How Power of Sale Works in Ontario
In Ontario, when a homeowner takes out a mortgage, they agree to provide the lender (often a bank or financial institution) with a legal right to reclaim the property if the mortgage is not paid as agreed. One of the most common methods for doing this is through a process called Power of Sale.
This process allows the lender to sell the property and recover the outstanding loan amount without having to go through the courts, making it faster and often less expensive than foreclosure.
What Is Power of Sale?
Power of Sale is a legal remedy available to a mortgage lender when a borrower defaults on their mortgage loan.
The mortgage agreement will typically include a clause allowing the lender to exercise this power if payments are missed or if other terms of the loan are breached.
Under the Ontario Mortgages Act, once a borrower defaults (typically by missing at least one or more payments), the lender may begin the Power of Sale process to recover the outstanding debt by selling the property.
Power of Sale vs. Foreclosure
While both Power of Sale and foreclosure allow lenders to deal with defaulting borrowers, they are different processes:
Power of Sale: The lender sells the property and uses the proceeds to pay off the mortgage. Any remaining funds go to the borrower.
Foreclosure: The lender takes full ownership of the property through the courts. The borrower loses all rights to any remaining equity.
In Ontario, Power of Sale is far more common than foreclosure because it is typically faster, cheaper, and less legally complex.
The Legal Process of Power of Sale in Ontario
Here is a step-by-step breakdown of how the Power of Sale process typically unfolds in Ontario:
1. Default
The process begins when a borrower defaults on their mortgage. This can happen through missed payments, failure to pay property taxes, not maintaining adequate insurance, or other breaches of the mortgage agreement.
2. Notice of Sale
After the borrower has been in default for at least 15 days, the lender may issue a Notice of Sale Under Mortgage.
This is a formal legal document that must be served to the borrower and any other parties with a registered interest in the property (such as second mortgagees or lienholders).
The Notice of Sale gives the borrower at least 35 days (or 45 days if the mortgage was signed on or after July 1, 2018) to bring the mortgage back into good standing. This period is known as the redemption period.
3. Redemption Period
During the redemption period, the borrower can "redeem" the mortgage by paying all outstanding arrears, plus any legal and administrative costs incurred by the lender.
If the borrower pays in full, the Power of Sale process ends and the mortgage resumes as normal.
4. Statement of Claim (Optional)
In some cases, if the lender wishes to recover more than the value of the property (e.g., if there is a shortfall after sale), they may also commence legal action through a Statement of Claim to pursue the borrower for the deficiency.
5. Possession of the Property
If the borrower does not redeem the mortgage during the redemption period, the lender may take steps to take possession of the property.
This can be done either peacefully (if the borrower has vacated) or by obtaining a Writ of Possession from the court.
6. Sale of the Property
Once possession is obtained, the lender can sell the property.
The sale must be conducted in a commercially reasonable manner. The lender has a legal duty to obtain the best possible price under the circumstances.
They cannot simply sell the property for less than its market value to recover their costs.
7. Distribution of Proceeds
After the sale, the lender applies the proceeds in the following order:
1. Legal fees and costs related to the Power of Sale.
2. Outstanding mortgage principal and interest.
3. Other registered claimants (e.g., second mortgages).
4. Any remaining balance goes to the borrower.
If the sale does not cover all debts owed, the lender may sue the borrower for the deficiency —the shortfall between the sale price and the total debt.
Rights and Protections for Borrowers
Although Power of Sale allows lenders to act relatively quickly, borrowers are not without rights:
Borrowers must receive proper notice (Notice of Sale).
They have the right to redeem the mortgage before the sale takes place.
The lender must act in good faith and obtain fair market value for the property.
Borrowers can challenge the sale in court if they believe the property was sold unfairly or below market value.
Implications for Homeowners
Losing a home through Power of Sale is a serious matter.
Not only can the borrower lose their property, but they may also still owe money if the sale doesn’t cover the full mortgage balance.
This can lead to court action, wage garnishment, or even bankruptcy in severe cases.
However, Power of Sale can also protect borrowers from losing any remaining equity. Since the lender is required to return excess funds after the mortgage and costs are paid, borrowers might still receive money after the sale if the property has appreciated in value.
How to Avoid Power of Sale
To avoid Power of Sale proceedings, borrowers should:
Make mortgage payments on time.
Communicate proactively with the lender if financial difficulties arise.
Consider refinancing or selling the property voluntarily if the mortgage becomes unmanageable.
Seek advice from a real estate lawyer or credit counselor.
Conclusion
Power of Sale in Ontario is a legal process that allows lenders to recover unpaid mortgage debts by selling a property after a borrower defaults.
Though it can seem harsh, it is a structured process that includes legal protections for borrowers and obligations for lenders.
Understanding your rights and acting quickly when financial trouble arises can make the difference between losing everything and finding a manageable solution.
