The Land Titles Act (Ontario) provides that the priority of instruments registered against title is established by the order in which they are registered.[i] Conversely, the priority of an unregistered lease in relation to other property interests may be determined in accordance with the doctrine of actual notice. Pursuant to the 1976 case of United Trust Co. v. Dominion Stores Ltd. ("United Trust"), the Supreme Court of Canada (the "SCC") held that the Land Titles Act (Ontario) did not abolish the doctrine of actual notice and, accordingly, the priority of an unregistered lease may be protected if a subsequent interest holder, such as a lender, has actual notice of the unregistered leasehold interest at the time it registers its interest against title.[ii]
Interestingly, despite the SCC determining that actual notice of a leasehold interest affects the order of priority, a change from an unregistered interest to registered interest may invalidate priority previously established through the doctrine of actual notice in accordance with the DeGasperis Muzzo Corp. v. 951865 Ontario Inc. case ("DeGasperis Muzzo").
A lease was entered into between DeGasperis Muzzo Corp. ("DMC"), as tenant, and Stadium Corporation of Ontario Limited ("Stadium Co."), as landlord, concurrently with a continuing rights agreement. The continuing rights agreement provided that the lease could not be registered against title until after Stadium Co. had completed the sale of its interest in the premises and had completed the registration of two mortgages (one in favour of Montreal Trust Company of Canada and the other in favour of Stadium Co.). [iii] The lease was then registered against title subsequent to the two mortgages being registered against title.[iv] The Ontario Superior Court of Justice (the "Superior Court") was tasked with determining whether the mortgages had priority over the lease.
In reviewing the facts of the case, the Superior Court determined that the two mortgagees had actual notice of the lease as: (i) the continuing rights agreement contained a provision requiring Stadium Co. to advise lenders, purchasers and assignees of the terms of the continuing rights agreement; and (ii) as evidence was provided that documents delivered to the mortgagees during the course of the transaction provided actual notice of the lease.[v] Additionally, the two mortgagees had executed non-disturbance agreements in favour of DMC with respect to the lease.[vi]
Counsel for DMC argued that the lease had priority over the mortgages pursuant to the doctrine of actual notice and the ratio of United Trust, whereas counsel for the mortgagees argued that once an interest is registered against title, priority is determined by the order of registration pursuant to the Land Titles Act (Ontario).[vii] The Superior Court accepted the mortgagees' submission and determined that although the lease initially had priority over the mortgages through the doctrine of actual notice, once the leasehold interest was registered against title its priority was lost.[viii]
In 2001, the Ontario Court of Appeal upheld the decision of the Superior Court.[ix]
The facts of DeGasperis Muzzo were highly influential in the Superior Court coming to this decision. In that case, the lease documentation actually stated that the lease would be subordinate to the mortgages so this must be reviewed on a case-by-case basis. Furthermore, various scholars have taken issue with this proposition in DeGasperis Muzzo (as it is contrary to well-established principles of our actual notice regime) and DeGasperis Muzzo has not been cited in any further decisions, possibly detracting from the weight of this case. That said, this case should be considered in reviewing timing of registration.
As priority cannot be guaranteed if an unregistered leasehold interest is later registered, it is generally best practice to register a leasehold interest as soon as possible after the same is created. If time has passed between the creation of a leasehold interest and its registration, the parties risk a subsequently created interest obtaining priority through its registration against title.