Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Real Estate Mortgage Enforcement, October 2008
After considering the relative merits of power of sale, judicial sale and foreclosure, the private power of sale procedure is the remedy of choice for many lenders. Accordingly, a general working knowledge of this remedy is important for lenders and their lawyers.
When seeking to exercise the power of sale remedy, the applicable provisions contained in the mortgage should be carefully reviewed. The lender may not be entitled to exercise its power of sale remedy immediately. The mortgage may require that written notice of default be given to the borrower first, together with a stated period of time within which to cure the default. Sometimes, the period for curing the default is subject to extension for such reasonable period of time as may be necessary to cure the default, provided that the borrower has commenced to cure the default within a stated period and thereafter proceeds diligently. This is especially true in the case of non-monetary defaults, such as a failure to repair the property. In these circumstances, the lender must be careful to ensure that the nature of the default is sufficient to enable the power of sale to be exercised and that all applicable notices have been given and all cure periods have expired.
Statutory Notice Periods
If the default entitles the lender to commence power of sale proceedings, there are certain statutory notice requirements to be complied with by the lender, as follows:
1. Mortgages Act. Section 32 of the Mortgages Act (Ontario) provides that notice of the exercise of a power of sale cannot be given until the default has continued for at least 15 days. Furthermore, the sale cannot be made for at least 35 days after the notice has been given. Under Section 39 of the Mortgages Act (Ontario), the lender may apply without notice to court for leave to exercise its power of sale without notice, provided that the mortgage contains a power of sale remedy and the default has continued for at least 15 days. Section 40 also provides that where the mortgage is given to secure the issuance of bonds or debentures, a notice of sale need not be issued in such circumstances.
2. Bankruptcy and Insolvency Act. Under Section 244 of the Bankruptcy and Insolvency Act (Canada), a secured creditor that intends to enforce its security on all or substantially all of the inventory, accounts receivable or other property of an "insolvent person" is required to send notice of its intention to enforce its security to that person if the assets that are the subject of the enforcement proceedings have been acquired for or used in relation to a business carried on by that person. Subject to certain exceptions, Section 244(2) of the Bankruptcy and Insolvency Act (Canada) provides that enforcement of the lender's security may not proceed until 10 days after the notice of intention to enforce security has been sent. A notice of intention to enforce security must be sent in accordance with Rule 113.1 of the Bankruptcy and Insolvency Rules. The lender's initial demand for payment and the notice of intention to enforce security may be sent simultaneously.
3. Farm Debt Mediation Act. If the mortgaged property belongs to a farmer, Section 21 of the Farm Debt Mediation Act (Canada) requires the lender to give 15 business days written notice of its intention to realize upon its security. The notice must also advise the farmer of his or her right to make an application to an administrator for relief pursuant to Section 5 of the Act. Relief under Section 5 may result in a stay of proceedings against the farmer, a review of the farmer's financial affairs and/or mediation between the farmer and all the farmer's secured creditors for the purpose of assisting him or her to reach a mutually acceptable arrangement.
Statutory Power of Sale
If the mortgage does not contain power of sale provisions, the lender may look to the statutory power of sale provisions set out in Part II of the Mortgages Act (Ontario). Some of the time periods set out in Part II differ from those set out in the usual power of sale provisions contained in most mortgages. It is rare, however, for a mortgage to fail to contain power of sale conditions.
Issuance of the Notice Of Sale
The procedure for issuing a notice of sale is as follows:
1. Subsearch/Execution Search. A few days before the notice of sale is to be issued, a subsearch of title to the mortgaged property and a search of execution creditors should be conducted to determine the names of all persons having an interest in the mortgaged property subsequent in priority to the lender.
2. Notice of Sale. After the subsearch has been reviewed, a draft notice of sale should be prepared and reviewed with the lender. The format is prescribed by the Mortgages Act (Ontario). The addresses of the recipients of the notice should be obtained from the subsearch or from the lender's records.
3. Updated Subsearch/Execution Search. On the day the notice is to be issued, a further subsearch of title to the mortgaged property should be undertaken to verify that no other instruments have been registered prior to 4:30 p.m. on the preceding day. A further search of executions should also be conducted. Any additional parties entitled to receive the notice of sale should be added.
4. Completion of Notice of Sale. On the day the notice is to be issued, details concerning the amount then due under the mortgage, including principal, interest and costs, should be completed based on final information from the lender. The date by which payment must be made should also be confirmed and completed.
