Mortgage Enforcement Remedies: Power of Sale

By Puneet Shroff

When a borrower cannot meet their mortgage obligations, the lender, known as the mortgagee, has several remedies at their disposal. These include selling the property, taking ownership through foreclosure, seizing possession via a court order or a receiver, or securing a judgment against the borrower. What course of action is chosen will depend on a variety of factors. This article will primarily focus on the most common method of enforcing mortgage security: Power of Sale.

What is a Power of Sale

Power of Sale is a legal mechanism that grants the lender (the mortgagee) the right to sell the property used as collateral when the borrower (the mortgagor) fails to fulfill their mortgage commitments. This mechanism allows the lender to recover the outstanding loan amount by selling the property. The sale proceeds are used to settle the debt, and if there's any surplus, it is returned to the borrower. The power of sale is established either under the terms of the Mortgages Act of Ontario or as stipulated in the mortgage documentation. As most modern mortgages include power of sale provisions, this article will assume same.

Power of Sale vs. Foreclosure

Power of Sale and foreclosure are both legal remedies available to lenders when a borrower defaults on their mortgage. However, they are different processes.

Foreclosure: In a foreclosure procedure, the mortgage lender must go through a civil court to obtain an order of foreclosure. This process, which is usually lengthy, results in the mortgage lender acquiring legal ownership of the property. As the new owner, the lender can sell the home on the open market and retain all sale proceeds.

Power of Sale: In a power of sale process, the homeowner maintains ownership of the property until it is sold. The lender has a fiduciary duty to sell the property at fair market value. The sales proceeds are then used to pay off any outstanding mortgage balance, fees, and other costs. If there are any leftover funds from the sale, they are returned to the homeowner.

The Power of Sale Process in Ontario

The power of sale process commences when the lender identifies consistent missed payments from the homeowner. The lender could also try to contact the homeowner to determine the cause and potentially work out a payment plan. If these efforts fail, the lender may resort to exercising their power of sale rights. Mortgage defaults aren't solely about missed payments; they can also involve a breach of other loan covenants such as failure to insure the property or pay property taxes. The process generally involves several steps, each with its unique requirements and timelines:

1. Notice of Sale: If the homeowner falls behind on their mortgage payments, the lender can issue and serve a Notice of Sale 15 days after the default has occurred.
2. Form of Notice: The notice is to be as prescribed by the Mortgages Act and to state the amount claimed to be due for principal, interest, taxes, insurance premiums, costs, and other expenses.
3. Whom to Serve: The Notice should be served via personal service or registered mail to the borrower, their spouse and anyone who appears on the parcel register for the property, as well as execution creditors, if applicable the Crown and any person who has provided written notice to the lender of having an interest in the property.
4. Redemption Period: Following the Notice of Sale, the property cannot be listed for sale for 35 days following the notice. This is a redemption period during which the homeowner can bring the mortgage up to date or pay off the entire mortgage debt.
5. Property Sale: The Lender typically sells the property using a licensed real estate agent.
6. Application of Proceeds: The proceeds from the sale are then used to pay off the mortgage debt and other related fees.

Advantages of a Power of Sale:

1. Flexibility and Efficiency: A flexible, efficient, and relatively inexpensive option.
2. Non-Court Supervision: Operates without court supervision, avoiding unnecessary court appearances.
3. Control: Allows the lender to retain control over the entire process.
4. Irreversibility: Cannot be set aside or reopened after the sale.
5. Time Acceleration: Accelerates the time within which the mortgagor must pay the outstanding amount.
6. Clarity: A straightforward remedy clearly outlined in mortgage documentation or the Mortgages Act.
7. Deficiency Recovery: If a shortfall occurs, the lender can initiate an action to recover the deficiency. Similarly, a borrower can sue the lender for an improvident sale.
8. Abandonment Option: The mortgagee can abandon proceedings at any time, subject to s. 42 of the Mortgages Act.

Legal Rights of the Homeowner in a Power of Sale

During a power of sale process, homeowners have certain rights, including:

1. Right to Redeem: The homeowner can stop the power of sale by paying the outstanding mortgage balance and associated costs before the sale.
2. Right to Notice: The lender must provide the homeowner with a Notice of Sale until at least 15 days after the default and 35 days before the sale.
3. Right to Surplus Funds: If the proceeds of the sale exceed the outstanding mortgage balance and associated costs, the homeowner is entitled to receive the surplus funds.
4. Right to Legal Representation: Homeowners have the right to legal representation throughout the power of sale process.
5. Right to Challenge the Sale: Homeowners have the right to challenge the sale if they believe the property was sold for an unfair price or if there were errors in the power of sale process.

Preventing Power of Sale

Preventing a power of sale is possible through several methods. Homeowners can refinance their mortgage, negotiate with their lender, or sell their home before the power of sale process begins. It's essential to act quickly to have more options available and potentially stop the power of sale.

Conclusion

A power of sale process can be overwhelming for borrowers and lenders. However, understanding the process, their rights, and the available options can help alleviate some of the stress associated with it. Contact our office for legal advice as it is vital to protect your rights and explore the best possible solutions.