How long does a commercial landlord have to bring a claim against a tenant or guarantor/indemnifier following a lease default and demand on the guarantee/indemnity?
In order to answer that, let us look at a case involving a guarantee under a mortgage that went into default. In a 2012 Ontario Court of Appeal decision, [Equitable Trust Company (The) v. Marsig, 2012] the Court dealt with the issue of determining whether a lender could pursue guarantors under a mortgage more than two years after demand under the guarantee was made. The mortgage went into default and the lender exercised its power of sale, which resulted in a deficiency.
The lender instituted proceedings against the guarantors to recover the deficiency. The guarantors moved for summary judgment dismissing the lender’s action as being statute-barred under the two-year limitation period in section 5 of the Limitations Act, 2002 [“LA”]. The lender argued the applicable limitation period was in fact 10 years pursuant to the Real Property Limitations Act, R. S. O. 1990 [“RPLA”] which applies to “an action upon a covenant contained in … a mortgage”.
At trial, the lender was successful, and the applicable limitation period was held to be 10-years as in section 43(1)(k) of the RPLA and the lender’s claim on the deficiency could continue. On appeal, the guarantor lost again.
The appeal court reviewed the relevant provisions of the LA and the RPLA. The LA applies to court proceedings “other than proceedings to which the RPLA applies” and sets a basic 2 year limitation period for proceedings. Section 43 [k] of the RPLA provides for a 10 year limitation period on claims based upon “a covenant in a mortgage [or in any other instrument] which covenant is to repay the whole or any part of money secured by a mortgage”.
So, the RPLA 10 year limitation period applied rather than the 2 year LA period since the guarantor had signed the mortgage and the guarantee related to a covenant to repay monies secured by a mortgage.
Now, what does this mean for commercial leases and for a landlord suing a tenant (and vice versa) or a guarantor for lease defaults, given that a lease is not a mortgage and does not fall within section 43[k] of the RPLA? The appeal court in the Equitable case stated that it is not always easy to determine whether a particular guarantee is subject to the LA or, like the guarantee in the case, the RPLA.
Actions for Rent Arrears: The RPLA provisions relating to commercial leases address actions to recover rent arrears or interest and the limitation period for bringing an action for rent arrears is six (6) years from the date the rent was due, or six (6) years after written acknowledgment by the party owing the sum, to bring an action.
Actions for Non-Rent Defaults: Non-rent lease defaults (e.g. transfers without consent, or a failure to obtain insurance) are not covered by the RLPA and are subject to the two (2) year LA limitation period for bringing a proceeding.
So, subject to the parties varying a limitation period by contract (as discussed below) the statutory limitation periods are six (6) years for rent arrears and two (2) years for non-rent default claims involving a landlord, tenant and/or guarantor/indemnifier. Keep in mind that many non-rent defaults can be converted into rent defaults and then rent arrears if the landlord incurs costs to cure the default.
Varying Limitation Periods: The LA provides that contracts subject to it are open for the parties to vary, suspend or even extend the limitation periods. However, no such express right appears in the RPLA, and so any right to bring an action for rent arrears is extinguished upon the expiry of the six (6) year RPLA period.
The Lessons: 1. Lenders should have guarantors sign the actual mortgage and have it contain express guarantee language. 2. Landlords, Tenants and Guarantors/Indemnifiers should get legal advice upon a lease default to determine time limits for bringing a claim against one another. 3. Where the claim is for rent arrears, the landlord has six years from the date on which the payment was due, to commence proceedings. 4. From a tenant’s perspective, rent overpayments are not rent arrears and so the limitation period is two (2) years to bring an action. 5. Limitation periods may be varied by the parties to a contract, and extended under the LA, but not extended under the RLPA.
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.
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