November 18th, 2013
When a mortgagor (borrower) defaults on mortgage payments, the mortgagee (lender) has several remedies at its disposal. The most frequently used remedies are a power of sale, an action for judicial sale, and an action for foreclosure. The following is a comparison of the three remedies, highlighting the benefits and disadvantages of each.
Following a default, a mortgagee may sell the mortgaged property pursuant to a private power of sale. This remedy allows a mortgagee to force a sale of the mortgaged property for the purpose of recovering the outstanding balance remaining on the mortgage. This remedy is typically contained within the mortgage, but where it is not, it can be found within the Land Registration Reform Act and the Mortgages Act.
When a mortgagee exercises its power of sale, it is able to convey the mortgaged property to a third party purchaser despite the owner's wishes or objection. The benefit of this remedy is that the process is quite simple. Upon default, a mortgagee must provide notice to a mortgagor that it intends to exercise its power of sale remedy. The mortgagee then only has to wait 35 days before it can properly convey the mortgaged property. Within this period, the mortgagor may stop the process only by providing for the entire balance remaining on the mortgage. The ease and expediency of the power of sale process is its main advantage over other available remedies.
The goal of the mortgagee using a power of sale is not to profit, but simply to recover the balance outstanding on the mortgage. Provided that the proceeds extinguish the mortgage, the defaulting mortgagor is actually entitled to the surplus proceeds. As a result, the mortgagee can be held liable to the mortgagor if the property is not sold at its fair market value. The common law is clear that when a mortgagee exercises its power of sale, it has a duty to the mortgagor to receive the highest value possible. As a result, some mortgagees are dissuaded from pursing a power of sale, instead choosing a remedy where liability can be avoided.
Similarly to a power of sale, a judicial sale allows the mortgagee to convey the mortgaged property to a third party purchaser despite the owner's wishes or objections. However, in a judicial sale, the court oversees the entire process. Consequently, the mortgagee cannot be held liable if the proceeds are only sufficient to pay off the outstanding balance on the mortgage. As a result, several mortgagees select this mechanism as it insulates them from future liability.
Countering the benefits though is the fact that a judicial sale is a lengthy process. It requires greater notice to the mortgagor, and several appearances before the court. As a result of the additional time and cost required, many mortgagees bypass the judicial sale remedy.
Another remedy available to mortgagees is an action for foreclosure. Unlike the other two remedies, when a mortgagee successfully forecloses a property, it receives a court order awarding it full possessory and legal title of the mortgaged property. As a result, the mortgagee is entitled to all the proceeds following a sale, meaning it has no duty to provide the surplus to the mortgagor. While the full extinguishment of the mortgagor's interest is advantageous, it can also operate against the mortgagee. Where a property cannot be sold for an amount sufficient enough to satisfy the outstanding mortgage, a mortgagee has no standing to bring a claim against the mortgagor for the difference. Conversely, in both a power of sale and judicial sale, a mortgagee may claim against a mortgagor for the deficiency following a sale. This additional risk requires mortgagees to carefully consider the market value of the property before deciding upon the foreclosure remedy.
The different advantages and disadvantages of the remedies require a mortgagee to always consider the facts of every situation before selecting an applicable remedy. Only then will it be clear as to what remedy should be implemented. Clearly though, a mortgagee has several tools at its disposal that, if used appropriately, will protect it against loss following a mortgagor's default.
Matthew Wilson is a real estate and land development lawyer at the Ontario law firm, Lerners LLP. See his professional biography for more information about Matthew and his work in the area of land development, or email him at email@example.com.
The content contained in this blog is intended to provide information about the subject matter and is not intended as legal advice. If you would like further information or advice please contact the author.