5. Execution and Mailing of Notice of Sale. After the notice of sale has been finalized, each copy of the notice should be signed by the lawyer for the lender and taken to the post office for delivery by registered mail. A registration receipt should be obtained.
6. Delivery of Notice of Sale to Lender – No Further Proceedings. A copy of the notice of sale should be provided to the lender. It is critical that the lender take no further proceedings to enforce the mortgage until the expiry of the time for payment set out in the notice of sale, as such proceedings would be in contravention of Section 42 of the Mortgages Act (Ontario).
7. Statutory Declaration. On the day of mailing the notice of sale, a statutory declaration confirming service of the notice of sale should be prepared and sworn.
Recipients of the Notice of Sale
Section 31(1) paragraph 1 of the Mortgages Act (Ontario) stipulates that the notice of sale must be given to every person appearing by the register of title and by the index of executions to have an interest in the mortgaged property, other than prior encumbrancers. The recipients of a notice of sale should include the following:
1. Original Borrower. If the mortgaged property has been sold by the original borrower (and the original borrower was not released from its covenant by the lender), the original borrower is not a necessary party to which the notice of sale must be given. However, if the lender intends to proceed against the original borrower on its covenant to pay, the notice of sale should be given to the original borrower.
2. Current Owner. The current registered owner of the mortgaged property is entitled to notice.
3. Spouses. Under the Family Law Act (Ontario), the borrower's spouse is given statutory rights of possession and redemption paralleling those of the current owner and should be served with a notice of sale.
4. Subsequent Mortgage Lenders. The notice of sale should be given to all subsequent mortgage lenders.
5. Assignees of Subsequent Mortgage Lenders. If a subsequent mortgage has been assigned, service of the notice of sale upon the assignee is sufficient for the purposes of the Mortgages Act (Ontario).
6. Execution Creditors. Execution creditors of the borrower whose writs of execution are filed in the land registry office at the time the notice of sale is given are entitled to receive a copy of the notice of sale. Section 33(2) of the Mortgages Act (Ontario) sets out special rules for the service of a notice of sale on execution creditors.
7. Construction Lien Claimants. The rules governing priority between mortgage lenders and construction lien creditors are set out in Section 78 of the Construction Lien Act (Ontario). Section 33(3) of the Mortgages Act (Ontario) provides that where a lender is claiming priority over a construction lien creditor, notice of the exercise of the power of sale may be given by addressing the notice to the solicitor who filed the claim for lien.
8. Guarantors. Strictly speaking, the guarantor of a mortgage who has not paid any part of the mortgage debt has no interest in the mortgaged property and is therefore not required to receive a notice of sale. Nevertheless, guarantors are usually served with a copy of the notice of sale so as to keep them fully informed and perhaps to prompt payment on the guarantee.
9. Tenants. When preparing a notice of sale, careful consideration should be given to whether the lender wishes to extinguish leasehold interests of tenants subsequent in priority to the mortgage. Any such tenants served with the notice of sale will have their interests extinguished by operation of the power of sale process. The lender must examine this issue closely, as it may be important to preserve the rental income stream payable by such tenants.
10. Secured Parties under the Personal Property Security Act (Ontario). A notice of sale should be given to any secured party named in a notice of security interest registered against title to the mortgaged property.
11. Trustees in Bankruptcy. Where the lender has notice of the bankruptcy of a person who would otherwise be served with a notice of sale, the trustee in bankruptcy of that person is the proper party to be served with the notice of sale.
12. Court-Appointed Receivers. Where the lender has notice of the appointment of a court-appointed receiver for any person who would otherwise be served with a notice of sale, the court-appointed receiver should be served with the notice of sale.
13. Persons Under a Disability and Deceased Persons. Sections 33(4) and (5) of the Mortgages Act (Ontario) set out special rules with respect to the service of a notice of sale on persons under a disability and deceased persons.
14. Statutory Lien Claimants. Section 31(1) paragraph 3 of the Mortgages Act (Ontario) provides that where there is a statutory lien against the mortgaged property in favour of the Crown or any other public authority and where the lender exercising the power of sale has written notice of the lien, the notice of sale should be sent to the Crown or other public authority claiming the lien, provided the mortgage has priority over the lien.
15. Other Interests. Section 31(1) paragraph 4 of the Mortgages Act (Ontario) provides that where the lender has actual notice in writing of any other interest in the mortgaged property, the notice of sale should be given to the person holding such other interest, provided the mortgage has priority over such other interest.
Prior encumbrancers need not be served with a copy of the notice of sale, as a power of sale does not extinguish the rights of prior encumbrancers 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.