Mortgages and Commercial Tenancies Considering Goodyear Canada Inc v Burnhamthorpe Square Inc.

MORTGAGES AND COMMERCIAL
TENANCIES
CONSIDERING
GOODYEAR CANADA INC v.BURNHAMTHORPE
SQUAREINC
Simon P.Crawford

TABLE OF CONTENTS
Page
INTRODUCTION 1
1. FACTS OF GOODYEAR 2
MORTGAGE MADE AFTER THE LEASE 3
1. RECEIVERS 4
2. TAKINGPOSSESSION 5
3. EFFECT OFFORECLOSURE 7
MORTGAGE MADE BEFORE THE LEASE 7
1. TAKINGPOSSESSION 8
2. OLD LEASE OR NEW LEASE? 12
3. FORMING A NEW LEASE ON POSSESSION 12
4. IFTHEREIS A NEW LEASE. 14
5. BINDINGTHE MORTGAGEEAND THELESSEE UNDERTHE OLD LEASEBYPRIVITY OF
CONTRACT 15
(a) Effect ofPrivity ofContract 16
(b) Privity ofContractin United States'Law 16
(c) How to Create Privity ofContract 16
(i) AssignmentofLeases 18
(ii) AttornmentAgreements 19
(iii) ConsentbyNon-Disturbanceand Attomment 20
(iv) Consenttoleasein Mortgage 21
6. BINDINGTHE MORTGAGEE AND LESSEE UNDERTHE OLDLEASEBYPRIVITY OFESTATE.21
(a) How to Create Privity ofEstate — by Assigning the Reversion 22
(b) How to Create Privity ofEstate by Assigning the Leasehold 25
(i) Legal vs.Equitable Assignment 25
(ii) Assigning thefull interest 26
(iii) Transferring theEntireInterest 26
(iv) TransferringtheIdenticalInterest 27
(c) EffectofPrivity ofEstate on Assigning The Leasehold 27
(d) "Touching and Concerning"the Land 28
(e) ThePassing ofPrivity ofEstate 29
(f) Privity ofEstates under United States'Law 30
(g) The EffectofForeclosure 31
(i) Policy Considerations 33
(i)

MORTGAGES AND COMMERCIAL TENANCIES
CONSIDERING GOODYEAR CANADA INC v.BURNHAMTHORPESQUAREINC.1
INTRODUCTION
Simon P.Crawford
In December 1998, application for leave to appeal to the Supreme Court ofCanada was
filed in the matter ofBurnhamthorpe Square Inc. v. Goodyear Canada Inc. The decision ofthe
Ontario Court ofAppeal,which had been handed down that previous October,had revitalized a
long-standing body ofproperty and landlord/tenantcommon law.
Atthe heart ofthe appeal was the question ofwhether the existing common law property
rules should be able to operate to allow a commercial tenant to escape its obligations under a
lease when a mortgagee goes into possession, because that lease was registered after the
mortgage on the property. The application for leave was based on the practical, rather than
strictly legal, argument that "there is no modern reason why a mortgagee whose mortgage
precedes a lease and who,for commercial reason deems it necessary to take possession, should
be denied the ability to preserve the originallease between the mortgagor and the tenant".2
As will be explored in this paper,the Goodyear case has left a lacunae in the paperwork
relied upon by commercial lenders to establish either privity ofcontract or privity ofestate with
lessees who entered into leases subsequentto the mortgage.
The existing common law rule is this. Where a lease is entered into subsequent to the
mortgage, a mortgagee holds paramount title and, therefore, may eject the tenant forthwith. If
the mortgagee delivers a notice to the tenantto pay rentto the mortgagee and the tenant agrees to
pay rent, and does pay rent, the tenant is treated as a tenant of the mortgagee and a new
year-to-year tenancy is created. The former tenancy between the lessee and the lessor is not
terminated; however,in the absence ofany evidence to the contrary,that lease is unenforceable
as between the mortgagee and the lessee. The other alternative to the mortgagor to avoid this
result, is not to go into possession at all. In such circumstances,the mortgagee may appoint a
receiver to act as agent for the mortgagor, or may collect rents under an assignment ofrents or
leases from the mortgagor. Under either of these circumstances, the tenant's lease with the
mortgagor would continue to exist.
The matter for which leave is sought to the Supreme Court is based on the general
principle that the operation ofthe common law may cause a prior mortgagee to lose a valuable
lease merely by taking possession of the property, and that such a result is not commercially
reasonable. Rather, the applicants have sought a change in the common law which would,in
effect, displace hundreds of years of common law and equity with a commercially reasonably
[case citation]
2
Application for leave to appeal, to the Supreme Court of Canada, Burnhamthorpe Square Inc. and Goodyear
CanadaInc. atpage 8.

2
solution. The applicants propose that the new rule under the law should be that when a
mortgagor goes into default, a mortgagee whose mortgage is prior to the lease,should be able to
eject the tenantupon going into possession,or enforce the lease as againstthe tenant irrespective
ofwhetherthe mortgagee takes possession.
While it is likely thatleave to appeal to the Supreme CourtofCanada will be granted,the
Goodyear case has raised some interesting issues with respect to the effectiveness ofassignment
ofleases and rents and the necessity ofnon-disturbance and attornment agreements. I suggest
that the application shall fail for two reasons. Firstly, it is unlikely that the Supreme Court of
Canada will entertain the creation ofa new rule ofproperty and landlord/tenantlaw,which is not
based on the long history ofcommon law and equitable principles; and secondly,it is likely that
in the mind of the Court, if commercial reality dictates that the common law principles are
unreasonable,it falls upon the legislature to rework the law.
In the meantime, lenders, property owners, and tenants will have to be awake to the
issues that have arisen from the Ontario Court ofAppeal decision. They will have to reanalyze
their existing agreements and reconsider future agreements in light of the fact that privity of
estate and privity ofcontract may not exist where they anticipated it to. Accordingly,this paper
begins with the facts of Goodyear,and backs out into the age-old legal principle surrounding a
mortgagee's going into possession,and the doctrines ofprivity ofcontract and privity ofestate.
1. Facts ofGoodyear
Aetna Life Insurance Company ofCanada("Aetna)held a first mortgage dated October
1979 (the "1979 Mortgage) over certain office towers (the "Premises') which contained a
provision which purported to assign all present and future leases pertaining to any part of the
Premises to Aetna(the "1979 Assignment"). The Owner also provided separate assignments of
rents in favour ofAetna.In December 1980 Goodyear became a primary tenant ofthe premises
and signed 2 leases (the "1980 Leases"). Goodyear and Aetna entered into an Attornment and
Non-Disturbance agreement with respect to the 1980 Leases. Shortly thereafter,the Owner gave
Goodyear a notice ofthe 1979 Assignment.
In 1984 Canada Life Assurance Company("Canada Life")took a third mortgage over the
Premises.The Owner provided Canada Life with a General AssignmentofRents.
In 1987 Goodyear reduced its space in the Premises and took part ofan office tower in a
second premises. The letter agreement provided that consents and non-disturbance agreements
would be obtained from both Aetna and Canada Life to either(a)a surrender ofthe 1980 Leases
and substitution of a new lease for the reduced Premises, or (b) an amendment to the 1980
Leases. The consents and non-disturbance agreements were never executed by the
Mortgagees. Thatsame year,Goodyear entered into two new leases with the Ownerrepresenting
over 30% ofthe development's rental income,each for a term of 15 years, expiring in the year
2002(the"1987 Leases").
In 1992a property manager was appointed(the"Manage?).

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In February 1993 Canada Life purchased the indebtedness and security of Aetna, and
Aetna assigned the first and second mortgages to Canada Life, and gave Canada Life an
AssignmentofAssignmentofRents(assigning to Canada Life the 1979 Assignment).
0 Later,in 1993,the Owner defaulted under the first, second and third mortgages. Canada
Life appointed a receiver.
In 1994,the receiver was discharged and Canada Life took possession ofthe Premises.
The receiver assigned its property management agreement with the Manager to Canada Life.
Goodyear was advised to pay rentto the Manager on behalfofCanada Life. Goodyear complied
with therequest and started making regular rent payments directly to Canada Life's Manager.
In 1995, Canada Life assigned all three mortgages and the Assignment of Rents to
Burnhamthorpe Square Inc. ("Burnhamthorpe") with the intent that Burnhamthorpe would
acquire title to the property by foreclosing against the Owner.Canada Life took back a mortgage
and an assignment ofrents and assumption ofleases as part ofthe purchase price. Prior to the
assignment,Goodyear delivered estoppel certificates to Burnhamthorpe with respect to the 1987
leases.Canada Life,in the nameofBurnhamthorpe,obtainedjudgementfor foreclosure.
After the closing of the sale of the Premises, Goodyear served notice that it was
terminating its tenancy as ofthe end of1996,which was six years before the end ofthe term.
MORTGAGE MADE AFTER THE LEASE
When an owner enters into and registers alease and subsequently registers a mortgage on
the property, the mortgage attaches only to the reversionary interest which the Lessor has
retained under the lease - that is, the right to repossession at the end ofthe term ofthe lease.3
Accordingly,ifthere is no agreement which states otherwise, the mortgagee's interest is as the
owner ofthe reversion,subjectto the Lessor's rightto redeem the mortgage.
What this means in practice,is that the rights ofthe lessee to possession ofthe property
are paramount to the mortgagee's reversionary rights to possession and to seek recourse against
the propertyin order to recoverthe money owed pursuantto the mortgage;or stated another way,
the mortgagee takes its interest subjectto thelease4. Cases not yetconsidered:
• Canada Permanent Building and Savings Society v. Rowell(1860) 19 U.C.Q.B.
124(C.A.)
3 Falconbridge at320
4DistrictBank,Ltd. v. Webb,[1958] 1 A11 E.R. 126(Ch.D.)

4
A direct relationship between the lessee and the mortgagee is created. This relationship,
based on the full transfer ofthe reversionary interest,is privity ofestate. The Courtin Rogers v.
Humphreys stated:5
And if there be a lease, and such lease is prior to the
mortgage, the mortgagee has the same rights against the
lessee and those claiming under him that the mortgagor
had,and no other than he had,and his remedy must be on
the lease as assignee ofthe reversion,as long as the lease is
in existence,and the tenant acknowledges his title;...
This direct relationship as landlord and tenant created between the mortgagee and lessee is made
effective without any attornment by the tenant.6 This common law principle is now codified in
the Commercial TenanciesAct7 which provides:
Attornment oftenant,in what cases not necessary -- s.62(1)
62.(1) Every grant or conveyance of any rent or ofthe reversion or
remainder ofany land is good and effectual without any attornment of
the tenant ofthe land out ofwhich such rent issues, or ofthe particular
tenant upon whose particular estate any such reversion or remainder is
expectantor depending.{italics mine}
Tenant notto be prejudiced -- s.62(2)
(2)A tenantshall not be prejudiced or damaged by the payment ofrent
to any grantor or by breach of any condition for non-payment ofrent
before notice to the tenantofsuch grantby the grantee.
1. Receivers
If the mortgagor defaults under the mortgage, and if there is no agreement which
specifies otherwise, and ifthe mortgagee has not taken possession,the lessee may refuse to pay
the mortgagee directly and may instead pay the lessor and obtain a release.8 In response to this,
the mortgagee may appoint a receiver either in accordance with the terms of the mortgage or
pursuant to the Courts ofJustice Act. The court order may require the lessee to attorn to the
receiver.9
5(1835),4 A.D.&E.299,111 E.R.799 at804
6 Falconbridge 322 and compare Moss v. Gallimore(1779), 1 Dougl.279 at282,99 E.R. 182
7 R.S.O. 1990,Chap.L.7,
8 Taub at8
9 R.S.O. 1990, Chap. C43. Compare also Standard Life Assurance Co.(Trustee qp v. Deer Run Shopping Centre
Ltd., unreported, Ont. Gen Div., Sept 29., 1992, File 92-CQ-25189 and Vancouver City Savings Credit Union v.
MillerElectronicsLtd.(1986),8B.C.L.R.349(S.C.)].

