In our previous post, we discussed concerns that may arise for tenants who discover the financial difficulty faced by their landlord in paying off a mortgage over a property. This concern is further heightened when the mortgagee’s interest in the property was registered before a tenant’s notice of lease, leaving the tenant open to the risk of eviction from the property. Today’s blog post will discuss non-disturbance agreements and their benefit to tenants under a lease agreement.

A non-disturbance agreement can be defined as an agreement between a tenant and a mortgagee (the landlord’s lender), providing that the mortgagee will not disturb the tenant’s occupancy of the property as long as the tenant is not in default of terms under the lease.

This agreement is significant when the landlord cannot fulfill his mortgage loan obligations to the mortgagee and his interest is foreclosed. Usually, when the landlord’s interest is foreclosed by a prior mortgagee, the mortgagee can evict any tenant on the premises. However, with a non-disturbance agreement, the mortgagee agrees not to evict the tenant and allow the continued use of the premises by the tenant.

A non-disturbance agreement can be negotiated as part of a lease agreement for tenants with strong bargaining power. The lease agreement can also be made to obligate the landlord to procure a non-disturbance agreement in connection with any subsequent mortgage that the landlord obtains to which the leasehold interest is postponed to.

In addition to allowing the tenant to enjoy the use of the property, it is common for non-disturbance agreements to contain a provision that the landlord’s obligations under the lease agreement would bind the mortgagee. Likewise, the mortgagee would require a tenant to attorn to the mortgagee under the lease. What this essentially means is that the tenant recognizes the mortgagee as the new landlord. The case of Goodyear Canada Inc. v Burnhamthorpe Square Inc. 1998 41 O.R. (3d) 321 (CA) is instructive on this principle. The non-disturbance agreement may also contain additional terms by the mortgagee who wants to protect itself from liability from defaults of the original landlord.

In sum, a non-disturbance agreement offers important legal protections to a tenant in the scenario of a landlord mortgage default and ensuing foreclosure.

If you have questions about reducing risks in commercial tenancies, kindly book a free consultation with Northview Law by following this link or contact us at 905-857-4890. We look forward to hearing from you soon.

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