Last month we sent out the first bulletin in our mortgage enforcement series, which dealt with the issuance of demand letters and notices. This second bulletin deals with the types of remedies that are available to a lender in Ontario when there has been a default under the mortgage that has not been satisfactorily resolved following notice by the lender, as discussed in the first bulletin. Where market liquidity exists, the market is non-depressed and realizable values are achievable, the power of sale proceeding is often the remedy of choice as the most time efficient and cost-effective method to obtain value for the lender. However, each enforcement situation is unique and it is essential to choose the remedy or remedies that best suit the facts and circumstances of each situation.
Creating a strategy to determine the right type of remedy will depend on the facts of the situation, the legal and practical differences between available remedies, and factors such as the existence of collateral security and guarantors, prior encumbrances, outstanding municipal taxes, the solvency of the borrower, the physical condition of the property, and market trends and values. (Please note that these bulletins are drafted from an Ontario law perspective. We would be pleased to discuss any mortgage enforcement questions you might have for the other Canadian provinces).
- In an action for foreclosure, the lender seeks to have
the court order that the lender (or its assignee) will be the
absolute owner of the mortgaged property, free of the
interest of the borrower and all subsequent
- If obtained, the ownership established by the court order
will ultimately replace the borrower's liability to
repay the debt.
- Ultimately, a successful foreclosure remedy results in
the lender (or its assignee) taking ownership of the property
and extinguishment of the outstanding debt.
C. PRIVATE POWER OF SALE
- This is a contractual remedy available to the lender in
which the lender is required to follow a strict procedure for
the issuance of notices and in which the lender is ultimately
entitled to sell the property to a third party.
- The third and fourth bulletins in this series will
discuss the power of sale process in greater detail.
D. JUDICIAL SALE
- The lender can commence an action for sale in which the
court regulates the sale and directs the payment of the
proceeds of sale.
- The judicial scrutiny of the sale helps to insulate the
lender from procedural and substantive liability, but comes
at a higher cost in terms of time delay and procedural
- A successful judicial sale has the same effect as a
private power of sale.
E. ACTION FOR ARREARS
- The lender can commence an action for payment of the
arrears and seek judgment against the borrower (and others
- This may be strategic where the prospects for recovery
are good without the need to resort to security, where a
closed mortgage interest rate is above market and the lender
does not wish to provide the borrower with the opportunity to
redeem, or where there are problematic issues related to the
property or the security.
- A successful action for arrears will result in the
recovery of all or a portion of the debt and will not
directly involve the property or other security.
F. ACTION ON THE COVENANT (AND GUARANTEE)
- This is an action for payment on the contractual covenant
contained in the mortgage when a default occurs under the
- This action may be commenced concurrently in conjunction
with a power of sale proceeding.
- A successful action on the covenant will result in the
lender recovering a greater proportion of its outstanding
debt (particularly where it is clear that the value of the
property is insufficient to satisfy the amount of such
outstanding debt if power of sale is the only remedy
G. ACTION FOR POSSESSION
- Where the lender cannot obtain possession of the
mortgaged property (e.g. uncooperative borrower), the lender
must commence an action for possession.
- The lender may feel it is necessary to obtain vacant
possession of the mortgaged lands because the state of
maintenance and repair, insurance coverage or building
security may not be satisfactory to the lender.
- A lender in possession is potentially exposed to
environmental liability and other risks associated with
possession of the property.
- A successful action for possession allows the lender to
deal with the property directly when there are concerns that
the property is not being appropriately preserved and
protected or cannot be delivered to a purchaser.
H. NOTICE TO PAY RENTS
- With income producing properties, the lender will likely
wish to serve notice to tenants to pay all future rents to
- Priority issues between the tenants (e.g., rent deposits)
and the lender will become relevant in these situations and
will need to be reviewed on a case-by-case basis.
- A successful and timely notice to pay rents will ensure
that rents can be credited to the indebtedness.
- The lender may wish to hire an independent manager for
the property. This can be achieved either by way of private
appointment or by court appointment.
- Usually, this occurs when the property involves a going
concern and the lender wishes to prevent the borrower from
dealing directly with the property and other security
- A privately appointed receiver is in a similar situation
to that of a mortgagee-in-possession in that, if the receiver
has assumed management and control of the mortgaged property,
the receiver may be exposed to environmental liability for
contamination of the property both before, and after, the
appointment as well as other risks associated with possession
of the mortgaged property.
- A court appointed receiver has a duty to comply with
various legal obligations, including environmental law.
- There are several reasons that a creditor might choose a
court appointed receiver including the fact that many
purchasers of multi-residential and commercial properties are
now requiring that title to assets be provided through a
court-issued vesting order.
