Ontario Mortgage Enforcement: Power of Sale, Foreclosure, and Remedies

The Mortgages Act (Ontario): Overview

Mortgage enforcement in Ontario is governed primarily by the Mortgages ActR.S.O. 1990, c. M.40, the Land Titles Act R.S.O. 1990, c. L.5, and the Courts of Justice Act. The two principal enforcement remedies are:

• Power of sale (ss.32-36) — the lender sells the property on the mortgagor's default after giving proper notice; no court order required
• Foreclosure — a court action requesting that the mortgagor's equity of redemption be extinguished and title vested in the lender

Additional remedies include: appointment of a receiver, obtaining possession (mortgagee in possession), and suing on the personal covenant for the debt. In practice, power of sale is used in the vast majority of residential and commercial mortgage defaults in Ontario because it is faster and does not require court proceedings.

Power of Sale: Step-by-Step Procedure

Lender's Duty to Sell at Fair Market Value

The lender exercising power of sale owes a duty to the mortgagor and subsequent encumbrancers to take reasonable steps to obtain the best price reasonably obtainable. This is not an absolute duty to achieve the highest possible price — it is a duty of reasonable care in the selling process:

• Proper marketing (MLS listing, adequate exposure period)
• Accepting reasonable offers — not selling at an artificially depressed price to a related party
• Obtaining a market appraisal if any doubt about value
• Not proceeding in a manner designed to harm the mortgagor

If the lender sells at a grossly undervalued price or fails to properly market the property, the mortgagor or subsequent encumbrancers may challenge the sale and claim damages for the difference between the actual sale price and fair market value. In extreme cases, a court may set aside the power of sale transfer (though this is difficult after a bona fide third-party purchaser acquires title).

Foreclosure by Court Action

Foreclosure is commenced by statement of claim in the Superior Court of Justice. The court action seeks an order for sale with a redemption period (usually 60 days), failing which the equity of redemption is foreclosed and title vests in the lender. Key aspects of foreclosure:

• Parties to the action — all persons with registered interests in the property (subsequent mortgagees, judgment creditors, Construction Lien Act lien claimants) must be named as defendants
• Order for sale — the court first grants an order for sale and a redemption period; if the property is not redeemed, the order for foreclosure vests title in the lender
• Effect of foreclosure — the personal covenant is extinguished by foreclosure; the lender acquires title but cannot then sue the mortgagor for any deficiency. This is the key distinction from power of sale.
• Re-opening foreclosure — in exceptional circumstances (new value evidence, changed circumstances), the court may allow re-opening the redemption period, but this is unusual and discretionary
• When lenders prefer foreclosure — where the property value exceeds the debt (positive equity), foreclosure is rarely used; where the property is significantly underwater and there is no worthwhile personal covenant to preserve, some lenders prefer the clean title result of foreclosure without a power of sale

Deficiency Claims and the Personal Covenant

After a power of sale, if the net sale proceeds are insufficient to fully satisfy the mortgage debt, the lender may sue the mortgagor on the personal covenant to pay (typically contained in the Schedule to the standard OREA/CMHC charge form). Key points:

• Limitation period for deficiency claim — two years under the Limitations Act 2002 from the date of discovery (typically the date the sale closes and the deficiency is known)
• Proving the deficiency — the lender must show the sale was conducted at fair market value and provide a proper accounting of all sale proceeds and outstanding amounts
• Guarantors — guarantors of the mortgage obligation remain liable for deficiencies; the lender must also give notice to guarantors before exercising power of sale if the guarantee requires it
• Foreclosure extinguishes the covenant — once foreclosure is granted and becomes absolute, the personal covenant merges in the judgment and the lender cannot separately sue for the deficiency
• Practical considerations — deficiency claims against consumer mortgagors are often economically unproductive; lenders focus on institutional borrowers, commercial guarantors, and corporate borrowers with assets

Priority of Mortgages Under the Land Titles Act

On Land Titles land (the vast majority of Ontario residential and commercial property), priority among competing charges is determined by the date and time of registration (LTA s.78):

• First registered, first in priority — the first mortgage/charge registered on a PIN has priority over subsequently registered charges; this is why lenders register their mortgage immediately on closing
• Postponement agreements — a prior registered mortgagee can voluntarily postpone to a later mortgage (e.g., a second mortgage postponing to a new first mortgage on refinancing)
• Construction liens — a Construction Lien Act lien registered within the statutory lien period has priority over subsequent mortgages but not over prior registered mortgages; however, a prior lender who advances funds after the lien period begins may lose priority to construction liens registered before the mortgage
• Crown priority — unregistered Crown claims (CRA tax liens) may have priority over registered mortgages in certain circumstances under the Income Tax Act s.227; due diligence on tax arrears before advancing
• Condominium common expense arrears — under the Condominium Act 1998 s.85, common expense arrears have super-priority over a first mortgagee's claim to the extent of three months' common expenses

Mortgagee in Possession

A mortgagee who takes possession of the mortgaged property (before or instead of selling) assumes significant responsibilities:

• The mortgagee in possession must manage the property with the care of a reasonable prudent property manager — not merely preserve it
• Must collect rents and apply them to the mortgage debt and carrying costs; must account strictly for all receipts and expenditures
• Is liable for negligent waste or failure to collect rents from existing tenants
• Taking possession does not accelerate the power of sale procedure — the statutory notice requirements still apply
• For commercial properties, a receiver appointed by the court or by contract (under a general security agreement) is often preferable to mortgagee in possession because the receiver has clear management authority and the mortgagee maintains better insulation from liability

Frequently Asked Questions