5
The appointment of a receiver as agent for the lessor is an alternative to taking
possession ofthe property. If the receiver is appointed as an agent ofthe mortgagee, then the
effectis thatthe mortgagee takes possession ofthe property.
2. Taking Possession
At common law,(and in the absence of a contractual agreement to the contrary), no
default is required in order for the mortgagee to enter into possession ofthe premises. This right
arises from the reversionary interest which the mortgagee has obtained under the mortgage.1° In
Four-MaidsLtd. v.Dudley Marshall(Properties),Ltd.,the Court stated:
The mortgagee may go into possession before theink is dry
on the mortgage unless there is something in the contract,
express or by implication, whereby he has contracted
himselfout ofthat right. He has the right because he has a
legal term of years in the property or its statutory
equivalent. If there is an attornment clause, he must give
notice. If there is a provision that, so long as certain
payments are made,he will not go into possession,then he
has contracted himself out of his rights. Apart from that,
possession is a matter ofcourse.
Traditionally, at common law the mortgagee received legal ownership of the property
under the mortgage. The concept ofa legal mortgage is that the deed conveys the land in fee to
the mortgagee with a proviso defeating the conveyance ifa certain sum with interest is paid by a
certain time. Ifthat money is not paid on time,the mortgagee has an absolute estate in law. For
example,inDavidson v. McKay,the Court described the effect ofthe mortgage on title, and how
the mortgagor retains a rightto redeem the propertyll:
The[mortgagee's]title commenced with a bargain and sale by way
of mortgage, dated the 31st May, 1864, whereby [the mortgagor],
in consideration of$730 50, granted, &c., to the [mortgagee] in
fee the premises in question, subject to a proviso, that if [the
mortgagor]should pay to the[mortgagee]the suin of$73050,with
interest at the rate often per cent per annum,the principal sum on
the 31st May, 1866,and the interest on the 31st May in each year,
then the indenture should be void. There were covenants on the
mortgagor's part for payment, for good title, right to convey
without any manner of trust, reservation, proviso, limitation or
condition, to alter, charge, change, encumber or defeat the same,
and that after default the mortgagee might enter and possess the
premises,free and clear of all former conveyances, &c.; and after
10Four-Maids,Ltd. v.Dudley Marshall(Properties),Ltd.,[1957]Ch.317,[1957]2A11E.R.35.
11(1867),26 U.C.Q.B.306 at306

6
other covenants and agreements, it was declared that if the
mortgagor should make default in payment of principal and
interest according to the proviso, and after the lapse of one
calendar month from such default, the mortgagee might enter and
take the rents, and might sell the mortgaged premises and convey
the same to the purchaser.
Thecommon law has been modified bytheLandRegistration Reform Act,which provides:
Charge not a transfer -- s.6(1)
6.(1)A charge does not operate as a transfer ofthe legal estate in the
land to the chargee.
Rights and remedies preserved -- s.6(3)
(3)Despite subsection(1), a chargor and chargee are entitled to all the
legal and equitable rights and remedies that would be available to them
if the chargor had transferred the land to the chargee by way of
mortgage,subjectto a proviso for redemption.
A charge on land,while nottransferring the legal estate in the land to the mortgagee,still affords
the mortgagee all of the legal and equitable rights that would have existed at common law.
Accordingly,subjectto an agreementto the contrary,a lender is still entitled to possession ofthe
property at anytime after the mortgage is entered into.
Until such time as the mortgagee takes possession ofthe property and notifies the tenant
that payments are to be made to the mortgagee, the tenant may pay rent to the mortgagor.12
However,the mortgage will usually include a provision which provides that the mortgagor will
enjoy quiet possession ofthe property unless there is a default or the lease terminates. Such a
provision has the effect ofa redemise to the mortgagor,such that the mortgagor is effectively a
tenant until default or lease expiration.13 Accordingly, the mortgagee generally cannot take
possession before defaultin orderto collectrent.
However, on such default or termination, the mortgagee can take possession of the
property without giving notice or demand,and require the lessee to pay rents to the mortgagee
instead ofto the landlord.14 Upon taking possession the mortgagee also becomes liable in equity
as a mortgageein possession.15
13 Falconbridge at324.

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Generally speaking, a mortgagee will want to take possession in order to collect rents
from the lessee, to secure vacant possession in order to assist in the sale ofthe property, or to
secure vacant possession so that a new lessee may occupythe premises.
3. Effect ofForeclosure
As the lessee's interestis paramountto the mortgagee's,the lessee is not a proper party to
the foreclosure unless the mortgagee seeksreliefagainstthe lessee.16
MORTGAGE MADE BEFORE THELEASE
As stated in Martin v. Miles,"it may be said as a rule that everyone having an interest
from the mortgagorin theland,can redeem the mortgagee."17 Thatis,an interestin the equity of
redemption is an estate in the land that can be splitbetween the mortgagor and its lessee.
When an owner registers a mortgage on the property, it holds a fee simple subject to a
charge,and retains the equity ofredemption. When the mortgagor subsequently registers a lease
on the property,the lease constitutes a partial transfer ofthat equity ofredemption. The lessee's
partial interest, which is also referred to as the equity ofredemption pro tanto,18 entitles it to
redeem the mortgage and receive the mortgaged premises in foreclosure.19 As stated in Tarn v.
Turner2°
The mortgagor has an estate in the land, and he can deal with that
estate in the landjust as much as ifhe had never made a mortgage,
and can sell it, settle it, create charges upon it in favour ofhis wife
or children, or demise it; he can do anything he pleases with it, as
ifhe had the estate in fee unencumbered,but always subject to the
mortgage... when he conveys away his estate orpart ofhis estate
in the land he necessarily gives to each ofthe persons in whose
favour hegrants an estate the right to do that which he himselfcan
do, that is, to redeem the mortgage...Therefore it has always been
held since the doctrine of redemption has been worked out in
Courts ofEquity that any person who is thus entitled to an interest
carved out of the fee simple is entitled to come in and redeem,
subject ofcourse to any other equities paramount which affect the
16
Falconbridge at465
17(1883),5 O.R.(Ch.D.)404 at412
18 {LOOK UP LATIN]— Falconbridge at465.
19
Falconbridge at326.Compare also Collins v. Cunningham(1892).21 S.C.R. 139,and Capital Trust Corp Ltd. v.
McGuigan,[1934]O.W.N.656(H.C.J.).
20(1888),39 Ch.D.456 at460

8
estate, only coming in his proper place and being necessarily
subjectto those who are prior to him.{italics mine}
The mortgagee receives a charge, not merely on the mortgagor's reversionary interest,
but on the mortgagor's full interest in the estate, and thus,the mortgagee's right to have recourse
to the property to recover money owing pursuant to the mortgage is paramount to the lessee's
right ofpossession.
[Corbett v.Plowden [1884]25 Ch.D.678(C.A.)681 — If a mortgagor is in possession
and grants a lease to the tenant without the "concurrence" [consent?] of the mortgagee [my
comments - i.e. no subordination of the mortgagee's interest to the lessee?] then the lessee
(tenant) has precarious title because, although the lease is good as between the lessee and the
mortgagor/lessor, the paramount title of the mortgagees may be asserted against both of
them.]
For as long as the mortgagee does not interfere by taking possession, the lease is
enforceable as between the lessee and the lessor,and the lessor may demand rent under the lease
and distrain21 for the rents.22 Cases not yet considered:
• Trent v.Hunt(1853),9Ex.14,156 E.R.;
• Carpenter v.Parker(1857),3 C.B.N.S.206
1. Taking Possession
A mortgagee takes possession when it deprives the mortgagor of the control and
management of the property. The required intervention does not necessarily include physical
possession.23 One manneroftaking possession is by ejecting the lessee.24
As a general rule,the effect oftaking possession is that the mortgagee gains the rights of
the lessor for the purposes of managing and preserving the property, subject to the lessor's
equitable right of redemption. Furthermore, so long as the right of redemption exists, the
mortgagee may be liable to the lessor for an accounting.25 However,in the absence ofstatutory
21 The process of distraint traditionally refers to the seizure of property using "distress", that is a seizure without
legal process ofthe propertyfrom the possession ofthe wrongdoer.
22 W.B.Rayner &R.H. McLaren eds.,Falconbridge on Mortgages,4th ed.(Agincourt,Ontario: Canada Law Book,
1977)at 326(hereinafter Falconbridge). Compare also Collins v. Cunningham (1892)21 S.C.R. 139,and Capital
Trust Corp.Ltd v.McGuigan,[1934]O.W.N.656(H.C.J.)
23
Rusden v.Pope(1868),L.R.3Ex 269 at273
24
Falconbridge at643
25 Falconbridge at 646 and 651. The general principle of accounting is that the mortgagee may be required to
accountto the mortgagorfor any profits received in excess ofthe principle sum and interest.

9
authority, the mortgagee in possession's rights do not permit it to create leases which will be
binding on the lessor ifand when thelessor exercises its rightofredemption.26
In the absence ofan agreement to the contrary, at the moment that the mortgagee takes
possession ofthe premises he may remove the lessee,because at that moment,it is not bound by
the previously effective lease,and no new lease has yet been created.27
Ifthe mortgagee goes into possession, and neither the old lease is effective, nor a new
lease created, the result is that the landlord is able to evict the lessee, or stated properly,
commence an actionforpossession,28 or trespass.29 For example,in Towerson v.Jackson,3° the
Court noted that, if the mortgagee is not going to make the lessee a new offer, its only other
option is to evictthe lessee.InRogers v.Humphreys31 the Court phrased it this way:
. . . if the lease be subsequent to the mortgage, then the
mortgagee may treat the lessee and all those who may be in
possession as wrong-doers, and may bring an ejectment,
but he cannot distrain or bring any action for the rent they
have contracted to pay, as there is no relation oflandlord
and tenant between them,unless they choose to pay the rent
to the mortgagee,and he accepts it; and in that case there is
a relation of landlord and tenant created between the
mortgagee and the tenants, and the remedy of the
mortgagee will depend upon the particular circumstances of
each case;...
• Evans v.Elliott(1838),9Ad.&E.342,112E.R.1242
A mortgagee could also commence an action for mesneprofits32 and claim for the amountofrent
payablefrom the time the mortgagee took possession.33 Cases not yet considered:
26
Falconbridge at646.Compare also Chapman v.Smith[1907]2Ch. 97 at 102.
27 Falconbridge at 326. Compare also Devan Properties Ltd. v. Metropolitan Stores of Canada Ltd. (1988), 87
N.S.R.(2d),222 A.P.R.43(S.C.), and Dudley andDistrict BenefitBuilding Society v.Emerson,[1949]Ch.707 at
714.
28
Falconbridge at326
29 LOOK UP TERM
30[1891]2Q.B.484 at486
314 AD&E 312,799 at804
32 LOOK UP TERM

