortgage in favour of the applicant was registered against the property, for a term of five years securing the sum of $530,758.80, which called for payments monthly in the amount of $2,647.12.

[4] As it happened, the respondents, at the time they purchased the property, were also the owners of property at 38 Cedarcrest Street, Caledon, Ontario. They put that property up for sale immediately after obtaining the mortgage, but have been unsuccessful in their efforts to sell that property.

[5] In the result, the respondents were, and still are, the owners of two properties and they simply cannot afford to maintain them both.

[6] The taxes on the Shelburne property have not been paid until very recently. In December, 2018, the respondents stopped paying the mortgage payments to the applicant. The applicant has commenced enforcement proceedings, and has issued a notice of exercising its power of sale.

[7] The applicant discovered that there is a tenant in the property, under which the monthly rent is $2,300. That is obviously less than the monthly mortgage payment. The existence of the tenancy will, according to the applicant, constitute a significant impediment to the applicant realizing on its security. Hence this application to set aside the tenancy.

[8] The respondents have filed affidavit material, which discloses that, not surprisingly, maintaining two homes is quite challenging, and has contributed to financial difficulty for them.

[9] As noted, they tried to sell their property in Caledon, but without success. Accordingly, they put the Shelburne property on the market, and received an offer from one Joanna Sterling, who is the other respondent to this application. It was agreed that Ms. Sterling would lease the property for 18 months, during which she would have an option to purchase the property. If she exercised the option, the sum of $300 per month out of the rental payment would be applied as a credit towards the purchase price, to a maximum of $5,400.

[10] An Agreement to Lease was executed on April 26, 2018, and was accompanied by a corresponding Agreement of Purchase and Sale which was executed on May 7, 2018.

[11] For a few months in late 2018, Ms. Sterling failed to make the rental payments, which resulted in the failure, on the part of the respondents, to make their mortgage payments. The rental payments have since been made up. However, the mortgage remains in arrears. The applicant takes the position that the failure to pay the municipal taxes also constituted a default under the mortgage.

[12] It now appears that the Agreement of Purchase and Sale for Ms. Sterling is at an end, but she remains a tenant in the property.

[13] While the applicant, in its affidavit material, alleges that Ms. Sterling is a relative or friend of the respondents, it is clear from the affidavit material filed by the respondents that that is not the case. She is simply someone who exhibited an interest in purchasing the property, and in renting it in the meantime.

Submissions

[14] Mr. Butson, counsel for the applicant, submits that I should issue an order pursuant to s.52 of the Mortgages Act, setting aside the tenancy between the respondents and Ms. Sterling.

[15] Mr. Butson points out that the rent is less than the amount required for the mortgage payments. Furthermore, the lease was entered into after the mortgage was in default by reason of the failure to pay municipal taxes, and the registration of a tax lien on the property.

[16] Mr. Butson submits that it is a reasonable inference that the lease was entered into in order to interfere with the right of the applicant to enforce its security. Thus, the order sought should be granted.

[17] Ms. Sol-Edeigba, counsel for the respondents, submits that the application should be dismissed.

[18] Ms. Sol-Edeigba points out that the lease was entered into, not to interfere with the applicant’s rights, but to mitigate the financial circumstances in which the respondents found themselves. They were the unwilling owners of two properties, and simply could not afford to maintain them. They did their best to mitigate their difficulty by leasing the property with the ultimate objective of selling the property to the tenant.

[19] Ms. Sol-Edeigba points out that there is no evidence that the respondents did anything untoward, and their affidavit material, upon which they were not seriously challenged, makes it clear what their true motive was in leasing the property.

Analysis

[20] Section 52 of the Mortgages Act provides as follows:

Application to set aside tenancy

52 (1) The Superior Court of Justice may on application by the mortgagee vary or set aside a tenancy agreement, or any of its provisions, entered into by the mortgagor in contemplation of or after default under the mortgage with the object of,

(a) discouraging the mortgagee from taking possession of the residential complex on default; or

(b) adversely affecting the value of the mortgagee’s interest in the residential complex.

Idem

(2) In considering the application, the judge shall have regard to the interests of the tenant and the mortgagee.

[21] There is relatively little jurisprudence interpreting these provisions. The cases I have been able to find include Compcorp Life Insurance Co. v. Divitcos (1997), 12 R.P.R. (3d) 122 (Ont. Gen. Div.); Aaroncorp Investments Corp. – Summerhill v. Black, [1994] O.J. No. 2463 (Gen. Div.); Bank of Montreal v. Smith (2008), 71 R.P.R. (4th) 52 (Ont. S.C.J.); and Melo v. 2297248 Ontario Ltd., 2016 ONSC 4877.

