A power of sale is the most common mortgage remedy used by mortgagees of land in Ontario. When a borrower fails to uphold the terms of the mortgage a power of sale can be used to recover the lender’s principal, interest and expenses. Like many legal processes, the lender must follow a strict process in order to follow through with the eviction of the mortgagor and the eventual sale of the property.
Step 1: The Borrower Defaults on the Mortgage
The power of sale process begins after the borrower breaks the terms of the mortgage agreement. Typically, the borrower has failed to make one or more mortgage payments. Other defaults include the breach of a covenant in the mortgage: failure to insure the property, pay realty taxes, purposefully damaging the property, or using the property for an illegal use or activity. In the case of a breach of covenant the lender must contact the borrower in writing to notify them that they are in default of the mortgage terms and give them an opportunity to remedy the default. In the case of a failure to make mortgage payments this is not a requirement.
Step 2: The Lender Delivers a Notice of Sale and Related Notices
The lender must wait at least 15 days after the default to deliver a Notice of Sale Under Mortgage. There is also a requirement to give notice under the Bankruptcy Act and the Farm Debt Mediation Act, the latter two notices being mailed to the mortgagor in advance of delivery of the Notice of Sale.
The content of the Notice of Sale and to whom it must be mailed is governed by provisions of the Mortgages Act. It is mailed by prepaid registered mail to every party shown as a mortgagor and guarantor in the mortgage, as well as to all other parties who have an interest in the mortgaged property. These would include, subsequent mortgagees, any persons with liens registered against the property, and execution creditors. After the Notice of Sale is mailed, the lender must wait 35 days (or 40 days if the property is occupied by a married couple) before taking any further steps.
Step 3: The Borrower is Given Time to Pay off the Mortgage Debt
The waiting period after the Notice of Sale is delivered is referred to as the redemption period, during which the borrower must either bring the mortgage into good standing if it is not due or pay off the entire mortgage debt including legal fees incurred by the lender to enforce his rights.
If the mortgagor does not pay what is owed prior to the expiry of the redemption period, the lender is able to issue a Statement of Claim for the collection of the Debt owed and for possession of the property. The eviction of the mortgagor and others living at the property the lender can follow the approved practices which will allow him to list the property for sale on MLS and sell it.
Step 4: The Lender Applies to Take Possession of the Property
After the Statement of Claim is issued and served if the mortgagor does not file a Statement of Defence, the lender can sign default judgment. After signing default judgment the lender must then bring a court motion to ask the court for leave to allow for the issuance of a Writ of Possession. Once the Writ of Possession is issued by the court office the lender delivers it to the sheriff of the jurisdiction in which the mortgaged property is located. The sheriff schedules a date to evict the mortgagors (often the homeowner and their family) and gives them an opportunity to move out of the house. If they do not move out voluntarily, the sheriff will attend and arrange for the removal of the occupants.
Step 5: The Lender Evicts the Homeowners and Takes Possession of the Property
Once the homeowners are evicted the lender will proceed to sell the home, typically using a licensed real estate agent. To protect the lender, two appraisals of the property are secured as the lender must ensure that he sells the property for market value. Special clauses are inserted into the offer that clearly state that the property is being sold on an “as is” basis.
Step 6: The Property is Sold and the Proceeds from the Sale are Used to Pay Off Debts
When the sale is completed and the money is received, the proceeds of the sale are paid out in the following order:
Often, the costs associated with conducting the power of sale process are such that the homeowner will receive little to no proceeds from the sale of the property. In addition, if the mortgage lender is unable to fully recover their entire investment principal, they can file a Writ of Execution for the remaining sum owed with the local sheriff.
Important Legal Notice
One must always remember that the above discussion about the Power of Sale process is for information purposes only and is not meant to be an exhaustive discussion of the entire process that is available to a mortgage lender in the face of default of the mortgagor. Any lender who is experiencing a mortgage default should seek legal advice as to how they should proceed. In addition, the borrower has rights in the face of a power of sale and should consult a lawyer when they receive a Notice of Sale Under Mortgage.