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• Barnett v. Guilford(Earl)(1855),11 Ex. 19,156E.R. 728
The locus classicus for this principle is Keech v. Hall34 in which the Court found that a
mortgagee may treat the lessee as a trespasser or wrongdoer, and that in the absence of any
contract or conduct to the contrary,the possession held by the mortgagor or those holding under
it is precarious and held at the will of the mortgagee. In Gibbs v. Cruickshank the Court
described the mortgageein possession's rightthis way:35
The defendants were mortgagees ofthe premises, and default was
made by the mortgagor under the mortgage. The plaintiff was let
in by the mortgagor, subsequently to the mortgage, and the
defendants, who had done nothing to recognize him as a tenant,
were clearly entitled to treat him as a mere tortfeasor.
This is also confirmed in Lows v. Telford,36 In this case the Courtfound that,at the moment the
mortgagee breaks the lock of the premises and takes physical control of the premises, it can
immediately exercise its rights to dispossess thelessee. The Courtillustrated it this way37:
Ifthere are two persons in a field, each asserting that the field is
his, and each doing some act in the assertion of the right of
possession, and ifthe question is which ofthose two is in actual
possession, I answer, the person who has the title is in actual
possession and the other person is a trespasser. They differ in no
other respects. You cannot say that it is joint possession; you
cannot say that it is a possession as tenants in common. It cannot
be denied that one is in possession and the otheris atrespasser.
In the Goodyear decision, the Court considered the effect of a mortgagee taking
possession and found that the rights ofthe mortgagee are mirrored by correlative rights in the
lessee. That is to say,just as the mortgagee can immediately evict the lessee, the lessee may
abandon the premises subject to the mortgagor's right ofredemption on the grounds that neither
the old lease nor a new lease binds it to the mortgagee.Thatis to say,the original lease does not
terminate merely as a result ofthe possession. However,the Court found that the mortgagor,as
33
Rusden v. Pope(1868), L.R. 3Ex. 269 at275 the Court applied this principle with respect to a mortgagee who
went into possession ofa ship and sought to collect profits. Compare Ocean Accident and Guarantee Corp. Ltd. v.
Ilford Gas Co.[1905]2K.B.493 andPope v.Biggs(1829),9B&C245,109 E.R.91
34(1778),1 Dougl.21,99 E.R. 17; 1 Smith Leading Cases,12ed.(1915),577
35(1873),L.R.8 C.P.454 at457
36(1876),1 App.Cas.414
37
at page426

a result ofhis default under the mortgage,places the lessee in a precarious position ofpossibly
being evicted by the mortgagee with paramount title. Therefore, when the mortgagor is in
monetary default under the mortgage it thereby breaches the lease covenant for quiet enjoyment,
and thelessee,ifhe does notremainin possession,cannotbe sued by the mortgagor.
After recognizing that there exists no clear authority exercises its right to redeem,ifthe
mortgagor for the rule,the Court in Goodyearfound that,the lessee ifstill in possession under a
lease with the mortgagee, can enforce the original lease against the mortgagor's interest in the
land because to allow otherwise would be to allow the mortgagor,by his own default,to redeem
the mortgaged property free and clear ofthe lease agreement.
Furthermore,the Courtfound thatifthe lessee staysin possession after redemption by the
mortgagor,the lease(being enforceable by the mortgagor)must be enforceable against him. If
the lessee does not wish to stay inpossession,then the mortgagor,having breached his covenant
for quiet enjoyment,should not be able to force the tenant to remain in possession and abide by
thelease.
Accordingly, to avoid this result, mortgagees who wish to ensure that opportunistic
lessees do not walk awayfrom the property,may avoid going into possession altogether.
In order to avoid the liabilities associated with being in possession,a mortgagee may opt
to leave the receiver in place. The disadvantage of using a receiver is threefold. Firstly, a
receiver is an expensive way ofadministering an under-performing property;secondly,as stated
above,ifthe receiver is found to have been appointed as agent for the mortgagee and not the
lessor, the mortgagee will be in possession of the property anyway; and,(c) the mortgagee
cannot evictthe lesseefrom the premises until it actually takes possession.
[It should also be noted that the courts have held that a mortgagee that attorned rents
assigned to it under an instrument separate from the mortgage is not necessarily a mortgagee in
possession.]
A mortgagee may also avoid taking possession by structuring the lease so that the
mortgagee does not take possession in its capacity or character as mortgagee. If a mortgagee
enters into possession ofthe rents in a character other than as mortgagee,it is not a mortgagee in
possession. Accordingly, where a mortgagee is a party to the lease between the lessor and the
lessee,and the lease provides that rentis to be paid to the mortgagee,and the mortgagee actually
receives some payments,the mortgagee may not be a mortgagee in possession. The result is that
the payment of rents to the mortgagee by the lessee do not constitute an assignment of the
lease.38 Thisresult was achieved in
• Beckstead v.Ball(1960),26 D.L.R.(2d)374(Ont.H.C.J.)
• [thenshow how this is commercially unreasonable]

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Having said this, there is a case, Vancouver City Savings Credit Union v. Miller Electronics
Ltd. (1987), 13 B.C.L.R.(2d)205(C.A.) which suggests that where a mortgagee never enters
intopossession,the tenant may be able to avoid the lease —Look up]
2. Old Lease or New Lease?
At the moment of possession, no lease binds the mortgagee and the lessee. Before
discussing the construction and nature ofthe two possible leases that could cover the relationship
between the mortgagee and the lessee,it should be recognized that market influences will guide
which lease either the mortgagee or the lessee will wish to enforce. For example,if when the
mortgagee goes into possession, at a time when market rents are markedly lower than those in
the old lease,it is likely that the lessee will attempt to create and be bound by a new lease with
the mortgagee.Conversely,where marketrents are markedly higher,the lessee will likely try and
maintain the former lease,and create privity ofcontract with the mortgagee.
3. Forming a new lease on possession
In order for there to exist a landlord and tenant relationship between the mortgagee in
possession and the lessee,the mortgagee and the lessee must either bind each other underthe old
lease or enter into a new contract. Such new contract may be created expressly or by implication
through their conduct.39 The Courtin Towerson v.Jackson noted:4°
the mortgagee cannot, by the mere fact of giving the mortgagor's
tenant a notice, cause him to hold the mortgagee, but that there
must be a consent by the tenant to hold the mortgagee...All he can
do is to turn him out or make him an offer. An offer cannot be
binding on the tenant unless it is accepted, and the mere fact that
such an offer has been made cannotbe evidence ofassent.
This new contract cannot be entered into unilaterally. By merely giving notice to the lessee,the
mortgagee cannot create the contract or position itselfto sue or distrain forrent payable.41
One manner in which the mortgagee can consent to a new contract is by demanding
paymentfrom thelessee.42 For example,in Underhay v. Read,the Courtcommented:43
39 Falconbridge 327.
40[1891]2Q.B.484noted at486
42 Falconbridge at 327;Compare also Reporton theLaw ofMortgages,Ontario Law Reform Commission,(Ministry
ofthe Attorney General,1987)at237(hereafter"Report on Mortgages").Compare LeverFinance Ltd. v. Trustee of
Property ofNeedleman,[1956]2All E.R.378.
43(1887),20 Q.B.D.209 at214

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Here the evidence was that after the assignment of the mortgage
notice was given by the assignees ofthe mortgagee to the plaintiff
to pay to them the rent then due and thereafter to become due in
respect ofthe premises comprised in the mortgage, which appears
to import a consentthathe should hold atleastfor one year.
Cases not yet considered:
• Doe d.Rogers v. Cadwallader(1831),2C& Ad.473;109 E.R. 1218;
• Doe d. Whitaker v.Hales(1881),131 E.R. 124
• Smith v.Eggington(1874),31 L &T 150
If the lessee pays the rent when demanded from the mortgagee, a new tenancy is
created.44 Cases not yet considered:
• Evans v.Elliott(1838)112E.R.1242(confirmed in Goodyear)
However, if the lessee refuses to pay rent when demanded by the mortgagee, no new lease
exists.45 Furthermore, if the lessee does not pay the rent demanded and merely stays in
occupation ofthe property,that does notin itselfevidence that a new contractfor the tenancy has
been entered into. 6For example,Towerson v.Jackson,the Court stated47
It cannot be expected that the tenant on the receipt of the notice
should go out ofpossession, and there is nothing in the mere fact
ofthis continuing in possession which indicates thatby so doing he
intended to convey a complete acquiescence in the terms offered
bythe other side.
Cases not yet considered:
• Brock v.Forster(1897),34 N.B.R.262
In Goodyear,the Court noted that,had there been proper evidence ofintention during the
period ofpossession, Goodyear and the Mortgagee could have enforced the old lease. In fact,
44
Towerson v. Jackson,[1891]2 Q.B.484(C.A.)(confirmed in Goodyear). Guscon Enterprises Ltd. v. Andsam
Masonry Co.(1995),48 R.P.R.(2d)255(Ont.Ct.Gen Div.)— In this case the Courtimplied the existence ofa lease
on a year to year basis on the same terms as the prior lease to the extent they could be made compatible with a
yearly tenancy.
45 Sterling Trusts Corp. v. Wortman(August 17,197,S.C.O.,Master Sandler).
46
Falconbridge at 327.Compare Underhay v.Read(1887),20 Q.B.D.209
47[1891]2Q.B.484at487

- 14 -
the Court found that while Goodyear had indicated its intention to be bound by the terms ofits
lease for the full term, THERE WAS NO EVIDENCE that the Mortgagee intended to be so
bound.
Before leaving this section, it is ofsome interest that, in its 1987 Report on the Law of
Mortgages, the Ontario Law Reform Commission recommended that the law be changed such
that the mere demand for and subsequent payment ofrents by a mortgagee in possession, not
give rise automatically to a new lease. Rather, it was the commission's view that some further
course ofconduct should be required in order to infer that this new tenancy has been created so
that a lender would be able to demand and receive rent without necessarily assuming the
obligations ofthe mortgagee under the old lease.48
4. Ifthere is a new lease...
As a first rule,the point made by Goodyear is valid — that is,that ifthe lessee remains in
possession under a lease with the mortgagee,that lease can ONLY be a lease ofthe mortgagee's
interest in the property since the mortgagor still retains the equity ofredemption. As a second
rule, the terms ofthe new tenancy are not necessarily the terms ofthe lease between the lessee
and the mortgagor;rather the terms are inferred from whatthe practice ofthe parties is.49 Joyce
J. noted in Keith v.R. Gancia & Co.Ltd.that:5°
...although the mere payment and receipt of rent as
between the lessee and the mortgagee may convert the
lessee into a tenant from year to year, it does not follow
from that alone that the lessee holds upon the terms ofthe
lease so far as they are applicable to a tenancy from year to
year. I think, as stated in Smith's Leading Cases and in
other text-books, that in every case it is a matter of
evidence or inference from what is done. When a new
tenancy is thus created the terms ofsuch new tenancy must
be proved by evidence, and the mere fact that the tenant is
paying rentto the mortgagee after notice is no evidence that
the tenancy is to be on the same terms as those on which
the tenant held underthe mortgagor.
It has been confirmed that the new tenancy does not automatically mandate that the mortgagee
assumes responsibility for all promises in the former tenancy agreement.51 More particularly,the
48
Reporton Mortgages at243.
49 Falconbridge 327
50[1904]1 Ch.774 at748
51 Sadie MoranisRealEstateLtd. v.HongkongBank ofCanada,(1998)112739 OR(3d)692at698.

