Questions To Ask Before Taking Possession In A Mortgage Enforcement Setting

Copyright 2008, Blake, Cassels & Graydon LLP

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

The terms of most mortgages provide that the borrower is permitted to have possession of the mortgaged property prior to default and the lender is entitled to take possession of the mortgaged property after default. When a borrower defaults on its obligations under a mortgage, it is not uncommon for the lender to take possession and assume control of the mortgaged property in order to facilitate a sale.

The lender may take possession of the mortgaged property directly, either privately or by court order. Alternatively, the lender may take possession indirectly through a receiver appointed pursuant to terms of the mortgage or by court appointment. The lender may sue for possession by filing a statement of claim or take possession without a court order, if possession can be obtained peacefully. This could be accomplished by the lender simply changing the locks and taking possession. However, a lender who enters into possession of the mortgaged property prior to being entitled to do so will be liable for damages to the borrower. Where possible, consideration should be given to negotiating an orderly change of possession.

What are some of the primary considerations which should be taken into account by the lender prior to taking possession of the mortgaged property? After ensuring that it is entitled to take possession, a lender should ask itself:

1. Who is in possession of the mortgaged property?
2. If the mortgaged property is occupied by tenants, what are the details of the leases? Is there a current rent roll available?
3. Of the tenants in possession of the mortgaged property, which of them does the lender wish to keep in place or evict?
4. What is the debt-service ratio? Does the mortgaged property carry itself?
5. Are there any prior encumbrances required to be kept in good standing? Are there any significant arrears of utility charges or taxes?
6. If the lender intends to take possession, does the lender have available to it the expertise necessary to operate the mortgaged property?
7. Does the lender have a property manager "waiting in the wings" to take over the mortgaged premises?
8. Alternatively, does the lender intend to appoint a receiver? Who is the proposed receiver?
9. Has the receiver been properly appointed and duly indemnified?
10. What is the timing involved? Must possession of the mortgaged property be taken immediately? When should possession be taken?

The answers to these questions will influence the lender's strategy and decision-making. For example, in certain circumstances, the lender may wish to have the borrower continue to occupy the premises as a tenant or licensee of the lender. Alternatively, a new tenant may be found for the mortgaged property. From a practical point of view, it is important for the lender to have the mortgaged premises occupied to avoid the inconvenience of supervising a vacant 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.