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MORTGAGE DEFAULT: Power of Sale or Foreclosure?

Although generally the real estate market in Ontario has been robust, the frenzied market of the past has caused an increase in mortgage defaults as a result of an overall weakened economy and a tighter lending market.  Many clients of Levy Zavet PC are both lenders (“mortgagees”) who make investments in mortgaged property and borrowers (“mortgagors”) who are making real estate investments.  When borrowers begin to default, both mortgagees and mortgagors seek advice and remedies in order to recover their money or to negotiate payment terms.

In Ontario, the two most common mortgage enforcement remedies are: the power of sale and the judicial sale which is also known as a foreclosure.  The term foreclosure is often used by Canadians as a result of its popular use in American vernacular; however, in Ontario the power of sale is the remedy of choice for a mortgagee.  Power of sale rights and procedures are governed by the Mortgages Act R.S.O. 1990 , case law, and are also set out in the standard charge terms attached to the mortgage.

The benefits of power of sale proceedings are the following: expedience, for example, the redemption periods whereby the defaulting mortgagor can repay the outstanding mortgage amounts to bring the mortgage into good standing is shorter because a foreclosure requires court proceedings.  Courts are often slow and lawyers acting for mortgagors can always plead for extensions of time.  Costs; a power of sale can be done in a lawyer’s office without the need of lengthy court attendances. The right to sue; the mortgagee has the right to sue the mortgagor for any shortfalls after the sale (for example difference in the sale price and the equity loaned and other expenses such as taxes, utilities and repair) whereas in a foreclosure, the mortgagee is deemed to have accepted the property in satisfaction of the debt and therefore is precluded from seeking further compensation.  Land transfer tax (“LTT”); LTT is not payable by the mortgagee in a power of sale because they do not take title to the property as they would pursuant to a court order for foreclosure.

While power of sale is the remedy of choice, there are some benefits of a foreclosure to consider.  For example, the mortgagee can sell the property without having to account for any further encumbrancers on title such as other lenders and creditors with secured interest on the property (subject of course to the court proceedings), whereas in a power of sale, the mortgagee must sell the property for fair market value and pay-off the subsequent encumbrancers with the surplus.  Although, as stated above, taking title to the property has its drawbacks such as paying LTT, taking title can be beneficial in a weak market because the mortgagee can hold onto the property and create better value by renting or redeveloping it and waiting for the next upturn in the market to sell it and maximize their return.  Other benefits of a foreclosure include the resolution of complicated issues by the court (if there are any) and the ability to combine foreclosure proceedings and court actions against the mortgagor and others.

The process for conducting either a power of sale or foreclosure is not simple and must be done carefully otherwise a defaulting mortgagor can challenge the sale.  In order to conduct either remedy, all procedures with respect to service, notices, and or time periods must be strictly adhered to. Defaulting on a mortgage is never a good situation for any of the parties involved including the mortgagee due to the stress, hassle and expense of enforcing their remedies.  Whether you are a mortgagee whose investment is suffering as a result of a defaulting mortgagor, or you are a defaulting mortgagor trying to make good on your debt, the lawyers of Levy Zavet PC can assist you in determining the right remedy and or course of action and have the knowledge and expertise to do it right.

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