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term ofthe new lease is on a year to year basis unless there is evidence ofa contrary intention.52
The Courtin Corbett v.Plowden stated:53
But the paramount right ofthe mortgagees being asserted,
the tenant has availed himself of the right which in that
case the law gives him to consider himself as holding no
longer from the mortgagor, but as a tenant from year to
year of the mortgagees, and he has taken the necessary
stepsto determine histenancy.
Cases not considered:
• Doe d. HughesandRising v.Bucknell(1838),8 Can.&P.566,173 A11 E.R.620
Lord Selborne in Corbett v. Plowden,54 stated "that when a mortgagee intervenes by
virtue ofhis paramount title, and claims rent, which he has a right to do without setting up any
lease whatever, the rent if paid will be the previously existing rent, under a new tenancy from
year to year under the mortgagees." The Court in Goodyear followed the Corbett decision, and
found that alease given subsequentto a mortgage is notterminated by notice from the mortgagee
to the tenant to pay rent to him;but rather, results in a new tenancyfrom year to year under the
mortgage.It does notterminatethe original lease55.
The tenancy,once created,is terminable on six months'notice.56 This notice period was
confirmed by the Court in Goodyear which added that six months'notice to quit must be given
to end on the last day ofthe tenancy and that the notice must be unambiguous and state that the
tenant will deliver the premises on the proper date57.
[Note,however,that MannaiInvestment Co.Ltd. v.Eagle StarLife Assurance Co.Ltd.[1997]2
W.L.R.945 — states thatthere should be aflexible testfor notices.]
5. Binding the Mortgagee and the Lessee Under the Old Lease by Privity ofContract
As stated above,upon going into possession,the mortgagee and the lessee may be bound
to each other under the terms ofthe original lease. Traditionally,lenders have thought that this
53 25 Ch.D 678 and 681.
54 25 Ch.D.678
55
Compare Keith v.R. Gancia and Co.Ltd.,[1904] 1 Ch.774(CA),Re Clarkson Co.and Morrison(1975),8 O.R.
(2d)414(Div.Ct.),Kinnear v.Aspden(1892),19 O.A.R.468 at473,and Yorkshire Trust Co. v. GunterFarmsLtd.
(1989),40 B.C.1.R.(2d)161(C.A.).
56 Kinnear v.Aspden(1892),19 O.A.R.468
57 Cohen TaylorService Stores[1948]4D.L.R.658(Ont.C.A.).

- 16-
could be achieved by establishing either privity of contract or privity of estate between the
mortgagee and the lessee. At law, this is true, inasmuch as there can be no enforcement of
covenants betweentwo parties unless they share either privity ofcontract or privity ofestate.58
(a) EffectofPrivity ofContract
Privity ofcontract is created between the lessor and lessee pursuant to the covenants in
the lease.This privity under the lease always exists between thelessor and the lessee,even in the
face ofassignments oftheir respectivelease interests.59 Platt on Leases states:6°
It is perfectly settled by a multitude of decisions that,
notwithstanding an assignment of his lease, the lessee
continues liable on the personal privity of the contract to
the payment of the rent and the performance of the
covenants during the whole term; although the lessor
concur in the assignment or, by acceptance of rent or
otherwise,recognize the assignee as his tenant.
Secondly, the lessor remains personally liable for its covenants in the lease after it has
assigned its reversionary right,61 and is liable to the lessee even if the lessee has assigned its
interestin theremainder ofthe term ofthelease.62
(b) Privity ofContractin UnitedStates'Law
Friedman states that,in U.S.jurisprudence,it is specifically the tenant's covenant to pay
rent that creates privity ofcontract between the lessee and the lessor. Heinforms further,thatthe
effect ofthis privity ofcontact is that the lessee's liability for the lease covenants survive even
after thelessee assigns its interestin the lease to athird party.63
(c) How to CreatePrivity ofContract
In order to create privity ofcontract,the lessee and the mortgagee will each have had to
havereceived eitherimplied or express consentfrom the other to the lease.64
58
E.H. Burn, Cheshire and Burn's Modern Law of Real Property (15`11),(London: Butterworth's, 1994) at 453
(hereafter"Burn")
59 Burn at453.
69 Platton Leases,vol ii pp 352-3[getfull cite]
61 Stuart v.Joy[1904] 1 KB 362at367.
62 City andMetropolitan PropertiesLtd. v. GreycroftPropertiesLtd[1987]1 W.L.R. 1085,[1987]3 AllE.R.839.
63 Friedman at 113
64 CompareDavidson v.McKay(1867),26 U.C.Q.B.306

-17-
1. Canada Permanent Building and Savings Society v. Rowell (1860), 19
U.C.Q.B.
2. DistrictBankLtd. v. Webb[1958]1 All E.R. 126(Ch.).
The common law does not make a subsequent lease binding on the mortgagee unless either(a)
the mortgagee has authorized the lease, or(b)the mortgage granted consent to the lease in the
mortgage.6'At the very least this consent would include a clause in the mortgage which
empowersthe mortgagorto enterinto leases subsequentto the mortgage.
Lessees will wantto be careful in constructing their argumentin this regard becauseifthe
lessee is wrong,and no privity ofcontract exists with the mortgagee,the lessee could befound to
be overholding, and could be liable for double the normal rent for the overholding period66
pursuantto the Commercial TenanciesAct:
Penalty ofdouble valuefor overholding s.58
58. Where a tenant for any term for life, lives or years,or other person
who comes into possession of any land, by, from, or under, or by
collusion with such tenant, wilfully holds over the land or any part
thereof after the determination ofthe term, and after notice in writing
given for delivering the possession thereof by the tenant's landlord or
the person to whom the remainder or reversion ofthe land belongs or
the person's agent thereunto law fully authorized,the tenant or the other
person so holding over shall, for and during the time the tenant or the
other person so holds over or keeps the person entitled out of
possession, pay to such person or the person's assigns at the rate of
double the yearly value of the land so detained for so long as it is
detained, to be recovered by action in any court of competent
jurisdiction,againstthe recovering ofwhich penalty there is no relief.
Penalty ofdouble rent or overholding s.59
59. Where a tenant gives notice ofan intention to quit the premises held
by the tenant at a time mentioned in the notice and does not accordingly
deliver up the possession thereofatthe time mentioned in the notice,the
tenant shall from thenceforward pay to the landlord double the rent or
sum that the tenant should otherwise have paid, to be levied, sued for
and recovered at the same times and in the same manner as the single
rent or sum before the giving such notice could be levied, sued for or
recovered, and such double rent or sum shall continue to be paid while
the tenantcontinues in possession.
In theory, ifthe express or implied consent ofthe mortgagee is obtained to the lease, then the
situation is not a materially different from when the lease pre-exists the mortgage.In effect,the
lease binds the mortgagee.
66 Taub at5

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When thereis a power to lease in the mortgage or the mortgagee hasjoined as a[granting
party to authorize by deed ofconveyance],if[the mortgagee in entitled to possession and gives
notice,he gainsthe ordinary rights ofalandlord to sue or distrain for rent.67]
(i) AssignmentofLeases
As a matter ofcommon practice, mortgagees have required an assignment ofrents and
leases as part of the security of the mortgage. The terms of the assignment have historically
provided that the mortgagee is not liable for the performance ofthe terms ofthe lease, that the
mortgagee doesn't become a mortgagee in possession because ofthe assignment, and that the
assignment will notprejudice the mortgagee's other rights and remedies underits mortgage
Up until the release ofthe Goodyear decision, mortgagees believed that the effect ofthis
assignment, was to create privity of contract between the mortgagee and the lessee. The
presumed affect wasthat neither the mortgagee northe lessee would be able to evade the original
lease, even upon the mortgagee taking possession of the premises. For example, in
Manufacturer's Life Insurance Co. v. Toronto-Dominion Bank,68 the Court supported the notion
that a specific assignment ofleases could create privity ofcontract between the lessee and the
mortgagee, allowing the mortgagee to enforce the lease. Likewise,in Yorkshire Trust Company
v. Gunter Farms Ltd.°y the Court suggested that, where the mortgagee in possession couldn't
claim privity ofcontract under the former lease,the root ofits problem was that it had failed to
get an assignmentofthelessor's rights underthelease.
In Goodyear it was determined that such assignment documents do not create privity of
contract because the doctrine of privity of contract requires that there be mutual rights and
obligations between the lessee and the mortgagee. The Courtconsidered both the successors and
assigns clause in the mortgage and the separate assignments ofrents and leases. The Court noted
that there was no indication in the mortgage that the mortgagee intended or was obliged to carry
out any ofthe obligations ofa landlord under the lease. The successors and assigns provision in
the mortgage covered only covenants,liabilities and obligations ofthe mortgagor and mortgagee
underthe mortgage.
With respect to the assignment ofrents,the Courtfound that it only secured the payment
of the mortgage and assured performance of the agreements contained therein and in the
mortgage. An instrument cannot be both a security interest and an absolute assignment. The
Court directed that ifan instrument is an absolute and irrevocable assignment then there cannot
be a residual right remaining with the Mortgagor to recover the assets — that is, an equity of
redemption. A complete and perfect assignment cannot recognize the concept of an equity of
redemption.
Falconbridge 323
68
[1989] 1 W.W.R.474 at478,63 Alta L.R.(2d)80,92A.R.92(CA)
69(1989),40B.C.C.R.(2d)161(C.A.)

- 19 -
There were no provisions in the assignments which required the mortgagee to perform
the obligations ofthe landlord under the leases. Accordingly,the mortgagee had been assigned
rights under the leases, but had not accepted the landlord's responsibilities under the leases.
Therefore,the assignments operated only as an assignmentofa chose in action(a debtfor rental
payments)for which the mortgagee could sue in its own name." Having said that, the Court
noted further, that a mortgagor/lessor cannot assign its lease obligations to the mortgagee, and
that they can only be transferred to a third party by novation. Notwithstanding this, the Court
stated,that even ifthere was no evidence that there had been an assignment ofboth benefits and
obligations under the lease,the lessee had accepted the obligations ofthe assignee. Parties to an
assignment(i.e. the Owner and Mortgagee)cannot make the assignment absolute against third
parties(i.e.the Lessee)without the Lessee's consent.
Accordingly, while it may appear that one way to secure privity ofcontract would be to
have the lessee sign the assignment agreement,the problem remains that a court may find that
the assignmentfails to create a binding lease contract as only the benefits and notthe obligations
passed.
(ii) AttornmentAgreements
Most modern leases contain "attornment clauses," whereby the tenant agrees to attorn to
any mortgagee (or any purchaser from the lender). It is not clear whether such an attornment
clause existed in the Goodyear leases or not,or ifit did,whether or not the Court considered the
effectiveness ofthese clauses.
It seems that a properly drafted attornment clause should prevent another result like that
ofGoodyear.
[Note that the tenantcannottreatthe originallease as being atan endifthe tenant had attorned
to the mortgagee oragreed to treat the mortgagee aslandlord ifand when the mortgageegoesin
possession'l
One interesting fact in Goodyear, is that when Burnhamthorpe Square acquired,the
Canada Life mortgages, it obtained an estoppel certificate from Goodyear which Goodyear's
counsel had modified to exclude the consequences of Canada Life's [possession]. Had the
70
s. 53(1)ofthe Conveyancing andLaw ofProperty Act, R.S.O. 1990. cC-34 provides; "Any absolute assignment
made on or after the 31st day ofDecember,1897,by writing under the hand ofthe assignor,not purporting to be by
way ofcharge only,ofany debt or other legal chose in action of which express notice in writing has been given to
the debtor,trustee or other personfrom whom the assignor would have been entitled to receive or claim such debtor
chose in action is effectualin law,subjectto all equities that would have been entitled to priority overthe rightto the
assignee ifthis section had notbeen enacted,to pass and transfer the legal rightto such debt or chose in action from
the date,ofsuch notice,and all legal and other remedies for the same,and the power to give a good discharge for the
same withoutthe concurrence ofthe assignor."R.S.O. 1980,c.90.
71 Gerald Taub, Watch Out! What You Don'tKnow Can Hurt You,in Mortgages andLease Priority Issues:Striving
to be No 1., Canadian Bar Association, 1999 Institute ofContinuing Legal Education, January 28, 1999.(hereafter
"Taub")at4.

