18 Nov Mortgage Enforcement: Revisiting the Foreclosure Process
During uncertain economic times, parties often turn their mind to protecting their investments and limiting their losses. If you are a mortgage lender faced with a borrower that has defaulted on a mortgage loan, that may mean determining how to sell the security pledged for the mortgage loan.
There are two options available to lenders in this scenario: (1) the power of sale process and (2) foreclosure. These are two distinct processes, with correspondingly different obligations, time periods, and court interventions. Depending on the state of the economy, the nature and location of the property, and the state of the real estate market, one option may be more favourable to a lender.
Power of Sale
A power of sale is largely a self-help remedy with less required intervention from the Court. When a property is sold under the power of sale, the proceeds of the sale are applied to the mortgage debt(s), and other encumbrances as required by the Mortgages Act. If there was equity in the property, the surplus would be returned to the borrower after any other encumbrances with an interest or claim to the property have been paid. However, if there is a deficiency, the borrower, and any guarantor of the debt, remain liable for that deficiency. Because the borrower has an interest in the outcome of the sale, specifically whether there is a surplus or a deficiency, the lender must provide an accounting and must take commercially reasonable steps to market and sell the property.
Foreclosure
When a property is sold by foreclosure, the lender takes title to the property in lieu of, or as full satisfaction of, the debt pursuant to an order for foreclosure. If there is equity in the property, the lender acquires that equity, but if the property has depreciated in value, the lender also absorbs that loss and cannot seek further recovery from the borrower. Furthermore, the lender is not required to account to the borrower, or any other encumbrancers, thereby excluding them from sharing in any of the surplus equity and relieving the lender of the obligation to take commercially reasonable steps to market and sell the property. For this reason, foreclosure is often challenged by those with an interest in the property.
A foreclosure may be appealing when there has been a downturn in the economy, and property values have decreased. If the lender sells under a power of sale, they crystalize their loss. However, if the lender is in a position to hold onto, manage and or develop the property in the foreseeable future, they may be able to recover their losses at a future date when property values begin to rise. Furthermore, if the value of the property has decreased, there will likely be less opposition from the borrower who will no longer be liable for the debt, and less opposition from other encumbrancers who may be in the same position regardless of whether the property is foreclosed or sold at a loss under the power of sale by the mortgage lender.
Although appealing, foreclosures have their disadvantages. Because their key advantage is the ability to retain all the equity, to the exclusion of others with an interest in the equity of redemption, foreclosures are often challenged, which causes delay and additional expenses. In a foreclosure action, the lender commences an action under Rule 64.03 of the Rules of Civil Procedure for an order for foreclosure, payment of the debt, and possession of the property. The Statement of Claim will name, as defendants, all persons with interests in the equity of redemption (i.e. borrower, subsequent encumbrancers, lien claimants, execution creditors, etc.) as their interest will be adversely affected by an order granting foreclosure.
If the defendant(s) do not defend the action, the lender will obtain an order for foreclosure. The property is then transferred to the lender pursuant to the order, and the lender takes the title as would any other purchaser, and like any other purchaser, the lender has to pay land transfer taxes.
If the defendant(s) want to defend the action and attempt to convert the foreclosure to a sale and attempt to access the equity in the property, the defendants can file a Request to Redeem or a Request for Sale. If a defendant files a Request to Redeem, the requesting party is opting to pay out the foreclosing lender the amount claimed as due and owing, ending the foreclosure process.
If a defendant opts to file a Request for Sale, the foreclosure action gets converted into a judicial sale. The judicial sale process is a sale process overseen by the Court. The Court will have to approve every step of the sale process, including but not limited to: the listing, listing price, commission to be paid on the sale, choice of agent, the date for offers etc. This can not only make the sale process much more expensive, but it can also delay the process significantly. Furthermore, the lender seeking to foreclose loses the one benefit of the foreclosure the opportunity to retain any equity available in the property.
In Ontario, the most common mortgage remedy used by lenders is the power of sale. It is possible that if the housing market begins to decline and lenders are faced with having to dispose of their security, they will be faced with the decision of whether to proceed by way of a power of sale or a foreclosure. Given how vastly different the two processes are, both with respect to the outcome and the reliance on Court assistance, it would be prudent to seek legal advice early on when faced with choosing an enforcement process.
If you have any questions, please feel to reach out to Leslie Fluxgold directly at lferreira@fijlaw.com or at 905 763 3770 x 210 for further information.
The material provided in this article is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.
Liliana Ferreira’s practice encompasses commercial and estate litigation. She advises individual and corporate clients on a range of legal issues such as employment and contract disputes, construction matters and debt recovery claims. Prior to joining FIJ Law LLP in 2013, Liliana focused her practice on estate litigation at a boutique firm and gained experience in will challenges, dependant support claims, power of attorney disputes and fiduciary issues. Her unique expertise allows her to take a balanced approach to litigation with a sharp focus on advocacy and dispute resolution while assisting her clients in making informed business decisions.