On September 15, 2016, the New Brunswick Court of Appeal clarified the province's statutory regime governing both the exercise of a lender's rights when a borrower defaults on a mortgage and the calculation of the lender's damages in a subsequent deficiency action. The decision also settles two divergent lines of authority on whether a lender is entitled to recover post-mortgage sale expenses in a deficiency action and addresses what's been described as a statutory regime that's unfriendly to borrowers. New Brunswick mortgage lenders will want to review their mortgage sale strategies and resale processes in light of this decision.
In Keough v Sandfire Capital Limited Partnership, the lender loaned $200,000 to the borrower and registered a collateral mortgage against the borrower's property as security. The borrower didn't make any payments and the lender exercised its power of sale right under the NB Property Act. There were no bidders at the mortgage sale other than the lender, which purchased the property for a nominal amount ($100.00). The lender started a deficiency action against the borrower and eventually obtained summary judgment. The lower court calculated the lender's damages based on the unpaid mortgage balance as at the date the lender resold the property and determined the lender was entitled to recover its post-mortgage sale expenses. The borrower appealed the summary judgment decision and succeeded.
The New Brunswick Court of Appeal began by observing that sections 44 to 47 of the NB Property Act "create a largely mortgagor [borrower] -unfriendly bundle of powers, rights, limits on liability and immunities ... unmatched elsewhere in Canada and ... the rest of the common law world". It then acknowledged that judges have been "struggling" with several issues respecting lenders' powers under the Property Act, and there has been a "conscientious attempt at avoiding a perceived unfairness resulting from the application of statutory provisions drafted for the benefit of mortgagee [lenders]...". The Court then clarified some of those issues:
A lender's rights under sections 44 to 47 of the NB Property Act are distinct and treated separately. A lender has three distinct rights when a borrower defaults on a mortgage: the right of power of sale, the right to buy-in at the mortgage sale, and the right to resell properties purchased at mortgage sales. A lender owes the borrower a duty to exercise its power of sale right in an authorized, regular and proper manner, although the scope of this duty doesn't extend to ordinary negligence. This duty doesn't apply to a lender's rights to buy-in or resell; in fact, the statutory regime gives lenders an "unrestricted immunity" when exercising those two rights.
A lender may be subject to a claim for damages if it exercises its power of sale right in a way that's unauthorized, irregular or improper. If a lender exercises its power of sale right in an unauthorized, irregular or improper manner, it may be subject to a claim for damages for prejudicing the borrower's interests.
A lender improperly exercises its power of sale right when it purchases a property for a nominal amount at a mortgage sale. A lender has improperly exercised its power of sale right when it "fraudulently, willfully or recklessly" sacrifices the borrower's interests – such as when it purchases a property for a nominal amount at a mortgage sale. However, a lender has properly exercised this power when it purchases or sets a reserve bid at a price corresponding to the property's forced sale value as determined by an independent and professional appraiser. So a lender isn't required to bid up to the property's probable market value at a mortgage sale to properly exercise its power of sale right.
If the lender acts improperly, its deficiency will be the unpaid mortgage balance less the property's market value at the date of the mortgage sale. If a lender improperly exercises its power of sale right and proceeds with a deficiency action against the borrower, its damages will be the balance owing under the mortgage after deducting the property's market value as at the date of the mortgage sale – both of which the lender must prove. The deficiency calculation will not take into account any charges or expenses the lender incurred after the mortgage sale on the basis that the sale terminates the borrower's ownership of the property.
A lender who purchases a property at a mortgage sale owns the property for its own benefit and use. Once a lender has purchased a property at a mortgage sale, it has complete control over the management and resale of the property and can sell it as it sees fit. This means a lender doesn't have a duty to account to a borrower for the resale proceeds or to take steps to obtain the property's true market value, such as employing a real estate firm or exposing the property to the market for a sufficient period of time.
New Brunswick mortgage lenders will want to review their mortgage sale strategies and resale processes in light of this decision. Here are five steps to consider in that review:
- Get an appraisal as close to the mortgage sale date as possible. It's important to obtain an appraisal that accurately reflects the property's forced sale and market values before the mortgage sale date – but as close to that date as possible – and to adjust the bidding strategy accordingly. Ideally, lenders should obtain a comprehensive appraisal of the property before the mortgage sale; if this isn't possible, consider obtaining a drive-by appraisal before the mortgage sale and a comprehensive appraisal shortly after it. A lender might also want to consider obtaining multiple appraisals if the initial one doesn't accurately reflect the property's market value or is unfavourable to the lender's position.
- Decide whether there's a deficiency action worth pursuing. Lenders should compare the unpaid mortgage balance with the property's market value as at the mortgage sale date and decide whether a deficiency action is worth pursuing. It's possible that the property's market value exceeds the outstanding mortgage amount, for example where the borrower has made regular mortgage payments over a lengthy period; if so, the court could require the lender to pay the borrower the difference between the property's market value and the unpaid mortgage amount.
- Speed up the deficiency action. If there is a remaining deficiency worth pursuing, a lender doesn't have to wait until it resells the property to start an action against the borrower; it can do so shortly after the mortgage sale.
- Sell if you want – for what you want. Lenders should consider altering their sale strategies, such as minimizing post-mortgage sale expenses, to reflect that they are now clearly entitled to dispose of properties purchased at mortgage sales as they see fit and aren't required to obtain a purchase price that reflects the property's true market value.
- Consider revising the standard mortgage contract to deal with post-mortgage sale expenses. Lenders can't claim post-mortgage sale expenses against borrowers under the current statutory covenants, so they should consider overhauling their mortgage contracts to include a specific provision that borrowers are responsible for all reasonable post-mortgage sale expenses. Lenders should also ensure borrowers are aware of these provisions and that they will be responsible for these expenses.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.