Mortgage Remedies

by Howard Oldham

Default

There are a number of obligations on the part of the borrower in a mortgage arrangement. Most commonly, it is a failure to make timely payments on the mortgage that will cause the lender to take action.  If a borrower defaults under the mortgage, the lender basically has two option either to proceed by way of power of sale or foreclosure.  Under power of sale proceedings any excess funds after paying out the encumbrances on title are returned to the borrower.  Whereas with foreclosure, the lender becomes the owner of the property.  We rarely see foreclosure proceedings because the legal costs are much greater and it takes quite a long time.  In contract, power of sale proceedings are relatively easy to commence and can be done very quickly.

 

Power of Sale

Under the terms of the mortgage itself as a contract, as well as pursuant to the Mortgages Act, the lender has the ability to request the sale of the property in response to a default on the part of the borrower. This action on its own does not require Judicial intervention, or the oversight of the Courts. A lender may find itself in Court if the power of sale is contested or further relief is sought, such as taking possession of the property. A borrower may come into good standing by paying the amount owing.

 

Sale under Power of Sale

If the power to sell the property is exercised, there will be an accounting of the proceeds of sale and the borrower will usually have to pay the lender’s legal costs and other penalties before getting any equity that has accrued. The seller must make reasonable efforts to obtain fair market value for the property.

 

Foreclosure

If the lender wants to become the owner of the property, he or she may apply to the Court to seek that remedy. Often the borrower will contest foreclosure to ensure that there is an accounting for the equity that has built up, and a subsequent lender will contest it to maintain its rights. For private lenders, becoming the owner is likely only desirable if the value of the property is much greater than the amount owing or if the property can be expected to appreciate significantly. This is because the lender becomes the owner and gets to keep any equity in excess of the amount owing.  The lender should be prepared to hold onto the property for long enough to reap the benefits of the appreciation, and should anticipate the borrower challenging the foreclosure if there is significant equity built up.

 

Alternatives

There are other, less commonly used, options to consider: Judicial sale, action on the covenant, quit-claim, and/or attornment of rents.

 

 

Getting legal advice before taking action as a result of a default can assist a lender in obtaining the best possible outcome. A combination of the above approaches could prove most effective. Likewise, a borrower should get legal advice to ensure that the matter is dealt with in a fair manner.