Power of Sale
When a homeowner is in default with their mortgage payments, a lender can rely upon a power of sale provision in their standard charge document to lease or sell the property on default. If there is no provision in the charging document, the lender may rely on the Mortgages Act which authorizes Power of Sale.
Power of Sale is the remedy used in 90+% of cases of mortgage default in OntarioProcedure:15 days following default, mortgagee delivers a written “Notice of Sale” to all parties having an interest in the landMortgagor then has 35 days to pay all defaulted amounts (known as redemption) and stop the process –mortgagee cannot do anything for 35 daysIf he or she fails to do so, the mortgagee can then exercise Power of Sale rights
Steps of a Power of Sale
Notice of Sale
A homeowner, spouse, and encumbrancers after the lender may be served with a Notice of Sale after 15 days of default. The mortgagor is provided a minimum of 37 days of redemption period to pay off the principal and interest amount owing. During the notice period, the lender cannot negotiate or accept any payment, otherwise, the Notice becomes void.
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.
Statement of Claim
Once the notice period expires and payment is not received, the lender may issue a Statement of Claim with the Superior Court of Justice to take possession of the property. However, Statement of Claim may be served in conjunction with the Notice of Sale.
Statement of Defence
Once the Statement of Claim is issued, the borrower is provided a minimum of 20 days to file a Statement of Defence with the Court. It is important to note that the lender may provide an extension to the borrower to file a Statement of Defence.
Writ of Possession
If a Statement of Defence has not been made by the borrower the lender can note the defendant in default, then file a motion to get an order for a writ of possession. The writ of possession is then provided to the Sherriff’s office in order to issue an eviction notice.
If the property is listed for sale, the lender has an obligation to the mortgagor to conduct an appraisal of the property and list the property at true market value through a brokerage. However, the property is sold in “As Is” condition.
Mortgagor’s Right of RedemptionThis is a risk unique to the marketing of the Power of Sale properties.Until closing the mortgagor has the right to redeem (pay off) the mortgage and take back the property... in which case the listing or sale is abandoned and the property is removed from the market.It doesn’t happen often, but it’s essential to inform prospective purchasers of POS listings of this possibility, so as to avoid an unpleasant situation in the event the mortgagor does redeem.
Based on the Ontario Court of Appeal decision in Logozzo v Toronto-Dominion Bank (1999), the borrower cannot negotiate or pay off the arrears once the lender has entered an unconditional Agreement of Purchase and Sale with a third party. However, it is important to note that if an Agreement of Purchase and Sale contains a redemption clause, the lender may terminate the transaction upon receipt of redemption funds from the borrower.
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