Power of Sale
If you are unable to pay your mortgage, you could face a serious repercussion known as power of sale. Read on to find out more about the process in Ontario.
By Emily Southey | 9 minute read
In Ontario, when a borrower defaults on their mortgage payments for a specific period, mortgage lenders have two legal avenues available to them: power of sale or foreclosure. Both are types of forced sales but there are key differences between the two. Below we delve into the power of sale process in Ontario, as well as how foreclosure and power of sale differ.
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Power of Sale Process
The borrower defaults on mortgage payments
The power of sale process begins when a borrower defaults on their mortgage payments, effectively breaking the terms of their mortgage agreement. Typically, the borrower must default on more than one mortgage payment for the process to be initiated. Other defaults beyond not making your monthly mortgage payments can lead to a power of sale. These include covenant defaults such as using the property for an illegal purpose, failing to insure the property, intentionally damaging the property, or failing to pay real estate taxes. Mortgage lenders are legally required to provide written notice to a borrower when a covenant default occurs to allow them to remedy the problem. However, it’s important to note that mortgage lenders are not obligated to provide written notice to a borrower who has defaulted on their mortgage payments.
“The power of sale process begins when a borrower defaults on their mortgage payments, effectively breaking the terms of their mortgage agreement.”
The mortgage lender delivers a notice of sale
The next step in the power of sale process involves the mortgage lender delivering what is known as a Notice of Sale to the borrower. The lender must wait a minimum of 15 days after the default occurs to deliver a Notice of Sale Under Mortgage. Two other notices, detailed in the Bankruptcy Act and the Farm Debt Mediation Act, respectively, must also be issued. These two warning notices are typically delivered before the Notice of Sale Under Mortgage is delivered. The rules and regulations surrounding the Notice of Sale are outlined in the Mortgages Act. For example, included in the Mortgages Act is the provision that the notice must be sent by prepaid registered mail to every party listed as a mortgagor and guarantor in the mortgage agreement, as well as to all parties that have a vested interest in the mortgaged property. These other parties may include execution creditors, subsequent mortgagees, and any person with liens registered against the property. Once the Notice of Sale Under Mortgage has been sent, the mortgage lender must wait a minimum of 35 days (or 40 days if the property is owned by a married couple) until they can move on to the next step.
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The borrower succeeds or fails to pay off the mortgage debt
The third step in the power of sale process is known as the redemption period. It is the period when the borrower has one last chance to remedy the situation. This either means bringing their mortgage into good standing or paying off their entire mortgage debt, along with any applicable legal fees incurred by the mortgage lender during this process. The redemption period takes place after the borrower has received the Notice of Sale Under Mortgage, and it usually goes one of two ways. Either the borrower pays what they owe and the process is halted, or the borrower fails to make payment, and the mortgage lender issues a Statement of Claim for the debt owed and applies to take possession of the property.
The mortgage lender applies to take possession of the home
If the borrower is unable to make payment and get back into good standing with the mortgage lender, the power of sale process moves into stage four. During this stage, the mortgage lender formally applies to take possession of the mortgaged property. To do this, a Statement of Claim is issued and served. If the borrower does not file a Statement of Defence, the lender can then sign a default judgment. After the default judgment is signed, the mortgage lender is required to bring a court motion to obtain the court’s permission to issue a Writ of Possession. If the court issues the Writ of Possession, the mortgage lender then delivers it to the sheriff in the jurisdiction where the mortgaged property is located. From there, it is the sheriff’s job to evict the borrowers from the property, giving them the opportunity to move out of the home voluntarily. If they do not move out voluntarily, the sheriff will arrange for the removal of the borrowers.
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The mortgage lender evicts the homeowners and takes possession of the home
Once the borrowers have been removed from the mortgaged property — whether voluntarily or forcibly — the mortgage lender will begin the process of selling the home. In most cases, the lender will enlist the help of a certified REALTOR®, as well as two appraisers. Two licensed appraisers will appraise the property to protect the lender, and the property will be put up for sale at market value. Power of sale homes almost always come with special “as is” clauses meaning the property is being sold exactly as it is.
