Canada: Selecting A Mortgage Enforcement Remedy

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate Mortgage Enforcement, October 2008

Introduction

When a borrower defaults on its obligations under a mortgage in Ontario, the lender has a variety of remedies from which to choose. Some of these remedies flow from rights granted to the lender in the security documentation delivered by the borrower at the inception of the loan, while others have their foundation in legislation and court proceedings (e.g., foreclosure and judicial sale).

A lender's enforcement strategy and choice of remedy after a default has occurred will regularly depend on careful consideration and weighing of the lender's options at as early a stage as possible. Without having conducted an assessment of the relative merits of the various remedies available, accompanied by the guidance of sound experienced legal advice, a lender may find that it has unwittingly made a choice which could delay or hinder its ability to maximize recovery. The potential pitfalls which a lender could be faced with along the path to recovery are the subject of this and the following articles in this Blakes Bulletin on Mortgage Enforcement.

Understanding the Variety of Choices Available to the Lender

A worthwhile starting point for any analysis of the lender's choice of mortgage remedy involves a general understanding of the various remedies open to the lender in a default scenario.

The lender may either (a) sell the mortgaged property under (i) the private power of sale provisions contained in the mortgage or (ii) pursuant to a court order made in a judicial sale action; or (b) obtain title to the mortgaged property by means of (i) a foreclosure action or (ii) accepting a quit claim deed to the mortgaged property. A brief discussion of the power of sale remedy and the foreclosure and judicial sale actions are set out below in this article. The quit claim deed alternative is the subject of one of the other articles in this bulletin.

In addition, the lender will also need to consider whether to take possession or control of the mortgaged property to preserve the value of the secured assets and, if so, how and when to do so. The lender may take possession or control of the mortgaged property directly, either privately pursuant to the provisions of the mortgage or by court order. Alternatively, the lender may take possession of the mortgaged property indirectly, through a privately appointed receiver pursuant to the provisions in the mortgage, or through a court-appointed receiver or interim receiver.

Elsewhere in this bulletin, you will learn about some of the essential factors for the lender to consider before taking possession, the legal implications of doing so and the pros and cons of receivership.

The lender may also wish to sue the borrower (and possibly others) at the appropriate stage of the enforcement process to recover payment of all of the debt or such portion that remains unpaid after applying to the loan amount the net proceeds of realization from other earlier enforcement steps. The lender may obtain a judgment against (a) the original borrower and/or any guarantor, or (b) the current borrower of the mortgaged property (if there has been a change of ownership) for payment of the debt secured by the mortgage (i) before sale under power of sale or judicial sale, or (ii) following sale under power of sale or judicial sale for the amount then due on the mortgage debt (after application of the net proceeds of sale). The lender's right to commence an "action on the covenant" is the subject matter of one of the articles that follows in this bulletin.

As will be apparent from this and the other articles in this bulletin, the appropriate enforcement strategy selected by the lender in the context of the particular loan default, as well as the choice of the steps that make up the strategy, are critical.

Sale of Mortgaged Property Pursuant to Power of Sale

In Ontario, it is typical to empower the lender to sell the mortgaged property under the "private power of sale" provisions contained in the mortgage. Subject to statutory notice requirements set out in Part III of the Mortgages Act (Ontario), these provisions entitle the lender to sell the property to a third party, enabling it to recover some or all of the debt, as well as its costs of recovery. This "private power of sale" remedy is peculiar to Ontario and is not available in other Canadian provinces.

Foreclosure and Judicial Sale

In circumstances where there is no ready market for the mortgaged property, the lender may decide to realize on its security by foreclosing the equity of redemption (also known by the more commonly used term "foreclosure") and becoming the registered owner of the mortgaged property. Where the market value of the mortgaged property is not readily ascertainable and the lender is concerned about being sued by the borrower or subsequent encumbrancers for selling the property at an improvident price, a conservative lender may seek refuge in the court process of a judicial sale. The procedures for these two mortgage actions are contained in the Ontario Rules of Civil Procedure, are technical and take a considerable period of time from start to finish to achieve the desired objective.

