With interest rates and property values constantly shifting, Ontario's real estate market is experiencing an unprecedented increase in mortgage defaults. When a borrower defaults on their mortgage, lenders have several statutory remedies available to recover the money owed. One of the most common is a power of sale, as it is typically more cost-effective and efficient than a foreclosure.
In Ontario, the power of sale process is regulated under the Mortgages Act,R.S.O. 1990, c. M.40, which sets out important rights and obligations for lenders and borrowers.
A power of sale allows a lender (also referred to as the "mortgagee") to sell a property when the borrower (the "mortgagor") defaults on their mortgage. Mortgage default occurs when borrowers fail to comply with the terms of the loan, most often by missing payments. Unlike a foreclosure, which transfers ownership to the lender through the court, a power of sale allows the lender to sell the property directly.
The Step-by-Step Process
- Default
The power of sale process begins when a borrower misses payments. Under s. 32 of the Act, the default must last at least 15 days before a Notice of Sale (the "Notice") can be sent.
Under s. 24, if mortgage payments are overdue for 3 months, the lender may initiate a power of sale. Where the mortgage contains its own power of sale terms, s. 30 allows the terms written into the contract precedence over the statutory process.
- Notice of Sale
Under s. 31, the Notice must be sent to the borrower(s), any guarantors, subsequent mortgagees, and any other parties with an interest in the property. The Notice must state the amount owed and provide a warning that the property will be sold if the debt is not paid.
Under s. 39(1), if a mortgage expressly allows the lender to sell the property after a specific type of default, and that default has lasted at least 15 days or if there's been at least 3 months of default under a mortgage where the law grants that power, the lender may seek permission from the court to sell the property without giving notice to the borrower. In 1173928 Ontario Inc. v 1463096 Ontario Inc., 2018 ONCA 669, the Court of Appeal clarified that the statutory and contractual rights to a power of sale should be read together, specifically in commercial proceedings.
- Redemption Period or the Borrower's Equity of
Redemption
Borrowers have a redemption period of at least 35 days from the date of the Notice to pay the outstanding debt and costs.
Under s. 22, borrowers can request a statement of the outstanding debt. If the lender fails to provide it within 15 days, their enforcement rights are suspended until it is furnished.
- Preparation for Sale
Lenders are expected to exercise good faith when listing the property for sale. The lender has an obligation to appraise the property, market it to achieve fair market value, and maintain detailed records of all expenses (including legal costs).
- Sale of Property
The property must be listed on the multiple listing service ("MLS"). The proceeds of the sale must cover the lender's costs; the mortgage loan (including interest and penalties); and any other encumbrances on title. Any excess must be returned to the borrower.
Borrowers Protections
Ontario law ensures that even in default, borrowers retain key rights:
- Right to redeem: The ability to pay off the debt before the sale closes.
- Right to surplus funds: Any excess from the sale after debts and costs must be returned to the borrower.
- Fair sale requirement: Lenders must take reasonable steps to obtain fair market value.
The Financial Consumer Agency of Canada requires financial institutions to:
- Set clear criteria for mortgage relief measures
- Proactively contact borrowers at risk of default
- Encourage borrowers to reach out to them if they anticipate difficulty making payments
- Offer mortgage relief options suited to the borrower's circumstances
- Provide clear, timely information so borrowers can make informed decisions
The power of sale process creates a careful balance between lender efficiency and borrower protection. Whether you are a borrower facing default or a lender enforcing a mortgage, understanding the timelines, notice requirements, and legal obligations is key to navigating the process and avoiding costly disputes.
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.
