Last week, we blogged about power of sale as a form of mortgage enforcement where a borrower is unable to make the agreed-to mortgage payments. This week, we will unpack and explore another mortgage enforcement option: taking possession of mortgaged property.
How Does Possession Work?
Where there has been a default by a borrower, the lender is entitled to enter onto (or into) the mortgaged property to take possession. This is a right, not an obligation, and will not happen in every instance of default.
A lender will be deemed to be in possession of a property when:
- the lender assumes “control and management” of the property; OR
- when the lender deprives the borrower of control and management of the property.
Examples of actions that can constitute possession include:
- paying utilities for the property;
- addressing tenant requirements;
- performing minor repairs;
- employing a property manager.
When Can Possession Occur?
Section 42 of the Mortgages Act prohibits a lender from taking any “further proceeding” during the time period granted to a borrower under a Notice of Sale to become compliant with payments owing. As such, possession of a mortgaged property cannot occur in this time frame, unless the lender obtains leave (i.e. permission) of the court.
If the lender does not act within two years of the default, the lender may not be entitled to compensation for losses that could have been minimized (or avoided entirely) if action had been taken sooner.
In addition, if the lender does not act within this two year window, the lender may open itself up to a defence by the borrower that the lender failed to mitigate their losses in a commercially reasonable manner.
Lender’s Obligations Once They Have Possession
Once a lender is in possession of the mortgaged property, the lender must act like a prudent owner and protect “the equity of redemption” (i.e: the right of a borrower to redeem his or her property once the debt secured by the mortgage has been discharged)
As such, the lender takes on certain obligations, including:
- adequately insuring the property;
- inspecting the property;
- taking reasonable steps to protect the property from things such as weather damage, vandalism, etc.;
- making all necessary and proper repairs to maintain and preserve the property;
- ensuring that mortgaged property complies with all relevant statutes, regulations, and by-laws.
If the property is a rental property, the lender will be deemed a landlord and must address various issues that may arise, including:
- hiring a property manager;
- ensuring the property manager attends to the property on a regular basis;
- advertising any vacancies in the mortgaged property;
- accounting for any revenues that were received from the property or should have been received from the property.
Importantly, the lender has no obligation to finance any maintenance or upkeep beyond the amount of income received from the property.
A lender who mismanages the property can open themselves up to liability if the borrower suffers any losses as a result of the lenders actions (or failures to act).
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 are a boutique firm with a unique focus on solving our clients’ biggest financial dilemmas. We draw 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.