- The lender should keep in mind that court appointed
receivers are responsible to the court, whereas a privately
appointed receiver has a principal duty of care to its
J. STRATEGIC PLANNING
Once the lender is aware of the various available remedies, it is necessary to create a strategy that will consider the pros and cons of each remedy, whether multiple remedies should be considered and when the remedies should be pursued throughout the process.
- Foreclosure and power of sale remedies are mutually
exclusive while the ancillary remedies can be used in
conjunction with either an action for foreclosure or a power
of sale proceeding.
- BLG can assist you in developing a well planned strategy
which exercises some or all of the ancillary remedies prior
to commencing the power of sale or foreclosure proceedings in
order to avoid being prevented from doing so during the
Keeping a Closed Mortgage Closed
- Consider commencing an action for possession or on the
covenant for arrears where it appears that the borrower is
deliberately defaulting under the mortgage so as to induce
the lender to issue a notice of sale.
- Conversely, the issuance of the notice of sale under the
power of sale proceedings will open the mortgage for full
Control of the Mortgaged Property
- The mortgage security may give the lender the right to
have the property inspected for environmental issues prior to
- Under the Environmental Protection Act, lenders
are entitled to conduct site investigations, secure and
provide services to the property and take preventative
measures without attracting liability for an order under the
Environmental Protection Act.
- Consider the different implications of taking control of
the property either by way of a lender in possession acting
through an agent or the appointment of a receiver-manager.
Not only will environmental liability be an issue, but
arrears of accounts (e.g. taxes and utilities) and service
contracts will need to be reviewed.
- Be aware of the timing constraints associated with each
- A lender who takes too long in providing notice /
implementing remedies can be attacked for not taking
reasonable steps to mitigate its damages by failing to take
timely and reasonable action.
BLG Commercial Real Estate Group
Our Commercial Real Estate Group consists of more than 50 experts across the country in all facets of commercial real estate law. We provide excellent creative legal advice to a broad spectrum of clients including developers, builders, pension funds, private financiers, lending institutions, private, public and crown corporations, national and international business communities, including aerospace and airlines, banking and finance, securities, manufacturing, construction, insurance, government agencies, natural resources, high technology, retail, transportation and real estate.
Our services include:
Acquisition and Development
Negotiation and preparation of all documentation relating to the acquisition, development, construction, financing and marketing of commercial, industrial and residential properties, including:
- Retail plazas
- Condominium projects
- Mixed-use developments
- Office buildings
- Residential subdivisions
- Business parks
- Shopping centres
- Apartment buildings
Negotiation of arrangements between private enterprise and governmental bodies relating to land and infrastructure development. Formulation and preparation of proposal calls for public/crown corporations and all ancillary agreements.
Construction and Infrastructure
Negotiation and preparation of construction contracts. Negotiation, structuring and financing of infrastructure projects.
Financing and Restructurings
Mortgage enforcement and preparation of all notices and court documents on behalf of lenders. Negotiation and preparation of all financing documentation on behalf of private and institutional lenders and borrowers, for project and term financing. Negotiation of arrangements between investors and developers pertaining to the restructuring of financial affairs, including attending to all due diligence matters.
Negotiation and preparation of all documentation relating to the acquisition, development, construction and financing of hotels, including advising with respect to all related issues including, hotel management agreements, licensing agreements, employment issues, co-owner arrangements, liquor licensing agreements and franchise agreements.
Performance of due diligence reviews and advising on compliance with laws and regulations, advising on obtaining required authorizations and licences and on co-ordinating environmental audits and clean-ups. Negotiation of environmental representations and warranties, advising on the management and disposal of contaminants and their transport, storage and export, and providing representation before administrative tribunals, the civil courts and in governmental inquiries related to these matters.
Advise and assist on all aspects of zoning and planning work, including securing approval of amendments to zoning, advising on expropriation and permitted land uses and the appeal of realty tax assessments. In Québec this includes representation before the Tribunal Administratif du Québec to contest municipal valuation assessments of major hotel, office, commercial and industrial properties.
Long Term Ground Lease
Negotiation and preparation of long-term ground leasing arrangements for both public and private sectors.
Negotiation and preparation of all leasing documentation for retail centres, business parks, office buildings and warehouses.
Structuring, assistance, negotiation and preparation of all condominium documentation, including project financing documentation, declaration, by-laws and rules, disclosure statement, development agreements and sales agreements.
Negotiation and preparation of all documentation required to form real estate syndicates and partnerships, as well as co-tenancy and joint venture arrangements for developers.
Negotiation and preparation of all required documentation and advising with respect to the entering into and the structuring of limited partnerships.
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.