The Foreclosure Process in Ontario

Have you ever held first or second mortgage? Or maybe you considered offering vendor take back on a property you are selling? If that's the case, you should consider what will happen if new owner stops paying.

In Ontario, the foreclosure process is very fast, as the proceedings are typically laid out in the mortgage documents. Power of sale was initially developed in Ontario by lenders who wanted a faster way to dispose of defaulted property and recover debt. As a result, they began to include power of sale as provisions in their mortgages and mortgage contracts . Under this the lender would allow them to dispose of property under the borrower's default and without having to resort to the courts. Power of sale is now part of the current Ontario Mortgages Act.

In the Mortgages Act there are two types of power of sale: Contractual and statutory. The first, contractual power of sale is when the mortgage documents have included power of sale provisions in their mortgage contract. The latter is when the mortgage documents have not included power of sale provisions. Statutory powers of sale are very rare because the lender will commonly have the provisions. However in the case of statutory power of sale the lender can still exercise power of sale as long as the borrower has defaulted for three months or more.

Both types of power of sale are started by the lender giving the defaulter a notice after 15 days of non-payment. The notice is given to all parties having a vested interest in the property. This includes subsequent encumbrances, statutory lien holders, or people who have advised the lender in writing, that they have an interest in the property.

The notice is attached to the Mortgages Act, and is called a Notice of Sale Under Mortgage. It advises of the lender's intention to exercise the power of sale, and includes details of the mortgage, such as:

The date in which the mortgage was made. The parties in the mortgage and the property mortgaged. The amount owing. A warning that if the amount owing is not paid by a specified date, the lender will exercise the sale of the property.

If this is a power of sale that is contractual, the borrower will have 35 days to pay, unless otherwise stated in the mortgage agreement. If this is a power of sale that is statutory, the borrower will have 45 days to make payment. The lender cannot do anything further within this redemption period, but by paying the amounts owing, the borrower can redeem the mortgage and save their home from foreclosure.

If the redemption period has passed without the borrower making the payment then the lender is legally allowed to foreclose on the property. Under power of sale, the bank has the right to sell the property by auction, private contract, or tender. Usually the property is listed with a real estate agent and placed on the market for sale. This is because the bank has noticed that they can get more for the home at the lowest cost to the bank.

Once the property is sold and if there is any surplus, the lender must account to the borrower or borrowers, and other parties with vested interests. In the Mortgage Act it  requires that the proceeds of the sale first be applied to the cost of conducting the sale, then to interest and cost owing under the mortgage, then to principal money owing under the mortgage, next to pay any amounts due to outside parties, and finally to pay tenants' security deposits.