In 1000979674 Ontario Inc. v. 13276139 Canada Inc., 2025 ONSC 6606, Justice Hilliard delivered a forceful reminder that mortgagees taking possession of property after default cannot simply terminate existing tenancies at will. This case offers critical insights for transactional lawyers drafting mortgages, leases, and security agreements.
The Background
The property owner, Woodside Greens Business Association Inc., granted a second mortgage to the respondents in August 2023, securing $3.9 million at 14% interest. The mortgage was supported by a General Assignment of Rents Agreement (GARA) and a General Security Agreement (GSA) covering all accounts receivable, inventory, equipment, and intangibles.
In August 2024, Woodside leased the property to the applicant for cannabis cultivation. Critically, the mortgagees were not formally notified of this lease until October 2025, after Woodside had defaulted and the redemption period under the Notice of Sale had expired.
When the mortgagees discovered the tenant’s occupation, they initially appeared cooperative, arranging property showings, seeking lease particulars for potential buyers, and serving a Notice of Attornment of Rents. However, on November 20, 2025, they abruptly changed course, serving simultaneous notices of cancellation and termination, changing the locks, and taking possession with police assistance.
The Legal Error
The mortgagees’ fundamental mistake was believing they had an absolute right to terminate the lease upon the mortgagor’s default. Justice Hilliard firmly rejected this proposition, relying on the Ontario Court of Appeal’s decision in Goodyear Canada Inc. v. Burnhamthorpe Square Inc.
The court clarified the applicable principles:
First, a lease granted after a mortgage is not binding on the mortgagee unless the mortgagee consented to and was aware of the lease when the mortgage was placed on the property. However, not being bound by a lease is fundamentally different from that lease being automatically terminated.
Second, even where a lease is not initially binding, the tenant and mortgagee can create a new tenancy through agreement or conduct. This is where the mortgagees’ actions proved fatal to their position.
Third, when a commercial tenancy is created with a mortgagee in possession, it runs year-to-year and requires six months’ notice for termination, unless the parties agree otherwise.
The Creation of a Tenancy Through Conduct
Justice Hilliard found that the mortgagees’ conduct created a tenancy despite not being bound by the original lease. The evidence was compelling:
- They served a Notice of Attornment of Rents, which the court characterized as a tacit acknowledgment of the validity of the lease
- They arranged property showings with the tenant’s cooperation
- Counsel corresponded about seeking continued cooperation to sell the property quickly
- They requested lease particulars for potential purchasers, not to challenge the tenancy’s validity, but to facilitate the sale
- They never questioned whether the lease was in good standing until after forcibly taking possession
The court emphasized that serving a notice directing rent payment to the mortgagee creates a new year-to-year tenancy, citing Corbett v. Plowden as interpreted in Goodyear. The mortgagees’ refusal to accept a rent cheque was not determinative; the totality of their conduct established the tenancy.
The Consequences
Having failed to provide the requisite six months’ notice, the mortgagees’ entry was unlawful. Justice Hilliard granted an interlocutory injunction ordering the tenant’s repossession, finding:
- A serious issue to be tried regarding illegal termination
- Irreparable harm, given the tenant’s investment in cannabis cultivation, the time-sensitive nature of plant genetics, and the specialized regulatory framework requiring Health Canada licensing
- Balance of convenience favoring the tenant, as the mortgagees could continue Power of Sale proceedings while the tenant retained its occupancy
The court awarded substantial indemnity costs of $16,971, denouncing the mortgagees’ high-handed and unlawful self-help actions.
Practical Takeaways for Transactional Lawyers
- Mortgage Drafting
Standard charge terms allowing rent collection upon default do not grant rights to terminate existing tenancies. Consider whether clients need explicit subordination and non-disturbance agreements with material tenants.
- Lease Provisions
When representing landlords, include provisions requiring notice to mortgagees upon lease execution. When representing tenants, consider seeking recognition agreements from existing mortgagees, particularly for leases involving substantial tenant improvements or specialized operations.
- Security Documentation
GSAs and GARAs provide important security interests, but don’t automatically resolve tenant possession issues. Coordinate security documents with clear understandings about existing or anticipated tenancies.
- Due Diligence
For purchasers and lenders, investigate actual property occupation, not just registered leases. This case illustrates that unregistered tenancies can create significant complications in enforcement proceedings.
- Enforcement Strategy
Mortgagees taking possession should carefully document all communications with tenants. Actions suggesting recognition of the tenancy, even while reserving rights, can create binding obligations. Consider written correspondence explicitly clarifying the mortgagee’s position from the outset.
- Self-Help Prohibition
The substantial indemnity costs award reinforces that self-help remedies invite judicial condemnation. Even when mortgagees believe they have rights, the prudent course is seeking court orders rather than unilateral action.
Conclusion
This decision serves as an important reminder that mortgage enforcement intersects with landlord-tenant law in complex ways. While mortgagees are not automatically bound by subsequent leases, their conduct after taking possession can create new tenancies with full legal protections. Transactional lawyers should ensure clients understand these dynamics and structure their security arrangements accordingly.