The Advantages of Power of Sale

The following are the advantages of a power of sale as compared to foreclosure and judicial sale:

  1. The borrower is generally required to pay the money due under the mortgage within 35-45 days after the issuance of a notice of sale, as compared to 60 days after a reference in a judicial sale or foreclosure action. Typically, a power of sale process, from start to finish, may be completed in approximately six months, while a contested foreclosure or judicial sale may take up to two years to complete.
  2. A notice of sale may be inexpensively produced and the entire procedure conducted from the lender's solicitor's office; in contrast, a judicial sale or foreclosure will likely involve several expensive court attendances.
  3. A notice of sale may be served by registered mail, while a judicial sale or foreclosure action is commenced by a statement of claim which must be personally served upon the defendants.
  4. If, after selling the mortgaged property under the power of sale, the mortgage debt has not been fully satisfied, the lender is entitled to sue the borrower and any guarantor to recover the shortfall. This right also exists after a judicial sale. However, after obtaining a final order of foreclosure, a lender is precluded from proceeding with an action against the borrower or any guarantor for any deficiency.
  5. Land transfer taxes are not payable by the lender when exercising a power of sale or when selling in a judicial sale; however, land transfer taxes of approximately 1.5% of the value of the property (except in the City of Toronto where such tax is approximately 3% of the value of the property) are payable by a lender when it becomes the owner of the property by registering a final order of foreclosure.
  6. A lender is generally entitled to abandon a power of sale proceeding at any time subject only to the provisions of Section 42 of the Mortgages Act (Ontario). However, once a lender has commenced a foreclosure or judicial sale action, the lender cannot abandon the action and then commence power of sale proceedings without leave of the court being granted, which leave will likely be denied.

The Advantages of Foreclosure and Judicial Sale

The following are the advantages of a judicial sale or foreclosure as compared to a power of sale:

  1. A foreclosure action may have some attraction to a lender in a depressed real estate market where an immediate sale of the property will not generate sufficient proceeds to repay the mortgage debt. In the long term, real estate values may improve to such an extent that, after foreclosure, the lender may be able to sell the property for an amount in excess of the mortgage debt without having to account to the borrower for any surplus. This is especially important where the lender intends to expend considerable funds improving the property for resale.
  2. In a judicial sale or foreclosure action, the proceedings are court-supervised. The lender is protected from improvident realization claims. Under a power of sale, the lender has the responsibility to conduct the sale properly, observe all technical requirements, sell the property for fair value and account to the borrower and subsequent encumbrancers for any surplus.
  3. In a judicial sale or foreclosure action, the court is always available for the disposition of complex issues, a forum which is not available in the power of sale procedure.
  4. Claims for possession and recovery of the mortgage debt may be combined with judicial sale or foreclosure proceedings; in contrast, a separate action must be commenced for possession and/or payment of the mortgage debt in power of sale proceedings.
  5. A lender who has acquired title by means of foreclosure under a subsequent mortgage will not become exposed to personal liability to pay a prior lender pursuant to Section 20 of the Mortgages Act (Ontario).

Results of Enforcement Action

When a lender exercises its rights under a power of sale, the lender is empowered to convey the mortgaged property to a purchaser free and clear of the borrower's interest and any other person having an interest in the mortgaged property subsequent in priority to the lender.

When a lender proceeds by way of judicial sale, the lender is empowered to convey the mortgaged property to a purchaser free and clear of the borrower's interest and any other person having an interest in the mortgaged property who has been made a party to the judicial sale action. In a foreclosure action, the lender becomes the owner of the mortgaged property and all persons holding an interest in the mortgaged property subsequent in priority to the mortgage lose their interest in the mortgaged property.

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.

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