Foreclosure and Residential Tenants #448

Aug 01, 2011

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Posted by
Mike Mangan

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Licensees often wonder whether during foreclosure proceedings the borrower can rent the property to a residential tenant so the tenancy survives the foreclosure. Generally speaking, the answer in British Columbia is "no". The recent decision in First National Financial GP Corp. v. Sirotka, illustrates why.1

In 2009, the lender began foreclosure proceedings which the borrowers did not contest. On December 1, one of the borrowers rented the property to a tenant in a month-to-month tenancy agreement. Eight days later, the court granted the Order Nisi. In an Order Nisi, the court gives judgment to the lender for the mortgage debt and sets the redemption period. At the time, the lender did not know about the tenancy.

In 2010, the lender obtained an order to list the property. When the court approved the sale on November 17, the lender knew about the tenancy, but no one told the court.

After the court-ordered sale, the tenant refused to vacate the property. So, the new owner asked the court for an order for possession, requiring the tenant to vacate.

Recall that a fee simple owner has possession of the land. When the owner, as borrower, gives the lender a mortgage, the borrower, in law, transfers his or her interest in the land to the lender. The borrower transfers the interest on the condition that the lender will return it when the debt is paid. Finally, when a land owner gives a lease to a tenant, the tenant acquires exclusive possession of the premises for the term of the lease.

In the First National case, the court noted that an owner may only grant an interest in land that the owner has to give. Under their mortgage, the owners, as borrowers, promised their lender possession of the property in the event of default. In this case, the tenant's right to possession was subject to the terms of the earlier mortgage, which gave the bank possession of the land. In the Order Nisi, the borrowers lost possession of the property. When the borrower purported to enter a tenancy agreement after the Order Nisi, the borrower had no possession rights to give because he had already transferred them to the lender.

In First National, the court also considered section 94 of the Residential Tenancy Act.2 That section requires the lender to add the tenant as a party to make any court order enforceable against the tenant in the foreclosure. In this case, it was too late to add the tenant as a party because the court had already given judgment in the Order Nisi. Historically, where a borrower rents the property to a residential tenant during foreclosure proceedings, but fails to add the tenant as a party, the court will not use section 94 as a shield to protect that tenant against the foreclosure. In the court's view, if the legislature wished to interpret section 94 that way, the government would need much clearer language. The court treats section 94 as more of a procedural requirement, rather than one giving substantial rights to the tenant. The inability to add the tenant as a party in First National did not immunize that tenant from the foreclosure.

In any event, the Land Title Act gave the lender's claim for possession priority over the tenant's claim.3 When the lender began foreclosure proceedings, the lender filed a Certificate of Pending Litigation (CPL) against the borrower's title. This is standard practice. The Act provides that where a person files a CPL, anyone who subsequently acquires an interest in the land (such as a tenant), takes subject to the rights of the claimant who filed the CPL.

In First National, the court gave the new owner an order for possession, but allowed the tenant roughly three weeks to vacate the property. The bottom line: during foreclosure proceedings, the borrower should not rent the property to a residential tenant without the lender's agreement. Otherwise, the foreclosure will bring the tenant's rental to an end. Also, in a court-ordered foreclosure listing, if the listing licensee learns there is a new residential tenant in the property, the licensee should promptly notify the lender.

  1. First National Financial GP Corp. v. Sirotka, 2011 BCSC 340.
  2. Residential Tenancy Act, S.B.C. 2002, c. 78.
  3. Land Title Act, R.S.B.C. 1996, c. 250, s. 31.

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