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The 411 on Foreclosures and Power of Sales

In Canada, there are two main ways a lender can recover a mortgage debt when a borrower defaults: Judicial sale or power of sale. Judicial sale is a sale conducted under the supervision and authority of the court, where a lender must apply to the court to get the court’s permission to sell the property. Power of sale allows a lender to sell property without the involvement of the court. The lender has the right to sell the property from the mortgage document and/or provincial legislation which authorizes power if sale in that province.

Power of sale is used as the lender’s primary recovery method in Newfoundland, New Brunswick, Prince Edward Island, and Ontario. Whereas, Judicial sale has been adopted as the primary debt recovery vehicle in British Columbia, Alberta, Saskatchewan, Manitoba, and Quebec. In Nova Scotia, the primary recovery process is called “Mortgage Foreclosure” or “Mortgage Foreclosure and Sale,” but is considered judicial, as the court is involved.

Judicial Sale vs. Power of Sale

The principal differences between power of sale and judicial sale are:

  1. The extent of court involvement. There is virtually no court involvement in the power of sale provinces, while in judicial sale provinces, the court is extensively involved: Ordering that the property be sold; Confirming the sale procedure after it occurs, and; Hearing any application for a deficiency judgment.
  2. The way in which the process is started. In power of sale provinces, sending a notice to the borrower and current owner of the property starts the process. In judicial sale provinces, a lawsuit against the borrower, and others who may be liable, starts the process.
  3. The way in which a deficiency judgment is sought. In power of sale provinces, a lender seeking a deficiency judgment must start an action against the borrower after the property has been sold. In judicial sale provinces, the deficiency judgment action is started as part of the main action, or suing, of the borrower.

 

Power of Sales in Ontario

Of the four provinces primarily practicing power of sale proceedings, only Ontario has accepted practice to list property for sale with a real estate broker. Lenders in Ontario may use power of sale or judicial sale procedures, but power of sale is used in 90%-99% of all foreclosures. It is preferred because it is usually speedier and lest costly than judicial sale.

Foreclosure proceedings in Ontario are quite speedy, as the proceedings are usually laid out in the mortgage documents. Power of sale was initially developed in Ontario by lenders who wanted a faster way to dispose of property and recover debt. As a result, they began to include power of sale provisions in mortgages that would allow them to dispose of property under the borrower’s default and without having to resort to the courts. Power of sale is now part of the Ontario Mortgages Act.

The Mortgages Act refers to two types of power of sale: Contractual and statutory. Contractual power of sale is when the mortgage documents have included power of sale provisions. Statutory power of sale is when the mortgage documents have not included power of sale provisions. While statutory power of sale is very rare, the lender can still exercise power of sale as long as the borrower has defaulted for three months or more.

Both types of power of sale are started by giving a notice to the borrower after 15 days of default. The notice must be given to anyone having an interest in the property, including subsequent encumbrancers, statutory lien holders, or people who have advised the lender in writing, that they have an interest in the property.

The notice is attached to the Mortgages Act, and is called a Notice of Sale Under Mortgage. It advised of the lender’s intention to exercise the power of sale, and includes details of the mortgage, such as:

  • The date the mortgage was made.
  • The parties to the mortgage and the property mortgaged.
  • The amounts owing.
  • A warning that if the amounts owing are not paid by a specified date, the lender will sell the property.

If the power of sale is contractual, the borrower has 35 days to pay, unless otherwise stated in the mortgage agreements. If the power of sale is statutory, the borrower has 45 days to pay. The lender cannot do anything further within this “redemption” period, but by paying the amounts owing, the borrower can redeem the mortgage.

Once the redemption period expires and the borrower has failed to correct the default, the lender can sell the property. Under power of sale, the property can be sold by auction, private contract, or tender. Usually the property is listed with a real estate agent and placed on the market for sale. To ensure that the property comes to the attention of a large segment of the market, guidelines have been set up, including; listing the property with a multiple listing service, obtaining appraisals, and ensuring the listing is for the usual period of such properties.

Once the property is sold and if there is any surplus, the lender must account to the borrower(s), and other subsequent encumbrancers. The Mortgage Act requires that the proceeds of the sale first be applied to the cost of conducting the sale, then to interest and cost owing under the mortgage, then to principal money owing under the mortgage, next to pay any amounts due to subsequent encumbrancers, and finally to pay tenants’ security deposits.

Source: Canadian Foreclosure Sales Inc.

Posted on Tuesday, March 27, 2007 at 02:33AM by Registered CommenterElaine | Comments3 Comments | References1 Reference

References (1)

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Reader Comments (3)

Very informative and well explained. Thanks! :)

http://www.knock-knock.ca
November 27, 2008 | Unregistered CommenterNikki
Can someone looking to buy a house save money on a power of sale? Or is it pretty much the same as a regular sale?
January 14, 2009 | Unregistered CommenterApricot
The article is very informative. Canada was not seriously affected by the economic downturn. <a href="http://www.mysafetravel.com/">Foreclosure homes in Canada</a>, is found increasing.
December 8, 2009 | Unregistered CommenterWilliam Alexzander

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