Last week we blogged about taking possession of a mortgaged property as a form of mortgage enforcement. This week we explore this remedy in more detail- analyzing the pros and cons.
The Cons of Mortgage Possession
Once a mortgagee (i.e. the lender) takes possession of a mortgaged property, he or she has an obligation to act as a “prudent owner” and must protect what is known as the “equity of redemption” (i.e. they must essentially treat the property as the owner would and ensure that it remains in good condition in the event that the mortgagor- the borrower- may be able to take it back).
This obligation comes with significant responsibilities that must be carried out. A lender who takes possession of a mortgaged property and subsequently mismanages the property can be liable for significant damages if the borrower suffers any losses as a result.
Responsibilities of a lender in possession of a mortgaged property include:
- Hiring a property manager (or managing the property);
- Ensuring the property is visited/checked regularly (by the property manager or by the lender if acting as property manager);
- Managing finances related to the property;
- Carrying out any landlord obligations (if the property is a rental property);
- Ensuring that necessary and reasonable repairs are carried out;
- Ensuring the property complies with all relevant by-laws, statutes, and regulations (including fire code requirements, insurance coverage requirements, etc.)
A lender in possession will be liable for any damages or loss to the property resulting from gross or wilful negligence or waste. Failure to take reasonable steps to protect the property may result in a reduction in the amount of money owing on it.
Where a lender takes possession of a mortgaged property the lender must fulfill the responsibilities outlined by the Environmental Protection Act to be a “person responsible” for any contaminants. This is particularly relevant where the property is an industrial property. This may attract significant liability for the cost and clean up of contaminants, if this is an issue.
The Pros of Mortgage Possession
Once a lender takes possession of a mortgaged property that lender is entitled to any rents and profits related to that property (including any rent arrears).
As long as the lender does not interfere with the borrower’s rights to redeem the mortgage, the lender can lease the mortgaged property.
Where a lender takes possession of the mortgaged property, the borrower (or any subsequent encumbrancer) will be prevented from taking advantage of s. 2 of the Mortgages Act, which generally allows the borrower to call for an assignment of the mortgage.
Where a lender takes possession of the mortgaged property and an action to enforce the mortgage has also been commenced, a judgement in that action (along with the possession) will deny the borrower the ability to put the mortgage back into good standing.
If you are involved in a mortgage dispute or would like to commence mortgage enforcement proceedings, contact the Toronto real estate lawyer Eli Karp at Financial Litigation. We rely on our in-depth knowledge in real estate, breach of contract, and collection actions to provide thorough and pragmatic advice and solutions. Our responsiveness is unparalleled, we are available seven days a week, and offer prompt, effective legal guidance and crisis management no matter when an issue may arise.
Respond to your mortgage crisis with Financial Litigation and let our unique experience guide you through your dispute. Schedule your consultation online, or by calling us at 416 769 4107 x1.