-20-
estoppel certificate not contained this qualifier, or had it also provided for a covenant of
attornment by Goodyear in favour ofBurnhamthorpe Square,then Goodyear would have been
bound to Burnhamthorpe Square contractually under the terms of the leases. [My comment:
Query whether a lender could demand a setform ofestoppel thatis combined with a mandatory
form ofattornment.]
(iii) ConsentbyNon-Disturbance andAttornment
The general practice has been for the tenant to require the mortgagee's consent to lease,
in which the mortgagee agrees to non-disturbance on the basis that the tenant upholds its
covenants under the lease. Parties will normally enter into non-disturbance agreements — these
do not depend on their respective estates in land butrather on the generallaw ofcontract.
In Goodyear, the Court found that privity of contract can be created either before the
mortgagee goes into possession,or after,the effect ofwhich would be to bind the mortgagee and
lessee under the terms of the original lease. If there is an implied contract between the
mortgagee and the tenant,then the terms ofthe Lease would be binding on both the tenant and
the mortgagee.
Did the tenant's signing of the Attornment and non-disturbance agreement (and its
conduct)and the mortgagee's conductby its letters,constitute an implied contract?
It is unclear whether the tenant would be bound without attorning to the mortgagee
(although it is clear that the mortgagee would be bound ifit made express or implied consent to
be bound).
On the facts of Goodyear, the lease provided that the landlord "will have obtained
consent to the new leases from all mortgagees and non-disturbance agreements from all
mortgagees". Goodyear executed a non-disturbance agreement which provided that if the
mortgagor defaulted under the mortgage, the mortgagee would permit Goodyear to remain in
possession of the premises on the terms of the 1987 leases. The Mortgagees never executed
consents to lease or non-disturbance agreements. However,the Court stated that the execution of
the non-disturbance agreement would not, by itself, create privity of contract as such a
relationship cannot be created unilaterally. Accordingly,the Court had to look to the conduct of
the parties to determine ifthere had been consent by both mortgagee and lessee to be bound by
the previous lease.
It is also ofinterest that the Courtlooked at the parties actions after the new tenancy was
created to determine if, in fact, the parties had evidenced intention to be bound by the original
lease. This suggests,I believe,that even ifa new year-to-year tenancy is created, and so long as
the previous lease exists (inasmuch as the mortgagee's equity of redemption exists), the
mortgagee and the lessee are free to revert and be bound by the original lease between the lessee
and the mortgagor.72 The Court found that,in the absence ofthe mortgagee's written consent,
72 However,compare Corbett v.Plowden,25 ChD.678 at681,in which the Courtfound that once a new tenancy is
created it is therefore too late for the mortgagees to adopt the agreement between the mortgagor and the tenant and
bring an action to enforce it againstthe tenant.

-21 -
the execution of the lease, non-disturbance, and the exchange of letters, all parties hadn't
intended the lease to be binding on them. The Court found that the mortgagees evidenced no
intention to be bound. There was no unequivocal indication ofsuch intention and therefore no
implied agreement between the lessee and the mortgagee that the mortgagee be bound by the
terms ofthe lease.
(iv) Consentto lease in Mortgage
[It is less common for institutional lenders to include a clause in the mortgage that
empowersthe mortgagor with a blanket powerto lease.]
6. Bindingthe Mortgagee and Lessee Under the Old Lease by Privity ofEstate
Privity ofestate arises from the relationship between two parties who each hold the same
estates as those created by thelease.73 Thatis to say,one person holds:
(i) the original reversion
and the other person holds:
(ii) theresidue ofthe original term ofthelease.
On the creation of the lease, and in the absence of assignment, the lessor holds the
original reversion and the lessee holds its interest in the residue of the term. Cases not yet
considered:
• Bickford v.Parson(1848)5 CB 920 at929
• Platt on Leases, vol ii, p. 351 who states [get book}: "privity of
estate is the result oftenure; it subsists by virtue ofthe relation of
landlord and tenant,and follows like a devolution ofthe reversion,
and oftheterm".
Forfurther clarification,the reversion is:
...areversion is an undisposed ofestate in property,left by a
grantor after he has parted with some particular interest less
than the fee simple therein. In the second place, it is an estate
which returns to the grantor after the determination of such
particular estate(1 Plowd. 160 a). The derivation ofthe word
from the Latin verb revertor, makes this perfectly clear
(Coke's Littleton, 142 b). "There cannot, in the usual and
proper sense of the term, be a reversion expectant upon an
73
Burn at453.

- 22-
estate in fee simple:" per Selborne, L.C. in A.G. Ont. v.
Mercer,8 App.Cas.767,at p.772.74
Accordingly, in accordance with the locus classicus, Spencer's Case,75 ifthe lessee assigns its
full interest(which is in the residue ofthe term)there exists privity ofestate between the lessor
and the lessee's assignee.76:
(a) How to CreatePrivity ofEstate — byAssigning theReversion
It would appear that the ability of the lessor to transfer its rights in the lessee lease
covenants did not exist at early common law because covenants and conditions did not run with
the reversion. At common law, covenants ran with the land (which allowed lessee's to assign
theirinterests),butnot with the reversion,which meantthat an assignee ofthe landlord could not
sue on the lease covenants.77 The assignee ofthe landlord's right ofreversion was considered to
be astranger who could not enforce the covenants ofthetenant.Both the Grantees ofReversions
Act,1540 and the 1541 Statute of32Henry V11178 changed thatlaw. The latter stated,in part:
Whereas sundry leases have been containing covenants both by the
lessors and by the lessees and whereas at the common law no stranger
to any such covenant shall take advantage ofit and whereas grantees of
reversion and patentees ofthe king have been denied any right ofaction
againstsuch lessees now therefore...
The net effect ofthese statutes was that both the benefits and the burdens of all covenants and
conditions in the tenancy agreement which "touched and concerned" the land would pass on a
transfer ofthe reversion.The general rule is that, where the assignment is ofthe entire reversion
interest ofthe lessor, privity of estate is created between the assignee and the lessee, and the
assignee takes both the benefit and the burden ofthe lease.79 There were three criteria that had to
be met in order for the benefits and the burdens under the lease to pass:(a)there had to be an
intent that the covenant would run;(b)the covenant had to touch or concern the land; and (c)
there had to exist privity ofestate between the promissor and the promissee.8° This common law
is now supplemented by the combined affectofsections4to 8 ofthe Commercial TenanciesAct.
Remedies available to assignees ofreversion — s.4
74 Ferguson v.MacLean[1931] 1 DCR,61 at67(S.C.C.)
75 (1583)5 Co.Rep.16a
76 Purchase v.LichfieldBreweryLtd[1915] 1 KB 184;M&B p.525
77 Rogers v.NationalDrug& Chemical Co.(1911),23 O.L.R.234;affd 24 O.L.R.486(C.A.)
78 ch 34(1541)
79 Megarry at357
80Freidman at 1809.

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4. All persons being grantees or assignees of the Queen, or of any
person other than the Queen, and the heirs, executors, successors and
assigns of every ofthem,shall have and enjoy like advantage against
the lessees, their executors, administrators, and assigns, by entry for
non-payment ofthe rent, or for doing ofwaste,or other forfeiture, and
also shall have and enjoy all and every such like and the same
advantage, benefit, and remedies, by action only, for the non-
performance of other conditions, covenants, or agreements, contained
and expressed in the indentures oftheir said leases, demises or grants
against all and every ofthe said lessees and grantees, their executors,
administrators, and assigns as the said lessors or grantors themselves,
or their heirs or successors, might have had and enjoyed at any time or
times.R.S.O. 1980,c.232,s.4
Lessee's covenant to run with reversion — s.5
5. Rent reserved by a lease and the benefit of every covenant or
provision therein contained, having reference to the subject-matter
thereof,and on the lessee's partto be observed or performed,and every
condition of re-entry and other condition therein contained shall be
annexed and incident to and shall go with the reversionary estate in the
land or in any part thereof,immediately expectant on the term granted
by the lease, despite severance ofthat reversionary estate, and shall be
capable ofbeing recovered,received,enforced and taken advantage of
by any person from time to time entitled, subject to the term, to the
income ofthe whole or any part, as the case may require, ofthe land
leased.R.S.O. 1980,c.232,s.5.
Grantee ofreversion may enforce covenants — s.6
6. The benefit ofevery condition ofre-entry or forfeiture for a breach
ofany covenant or condition contained in alease shall extend to and be
enforced and taken advantage of by the person from time to time
entitled, subject to the term,to the income ofthe whole or any part, as
the case may require, ofthe land leased, although that person became,
by conveyance or otherwise,so entitled after the condition ofre-entry
orforfeiture had become enforceable.R.S.O. 1980,c.232,s.6.
Action ofcovenant,etc.,against assigns ofgrants and lessors — s.7
7. A11 lessees and grantees oflands, tenements,rents, portions, or any
other hereditaments for term of years, life or lives, their executors,
administrators, and assigns shall and may have like action, advantage,
and remedy against all and every person who shall have any gift or
grant of the Queen, or of any other persons, of the reversion of the
same lands, tenements and other hereditaments so let, or any parcel
thereof, for any condition, covenant, or agreement, contained or
expressed in the indentures oftheir leases as the same lessees or any of
them, might and should have had against their said lessors, and
grantors,their heirs,or successors.R.S.O. 1980,c.232,s.7.
Lessor's covenants to run with reversion — s.8
8.The obligation ofa covenant entered into by a lessor with reference
to the subject-matter of the lease shall, if and as far as the lessor has

