Real Talk!

There is a great deal of myth and misunderstanding about properties being sold under "Power of Sale". Let me begin this blog by saying that I am not a legal expert and that any homeowner who is in default of their mortgage payments should stay in touch with their lenders.

In this economic climate, many lenders are understanding and willing to make special arrangements for payments under certain circumstances AND FURTHER... anyone facing any sort of action from their mortgage lender should gather up any and all mortgage documents that they have and seek professional legal advice- in other words...get a lawyer!

Foreclosure and/or power of sale is a serious matter- but it shouldn't be as confusing as it seems to be. It is primarily a problem of and for the (owner) borrower and the person(s) or company that provided the borrower with their mortgage funds.

In Ontario, when a borrower defaults (fails to pay) on their mortgage, the financial institution (or lender) most often attempts to recover its losses by repossessing and selling the property. In most cases, mortgage documents include a “power of sale” clause granting the lender the right to sell the property when there is a default.

The Mortgages Act of Ontario talks about two types of power of sale: Contractual and Statutory. Contractual power of sale occurs when the mortgage documents have included the provision for power of sale: a statutory power of sale takers place when the mortgage documents don’t spell out the provision for a power of sale but the borrower has been in default for 3 or more months.

In a contractual power of sale, the borrower is notified of the lender’s intent to exercise the power of sale, the borrower has 35 days (or as otherwise might be stated in the mortgage documents) to pay up. In a statutory power of sale, the borrower has 45 days to redeem and pay in full.

In other words- even once power of sale process has begun and the homeowner is removed from the home, the homeowner has the ability to bring the mortgage up to date and pay all interest and fees owing and move back into the property... the reality is; that once a homeowner is removed from the property (or chooses to leave) they rarely come up with the funds necessary to get their property back and the sale proceeds under power of sale. The power of sale can often be the fairest, most inexpensive method to deal with an unpleasant financial circumstance.

Once this redemption period expires, if the borrower has not paid up, the lender is allowed to sell the property by auction, private contract or tender. Usually the property is listed by a real estate representative and placed on the market for sale. There is a responsibility upon the lender to ensure the property is brought to the attention of a large segment of the market- for instance, it should be put on MLS for the usual length of time and offered for fair market value.

Foreclosure is different but similar... it's a more involved legal action that a lender can take if the borrower stops paying. The lender applies for an “order nisi” – the first order of foreclosure. Sometimes the borrower will sign off and agree, otherwise, the lender must apply to the courts before they proceed.

Once the court determines that the borrower is not going to redeem (by paying the full amount owing, plus interest, costs and taxes) they will issue registration of the Final Order for Foreclosure, the mortgagee will automatically be deemed to be in possession and have the right to sell the property.

Ontario's laws are very strict about the procedures for marketing a power of sale property and the company or person who is initiating the power of sale must do their best to obtain what is called TRUE market value as opposed to fair market value for the property, otherwise if the property is sold too far under TRUE market value, the owner could sue them for the difference.

The lender must account to the borrower or borrowers and any other parties with vested interests. The Mortgage Act requires that the proceeds of the sale first be applied to the cost of conducting the sale, then to interest and costs owing under the mortgages, then to principal money owing under the mortgage, next to any amounts due to outside parties, and finally if there is any surplus- it goes to the owners... alternately, if there is a short fall, under power of sale, the seller can sue the owner for the difference.

In the case of Foreclosure, the title to the property is registered in the name of the mortgagee who accepts the property in full satisfaction of the debt, releasing the defaulted owner from liability.

In a Power of Sale situation, once the creditors are paid out of the proceeds of the sale, the property may be transferred (deeded) to a Buyer.

As a Buyer, the purchase of a home being sold by power of sale is nothing to fear... and should be dealt with in the same way as any other purchase- except the Buyer must understand that the bank (or lender) won't- can't, really- make any representation or warranties- the lender has likely never occupied the home and won't have any knowledge of its workings.

There are no "secrets" in a Power of Sale or Foreclosure. It is a governed process. The Seller's mortgage will be discharged, any other mortgages and leins will be discharged and outstanding monetary expenses (such as taxes and utility charges) will be paid for (or adjusted for) at closing. The Buyer's lawyer will conduct a title search, prior to completing the transaction, to ensure that title is clear.

Before making an offer to purchase a power of sale, it's a good idea that the Buyer to do their homework. Obtain copies of the survey, inquire at the township offices about permits and documentation that relate to the property. Talk to neighbours. Sign a Buyer's representation agreement and have a Realtor working on your behalf.

Be prepared... the Lender/Seller often attaches a schedule "B" to Purchase Agreements, spelling out the terms of the process and their responsibilities or lack thereof.

A well-drafted Agreement can help to deal with concerns. I generally recommend, particularly in the case of a power of sale, that an offer be made conditional "upon the approval of the Buyer's solicitor". It's not so much that lenders will change their schedule "B"s... but they are all a little different and the Buyer's lawyer will be able to explain the jargon of the schedule "B" and provide expert advice, addressing any areas of concern.

