What Happens When a Landlord Defaults on their Mortgage?

By Merovitz Potechin on Monday October 21, 2019.

When a mortgage goes into default, a mortgagee (the lender), has various options available to recover the debt owed to it. When this situation arises in the context of a mortgaged property that is subject to one or more tenancy agreements, there are certain complications which may arise regarding the payment of rent which are important for both landlords and tenants alike to understand.

Rights of Mortgagees as Landlords

Sections 44-58 of the Mortgages Act deal with the rights and obligations of mortgagees as landlords in Ontario. If a landlord has issues paying the mortgage for their property, the lender may take the possession of the property, thereby becoming what is known as a “mortgagee in possession”. For tenants of the property, this means that the lender is now deemed to be a landlord pursuant to the Residential Tenancies Act (“RTA”).

Once deemed to be a landlord, the lender is entitled to certain rights, the most notable being the collection of rent. The lender also takes on certain key obligations, including the maintenance of the property.  For tenants, this means that rent must now be sent to a new entity. The lender must provide adequate notice to the tenants of this new state of affairs and this notice must include their name and contact information so that the tenants know exactly where rent must now be delivered. This notice is usually called a “Notice of Attornment of Rents” and states that the tenant(s) must stop paying their previous landlord and  must now pay the lender instead.

In addition to the foregoing, a mortgagee in possession that is deemed to be a landlord acquires standing before the Landlord and Tenant Board (“LTB”). This means that any LTB proceedings that the tenant may wish to bring in relation to their rental unit (i.e. regarding maintenance, harassment, or otherwise) will now be brought against the lender. Similarly, the lender can bring any proceeding against a tenant that a landlord would be able to under the RTA, including applications for eviction and harassment.

Failure to pay and eviction

Once a valid Notice of Attornment of Rents is served by a lender, tenants must immediately cease paying their previous landlord, and must instead pay their rent to that lender. . It is important that tenants do not continue paying rent to their previous landlord once the Notice of Attornment of Rents is received, even if the previous landlord assures them that the Notice was a mistake or that the situation will be resolved. This is because the lender is now legally entitled to receive the rent. If the lender does not receive rent payments, they can commence eviction proceedings in relation to those arrears. Even if the tenant has paid their rent in full to their previous landlord, this will not be enough to avoid eviction. In such a case, tenants remain liable to the lender for the full amount of the rent arrears and their remedy would be to seek recovery of the amounts improperly paid to the  previous landlord through the regular court system.

The dog ate my rent notice

This duty on the part of a tenant has been confirmed by the LTB in many cases. For example, in an interesting case heard by the LTB in 2006, a tenant argued that they never received their Notice of Attornment of Rents because it was served under their door and their dog ate it. The tenant continued paying rent to their previous landlord and argued at the LTB that they should not have to pay their rent to the lender since they were of the view that they had already paid. The LTB determined that since the Notice of Attornment of Rents was duly served, the tenants were responsible for the actions of their dog and they remained liable to pay the lender in full for the rent arrears.

Can the landlord regain their status?

If the borrower brings their mortgage back into good standing, then the mortgagee in possession ceases being the landlord and the situation reverts back to the previous status quo. However, it is important to note  that the lender remains liable for any acts/omissions during the time period it was deemed to be the landlord.

For example, if a tenant brought an application to the LTB for breach of a maintenance obligation during the time the mortgagee was deemed to be the landlord, but it had not been resolved by the time the borrower/landlord brought the mortgage back into good standing, the lender would still be the party liable to respond to the LTB application and would be on the hook for any damages as determined by the LTBs.    If you are a landlord dealing with issues with your lender, tenants or with the Mortgages Act, contact the litigation lawyers at Merovitz Potechin LLP.