If a borrower falls behind on his mortgage payments and goes into default, the lender has the legal right to go after its interest in the property. This is why Ontario instituted the Ontario Mortgage Act to provide both borrowers and lenders with an established set of privileges available to secure their interests.
Lenders benefit from a fairly swift power of sale process in Ontario. The law was designed in part to help lenders get rid of foreclosed property and recover their funds more quickly. This is why you find power of sale provisions inside the mortgage documents, so that the sale process can begin without having to go through the court system.
The process can begin as soon as the borrower misses just one mortgage payment. Again, though, this is an option that lenders do not want to pursue unless they have to, so if you feel that you’re at risk of missing a payment, proactive communication is your best bet. No sooner than 15 days after that missed payment, the lender may give you a Notice of Sale. The lender may act without notifying the borrower, but only with permission from a court. This only happens when the lender diligently tries to reach the borrower and cannot, such as in the case of abandoned property.
You as the borrower would have a time period to redeem the property — typically 35 days to opt to bring the mortgage into good standing. However, if the mortgage has expired without renewal, the borrower has to pay the whole principal balance of the mortgage as well as any other costs. During the repayment period, the lender cannot take any other action. If the period goes without payment, then the lender files a Statement of Claim and Possession and takes over the property unless the borrower files a Statement of Defence within 20 days. After that, eviction and sale take place.
|1||Demand Letter||When mortgage is in arrears.||Not a requirement by the lender. The Power of Sale can commence|
once the mortgage is 15 day in arrears.
|2||Notice of Sale||15 days after missed payment.||A lender cannot issue a Notice of Sale on its own without a Judge’s approval. Notice must be provided to all parties with a vested interest in the property. (Original borrower, current owner, spouses, subsequent mortgage lenders, etc.). Registered Mail is considered the date served, & not the date it is received.|
|3||Redemption Period||35 days||Property owner must bring the mortgage to good standing, or pay the outstanding mortgage balance. Does not apply if the mortgage is a renewal state. If mortgage is paid into good standing, the mortgage is redeemed.|
|4||Possession of Property by the Lender||If the Redemption period expires…|
|i.||Statement of Claim||20 days to respond||Property owner must file a Statement of Claim defense with the court. If not filed, the lender obtains a ‘Writ of Possession’. Eviction arrangements are put into motion.|
|ii.||Property is listed||Property must be marketed. Specific Laws are in place on how the property is marketed. Must be listed on Canada’s multiple listing services, appraisals by accredited professionals, and marketed for a reasonable time.|
|iii.||Property is sold||Lender must payout the following in such order:|
1) All expenses involved in the sale. Realtor, legal, etc.
2) Pay all interest associated with POS
3) Pay the principal balance
4) Payment of rental deposits made by tenants (if applicable)
5) Balance to the borrower
Note 1: If there is a shortfall, the lender may sue the borrower.
Note 2: If there is default insurance for the lender, borrower is still liable to the insurance company
Alternatives for the Lender: Standard Foreclosure process. Lender obtains ownership and borrower has no interest. Rarely an option taken.
Alternatives for the Borrower: File for Consumer Proposal or Bankruptcy.
The Ontario Mortgage Act Includes Two Different Kinds Of Power Of Sale: Contractual And Statutory.
In about 99 percent of cases, lenders can use the Power of Sale method to dispense of properties that have delinquent mortgages. There are two types: statutory Power of Sale and contractual Power of Sale. If the lender uses the Ontario Mortgages Act to pursue a Power of Sale, it’s considered statutory. If the mortgage contract has conditions permitting the lender to sell the property that the borrower is using as collateral without using the court system to resolve the issue, then it’s considered a contractual Power of Sale. It is quite rare for a mortgage in Ontario not to have a Power of Sale provision in the paperwork. In short, the lender sells the property, recoups the value of the balance of the mortgage and any other costs, and then returns any proceeds remaining to the borrower.
Contractual power of sale refers to mortgage documents that contain the provisions for the power of sale. If those provisions are not in the paperwork, then statutory power of sale comes into effect. The statutory variety is quite rare, but as long as the default period is at least three months, the lender can still carry out power of sale.
In both cases, the power of sale process begins with a notice to the borrower once he has been in default for 15 days. Everyone who has an interest in the property (the borrower as well as any statutory lien holders, later encumbrancers, and anyone else who has given the lender written notice of interest in the property) must receive a copy of this notice.
The Mortgage Act refers to this notice as a Notice of Sale under Mortgage. Its purpose is to inform the interested parties that the lender intends to exercise the power of sale, and it must include this information:
- The date when the mortgage was issued
- The property mortgaged
- The amount owed
- The lender and the borrower
- The warning pertaining to the power of sale
In cases of contractual power of sale, the borrower has 35 days to satisfy the balance unless the mortgage agreements provide otherwise. If the power of sale is statutory, the time period is 45 days. During this time period, the lender is prohibited from taking any further action, and the borrower can pay back the defaulted amount and bring the loan back into good standing.
After the redemption period expires, the lender can then move to sell the property, by auction, private contract or tender. In most cases, the lender lists the property with a real estate agent, who places the property up for sale on MLS.
The law has several requirements to ensure that the availability of the property is widely known throughout the real estate market, including:
- Seeking and obtaining appraisals
- Listing property with MLS or a similar multiple listing service
- Maintaining the listing for the typical time frame for properties up for sale
If the sale yields more than the balance owed, the lender must credit that to the borrowers, assuming that all other lien holders have been satisfied. The proceeds of the sale must satisfy these interests in order, according to the Mortgage Act:
- The cost of conducting the sale
- Interest and fees owed under the mortgage
- Principal owed under the mortgage
- Amount due to subsequent encumbrancers
- Tenants’ security deposits (if applicable)
Please bear in mind that this article contains guidelines rather than professional legal advice. Be sure that you consult a real estate attorney for assistance with your individual situation.