-24-
power to bind the reversionary estate immediately expectant on the
term granted by the lease,be annexed and incident to and shall go with
that reversionary estate, or the several parts thereof, despite severance
ofthatreversionary estate,and may be taken advantage ofand enforced
by the person in whom the term is from time to time vested by
conveyance, devolution in law, or otherwise, and, if and as far as the
lessor has power to bind the person from time to time entitled to that
reversionary estate, such obligation may be taken advantage of and
enforced againstany person so entitled. R.S.O. 1980,c.232,s.8.
Ifthe lessor assigns its interest in the right to the reversion there exists privity ofestate
between the holder of the residue ofthe lease term and the lessor's assignee. Where both the
lessor and the lessee assign their respective interests, there exists privity of estate as between
theirrespective assignees.
The problem, however, is how to assign the reversionary interest. In Goodyear, it was
made clear that an assignment ofleases to a mortgagee acts as a security instrument. It assigns
certain benefits ofthe lease, but not the reversion. The most that an assignment ofleases can
assign is the landlord's interest in the lease. Since they do not assign the reversion, they can
assign only the contractual rights ofthe landlord - which does not create a privity of estate.81
The Court found that even ifthe assignments had been absolute, that is, even ifthe language of
the assignment covered the full term ofthe lease,the subject matter ofthe assignments was the
leases and not the reversionary interest ofthe lessor. Presumably,this is correct inasmuch as a
mortgagor would not be able to assign its entire reversionary interest to the mortgagee and
maintain the ability to act as landlord in its own capacity. The effect of an assignment ofthe
reversion would be to transfer title to the mortgagee, as in a sale, where the mortgagor doesn't
retain an ability to redeem possession ofthe premises.
In United States law the doctrine of privity is such that, when the right ofreversion is
assigned, any action on a broken covenant does not run with the reversion. It instead remains a
chose in action.82 The effect ofthis terminology is,I believe,the same as that which exists under
Canadian law — that is, that the assignee ofthe reversion is only liable for those breaches which
occur during the period ofits privity ofestate. Those breaches occurring prior to the assignment
remain with the lessee and may be acted upon by the lessor pursuant to the privity ofcontract
thatremains between thelessee and thelessor.
In Goodyear, the court also stated that privity of estate cannot be created between the
lessee and the mortgagee by reason ofimplied or written consent to the leases by the mortgagee.
Even ifthere is written consent by the mortgagee to the lease, privity ofestate is not created as
no tenurial relationship is created.
81 The Court found that the decision in Re Manufacturer's Life Insurance Co. and J.K.P. Holding Co. Ltd.(1986),
25 D.L.R.(4th)461 is wrong.In that case the court considered the landlord's assignment oflease to be the same as
an assignment ofthe reversionary interest. In that case the Court stated at 467,"Thus,both the documentation and
the conduct ofthe parties support the conclusion that there was an absolute assignment ofthe lease in question and
that privity ofestate between the appellant and respondent wasthereby established."
82 Friedman at 1809

-25 -
(b) How to CreatePrivity.ofEstate byAssigningtheLeasehold
As stated above, privity of estate arises from the relationship between two parties who
each hold the same estates as those created by the lease.That said,one must determine the nature
ofthe assignment required for the lessee to create privity ofestate between its assignee and the
holder ofthe reversion.
(i) Legalvs. EquitableAssignment83
Under British law,it waslong held thatifthere is no legalassignment,the benefit and the
burden of the lease covenants are not passed to the assignee. Under British law, a legal
assignment could only be made by way ofdeed pursuant to section 52(1)ofthe Law ofProperty
Act, 1925. Accordingly,where an assignment was made by a method other than by deed,such as
by an oral contract to assign,then it has effect only in equity. The effect ofbeing effective only
in equity is that the assignment is effective only as between the assignor and the assignee.
Consequently, unless the lessee's assignee (under an equitable assignment) is estopped, the
lessee's assignee could deny liability under the lease.84 Accordingly, where a person is an
equitable assignee, although that person cannot be bound privity ofestate,that person may still
be estopped from denying liability underthe lease.85 The Courtin RodenhurstEstate86stated:
Where,however,the equitable assignee leads the lessor to
understand quite definitely that he, the equitable assignee,
is more than an equitable assignee and has the term as a
legal assignee, then, if the landlord acts upon that
representation in such a way as to alter his position, you
have every constituentofa commonlaw estoppel.
[It would seem that the same principle would not hold true under Canadian law, as the
Conveyancing And Law OfProperty Act87 requires only that assignments of chattel interest in
land are required to be made by deed:
Requirementofdeed for certain interests -- s.9
9. A partition of land, an exchange of land, an assignment of a
chattel interest in land, and a surrender in writing of land not
being an interest that might by law have been created without
83 Generally,see Megarry at354
84
Megarry at322
85 Megarry at 322 Compare also Rodenhurst Estates Ltd. v. W.H. Barnes Ltd[1936]2 All E.R. 3 In this case the
Court found that, because the parties failed to execute the assignment, even though there was a clear binding
agreement,the assignment was equitable.
86 RodenhurstEstate,supra, note s at 12.
87 R.S.O. 1990,Chap.C.34

-26-
writing, are void at law, unless made by deed. R.S.O. 1980, c. 90,
s.9.
(ii) Assigning thefullinterest
There are two general qualities ofthe assignment that must exist in order for privity of
estate to be vested in the lessee's assignee:(a)the entire interest ofthe lessee must be transferred
to the assignee; and(b)the interest transferred to the assignee must be identical to that held by
the lessee.Each ofthese is discussed in greater detail:
(iii) Transferring theEntireInterest
When the lessee transfers its interestin the residue ofthe ten-n,the assignment must be of
the identical term and the whole ofthe term that the lessee had.88 Accordingly, if the lessee
assigns the lease for the term less a day,thereby holding a reversion,then the transfer is not an
assignment,butis an"under-lease"89 or sub-lease.9°
When there is sub-lease there exists, as between the sub-lessee and the lessor, neither
privity ofcontract nor privity ofestate,the result ofwhich is that neither party can sue the other,
atlaw91 on the lease covenants.92 Or stated another way,the sub-lessee enjoys neither the benefit
nor the burden ofthe head lease. Joyce J. made this observation in South ofEnglandDairies Co.
v.Baker:93
We all know that this is the reason why a mortgage of a
lease is usually made by way ofunderlease in order that the
mortgagee may not become liable to perform the lessee's
covenants. An assignment of a term differs from an
underlease in that the former means parting with the whole
and the latter with only a portion ofthe lessee's interest. An
assignment of a lease must necessarily embrace all the
estate ofthe assignor.
88 Burn at456. Compare West v.Dobb(1869)L.R.4 Q.B.,p.634
89 Burn at456
9° Megarry at353
91
as opposed to equity. Burn at456 points outthatthere is a possibility that the under-lessee could be held liable in
equity on the purely negative covenants.
92 Burn at456
93[1906]2Ch 631;M &B p.520

-27-
The Ontario Law Reform Commission, Report on Landlord and Tenant Law, 1976,
describes the legal result ofthe relationship this way:94
Where there is privity neither of contract nor of estate, as is the case
between a landlord and a sub-tenant, covenants generally are not
enforceable between the parties. This rule is, however, subject to
certain exceptions,as setoutbelow:
a) forfeiture clauses may operate in certain instances even though
there is no privity ofcontract or estate;
b) the benefit of a covenant which "touches and concerns" the land
may run atlaw and be enforceable between the parties,subject to
certain specialrules;in equity,the benefitofany covenant may be
assigned as a chose in action as noted above;
c) the benefit and the burden of restrictive covenants may run,
subjectto specialequitable rules governing such covenants;and
d) in England, under section 56 of the Law ofProperty Act, 1925,
certain parties may have the right to enforce covenants even
though they are not made a party to the tenancy agreement.
Strictly speaking, this is not a question of the running of
covenants, as the section may operate without any assignment or
other action by the covenantor or covenantee, but is mentioned
here as another possible means whereby a party other than the
original covenantor or covenantee may enforce a covenant in the
tenancy agreement. There is no statutory equivalent in Ontario
law to section 56."
(iv) Transferring theIdenticalInterest
To create a full assignment the assignee must take the exact interest ofthe assignor. For
example, where a lessee mortgages the lease the mortgagee cannot be sued on the lease
covenants as an assignee(even if it goes into possession) because the lessee's mortgagee has
onlytaken an equitable rightto theland and notthelegalterm ofthe tenant.95 Compare:
• Cox v.Bishop(1857)8 De GM & G 815;M&B p.524
(c) EffectofPrivity ofEstate on Assigning TheLeasehold
According to Spencer's Case, supra, the primary effect of privity of estate is that the
assignee ofthe interest in the residue ofthe term is subject to the benefit and the burden of all
covenants and conditions touching and concerning the land.96 However,where the burden ofan
94
[get cite]
95 Burn at456
96 Robert Megarry, Megarry's manual ofthe Law ofReal Property(7th ed)(London, Sweet & Maxwell, 1993) at
353.(hereafter"Megarry").

- 28 -
express covenant relates to something notin existence at the time ofthe agreement(in posse)as
opposed to something in existence(in esse),the covenant will only run ifthe lessee covenanted
for itselfand its assigns in the lease.
(d) "Touchingand Concerning"theLand
Covenants which"touch and concern"the land, or,"have reference to the subject-matter
ofthe tenancy agreement" may be either lessor or lessee covenants, but must relate to the land
and notthe person.
Generally speaking a covenant will "touch and concern" the land, if it is intimately
involved in the relationship between the parties and directly concerns or benefits the land — it
must affectthe nature,quality or value ofthe land or its mode ofuse97
Spencer's Case98,supra,is the locus classicus with respect to which covenants run with the
land. According to the Courtin Spencer's Case, where an express covenant"touches and concerns"
something already in existence (in esse), the covenant will automatically run with the land, but
where the covenant,although directly touching and concerning the land,refers to something notin
existence(inposse)atthe date ofthelease,the covenant will notrun with theland unlessthetenant
hascovenanted forhimselfand his assigns. Thefollowingexampleshave evolved:
Examples of covenants which have been found to be in esse include covenants to pay
rent,to pay rates and taxes,to repair,to not erect a building on the adjoining land,and to reside
on the premises.99
Covenants which have been found to be in posse(and will run with the land only ifthe
assigns of the covenantor are expressly referred to as being bound by the covenant) include
covenants to rebuild in case ofdestruction and to erectfuture houses on the demised premises.
Personal or"collateral"covenants which do not"touch and concern"the land and will not
run with the land even though the covenantor has expressly stated that assigns are to be bound by
such covenants. While the benefit of such collateral covenants can be assigned, the burden
cannot. Examples of personal or collateral include covenants to give the lessee an option to
purchase,to paytaxesfor a premises other than the demised premises,to replace chattels otherthan
fixtures,and notto sell hay.
Courts have also found thatallimplied covenantsrun withtheland.
In addition to the common law principles,the law ofequity provides that both the benefit
and burden ofanegative covenantrun withtheland.
97 MayorofCongleton v.Pattison,(1808 10 East. 130,103 E.R.725
98 Spencer's Case(1583),5 Co.Rep. 16a,77E.R.72
99 Oosterhoff, Albert H., "The Law of Covenants: Background and Basic Principles", National Real Property
Review — Vol.4,No.3,March,1991(Butterworths),p.25

