Ontario Mortgage Default — Power of Sale, Redemption, and Deficiency

Overview — Mortgage Default Remedies in Ontario

When a mortgagor (borrower) defaults on a mortgage, Ontario law provides two primary remedies for the mortgagee (lender): power of sale (statutory right under the Mortgages Act RSO 1990 c M.40) and judicial sale by foreclosure (court-ordered sale). Power of sale is by far the more common remedy in Ontario — it is faster, less expensive, and does not require a court application.

Unlike other provinces where the lender forecloses (takes title to the property), Ontario power of sale does not transfer title to the mortgagee. The mortgagee sells the property as agent for the mortgagor, applies the proceeds to the mortgage debt, and pays any surplus to the mortgagor (or subordinate charge holders). The mortgagee never takes title.

Power of Sale — Step by Step

Step 1: Notice of Sale (s.32)

Before exercising power of sale, the mortgagee must give the mortgagor written notice of the intention to sell under s.32 of the Mortgages Act. The notice must:

• •Be in writing and served on the mortgagor (and any subsequent encumbrancers) personally or by registered mail to their last known address
• •Identify the default (missed payments, property tax arrears, insurance lapse, etc.)
• •State the amount required to cure the default and redeem the mortgage
• •State the mortgagee's intention to exercise power of sale if the default is not cured

Step 2: Redemption Period

After service of the Notice of Sale, the mortgagor has a 35-day statutory redemption period (s.32) to cure the default and redeem the mortgage. The mortgagee may not sell the property during this period.

However, if the mortgage document contains a longer notice provision, that provision governs. Most institutional mortgage documents (bank standard forms) contain the 35-day statutory minimum — private mortgages and commercial mortgages may provide for longer redemption periods.

Cure of default during the redemption period requires payment of: all arrears of interest and principal, property taxes in arrears, insurance premiums in arrears, the mortgagee's legal costs incurred to the date of cure (typically $500–$2,000 for the notice stage), and any other sums required under the mortgage terms.

Step 3: Property Listing and Sale

If the mortgagor does not cure the default within the redemption period, the mortgagee may proceed to sell. The mortgagee's key obligation is to obtain the best price reasonably obtainable in the circumstances — not necessarily fair market value, but a price that a reasonable vendor would accept in a properly conducted sale (Farrar v Farrars Ltd (1888) 40 Ch D 395, adopted in Ontario).

The mortgagee must take reasonable steps to obtain the best price, which typically includes:

• •Listing with a licensed real estate agent on MLS
• •Obtaining an appraisal or BMA (Broker Market Analysis) before listing
• •Allowing reasonable time for the property to be marketed
• •Not selling to a related party or at an obvious undervalue

The mortgagee may sell without court approval. The purchaser on a power of sale takes clear title free of the mortgage and subsequent encumbrances (s.35) — subsequent mortgages are discharged on registration of the power of sale deed.

Step 4: Distribution of Proceeds

After the sale, proceeds are distributed in this priority order:

Deficiency Claims

A deficiency arises when the power of sale proceeds are insufficient to satisfy the full mortgage debt. The mortgagee may sue the mortgagor personally for the deficiency — this is a personal debt claim, not a property claim.

Ontario has no anti-deficiency legislation for residential mortgages (unlike some US states). The mortgagee may sue for the full deficiency in the Ontario Superior Court of Justice. The limitation period is 2 years from the date the deficiency is quantified (i.e., from the date of the power of sale closing, when the net proceeds are determined).

However, if the mortgagee failed to obtain the best price reasonably obtainable, the mortgagor may counterclaim in the deficiency action for the shortfall attributable to the inadequate sale price. The mortgagee must prove the sale was conducted at arm's length and at the best price reasonably obtainable in the circumstances.

Judicial Sale by Foreclosure

The alternative to power of sale is a court application for judicial sale under s.39 of the Mortgages Act. Judicial sale is significantly less common in Ontario because power of sale is faster and less expensive. However, judicial sale may be preferable where:

• •The mortgage instrument does not contain a power of sale clause
• •The mortgagor is in bankruptcy and automatic stay applies to power of sale proceedings
• •Title is defective and the mortgagee wants a court-supervised process to ensure clear title to the purchaser
• •There is a dispute about the amount owing or priority that benefits from court supervision

Under judicial sale, the court appoints a reference officer who oversees the sale process. The reference officer confirms the amount owing, gives notice to all encumbrancers, supervises the listing and sale, and reports to the court. A judicial sale is typically 6–12 months longer than power of sale.

Mortgagor's Rights During Power of Sale

The mortgagor retains several rights during the power of sale process:

• •Right of redemption: the mortgagor may redeem (pay off the mortgage in full) at any time up until the moment the power of sale closes — even after the property is listed and an offer is accepted, the mortgagor may redeem by paying the full amount required to discharge
• •Right to challenge inadequate sale price: the mortgagor may seek an injunction to stop the sale if the proposed price is grossly inadequate, or sue for damages after the sale if the price was not the best obtainable
• •Right to surplus: after all encumbrances are satisfied, any surplus belongs to the mortgagor
• •Right to notice of sale: all subsequent encumbrancers must receive notice of the sale and have an opportunity to redeem or exercise their own rights

Priority Among Charges

Under the Land Titles Act RSO 1990 c L.5 and Registry Act RSO 1990 c R.20, priority among charges on land is generally determined by registration order (first in time, first in right), subject to exceptions:

• •Construction liens under the Construction Act RSO 1990 c C.30 have a special priority over mortgages registered after the first lien attached — the date of lien attachment relates back to the first supply of services or materials to the improvement
• •Property tax arrears have a super-priority over all charges — property taxes in arrears survive a power of sale and must be paid from proceeds first
• •Crown priority — certain Crown claims (source deductions, HST, environmental liabilities) may have priority over registered charges in specified circumstances

Practical Checklist for Mortgagee's Counsel

• ✓Confirm power of sale clause exists in mortgage instrument — not all mortgages contain it; statutory power under s.25 requires a charge or mortgage "under seal"
• ✓Conduct title search to identify all encumbrancers who must receive Notice of Sale — construction liens, caveats, second mortgages, execution creditors
• ✓Calculate exact amount in default including principal, interest, tax arrears, insurance, and legal costs to date — mortgagor has right to redeem on payment of this amount
• ✓Serve Notice of Sale properly — personal service or registered mail to last known address; incorrect service voids the notice and restarts the 35-day period
• ✓Obtain BMA/appraisal before listing and document the best price analysis — critical to defend against mortgagor's inadequate sale price challenge
• ✓Confirm no bankruptcy/CCAA stay — insolvency proceedings automatically stay power of sale proceedings without leave of the insolvency court
• ✓Assess deficiency at closing — if proceeds insufficient, issue claim within 2-year limitation period; document mortgagor's personal covenant to pay
• ✓Trust accounting: sale proceeds must be held in trust — LSO By-Law 9 applies to all funds held in the course of a real estate transaction