It is very common for home buyers to take out mortgage loans to pay for the purchase of their homes. They are obviously expected to make regular payments on the loan towards its repayment. However, a sudden downturn in the financial situation might force a homeowner to miss these payments, forcing the mortgage lender to initiate recovery of the loan, either through a power of sale or a foreclosure. In either case, they will need to consult a civil litigation lawyer to figure out their options.
What is involved in a power of sale?
Power of sale, as the name indicates, gives the mortgage lender the power to force the sale of the property to recover the money borrowed. There is no need for the lender to go to court to initiate this process.
What are the steps involved in a power of sale?
Payment default or breach of terms:
The process is triggered when the homeowner defaults on the payment at least once or twice. In some cases, other breaches of the covenant, such as failures to pay municipal taxes or to maintain insurance on the property, can also trigger such an action. It is important for the borrower to know their obligations under the mortgage covenant to avoid mortgage enforcement. In all cases, the lender must give enough time to the borrower to remedy the situation.
Notice of sale:
After the default, the lender is required to wait for 15 days before issuing the notice of sale. Once the notice of sale is served to the borrower, the lender must wait for a further 35 days. This is called the redemption period, which allows the borrower time to cure the default or redeem the mortgage. The waiting period is 40 days if a married couple is occupying the house.
Statement of claim (not mandatory):
A statement of claim is the statement filed by the lender with the court, mentioning the amount owed to him and requesting the right to take legal action if the dues are not cleared through the sale. This is done as a precautionary measure if the lender is not sure about recovering the full amount and is generally not a prerequisite for the lender to take possession of the property.
Sale after the redemption period:
Once the property is listed for sale, the lender must sell it to the party at a commercially reasonable price. This does not mean the Lender must wait for the best price possible, but the property cannot be sold below market value. If the property is sold below the market rate, the borrower has the right to sue the lender to challenge the sale.
Surplus amount and final settlement:
The remainder of the loan amount is recovered from the proceeds of the sale. After the costs involved in the legal proceedings of the power of sale are also deducted from the final proceeds, the surplus amount will be transferred to the borrower.
Legal action, if the sale did not result in a full recovery:
In some cases, the proceeds from the sale might not cover the money owed to the lender. If there is a deficiency, and the lender has already obtained judgment, the lender can continue to enforce the judgment against other properties and income of the debtor. If the lender has not obtained judgment, they have the right to claim judgment for the deficiency amount.
How is the money settled?
The proceeds of sale must be paid on a priority basis:
- If there are any mortgages or encumbrances that were secured against the Property prior to the lender’s mortgage, these claims must be paid first.
- Expenses incurred by the lender for the sale, like the agent’s fee, legal fees, and all the costs associated with the sale, are settled next.
- This is followed by the principal and interest and any other payments the borrower owes to the lender.
- If there are any other claims secured against the property after the lender’s mortgage, these claims are to be settled next.
- After this, the remainder of the funds is paid to the borrower as a final settlement.
What are the rights of the homeowner in a power of sale?
Notice of sale:
The borrower is entitled to receive the notice of sale clearly mentioning the default, whether it is payment or a breach of terms, and the redemption period in which the borrower can remedy the default.
Redemption period:
The borrower has the right to a redemption period of a minimum of 35 days starting from the date of notice to make the pending payments or remedy the breach of the mortgage terms.
Surplus funds:
If there are any surplus funds after deducting the dues, agent fees, and other debts, the borrower is entitled to this amount.
Legal representation:
The borrower is entitled to obtain legal representation from a civil litigation lawyer for advice and take legal action, if necessary.
Challenge the sale:
If the borrower is convinced that the lender is selling the property below the market price, he has the right to challenge the sale through his lawyer.
What is a foreclosure?
Foreclosure is the legal process that transfers the title ownership of a property to the lender. This is done through courts and therefore takes longer than a power of sale. While a power of sale may be completed within 6 months, a foreclosure typically takes one year or more to see completion.
What are the steps involved in a foreclosure?
Borrower defaulting on the mortgage terms:
This can be the failure to make the mortgage payments or property taxes or any other breach of the mortgage terms.
The lender sends a demand notice:
The lender, through the demand letter, will give the borrower a set time to remedy the default.
Statement of Claim for the property is filed with the court:
If the borrower fails to remedy the default, the lender submits a Statement of Claim with the court for the foreclosure.
The borrower is given a chance to respond with a statement of defence:
The borrower has 20 days to respond to the Statement of Claim with a Statement of Defence, in which they can raise a challenge to the default or the lender’s right to foreclosure. If no defence is filed within 20 days, the lender can request Judgment from the court.
Redemption period:
After judgment, Ontario law provides a ‘redemption period’, typically six months, during which the borrower can repay the debt and reclaim the property.
Foreclosure order:
Once the redemption period passes, the court will issue the foreclosure order transferring the full ownership of the property to the lender. There is no requirement on the lender to sell the property or transfer the surplus amount to the borrower.
What is the difference between power of sale and foreclosure?
The main differences between the two options are:
Court Involvement:
Power of sale can be initiated without court intervention, while foreclosure requires a court order.
Ownership of the property:
Power of sale only gives the lender the power to sell the property to recover the amount they are owed. The ownership is never transferred to the lender at any point. In a foreclosure, the court grants the full legal ownership of the property to the lender.
Right to the surplus funds:
While the power of sale involves the final settlement of surplus funds with the borrower, there is no such legal obligation on the lender in a foreclosure.
Which of the two options is riskier for a borrower?
For a borrower, a foreclosure might be considered riskier since the full ownership of the property is transferred to the lender without any right to the surplus funds from the sale.
How can our civil litigation lawyer help you?
While both these legal procedures perform the same function, the timelines and the outcomes involved are quite different. This is why you need to get in touch with our civil litigation lawyers immediately for guidance upon receiving the legal notice. Our team of experienced lawyers will ensure that your rights and financial interests are protected throughout the process. Reach out to our legal team today at 905-405-0199 for a consultation.
