Mortgage enforcement is the right of a mortgagee (lender) to pursue a mortgagor (borrower) to recover a mortgage loan that has gone into default. When a mortgagor defaults on mortgage payments, the mortgagee has several available remedies available at law. The most frequently used remedies include power of sale, judicial sale, and foreclosure. Each remedy has its own advantages and disadvantages, and this blog post will discuss each one.
After the mortgagor commits an act of default, which most commonly is the failure to pay mortgage payments on time, the mortgagee may sell the property pursuant to its right to power of sale.
This remedy allows a mortgagee to force a sale of the mortgaged property for the purpose of recovering the outstanding balance remaining on the mortgage. This remedy is typically contained within the mortgage, but where it is not, it can be found within the Land Registration Reform Act, the Land Titles Act and the Mortgages Act.
When a mortgagee exercises its right to power of sale, it will seek possession of the property for the purpose of selling the property to a third party purchaser. The borrower can challenge the sale in various ways and it is essential for the mortgagee to retain experienced counsel to ensure there are no deficiencies with the notice of sale. The mortgagee must also ensure they sell the property at fair market value, otherwise they may face an allegation of improvident sale from the mortgagor/borrower. The benefit of this remedy is that the process will not involve lengthy delays and is fairly straight forward.
Upon default, a mortgagee must provide notice to a mortgagor that it intends to exercise its power of sale remedy. The mortgagee will then be required to wait 35 days before it can properly market the property for sale. During this period, the mortgagor has the right of redemption and can repay the entire outstanding mortgage balance including costs incurred by the mortgagee to stop the sale of the property. The power of sale process can be completed relatively quickly compared to the other remedies available.
The mortgagee exercising its right to a power of sale is not entitled to profit from the sale, but simply to recover the balance outstanding on the mortgage. Provided that the proceeds extinguish the mortgage, the defaulting mortgagor is actually entitled to the surplus proceeds of sale. As a result, the mortgagee can be held liable to the mortgagor if the property is not sold at its fair market value. The law is clear and requires the mortgagee to sell the property to the highest bidder otherwise the mortgagor may make a claim for improvident sale against the mortgagee. As a result, some mortgagees are dissuaded from pursing a power of sale, instead choosing a remedy where liability exposure is limited.
Due Diligence in exercising Power of Sale remedies
If the lender exercises its right to enforce the mortgage under power of sale, then the lender will be required to complete the following:
- Provide notice of default to borrower;
- Provide notice of sale in proper form;
- Appraise the property;
- Sell the property at fair market value; and
- Keep detailed list of all costs incurred;
Similar to a power of sale, an action for judicial sale allows the mortgagee to obtain the legal right to sell the property to a third party purchaser. However, in a judicial sale, the court oversees the entire process therefore liability exposure is dramatically reduced. Consequently, the mortgagee cannot be held liable if the proceeds are only sufficient to pay off the outstanding balance on the mortgage. As a result, several mortgagees select this mechanism as it insulates them from future liability.
The disadvantage of a judicial sale is that it is a lengthy process that requires court approval. In addition, the notice periods under a judicial sale are lengthier than a power of sale and consequently many mortgagees despite the limited liability exposure still opt for pursuing the power of sale remedy.
Another remedy available to mortgagees is an action for foreclosure. Unlike the other two remedies, when a mortgagee commences an action for foreclosure and successfully achieves the necessary court order, the mortgagee will be awarded full possessory and legal title of the mortgaged property. As a result, the mortgagee is entitled to all the proceeds following a sale, meaning it has no duty to provide the surplus to the mortgagor/borrower. While the full extinguishment of the mortgagor’s interest is advantageous, there are also certain drawbacks considering if there is a shortfall the mortgagee does not have a subsequent right to pursue the mortgagee for the shortfall. By contrast the power of sale remedy and the judicial sale remedy allows the mortgagee to claim the shortfall from any sale against the mortgagor. This additional risk with foreclosures requires mortgagees to carefully consider the market value of the property before deciding upon this remedy.
Conclusion
Clearly every remedy has its own advantages and disadvantages, and it is imperative for a mortgagee to consider and discuss all available options carefully with its lawyer to determine which remedy is most suitable to achieve the objectives of the mortgagee.
The lawyers at Vakili Law Group have been advising individuals, development companies, real estate investment corporations, private lenders and small businesses for more than 15 years and will be happy to assist you with your matter as well. For more information feel free to schedule a free 15-minute consultation with one of our lawyers by clicking on the following calendar link: https://calendly.com/vlglaw/book-a-call-meeting