The power of sale

In Ontario, nothing can cause a homeowner more grief than receiving a notice from his mortgagee that it is exercising its right under the "power of sale" provision in the mortgage deed.

There is a lot of this going on, and with massive unemployment it will get worse. Aside from shyster lenders and others who have no patience with delinquent borrowers, here is what you may expect from conventional mortgagees such as banks and trust companies when your mortgage is in arrears.

You will receive one or two letters from your lender demanding that arrears be brought up to date. If you ignore them, you will receive an initial letter from the lender's solicitor, reminding you about your overdue payments, along with a demand for payment plus a fee for his services in writing the letter.

Ignore this and you get another letter from the same solicitor demanding more money for his services, plus mortgage arrears, and a warning about the lender selling your home to satisfy the debt.

Ignore this and you will receive a notice under a power of sale, which will say that the entire amount of the mortgage principal plus interest arrears, plus a whopping legal fee must be paid by a date a couple of days beyond 35 days of receipt of the registered notice.

You will receive it, and so will your spouse and any party holding judgment executions against you. It won't do any good to refuse the registered notice, because the law says that when it was placed in the hands of the post office it was "delivered," whether you accepted it or not.

Your initial reaction will be that if you can't pay the arrears, how do they expect you to pay the whole thing? What the notice doesn't say is that if the mortgage term has not reached an end, usually you don't have to.

But you must make the late payments, and pay the lawyer's charges, which will be added to your mortgage debt.

When you receive the notice, do not delay or procrastinate in doing something about it. If you ignore it, and the time limit expires, you will receive a notice to vacate your home within a few days; if you ignore this, you will be evicted by the sheriff. And your home will be sold.

It will not be given away as distress merchandise, but on the other hand your mortgagee will be under no obligation to wait for a top market price.

Such short notices will provide extreme hardships because, even if you have a chance to immediately rent a house, you will have to put up the first and last month's rent which will probably be at least two thousand dollars. Even an apartment means laying out about one thousand.

Then you will have moving expenses to pay, plus all the disruptions of moving on short notice. And it will be short, because the lender is not in any mood to do you any favors at this stage of the game.

If you make part payment to a bank branch thinking that this will delay the fatal day by causing the lender to go around again, don't count on it. You will receive a letter acknowledging the payment, but subject to the lender's rights under the power of sale.

Other than raising money for your arrears, the only recourse you have is to sell your home. And this is where you especially need the broad shoulders of good lawyer to intercede on your behalf.

Your home could be put on the market and sold before the power of sale notice is received, but have your lawyer call the lender and let it know what you are doing. This will show a bit of good faith, and you will probably receive a sympathetic hearing at this point.

If it is sold during the term of the sale notice, you will still have to bring the arrears up to date within the time limit. If the sale is a good, solid one with no conditions, your lawyer is a good man to look to for interim financing. He'll get the advanced money back out of the proceeds of the sale.

The Lender's Responsibilities

The lender (or mortgagee) who has paved the way to sell a house under his power of sale has certain responsibilities which should not be taken lightly.

He properly serves the borrower (or mortgagor) with his notice, which the borrower does nothing about. Then the lender has the homeowner evicted, leaving the lender with an empty house on his hands.

At this point, some lenders undoubtedly are of the opinion they can then sell the property for any price as long as it covers the mortgage debt and legal fees.

Fortunately, we have courts that take a dim view of such behavior and have gone so far as to render sales null and void made under such circumstances.

Large conventional lenders normally take the safe route and do it properly, ensuring that the borrower who is losing his property at least gets a fair shake out of his misfortune. But not always, it seems.

One bank, as lender and mortgagee, had a sale criticized and was penalized by a court because the property was sold too cheaply. Here is what happened:

The bank sold a property under power of sale for $45,000. The court found the value of the property was about $65,000 and decided it had been sold too cheaply.

The bank was held responsible for selling in a negligent and careless fashion and had to compensate the former owner of the property for this.

It was observed that the bank didn't put forth enough effort in the sale and that the property should have received wide exposure by being placed on multiple-listing, a service provided by a real estate board.

While judges have on more than one occasion said a lender is not a trustee in the power of sale, and can give preference to its own interests, they have also said the lender must act in good faith and take reasonable precaution in obtaining the true market value of the property at the time it wishes to sell it.

One court stated that the prime duty of such a lender is to act bona fide in exercising the power of sale. It went on to list further duties of the lender:

• To try to realize the fair value of the property.
• To deduct only reasonable expenses of sale from the proceeds.
• To consider the interests of the borrower as well as the lender's own interests.
• Not to conduct the sale in bad faith.

It would therefore be prudent for a lender to first have the property properly appraised.The cost of this, of course, would come off the top in the accounting to the borrower.

Next, have the property listed on a multiple-listing service, to give it wide exposure.

These two basic steps would show good faith to all and the lender could not be criticized for attempting to take advantage of a hapless borrower by sacrificing the property in order to gain his own ends quickly.

The broker listing the property should certainly have his For Sale sign on the front lawn, and the lender should ensure the broker earns his money by doing a bit of advertising also.

A major problem in obtaining a reasonable market price is that many people think power of sale means nothing but bargains, and they make lowball offers.

A responsible lender will not be impressed by such people, and with reasonable effort on the part of his broker, a decent market price will be realized.

The one who lost the property receives what's left after everything is paid off, so it would be in his own best interests to ask his lawyer to do what he can to ensure that he is getting treated fairly.

Back To Top