Some Buyers, especially those experienced in purchasing property under power of sale, are not too concerned about Schedule B's... as they are commonly used and generally contain simple disclosures- as an example, the may contain the following clauses (or,they may not):

1. The purchaser acknowledges that the Vendor is selling pursuant to the power of sale contained in its mortgage (the "Mortgage") on the property and accepts title pursuant to the exercise thereof,

2. The Vendor shall have the right to terminate this Agreement if the Mortgage is redeemed or payment is made on the Mortgage prior to closing,

3. In the event that the exercise of the power of sale of the property by the Vendor is placed in issue, the Vendor may extend the closing date for a period of time not exceeding 60 days in total, if the Vendor is unable to resolve such issue by 5 p.m. of the last day of such extended period or periods, this Agreement may be terminated by the Vendor,

4. This Agreement is made without representation, warranty or condition with respect to the fitness,condition, zoning or lawful use of the property. The Purchaser will accept the property "as is" "where is" condition on the day of closing without regard for its state of repair, location of structures, wells, retaining walls orfences (freestanding or otherwise) and subject to any judicial, municipal or any other government by-laws, agreements, restrictions, rights of way, easements, covenants which run with the land or minor encroachments by buildings or fences on the subject property or adjoining properties or streets,

5. The Vendor is selling only such interest as it may have in the fixtures and chattels referred to in the Agreement and/or located on the property and does not warrant title thereto. On closing the Purchaser may have possession of the fixtures and chattels then on or about the property "as is". The Vendor agrees that it will not remove any such fixtures and chattels from the property but the Vendor will not be responsible for the removal of such fixtures or chattels by any third party prior to closing. The Vendor will not provide a bill of sale, warranty or other title documentation and there will be no adjustment or abatement of any kind to the purchase price with respect to fixtures and chattels,

6. If the Property being conveyed is a condominium then the Vendor agrees to deliver to the Purchaser forthwith upon request a written consent to obtain an 'Estoppel Certificate' directly from The Condominium Corporation. The Vendor shall not be obliged to deliver any further documentation of the Condominium Corporation nor an Estoppel Certificate,

7. The Vendor and Purchaser agree that the acceptance of this offer communicated by confirmed facsimile transmission shall be binding upon the parties. The Purchaser agrees to deliver an executed original Agreement to the Vendor within two days of acceptance of the offer,

8. Any termination right provided for in this Agreement shall be by written notice delivered to the address set out below or by confirmed facsimile transmission to the other party or his/her solicitor whereupon the Agreement shall be at an end and the deposit returned to the Purchaser without interest or penalty,

9. The Vendor has no knowledge and makes no representation whatsoever as to whether the property hasbeen insulated with urea formaldehyde foam insulation or whether the property contains any othersubstances, liquids. Gases or materials which may be hazardous or toxic,

10. Purchaser covenants and agrees to pay to the Vendor at closing, in addition to the balance due onclosing, the amount of Goods and Services Tax ("GST") (if such tax is applicable to this transaction)which may be imposed by relevant legislation of the Government of Canada on the sale of thisproperty. Provided however that the Vendor is solely responsible for the payment of GST on theamount of any real estate commission payable by Vendor hereunder. The Vendor shall not beresponsible to provide any certificale with respect to the applicability of GST to the transaction,

11. In the event of conflict between this Schedule "B" and the provisions of the Agreement of Purchase and Sale, Schedule "B" shall prevail,

12. The Vendor makes no representation whatever with reference to the tenancy or occupancy of theproperty and the Vendor will transfer possession subject to such tenancies and occupancies as may exist at closing without any adjustments respect thereto. In the event, that vacant possession cannot be provided by the closing date, the Vendor may, at its sole option, extend the closing dale for any period or periods not exceeding 60 days- If vacant possession cannot be provided by 5 p.m. on the last day of such extended period or periods, the Purchaser may accept the property with existing occupants or either party may terminate the Agreement without penalty.

In many cases, the redemption period has long passed... so there is no possibility that item #2 or #3 will come into affect.

It is also wise to remember that, since the owners (or mortgagors) of the property were not able to make the mortgage payments, they may not have been able to upkeep the property and may have deferred or not repaired or maintained the property.

Power of Sale, or not... I always recommend that Buyers obtain a home inspection; as it helps identify areas that need attention and specifies defects or potential problems.

& a lawyer can advise the Buyer if the property qualifies for Title Insurance and those risks that will be covered and which will be excluded.

Title insurance policies can be issued in favour of a purchaser (on new/resale homes, condos and vacation properties), a lender, or both the purchaser and lender. Lenders will sometimes require title insurance as a condition of the loan. The premium for title insurance is paid once (at the time of purchase).

The types of risks that are usually covered under a title insurance policy include: survey irregularities; forced removal of existing structures; claims due to fraud, forgery or duress; unregistered easements and rights of-way; lack of pedestrian or vehicular access to the property; work orders; zoning and set back non-compliance or deficiencies; etc. For a risk to be covered, generally it has to have existed as of the date of the policy. As with any type of insurance policy, certain types of risks might not be covered, for example, native land claims and environmental hazards are normally excluded.

Title insurance can help ensure that a closing is not delayed due to defects in title. And, if an issue relating to title arises with respect to a risk covered under the policy, the title insurance covers the legal fees and expenses associated with defending the insured's title and pays in the event of loss.

While distress sales resulting from bank foreclosure or power of sale provisions often represent a great way to get a fantastic deal on a home, remember 1/ Utilize the services of a qualified Realtor by signing a Buyer Representation Agreement. 2/ Do your homework. 3/ If you have any legal questions about any contract- speak with a lawyer. No one but a lawyer is qualified to give legal advice.