Lenders’ Remedies When a Borrower Defaults on a Mortgage in Ontario
When a borrower defaults on a mortgage, the lender is entitled to several remedies to reclaim the debt owed by the borrower. The lender can exercise a foreclosure of the mortgaged property, the lender can have the courts oversee a judicial sale of the mortgaged property, or the lender can execute a power of sale. In addition to non-payment of the mortgage or failing to pay a mortgage back by the end of the mortgage term, there may be other instances that cause the borrower to be in default of the mortgage. For example, many mortgages include a clause to the effect that if the fire insurance on the property lapses, the mortgage will be deemed in default. Similarly, some mortgages set out that failure to pay property taxes in time will result in default of the mortgage. It is important that the borrower carefully reviews the mortgage terms with his solicitor to ensure he is aware of instances that would lead to a default under the terms of the mortgage.
In a foreclosure, the lender takes possession of the mortgaged property from the borrower in default. A foreclosure may be an attractive remedy for a lender if the real estate market is down and the sale of the property would not be sufficient to pay off the mortgage debt. It is important to note that if a lender obtains a final order of foreclosure, they agree to take possession of the mortgaged property in full satisfaction of the debt owed by the borrower.
Another remedy available to lenders when a borrower defaults on the mortgage is a judicial sale. In a judicial sale, the lender sells the mortgaged property to pay off the debt with the assistance and oversight of the courts. Every step of a judicial sale is approved by the courts, including the terms of the sale and the sale price of the property. A judicial sale can provide the lender with reassurance that the borrower will not have a claim for the improper sale of the mortgaged property.
POWER OF SALE
The final remedy available to lenders when a borrower defaults on the mortgage is a power of sale. A power of sale is the most common remedy taken by lenders in Ontario, as it may be the quickest and least expensive of the three remedies. In a power of sale, the lender takes possession of the mortgaged property and sells it to pay off the mortgage debt owed by the borrower. In a power of sale, excess funds from the sale of the property after repaying the lender and other encumbrancers will be paid to the borrower. If the proceeds of the sale do not satisfy the mortgage debt, then the lender can still sue the borrower for the remaining debt.
STEPS TO A POWER OF SALE
STEP 1: SERVING A DEMAND LETTER (OPTIONAL)
After the borrower defaults on the mortgage, the lender may serve the borrower with a demand letter. The demand letter will set out the balance required to bring the mortgage into good standing including accumulated interest and monthly payments, any accrued legal fees or disbursements, and the deadline for payment. The Mortgages Act prohibits a lender from commencing any further proceedings against the borrower prior to the deadline listed in the demand letter.
STEP 2: ISSUANCE OF A NOTICE OF SALE
If no demand letter was served, the lender must wait 15 days after the borrower has been placed in default before issuing a notice of sale to the borrower. It is important to note, a notice of sale may have to be served on various parties that have an interest in the mortgaged property, including, but not limited to guarantors, spouses, subsequent mortgagees, and tenants leasing the mortgaged property. The notice of sale will typically set out that the borrower is in default, the balance owed to place the mortgage in good standing, and the deadline to pay the balance owed. After the notice of sale has been personally served to the borrower, the borrower will have a 35-day redemption period to pay the outstanding debt to place the mortgage in good standing.
STEP 3: SERVING THE STATEMENT OF CLAIM
After the 35-day redemption period has expired, the lender can issue a statement of claim requesting, among other things, the outstanding debt and possession of the mortgaged property. If the borrower does not file a statement of defense within 20 days of being served the statement of claim, the lender can bring forth a motion for default judgment.
STEP 4: OBTAINING WRIT OF POSSESSION
If the lender has a judgment issued in their favour, they will be able to bring a motion to obtain a writ of possession for the mortgaged property. The writ of possession will enable the lender to take possession of the mortgaged property. Upon obtaining the writ of possession, the lender can evict any occupants with the assistance of the sheriff and sell the property to pay the debt owed by the borrower.
STEP 5: CLOSING THE SALE OF THE PROPERTY
Once the lender has actual possession of the property, they will likely place the property up for sale immediately. Once a buyer has been found, the lender will enter into a binding agreement of purchase and sale with the potential buyer. It is important to note that an agreement of purchase and sale entered into in a power of sale should include specific clauses and conditions to adequately protect the lender selling the property. For example, a condition should be added to the effect that the buyer acknowledges that the transaction is taking place under a power of sale and that the defaulting borrower may redeem the mortgage at any time prior to closing, ultimately leading to the termination of the transaction. This will protect the lender in the event the borrower comes up with enough funds to pay the mortgage back in full prior to closing.
Under a power of sale, lenders have a duty to sell the property at a fair market value, which can be calculated based on an appraisal. To show that the property was sold at fair market value, it may be necessary to acquire two separate appraisals. The lender must be ready to demonstrate that the property was sold at fair market value. Once the transaction has been completed, the lender must attend to the payment of outstanding encumbrances in accordance with the priority of the security interests. Any surplus must be paid back to the borrower.
If you are a lender looking to enforce the terms of a mortgage, contact us to set up a consultation. Our real estate law team has the experience and knowledge to assist you throughout every step of the mortgage enforcement process.
The information contained in this article is not to be construed as legal advice. The content is drafted and published only for the purpose of providing the public with general information regarding various real estate and business law topics. For legal advice, please contact us.
About the Author:
Shahriar Jahanshahi is the founder and principal lawyer at Jahanshahi Law Firm with a practice focus on representing business star-ups and investors in the province of Ontario. For further information about Shahriar Jahanshahi, click here.