2018.06

Mortgage Enforcement: Renewed Appeal of the Foreclosure Remedy

By: Shane Greaves

When a borrower defaults under a mortgage in Ontario, the lender has three primary remedies available which involve a sale or transfer of the mortgaged property.

First, the lender may privately sell the mortgaged property to a third party in accordance with the mortgage’s Power of Sale provisions and the Ontario Mortgages Act. Second, the lender may sell the property after obtaining a court order in a Judicial Sale proceeding. The third primary remedy is Foreclosure, where the lender obtains title to the mortgaged property. Instead of selling the property to a third party, the lender itself becomes the registered owner and forecloses the interests of the borrower and any subsequent encumbrancers in the property.

In recent years, lenders have most often availed themselves of the Power of Sale remedy. The popularity of this remedy is a result of its numerous benefits, which include the following:

(i) Shorter Timelines: The private Power of Sale process can often be completely concluded within six months, especially in an active real estate market. Foreclosure and Judicial Sale, which involve court proceedings and attendances, typically take much longer.

(ii) Expense: In many cases, Power of Sale can be effected purely from the lawyer’s office, without the need for court attendances. Foreclosure or Judicial Sale regularly require expensive appearances in court.

(iii) Land Transfer Tax: A lender must pay land transfer tax when it becomes the registered owner of the property through the Foreclosure process. In the City of Toronto, this tax equals approximately 3% of the value of the property. In contrast, the lender is not responsible for any land transfer tax when it sells the property through Power of Sale (or Judicial Sale).

(iv) No possession:  A mortgagee-in-possession may become liable to third parties for environmental, lease and other property related obligations. A sale under Power of Sale generally allows a lender to avoid these consequences.

(v) Further Recourse: Where the proceeds of sale are not enough to fully satisfy the mortgage debt which include expenses related to the sale of the property, both the Power of Sale and Judicial Sale remedies allow the lender to sue the borrower and/or any guarantor to recover the deficit. On the other hand, a lender who chooses the Foreclosure remedy accepts the property as full satisfaction of the debt and cannot commence any proceedings for the shortfall.

Despite the foregoing, the Foreclosure remedy becomes more attractive for lenders in a real estate market where prices have fallen. Due to the drop in prices over the past year, the sale of a mortgaged property in the City of Toronto today may not produce sufficient proceeds to fully repay the outstanding mortgage debt. The borrower and/or guarantor may also not have sufficient other assets against which the lender can enforce a judgment for the shortfall. Therefore, if a lender  believes that the real estate’s value will rebound in the future, becoming the registered owner through Foreclosure may make more sense (rather than conducting a Power of Sale). The lender or its receiver may lease the property and wait until property values improve before then selling the property for a higher amount. In fact, the lender can potentially sell the property for an amount greater than the mortgage debt, and in that case, will not have to account to the borrower for the surplus.

In contrast, under Power of Sale, the surplus is paid to subsequent encumbrancers and/or the borrower. As a result, the lender has the duty to sell the property for fair value. A failure to do so can expose the lender to liability for improvident realization. Conversely, the lender is protected from these claims when it chooses the Foreclosure remedy, as it does not actually sell the property to a third party (at least not immediately). Accordingly, and provided that the lender can obtain sufficient rent to cover taxes, maintenance and insurance, a strategy of Foreclosure and lease can now be advantageous.

The Foreclosure remedy is therefore gaining popularity. Given its numerous benefits, however, Power of Sale will likely continue to be the remedy of choice for most lenders.

For more information or assistance with mortgage enforcement or real estate litigation, contact Shane Greaves by phone at (416) 368-0600 or by e-mail at sgreaves@businesslawyers.com.   

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