Falling behind on mortgage payments is a stressful experience for any homeowner. In Ontario, when a borrower defaults on their mortgage, lenders have legal remedies to recover the money they are owed. The most common of these is the "power of sale," a legal process that allows a lender to force the sale of a property.
While it may sound similar, a power of sale is fundamentally different from a foreclosure. Understanding this distinction, along with the detailed steps and timelines involved, is crucial for both borrowers and potential buyers navigating Ontario's real estate market.
Power of sale vs. foreclosure: What's the difference?
The primary difference between a power of sale and a foreclosure in Ontario lies in the property's ownership.
Power of Sale: The borrower retains ownership of the property throughout the sale process. The lender acts as a vendor to sell the property and collect the outstanding debt. Once the sale is finalized, any surplus funds—after the mortgage debt, all legal fees, and other costs are paid—are returned to the former homeowner.
Foreclosure: In a foreclosure, which is a much rarer and longer court process, the lender then takes legal ownership of the property outright. This means the lender keeps all the profits from the sale, and the homeowner loses all rights to any equity in the property.
For lenders, the power of sale is the preferred option because it is generally faster and less expensive to execute.
The power of sale process in Ontario:
A step-by-step timeline
The power of sale process is governed by Ontario's Mortgages Act and must follow a strict, multi-step procedure.
Step 1: Mortgage default
The process begins when a borrower defaults on the mortgage agreement. While the most common cause is missed payments, a default can also occur from other breaches, such as failing to pay property taxes or maintain property insurance. The lender can take action 15 days after the default.
Step 2: Notice of Sale under Mortgage
After at least 15 days have passed since the default, the lender serves a legal document called a "Notice of Sale under Mortgage". This formal notice is sent to the borrower, any guarantors, and all other parties with an interest in the property, such as other mortgage holders or lien claimants. The notice outlines the amount of arrears and warns that the property will be sold if the debt is not paid.
Step 3: Redemption period
Following the delivery of the notice, a redemption period of at least 35 days (or 40 days for a property occupied by a married couple) begins. During this time, the borrower has the legal right to "redeem" the property by paying the full amount of the mortgage arrears, along with all legal and administrative costs incurred by the lender. Bringing the mortgage back into good standing effectively stops the power of sale process.
Step 4: Statement of Claim and Writ of Possession
If the borrower fails to remedy the default during the redemption period, the lender can issue a Statement of Claim for the money owed and apply to the court for a Writ of Possession. The Writ is a court order that gives the lender the right to take possession of the property and evict the occupants. This is a crucial turning point, as it marks the end of the borrower's right to redeem the property by simply paying the arrears.
Step 5: Sale of the property
Once possession is secured, the lender hires a real estate agent to sell the property on the open market. The lender has a legal duty to act in "good faith" and take reasonable steps to obtain fair market value for the property. This usually involves getting professional appraisals and listing the property on the Multiple Listing Service (MLS).
Step 6: Distribution of proceeds
Upon the sale's closing, the proceeds are distributed in a specific legal order.
First: Real estate commissions, legal fees, and other selling expenses are paid.
Next: The outstanding principal, interest, and any other amounts owed to the foreclosing lender are settled.
Then, any subsequent mortgagees or lien claimants are paid in order of their registration.
Finally, if any money remains, the surplus is paid to the former homeowner.
If the sale does not generate enough funds to cover the debt and costs, the lender can pursue the borrower for the deficiency.
Rights and precautions for borrowers and buyers
Both borrowers and potential buyers involved in a power of sale transaction should proceed with caution and seek legal advice.
For borrowers:
Act quickly: Responding immediately upon receiving a Notice of Sale is critical. The redemption period is your best opportunity to stop the process.
Negotiate: Speak with your lender to see if a repayment plan or other arrangement can be made.
Seek legal counsel: A real estate lawyer can explain your rights, negotiate with the lender, and challenge the sale if the lender fails to follow the proper legal procedures.
For buyers:
No warranties: Power of sale properties are typically sold "as-is." This means the lender makes no guarantees about the property's condition, leaving the buyer responsible for any defects.
Higher risk: There is always a risk that the original homeowner could challenge the sale in court, potentially causing delays or complications.
Title insurance: Given the potential risks, title insurance is an especially prudent investment for buyers of power of sale properties.
Conclusion
The power of sale is a legal remedy with severe consequences for a defaulting homeowner but offers lenders an efficient path to recovery. For all parties involved, understanding the strict timelines, legal requirements, and associated risks is paramount. Consulting with a qualified Ontario real estate lawyer is the most effective way to navigate this complex process, protect your rights, and secure the best possible outcome.