Power of Sale 101
When a borrower defaults on their mortgage, the lender (also known as the mortgagee or chargee) is usually quick to make movements that will return the cash back into their pocket, which can mean seizing and selling the property. However, the process is not so simple, and lenders need to follow an intricate series of steps while watching for any pitfalls along the way.
Before we get started, it’s important to note that power of sale and foreclosure, while sometimes used interchangeably, are two very different processes. In a foreclosure, the lender goes through a court process to take title on the home, and can then proceed to sell the property. If the sale earns more than the mortgage loan was worth, they are entitled to keep any profits. However, foreclosure can be more complicated and onerous, and while we do assist clients with foreclosure, this article will speak directly to power of sale.
How does a lender proceed with a power of sale? Do the borrowers have any opportunity to turn things around? What do mortgagees need to watch for when going through the power of sale process?
How does a power of sale work?
There are multiple ways that a borrower can violate the terms of a mortgage resulting in default. The most obvious, of course, is if the borrower doesn’t make their required monthly payments owed to the lender in accordance with the terms of the mortgage or any renewal or amendment agreements. There are; however, also other potential violations, such as failing to properly insure the property, using the property for illegal activity, failing to keep other mortgages in priority in good standing, or falling behind on property tax payments, among others.
As a best practice, in all cases, the mortgagee’s first step is to notify the borrower of the default and provide them with time to remedy the situation, although this courtesy is not entirely necessary as long as the lender follows the legislated requirements for notice and demand.
If the default has lasted longer than 15 days, the lender can begin enforcement proceedings, which includes filing a statement of claim and serving it on the borrower or delivering a Notice of Sale via registered and regular mail to anyone registered as a borrower on the mortgage who has an interest in the property and any subsequent encumbrancers such as (but not limited to) writ holders, companies with registered notice of security interests, other mortgagees who registered on title after the lender’s mortgage.
The Notice of Sale is required in any instance the property is being sold by the lender by way of power of sale. This is a formal requirement, and takes a prescribed form which a mortgage enforcement lender can assist with. Lenders then must wait a minimum of 37 days before taking any next steps. This is known as the redemption period. Within this time, the lender cannot take any steps to sell the property because the borrower has the power to either bring the mortgage into good standing (if it has not yet matured), or pay it off entirely.
In addition to the Notice of Sale, a lender may choose to file and serve a Statement of Claim which is the legal demand for either the repayment of the debt, or possession of the property or both. However, there are occasions when the borrower will be able to produce the funds needed or agree to give the lender possession voluntarily, and litigation is not necessary. While not common, we guide our clients through this scenario so that they can determine the appropriate next steps. .
If a Statement of Claim is needed, and the borrower does not file a Statement of Defence, the lender can then obtain a default judgment in their favour. This default judgment is what allows the lender to move ahead with a Writ of Possession. That allows the lender to:
Have the right to recover the property and proceed with sale; and,
Obtain a monetary (cash) judgment so the lender can collect more money later on, if they do not recover the entirety of the loan on the sale.
If there are not sufficient funds on the sale or the refinance, we guide our clients through their potential options for any further recovery. We also guide clients through what happens if the borrower does file a Defence, and the case moves ahead to more robust litigation proceedings. No matter what happens, we’ve got you covered!
How does a Writ of Possession work?
The Writ of Possession is the legal document that allows lenders to evict the homeowners and take the property back in order to proceed with a sale. Lenders must complete a two step process to obtain a Writ of Possession, which when received is addressed to the local county sheriff (yes, we still have those!) who then has the authority to evict the borrowers from the property.
Unlike what we all saw in cartoons as kids, the sheriff does not go into a property voice booming and guns blazing. Instead, they’ll usually give the owner an opportunity to move out of the property peacefully. If the owner does not comply, the sheriff can then make arrangements to have the owners removed from the home. The lenders can then proceed to sell the property on the market.
What happens when the property has tenants?
This situation may arise in a property that currently has tenants, and that can make things a bit trickier. Even landlord borrowers in default must comply with the Residential Tenancies Act, and the Sheriff cannot forcibly remove tenants just because there is a mortgage enforcement proceeding going on.
We guide our lender clients through this situation as well. There may be a possibility of reclaiming the property without removing or disrupting any of the tenants, and ensuring that you can recoup your debts while still staying compliant. You may even be able to collect rent from the tenants while moving through the process.
Selling the Property by Power of Sale
When a lender is selling a property that is being sold by power of sale, the property should be sold at fair market value. This generally means that at least two appraisals will be conducted by recognized appraisal companies such as AACI or CRA licenced appraisers to ensure the lender knows what the fair market value is and to sell within and around the appraised value to avoid any concerns regarding improvident (aka inappropriate) sales.
The home is also normally sold ‘as is,’ which softens or relinquishes the lender’s responsibility to complete upgrades or renovations that a standard seller may feel obligated to complete. Similarly, in a standard sale, a buyer may be able to ask questions about the history of the home, the history of appliances, any past incidents, for example, but they do not have this opportunity in these types of sales as the lender will not necessarily be able to collect the information and is not expected to find it out on their own or at all.
Language is inserted into the agreement of purchase and sale to clarify that it is sold as is, and the lender often waives any responsibility as to the condition of the property. Realtors assisting the lender who do not normally do sales by power of sale need to be entirely engaged in this process to ensure they don’t accidentally put the lender in a position they don’t need to be in or contradict the lenders special power of sale scheduled terms by adding their template/boilerplate conditions.
Final Thoughts
Power of sale proceedings may not be simple, but our job is to make it as easy as possible for our clients. We serve as your strategic guide, informing you of your options, rights, responsibilities, and risks at every step and explaining the possible impact of each decision that you make. Because it is so complicated and there are so many moving pieces, it’s important to have a knowledgeable guide as you go through the process. That’s why we’re here for you. Contact Us today to set up a consultation.