- 29-
For example,negative covenants which restrict the use ofland for certain purposes are said
to be analogous to a negative easement and run with the land in equity. These may be taken
advantage ofby or against an assignee. The party seeking to enforce the benefit ofthe covenant
must establish that either itreceived an express conveyance ofthe covenant and the covenant states
thatitisforthe benefit and protection ofaparticular parcel oflane°.
The Ontario Law Reform commission,Reporton Landlord and TenantLaw,noted also:1°1
Quite apartfrom the running ofthe benefit and burden ofcovenants with
the land or the reversion, it is possible for the benefit ofcovenants to be
expressly assigned (except,for example, in those cases where one party
has covenanted with the other to do work,or to perform services,and itis
clear that either party has been selected with reference to his individual
personal qualifications). Thus an option to purchase contained in a
tenancy agreement, although held not to touch or concern the land, has
been held capable ofbeing assigned as such. It is not an objection to the
assignability of such a covenant that it is contained in a tenancy
agreement, and the benefit will pass if the assignment of the tenancy
agreement can be taken to extend to the benefit of the option. The
foregoing rules apply only to the benefit of a covenant and not to the
burden;however,in certain instances the burden ofa covenant may create
an equitableinterestin theland and thus be binding upon an assignee...
(e) ThePassing ofPrivity ofEstate
Where a lessee assigns its interest in the residue ofthe term, it no longer has privity of
estate with the holder ofthe reversion interest. Likewise, where a lessee assigns its interest in
the residue of the term, the assignee cannot subsequently be found liable, on the grounds of
privity ofestate,for a breach ofcovenantthat existed before the assignment./°2 Compare;
• Grescotv. Green(1700)1 Salk 199
Conversely, where a lessee assigns its interest in the residue of the term, the assignee
cannot sue the lessor for breaches ofits covenant committed before the assignment.i°3 However,
the lessee's assignee is responsible for breaches occurring during the period ofthe assignment.
Compare:
• Harley v.King(1835)2CR M &R 18
100Mooreman v.SchemmerandDalton(1959),21 D.L.R.(2d)470(Ont.H.C.J.).
101[getcite]
102
Megariy at354
103 Bum at455

- 30-
If the lessee's assignee re-assigns the residue of the term to a subsequent assignee, the
subsequent assignee and not the lessee's assignee is liable for breaches occurring after the re-
assignment. Compare:
• Paulv.Nurse(1828)8 B & C486.
The exception to these effects ofprivity ofestate is when,at the time ofthe assignment,
the holder ofthe reversion obtains from the assignee a covenant that he will during the residue
ofthe term granted by the lease pay the rent and observe the covenants and conditions on the
part ofthe lessee contained in the lease. In such a case,each successive assignee remains liable
under his covenant to pay the rent until the end ofthe term granted by the lease, so that, on
default in payment of the rent by the assignee in possession of the leasehold premises, any
earlier assignee is liable for the arrears ofrent.1°4
(i) The Assignee's Implied Indemnity
As a general rule, upon default by the lessee's assignee, the Landlord can elect to bring
an action against the lessee(underprivity ofcontract)and the lessee's assignee(underprivity of
estate).
However, a rule has evolved which states that the lessee's assignee(who has privity of
estate)is theprinciple debtor and the lessee is thesurety. Compare:
• Humble v. Langston(1841)7M& W517at530,perParkeB.
The result of this is that there exists an implied indemnity pursuant to which every
assignment(for valuable consideration) is deemed to include a covenant by the assignee that it
willperform all ofthe lessee's obligations under the lease. This implied covenant binds to all
later assigns,such that U.,on breach, the lessorsues the lessee, the lessee can name its assignee
in the action, who can,in turn, name its assignee.1°5
(f) Privity ofEstates under UnitedStates'Law
According to Friedman,/°6 privity of estate is created upon assignment of the lessee's
interest to a third party and accepted by the assignee1°7,between that third party and the lessor.
At the moment that privity ofestate is created between the lessee's assignee and the lessor, the
privity ofestate between the lessor and the lessee ends.
104
J.Lyons& Co.Ltd. v.Knowles[1943]1 KB 366,[1943] 1 A11E.R.477.
105 Burn at455
106 Milton R.Friedman,Friedman on Leases(4t1i ed)(Practicing Law Institute, 1997)(hereinafter"Friedman")at
107Friedman at386

-31 -
As in Canadian law,there exists a distinction in U.S. law between an assignment and a
sublease,inasmuch as an assignment is a transfer ofthe lessee's entire interest(the entire term
and estate) and a sublease is ofsomething less. It should be noted,however,that an assignment
pro tanto, meaning the lessee's assignment ofthe tenant's interest in a part ofthe leased lands
still creates a landlord and tenant relationship between the lessor and the assignee — the
relationship being created on the basis ofa rent proportional to the rent under the head lease. The
effectiveness ofthe assignmentis based on whether or not the lessee has assigned the entirety of
the remainder ofthe term ofthe lease — that is, the lessee has left no reversion in itself1°8 This
result is effected irrespective ofthe intentions ofthe parties ifthe assignment is ofthe lessee's
entire interest.Friedman does note,however,thatthere wasfound to be no assignment where the
lessee had transferred the entire lease,savefor the renewalrights thereunder.
The position ofthe U.S.courts has been thatifthe assignee obtains the leasehold interest
in its entirety then privity ofestate is created; however,is the assignee also assumes the lessees
obligations underthe lease,then it enjoys privity ofcontract directly with the landlord.'°9
(I) Lease"gained"priority overthe mortgage
A landlord might also attempt to argue that, due to a substantial amendment to the
mortgage, the lease gained priority to it. The effect of this would be that, on possession, the
mortgagee would be in the same position as would a mortgagee under a mortgage registered after
thelease.11°
(g) TheEffectofForeclosure
As stated above, the law provides that, where the mortgage registration proceeds the
lease, the lease is subject to the mortgage, and the lessee purchases a portion ofthe equity of
redemption and can redeem. The law suggests that the effect of this is that the lessee is a
necessary party to an action for foreclosure or sale,ifthe mortgagee wants to bind the tenant by
the proceedings.111
• Capital Trust Corp.Ltd. v.McGuigan[1934]O.W.N.656(H.C.J.)
108 Friedman at364
1°9 Compare Studebaker Corp. v. Aetna Say. & Trust Co.,21 F.2d385(7th Cir. 1927);and Gateway Co. v. DiNoia,
232 Conn.223,654A2d.342(1995).
ito For example,in Canada Trustco Mortgage Co. v.ParkPlaza Country Club HoldingsInc.,[1988]6 W.W.R.348,
28 B.C.L.R.(2d)98 (SC). The modifications of the plaintiff's mortgages deleted one of the interested parties,
deleted one ofthe properties charged,changed the interestrate,the due date and prepaymentprivileges,and required
delivery of an irrevocable letter ofcredit. Those changes were fundamental enough to amount to a novation even
though the parties to the mortgage had expressed their intention merely to"amend the debenture".Butthe novation
did not mean that the mortgages as originally registered had ceased to exist for all purposes. The result was that
those terms ofthe mortgages unaffected by the modifcations continued to have priority over the defendant's lease,
butthe lease took priority overthose terms which were substituted as new by the modification agreements.
111 Falconbridge at465. Compare Tarn v. Turner(1888),39 Ch.D.456(C.A.)at467

- 32-
In fact,there isjurisprudence which suggests that, where the lessee has not been made a
party to the foreclosure proceedings, the lessee's equity ofredemption survives, and the lessee
may later open the foreclosure and redeem(subject to the rights ofother persons with an interest
in the equity ofredemption)if the landlord refuses to confirm the tenancy.112 For example, in
Martin v.Miles(1883),5 O.R.404(Ch.D.),the mortgagee obtained a final order for disclosure
against the mortgagee without giving notice to or naming the lessee as a party. When the
mortgagee subsequently demanded that the lessee give up possession of the land, the lessee
offered to pay the full claim ofthe mortgagee in respect ofthe mortgage,thereby exercising its
right to redeem. A portion of the court found that the lessee's part-interest in the equity of
redemption survived the foreclosure and could have been exercised as againstthe mortgagee.
Furthermore,ifthe mortgagee does not name the tenant,then the mortgagee runs the risk
ofthe tenant exercising its rightto redeem after the foreclosure.
In Goodyear,
• The new owner, Burnhamthorpe wanted an estoppel certificate from Goodyear
acknowledging the 1987 Leases and stating thatthere were no existing defaults by
the Landlord. The estoppel certificate provided that the lease was, "subject to
whatever legal effect the intended foreclosure of the charge might have, in full
force and effect". This estoppel made it clear that Goodyear was preserving all
rights it may have had as a result ofthe foreclosure. Accordingly,one right which
Goodyear may have as a result of the foreclosure is the right to redeem the
property(redeem the mortgages affecting the property).
• The Court also noted that once Goodyear and the mortgagee had entered into a
year to year tenancy, Goodyear had a right to terminate that tenancy irrespective
ofthe foreclosure proceedings.
• On a final note, the Goodyear decision also clarified that upon
foreclosure, the mortgagee does not gain privity of estate with the
lessee by being the surviving holder ofthe equity ofredemption. The
Court found that when the mortgagor's equity of redemption was
foreclosed, the mortgagor was not replaced by the foreclosing
mortgagee or its assignee which could then take subject to the lease
and be entitled to enforce it against Goodyear.
• Rather, when the mortgagor's equity of redemption was foreclosed
the foreclosing mortgagee did not replace Angeles by becoming
owner ofits equity ofredemption.
• The mortgagor's equity was gone as a result ofthe foreclosure and the
legal estate of the mortgagee became a vested estate free from the

- 33 -
mortgagor's equitable claim. Furthermore, the Court found that
Goodyear could not be required to remain in possession of the
property under a lease made with the mortgagor merely because it
was notjoined in aforeclosure action by the mortgagee.
This finding in Goodyear is expressly contrary to that in Re: Manufacturer's Life and
J.K.P. Holding Co. In that case, the. Court found that foreclosure could create privity ofestate
between the mortgagee and the lessee. The Courtstated:113
No doubt the mortgagee could have foreclosed the lease
and obtained title to the land not subject to the lease. It
chose notto do so. Therefore,when the title was registered
in the name ofthe mortgagee pursuant to the order ofthe
court, the mortgagee had only the reversionary interest in
the land; the tenant had the leasehold interest. Once the
mortgagee decided not to foreclose the lease and obtained
title subject to it, there was privity of estate between
himselfand the lessee and the consequences ofsuch privity
followed.
(i) Policy Considerations
The Law Reform Commission looked at the legal reality ofthese priorities in 1987 and
made some comments, which, in light of the Goodyear decision, may give some insight into
where the law may be going.
The Commission noted that it is common practice for mortgagees to evict the tenant after
taking possession because,even though the mortgagee may want to obtain rent from the tenant,
the mortgagee does not want to be presumed to have entered into a new tenancy, and be bound
under a year to year lease on the same terms as the previous tenancy.114 This,combined with the
fact that,once the new tenancy exists,the mortgagee will notbe able to obtain vacant possession
until the end ofthe lease, has made the inconvenience ofthe new tenancy less attractive than
eviction ofthe tenanton possession. Accordingly,it wasthe Commission's view that:115
We believe that this state ofaffairs can create unnecessary hardship to
tenants who suffer premature eviction. Moreover, this rule is of
advantage to neither the borrower, who no longer receives rents from
the tenant after eviction, nor the lender, who is often left with the
property that produces no revenue until sale.
An alternative to eviction ofthe tenant or a presumed assumption by
the lender ofthe existing lease would be to allow the lenderto leave the
113 26D.L.R.(4th)461 at463(Alta C.A.)
114 Reporton Mortgages at242.
115 Reporton Mortgages at242.

