The need for mortgage enforcement arises where the borrower (i.e. mortgagor- usually a homeowner, or owner of office, retail, other business space) is unable to make their mortgage payments, and therefore fails to comply with the agreed-upon terms in the mortgage contract with the lender (i.e. the mortgagee- generally a bank or private lender).
Where this occurs, there are a number of steps that a mortgagee can take to ensure that their rights are protected, and that they receive the money owing to them. Two such options are a power of sale and a foreclosure. This week we will explore the power of sale. Next week we will explore foreclosure and highlight the difference between these two enforcement options.
Defaulting on a Mortgage
Legally, a default occurs where a borrower has violated one or more terms of their mortgage agreement. The most common of these is the failure to make a required regular payment. Other examples of default include:
- Failure to have adequate property insurance;
- Failure to keep the premises in a reasonable state of repair;
- Failure to pay property taxes;
- Using the property for an illegal purpose.
Since a property is a lender’s security for a mortgage loan, that lender has an interest in maintaining the value of that property. Anything that can jeopardize that value can be considered a default on the agreement.
Power of Sale
A power of sale is a common mortgage remedy used by lenders in Ontario where there has been a default. It can be used to recover their principal, interest, and expenses.
The Power of Sale Process
A strict process must be followed in order to complete the full power of sale process.
STEP ONE: CONTACTING THE BORROWER
Upon default, the lender must contact the borrower, in writing via a demand letter, to notify them that they are in default, and give them the opportunity to remedy that default.
STEP TWO: DELIVERING A NOTICE OF SALE
Where a demand letter has no effect, and the borrower continues to be in default, the lender can deliver a Notice of Sale. This can only be done after at least 15 days following the default.
The Mortgages Act outlines what is to be included in the Notice of Sale, and also stipulates who the Notice should be mailed to. The Notice of Sale should be mailed, via registered mail to:
- Every party who is considered a mortgagor and a mortgagee in the agreement;
- All other parties who have an interest in the mortgaged property (including persons with liens registered against the property, execution creditors, and similar).
Once the Notice of Sale is mailed, the lender must wait 35 days or 40 days, depending on who resides in the property, before taking any further action. This is known as the “redemption period”.
In addition to a Notice of Sale, there is also a further requirement to give notice under the Bankruptcy Act and the Farm Debt Mediation Act (where the property in question is a farm), which must be mailed to the mortgagor along with the Notice of Sale.
STEP 3: THE REDEMPTION PERIOD
The borrower is granted the redemption period to bring the mortgage into good standing, or pay off the entire mortgage debt (including the legal fees incurred by the lender to enforce their rights).
Where the borrower is unable to rectify the situation within the redemption period, the lender can issue a Statement of Claim to collect what is owed and for possession of the property.
STEP 4: APPLICATION TO TAKE POSSESSION OF THE PROPERTY
Once the Statement of Claim is issued and served, and the mortgagor does not file a Statement of Defence, the lender can obtain default judgment.
After signing the default judgment, the lender must then bring a motion to request leave of the court to allow for the issuance of a Writ of Possession.
Once the Writ of Possession is issued, the lender delivers it to the Sheriff of the relevant jurisdiction (i.e where the mortgaged property is located). The Sherriff will then schedule a date on which to evict any borrowers living in or using the property, and gives them a chance to move out of the property. Where the borrowers do not voluntarily leave, the Sherriff can arrange for their removal.
STEP 5: SELLING THE PROPERTY
Once any occupants of the property are removed, the lender can then proceed to sell the property. The property must be sold for fair market value, and cannot be sold at a steep discount.
Once the property is sold, the proceeds of the sale are then paid out as follows:
- To the lender to cover any expenses incurred in selling the property (i.e. real estate agent fees, lawyer’s fees, etc.);
- To the lender to cover their principal, interest, and any other amounts they are entitled to;
- To any subsequent mortgagees, lien claimants, execution creditors (but only if any amounts are left over after payment of the above two);
- To the former property owner (again, only if any amounts are remaining at this stage- most often, there are not).
Where the lender is unable to fully recover their entire investment, they can file another Writ of Execution for the remaining amount owing.
If you are involved in a dispute over a mortgage in default or are involved in any other real estate dispute, including situations in which a buyer is not ready, willing and able to close on the agreed date or where a seller is unwilling to close as agreed, contact Financial Litigation.
We are a boutique law firm in downtown Toronto with a unique focus on the financial aspects of legal disputes. Our difference is our responsiveness. When you retain Eli Karp in your real estate matter, you know you will receive personal service and excellent advice. Eli is available seven days a week, and can offer prompt, effective crisis management and legal guidance no matter when a problem may present itself. Schedule your consultation online, or by calling us at 416-769-4107 x1.