[22] In Smith, Murray J. declared that a 10-year lease was unenforceable pursuant to s.44 of the Land Titles Act, being an unregistered lease for more than three years. However, he declined to set aside the lease under s. 52 of the Mortgages Act. At paras. 24 – 26 of his reasons, he stated:

The Bank argues that since the lease provides for a monthly rental amount less than one third of the monthly carrying costs of the property, the Bank’s interest in the property has been adversely affected by the terms of the 10 year lease. This may be so. It is not difficult to believe that the shortfall between the monthly rental payments and the monthly payments under the mortgage will generate a substantial loss in excess of $428,000 (not including property taxes) for the Bank if the terms of the 10 year lease are maintained through to January 2014 without variance. There is little doubt that if his 10 year lease is upheld, it will adversely affect the value of the Bank’s security.

However s.52 of the Mortgages act does not give this Court jurisdiction to vary or set aside a tenancy agreement except where a lease has been entered into by a mortgagor in contemplation of or after default under the mortgage with the object of discouraging the mortgagee from taking possession or with the object of adversely affecting the value of the mortgagee’s interest in the property.

The Court has no jurisdiction to set aside or vary a tenancy agreement simply because it is a bad deal for the Bank.

[23] In Melo, C.J. Brown J. stated, at para. 7:

Pursuant to the jurisprudence, in order to have a tenancy agreement set aside, the applicant must satisfy a three-pronged test, as follows: (1) there must be a tenancy agreement entered into by the mortgagor; (2) the tenancy agreement must be entered into in contemplation of or after default; and (3) the tenancy agreement must have the object of either discouraging the mortgagee from taking possession or adversely affecting the value of the mortgagee’s interest in the property.

[24] The first two elements of the test are usually not controversial, although in this case the respondents assert that the tenancy agreement was entered into long before default in payment of the mortgage payments occurred. While that may be so, it is clear that the tenancy agreement was entered into after default in paying municipal taxes, which constitutes a default under the mortgage.

[25] The more controversial factor is obviously the third one. As pointed out by Murray J. in Smith, it is not enough to simply show that the lease constitutes a bad deal for the mortgagee. It must be shown that the lease was entered into with the object of discouraging the mortgagee from taking possession or with the object of affecting the value of the mortgagee’s interest in the property.

[26] It would be a rare mortgagor who would candidly admit that his or her object in entering into the lease was to cause difficulty for the mortgagee. Inferences, however, may be drawn from the surrounding circumstances.

[27] In some respects, the inquiry is similar to that made where it is alleged that there has been a fraudulent conveyance – in such a case, the court will have regard for what are termed “badges of fraud”: Incondo Building Corp v. Sloan (2014), 2014 ONSC 4018, 121 O.R. (3d) 160 (S.C.J.), at paras. 52 and 53. Badges of fraud constitute circumstantial evidence from which fraudulent intent may be inferred.

[28] In a case such as this, the court can consider circumstances from which the intent of the mortgagor may be inferred. Without being exhaustive, such circumstances could include:

a) the amount of the rental payments as compared to the mortgage payments and other expenses; b) the relationship of the tenant to the mortgagor; c) the timing of the lease in relation to the date of default.

[29] The court must also consider any explanation offered by the mortgagor for the transaction.

[30] In this case, the rental payments are lower than the mortgage payments, but not by a significant amount. I am satisfied that there is no familial or other relationship between the respondents and the tenant. The tenancy was entered into quite some time before the default in making the mortgage payments. While it was after default in paying the municipal taxes, it would appear that the municipal taxes were never paid.

[31] The explanation offered by the respondents is persuasive. They were caught in the position of owning two properties, and they did the best they could to mitigate their financial difficulty. They entered into an Agreement of Purchase and Sale, and secured a lease from the purchaser and were able to get as much rent as they could.

[32] I am persuaded that the lease was not entered into with the object of discouraging the mortgagee from taking possession of the property or adversely affecting the value of the mortgagee’s interest in the property. Rather, it was entered into as a means of ameliorating the respondents’ financial difficulty to the extent possible.

Disposition

[33] For the foregoing reasons, the application is dismissed.

[34] I will invite brief written submissions as to costs from each party, not to exceed three pages together with a costs outline. Ms. Sol-Edeigba will have five days and Mr. Butson will have five days to respond. Ms. Sol-Edeigba will have three days to reply.

Gray J. Released: May 31, 2019

COURT FILE NO.: 1520/19 DATE: 2019-05-31 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: DUCA FINANCIAL SERVICE CREDIT UNION LTD. Applicant – and – OYINLOLA OSUNDINA, ADEOLA OSUNDINA, JOANNE MARIE and all other Tenants/Occupants of the premises known municipally as 445 TANSLEY STREET, SHELBURNE, ONTARIO, L9V 2S6 Respondents REASONS FOR JUDGMENT Gray J. Released: May 31, 2019