-34-
tenantin possession and obtain rentfor as long as is mutually agreeable
to the tenant and lender, without requiring the lender to assume the
obligations ofalandlord.
We recognize thatsuch ascheme might create some difficulties for the
tenant.As the law now stands,the person to whom the tenant pays rent
is required to satisfy the landlord's legal obligations. Generally, if the
landlord fails to fulfil these duties, the tenant will withhold rent until
the terms ofthe lease or the legislation are met.Ifatenantis required to
pay rent to the lender, who does not have the correlative obligations of
a landlord,the tenant may have more difficulty enforcing rights against
the borrower,who is the landlord.
Based on this analysis,the Commission recommended that, where a mortgagee goes into
possession ofa property,and its interest is subject to a"non-binding"commercial lease[by this
they mean alease that arises after the mortgage is entered into],the lender should be able to avail
itselfofone ofthree options:116
1. the mortgagee should be able to evictthe tenant;
2. the lender should be able to enter into a new tenancy agreement with the
tenant;and
3. the mortgagee should be able to demand and receive payment ofrent from
the tenant without automatically assuming the obligations ofthe landlord.
SPC/jm
Z:ClientsMortgages made afterthelease-8.doc
Created:26-Feb-1999 14:08 PMLastSaved:26-Feb-1999 14:08PM
116
Reporton Mortgages at243.

APPENDIX"A"
ATTORNMENT AND NON-DISTURBANCE AGREEMENT
THIS AGREEMENT madethis s day of•,1911.
AMONG:
s
(the"Chargee")
AND:
s
(the"Landlord")
AND:
•
(the"Tenant")
WHEREAS:
OF THE FIRSTPART
OF THE SECOND PART
OF THE THIRD PART
I. by a charge dated s (the"Charge")and registered in the Land Registry Office for the
i Division of s (No. ■) on the s as Instrument No.•,the Landlord granted the
Charge to the Chargee on the lands and premises more particularly described in Schedule
"A"attached hereto(the"Charged Property");
the presentregistered owner ofthe Charged Property is the Landlord;
byindenture oflease made as ofs (the"Lease"),the Landlord did demise and lease that
portion ofthe Charged Property on the s floor ofthe building and lease that portion of
the Charged Property and municipally known as•, as more particularly described
therein (the "Leased Premises") to the Tenant, notice of which was registered in the
Land Registry Office for the s Division of s(No. ■) on s asInstrument No.•;
IV. the Chargee,the Landlord and the Tenant agree to effectthe subordination ofthe Lease to
the Charge, including all advances heretofore made or hereafter to be made under the
Charge, and all moneys secured by the said Charge and to provide for the non-
disturbance ofthe Tenantbythe Chargee.

2
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the
premises and the sum of$2.00 now paid by each party hereto to the other and other good and
valuable consideration (the receipt and sufficiency of which is hereby acknowledged by each
party hereto),the parties hereto hereby covenant and agree with each other as follows:
1. Each ofthe Landlord and the Tenant acknowledges that the Lease is in full force and
effect and that there is no subsisting default thereunder by either the Landlord or the
Tenant.
2. The Tenant covenants and agrees with the Chargee that the Lease is and shall continue
hereafter to be subject and subordinate to the charge,including all moneys secured by the
Charge and including all advances heretofore made and hereafter to be made under the
Charge(as same may be modified and extended), without regard to the order ofpriority
ofregistration ofthe Charge and any notice ofthe Lease and without regard to the fact
thatthe Lease pre-dates the Charge.
3.
(a) The Chargee agrees that so long as the Tenant keeps and performs each of the
terms, conditions, covenants, obligations and agreements contained in the Lease
on its part to be kept and performed,the Tenant shall have the right to peaceably
and quietly have,hold and enjoy the Leased Premises for the entire term demised
by the Lease and anyrenewals provided forin the Lease,together with any and all
rights, privileges and benefits to which the Tenant may be entitled under and
pursuant to the terms of the Lease, all without interference, disturbance or
interruption by or from the Chargee or by any person, firm or corporation
claiming by, through or under the Charge, notwithstanding the fact that the
Chargee may re-enterinto possession ofthe Charged Property.
(b) Upon the exercise by the Chargee of any of the Chargee's rights and remedies
underthe Chargefor possession,foreclosure or sale,the Tenant shall:
(i) waive all ofthe Tenant's rights, ifany,ofredemption with respect to the
Leased Premises;
(ii) waive notice ofand service ofany process in connection with the exercise
by the Chargee ofany ofsuch rights and remedies;and
(iii) attorn to the Chargee or to any purchaserfrom the Chargee as lessor under
the Lease,ifso requested bythe Chargee.
4. The Chargee agrees with the Tenant that at such time as it takes actual possession ofthe
Leased Premises,it shall assume and,so long as it remains in possession thereof,it shall
perform each of the covenants, obligations and agreements of the Landlord under the
Lease in the same manner and to the same extent as iforiginally named in the Lease as
the Landlord; provided that the Chargee shall not by reason thereofbe or become liable
to remedy any non-continuing default ofthe Landlord arising prior to the time ofgoing
into actual possession,unless prior to such time it had notice ofsuch default.

-3-
5. Ifany default shall occur under the Charge,the Chargee shall give the Tenant notice of
such default. The Tenant shall have such period as may be reasonable in the
circumstances within which to remedy such default and ifsuch default is remedied with
such period,the Charge shall not,by reason ofsuch default,exercise any right orremedy
which it mighthave which would entitle it to possession ofthe Leased Premises.
6. If at any time during the currency of the Charge any default shall occur in the
performance of any ofthe covenants, obligations or agreements ofthe Landlord which
would give rise to a right in the Tenant to terminate the Lease, then the Tenant, before
becoming entitled as against the Chargee to exercise any right to terminate the Lease,
shall give the Chargee notice in writing ofsuch default. The Chargee shall have such
period as may be reasonable in the circumstances within which to remedy such default as
agent ofthe Landlord and ifsuch default is remedied within such period,the Tenant shall
not,byreason thereof,terminatethe Lease.
7. The rights and privileges granted to the Chargee under this agreement (the
"Agreement") shall not in any way be deemed to alter, affect or prejudice any of the
rights and remedies available to the Tenant againstthe Landlord.
8. Each of the parties to this Agreement agrees that it will require any transferee of its
interest in the Leased Premises to agree to assume and,so long as it holds such interest,
to perform each ofthe covenants, obligations and agreements of such party under this
Agreement in the same manner and to the same extent as if originally named as such
party to this Agreement and, thereafter, the Chargee's obligations pursuant to Section 3
shall terminate.
9. This Agreement may be simultaneously executed in several counterparts,each of which
when so executed shall be deemed to be an original, and such counterparts together shall
constitute one and the same instrument.
10. This Agreement shall be construed in accordance with and governed by the laws ofthe
Province ofOntario.
11. This Agreement shall enure to the benefit ofand be binding upon the parties hereto and
their respective heirs,executors,administrators,successors and assigns.

4
1
IN WITNESS WHEREOF the parties hereto have hereunto executed these presents the day,
month and year first above written.
CHARGEE
Per:
Per:
[Authorized Signing Officer]
LANDLORD
Per:
Per:
TENANT
Per:
Per:

APPENDIX"B"
ESTOPPEL CERTIFICATE
TO: [mortgage company]and its solicitors
AND TO: or its
Assignee(the"Purchaser")and its solicitors
RE: a certain lease of Unit s containing approximately s square feet (the
"Premises")situate in the complex municipally known as s (the "Property")and
certain mortgagefrom s (the"Landlord")infavour of s
AND RE: the proposed sale oftheProperty bythe Landlord to thePurchaser.
The undersigned hereby certifies,confirms and acknowledges that:
1. The lease ofthe Premisesfrom the Landlord to the undersigned,as tenant,dated•,1901
(the"Lease")has been validly executed and delivered by the undersigned,as tenant,and
is unmodified and in full force and effect and not in default by either the Landlord or the
undersigned.
2. The undersigned is the tenant ofthe Landlord pursuant to the Lease and as such accepted
possession ofthe entire Premises on or about s 1911,and has continuously occupied the
entire premises and carried on its business therefrom to the date hereof.
3. A11 ofthe Landlord's work to the Premises,which is the responsibility ofthe Landlord(if
any), has been completed to the satisfaction ofthe undersigned and in accordance with
the Landlord's obligations under the Lease (and any agreement to lease in respect
thereto)and the Premises are satisfactory and as permitted and required by the Lease.
4. The term ofthe Lease commenced on•,191,and expires on•,1911,unless renewed
or extended in accordance with the provisions ofthe Lease,ifany.
5. The undersigned is now paying in full an annual basic rent, completely net of all
operating costs and taxes, in the amount of$•, and, in addition, percentage rent (if
applicable), operating costs and taxes as and to the extent provided in the Lease; basic
rent and percentage rent (if applicable) payable under the Lease has been paid to•,
19M, our share of operating costs and realty taxes payable under the Lease is s%
thereof and has been paid throughout the term ofthe Lease to•,19M,and there is no
prepayment ofany rent or security deposit standing to our credit,save and exceptfor$s
on account of•. The undersigned has no claim for any deduction,abatement or set-off
ofany rent due or payable under the Lease nor any counterclaim or defence against the
enforcementofits obligations to be performed by it underthe Lease.
6. There is no litigation or governmental or municipal proceedings commenced or pending
or threatened against or by the undersigned with respectto thePremises orthe Lease.

6
7. There are no allowances,incentives,inducements,benefit packages or any other monies
owing or which may become due and owing to the undersigned at any time(however
characterized)underthe Lease,save and exceptfor the amountof$•.
CD 8 There is no agreement to lease or other lease or any other agreements, rights or
obligations between the undersigned and the Landlord or any previous landlord, other
than thatcontained in the Lease,pertaining to the Premises orthe Lease.
9. The undersigned has received no notice ofany assignment by the Landlord ofthe Lease
or the rents thereunder. The undersigned has not assigned its interest in the Lease or
sublet all or any part ofthe Premises.
10. The undersigned is at arm's length to the Landlord.
11. The undersigned acknowledges the assignment of either or both of the Lease and the
rents which are or may become due and owing under the Lease, the•, and hereby
waivesfurther notice ofsuch assignment and acknowledges that,until further notice from
•, the undersigned shall continue to pay rent when due and payable, to the party
stipulated in the Lease and shall not repay rent except as specifically permitted in the
Lease. The undersigned covenants and agrees with•, in consideration of TWO
DOLLARS ($2.00) and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the undersigned, that the undersigned
will not prepay any rent whatsoever, other than as specifically permitted in the Lease,
and,furthermore,that the undersigned will not amend the Lease or surrender same or the
Premises or any portion thereof,without•'s prior written approval.
12. The undersigned acknowledges that a sale ofthe Property is pending to the Purchaser and
the Purchaser,amongst other things,is relying on the contents ofthis Acknowledgement.
DATED at the day of ,1991
Per: c/s
I have authority to bind the Corporation.

Mortgages and Commercial Tenancies Considering Goodyear Canada Inc v Burnhamthorpe Square Inc.

Mortgages and Commercial Tenancies Considering Goodyear Canada Inc v Burnhamthorpe Square Inc.

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