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The property is sold by the mortgage lender at fair market value
The sixth step in the power of sale process in Ontario is the selling of the property and the subsequent payments. Once the home has been sold to a buyer and the mortgage lender has received the money from the sale, the process is almost complete. The final step is to pay out the involved parties using the proceeds of the sale. Payments are made in a specific order. First, the expenses incurred by the mortgage lender to sell the property (REALTOR®’s commission, legal fees) are paid. Next, payment is made to the lender in the amount of their principal and interest. If any money is leftover at this stage, payment is made to the other parties involved in the mortgage, such as the subsequent mortgagees and execution creditors. Finally, if any money remains, it goes to the original borrower. Typically, the costs associated with conducting a power of sale are substantial and therefore the borrower can expect to receive little or no funds. To make matters worse, if the mortgage lender is unable to recoup the principal investment from the sale proceeds, they can file a Writ of Execution for the remaining sum.
Foreclosure vs. Power of Sale
Foreclosure and power of sale are terms often used synonymously. While they’re both types of forced sales, there are key distinctions between the two, namely in how the house is sold, as well as the rights and responsibilities of the borrowers.
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Foreclosure
In a foreclosure, the mortgage lender takes title to the property by going to civil court (the courts are heavily involved in the foreclosure process). When the lender takes title to the property, it means that the lender has complete legal ownership over the property and can do with it as they see fit, whether that means renting it out or selling it. The foreclosure process typically begins after several months of missed mortgage payments. Therefore, the entire process from start to finish can take a year or more. Further, since the mortgage lender comes to own the property in a foreclosure, they do not have the same responsibility to sell for the highest price. They also keep all proceeds of the sale for themselves.
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Power of sale
In contrast, a power of sale is a much quicker process that relies less on the courts. It is the most common forced sale process in Ontario and is much quicker than a foreclosure, typically totalling three months from start to finish. In a power of sale, the mortgage lender has a duty to sell the property at fair market value and any leftover proceeds from the sale are paid to the borrower.
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Is a power of sale better than a foreclosure?
The answer to this question depends on several factors, including the remaining amount of your mortgage and the current market value of your home. For example, if your home’s value has decreased significantly since you bought it, a foreclosure may be more advantageous as you will not be responsible for any outstanding debts after the sale. Alternatively, if the market value of your property is well above what it was when you bought it, then a power of sale might be more advantageous, as it allows you to earn money from the sale, even if it’s a minimal amount. Ultimately, there are advantages and disadvantages to both, so it’s difficult to determine if one is better than the other.
Frequently Asked Questions
What is the difference between power of sale and foreclosure?
Power of sale and foreclosure are both processes involving the forced sale of homes. Where power of sale is most popular in Ontario, Prince Edward Island, New Brunswick, and Newfoundland and Labrador, foreclosure is the favoured process in the rest of Canada, including Quebec and British Columbia. While the documents prepared in both are similar, there are key differences. Namely, power of sale is a relatively quick process often taking three months or less, whereas foreclosures are lengthy, with the process only beginning after three to six months of defaulted payments. Further, in a foreclosure, there is no opportunity for the borrower to receive any money. In a power of sale, there is a chance the borrower may receive funds from the sale of the property, though it is typically only a small amount. Finally, under power of sale, the borrower is liable and can be sued if the cost of debt remains following the sale (the mortgage lender can file a Writ of Execution with the sheriff in the borrower’s jurisdiction). In contrast, if a home is foreclosed on, the borrower is off the hook for any debt remaining.
Can you negotiate a power of sale?
Typically, buyers cannot negotiate a power of sale. Homes sold under power of sale often come with special “as is” clauses, meaning the buyer agrees to purchase the property exactly as it is, with no repairs or upgrades. Buyers must be aware when purchasing a property under power of sale that any repairs or renovations will be their responsibility.
How long does a power of sale take in Ontario?
The power of sale process takes roughly three months in Ontario. The Notice of Sale Under Mortgage is sent 15 days after the default occurs. From there, the borrower is given a 35- to 40-day redemption period, during which they have a chance to pay back the money owed. Mortgage lenders cannot move on with the next phase of the process (the Statement of Claim and Writ of Possession) until the redemption period has come to a close.
When can a mortgage lender start a power of sale in Ontario?
According to the Mortgages Act, a mortgage lender in Ontario has the right to sell the mortgaged property anytime after three months of the mortgage default. Power of sale time frames vary by province. For example, in New Brunswick and Newfoundland and Labrador, mortgage lenders only have to wait two weeks from the date of the default.
Emily Southey
Wahi Writer
