POWER OF SALE: A SIGN OF THE TIMES

Melissa VanBerkum¹

On May 10, 2024, The Globe and Mail reported that the Bank of Canada, in its 2024 Financial Stability Report²,warns of a steep jump in mortgage payments (the majority occurring in 2026), with the median monthly payment increasing by more than 60% for those with a variable rate mortgage.³ Mortgage Professionals Canada reported in its Housing and Mortgage Market Review (Ontario, January Q1, 2024),that high mortgage rates and a softening economy exerted upward pression on mortgage delinquencies in the last quarter of 2023.⁴ While Ontario remains below the national average, defaults are on the rise, with no expectation that these numbers will decrease through 2024.⁵

If mortgage repayment obligations cannot be met, mortgagors will default on their mortgages, leaving mortgagees to explore their remedies. I consider below the mortgagee’s power of sale option.

What is a mortgage?

Mortgages, in one form or another, have been recognized for hundreds of years. The earliest mortgages under English law were pledges of land, where a pledge (or gage) was obtained by the lender (gagee) acquiring possession of some object.⁶ A practice then developed whereby the fee simple estate in land was granted to the mortgagee that gave the mortgagor a right of re-entry upon full payment of the debt.⁷

Over time, there was some modification with the introduction of a charge, with rights that encumbered the borrower in favour of the lender, but without a transfer of the legal estate to the lender.⁸ Currently, in Ontario, mortgages and charges are treated equally. Legislation provides that parties to a charge are entitled to all of the legal rights and remedies in the same way as if the borrower has transferred the land by way of a mortgage.⁹

Most often, it is the fee simple estate in land that is mortgaged but other legal interests, such as leasehold interests, easements and even a mortgagee’s rights can be mortgaged. In this paper, I assume that the interest is the fee simple.

Equity of Redemption

Historically, if the mortgagor failed to make the repayment in the full amount owed or by the due date, the mortgagor’s “right to redeem” (the right to recover the mortgaged interest) was lost forever, regardless of how little remained owing or the length of the delay.¹⁰ The courts of equity determined that this was an unfair result; they realized that the rights of a mortgagee to prompt and full payment of the debt needed to be balanced against the mortgagor’s investment in the property. In response, the courts developed the legal notion of a mortgagor’s “equity of redemption” or the net value of a property after deducting the mortgage loan amount.

Default Remedies

When a mortgagor fails to make payment by the prescribed deadline, default occurs. There are five remedies available to a mortgagee upon default:

(i) an action against the mortgagor on its personal covenant;

(ii) possession;

(iii) appointment of a receiver;

(iv) foreclosure; or

(v) a sale of the property via power of sale.

The best remedies in terms of cost and speed are power of sale and foreclosure.

Power of Sale Process

Individual mortgages spell out the mortgagee’s remedies. In Ontario, power of sale is also expressly permitted by statute.¹¹ Power of Sale gives the mortgagee the right to sell the mortgaged interest and is the most common remedy used in Ontario. Generally, in the power of sale process, the mortgagor continues to hold the ownership interest until the property is sold. This means that the mortgagor has an opportunity to redeem the mortgage by either bringing the mortgage up to date or by paying it off entirely.

The Mortgages Act, RSO 1990, c. M.40 sets out the obligations regarding the power of sale process in Ontario. In summary, the steps that must be followed are as follows:

1. Once the mortgagor fails to make the required payments, the mortagee may issue and serve a Notice of Sale 15 days after the default has occurred.

2. The Notice of Sale must state the amount owing for principal, interest, taxes, insurance premiums, costs and other expenses.

3. The Notice of Sale must be served on the mortgagor, their spouse, anyone who appears on the parcel register and, if applicable, the Crown and any person who has provided written notice of the mortgagee that it has an interest in the property.

4.The property may not be listed for sale for 35 days following the Notice of Sale. During this “redemption period”, the homeowner can bring the mortgage up to date or pay it off.

5. If the mortgage debt remains, the mortgagee may sell the property upon the issuance of a court judgment and after obtaining a Writ of Possession that gives the mortgagee the right to evict the occupants, with the assistance of the Sherriff.

6. The sale proceeds are then used to pay all of the costs of the mortgagee.

Fair Market Value

Typically, where there is equity in a property, the mortgagor refinances the mortgage to make it current and prevent a forced sale. This protects the mortgagor’s equity in the property. However, where there is little equity because the outstanding principle is significant or the property’s value has declined well below its purchase price, and the mortgagor cannot make the mortgage current, the property will be sold via power of sale.

In a power of sale, the mortgagee has a fiduciary duty to sell the property at fair market value. If the property is sold for more than the total debt, the surplus must be paid to the mortgagor. This means that, if the lender makes a quick sale at a discount, the mortgagor can sue the lender for any loss in equity. If the property sale proceeds do not cover the debt owed, the lender may sue the mortgagor for the outstanding balance.

To satisfy its fiduciary duty, a lender will typically use the services of a real estate agent/broker to list the property to ensure that it is marketed widely. It will also obtain appraisals to demonstrate the fair market value of the property prior to sale.

Both of these actions will help the mortgagee defend itself against claims that it breached its duty and sold below the property’s fair market value.

In practice, properties sold under power of sale are often listed on an “as is” basis and/or do not allow inspections prior to purchase. Both of these red flags would be expected to have an impact on the purchase price. In a declining market where property values are receding rapidly, the number of properties for sale under power of sale proceedings will likely increase. If supply outstrips demand, property values will slip even further. In this scenario, an appraisal will have to account for market forces at time of sale that may be quite different from those that were in play years, or even months, earlier.

Since the mortgagee does not take title to the property under power of sale, properties sold via power of sale are considered sales under duress (i.e. no “willing seller”) and are not classic “good indication of value sales.” However, power of sale proceedings still tell the appraiser/valuator something about the market, particularly where the number of forced sales are increasing due, in part, to overall changes in the economy such as higher interest rates, unemployment, rising debt-toincome ratios, etc.

Even with a reduction in current interest rates later this year, the Bank of Canada is not expected to lower rates to prepandemic levels. It will be interesting to see how mortgagors and mortgagees respond when the next tranche of mortgages come up for renewal in 2025-2027.

1. This article does not constitute legal advice. Parties should rely retain their own independent legal counsel.

2. https://www.bankofcanada.ca/2024/05/financial-stability-report-2024/

3. Mark Rendell and Rachelle Younglai, Bank of Canada warns of steep jump in mortgage payments, The Globe and Mail, May 10, 2024

4. Mortgage Professionals Canada, Housing and Mortgage Market Review: Quarterly Report – January 20; https:// mortgageproscan.ca/news-publications/publications/housing-and-mortgage-market-review

5. Ibid.

6. Bruce Ziff, Principles of Property Law, 5th Ed. (Toronto: Thomson Reuters Canada Limited, 2010), p. 431

7. Ibid, p. 432

8. Ibid.

9. Land Registration Reform Act, RSO 1990, c. L.4, subs. 6(3)

10. Bruce Ziff, Principles of Property Law, 5th Ed. (Toronto: Thomson Reuters Canada Limited, 2010), p. 433

11. Mortgages Act, RSO 1990, c. M.40, s. 24