Last month we sent out the first bulletin in our mortgage enforcement series, which dealt with the issuance of demand letters and notices. This second bulletin deals with the types of remedies that are available to a lender in Ontario when there has been a default under the mortgage that has not been satisfactorily resolved following notice by the lender, as discussed in the first bulletin. Where market liquidity exists, the market is non-depressed and realizable values are achievable, the power of sale proceeding is often the remedy of choice as the most time efficient and cost-effective method to obtain value for the lender. However, each enforcement situation is unique and it is essential to choose the remedy or remedies that best suit the facts and circumstances of each situation.

Creating a strategy to determine the right type of remedy will depend on the facts of the situation, the legal and practical differences between available remedies, and factors such as the existence of collateral security and guarantors, prior encumbrances, outstanding municipal taxes, the solvency of the borrower, the physical condition of the property, and market trends and values.

(Please note that these bulletins are drafted from an Ontario law perspective. We would be pleased to discuss any mortgage enforcement questions you might have for the other Canadian provinces).

B. FORECLOSURE 

  • In an action for foreclosure, the lender seeks to have the court order that the lender (or its assignee) will be the absolute owner of the mortgaged property, free of the interest of the borrower and all subsequent encumbrancers.
  • If obtained, the ownership established by the court order will ultimately replace the borrower’s liability to repay the debt.
  • Ultimately, a successful foreclosure remedy results in the lender (or its assignee) taking ownership of the property and extinguishment of the outstanding debt.

C. PRIVATE POWER OF SALE

  • This is a contractual remedy available to the lender in which the lender is required to follow a strict procedure for the issuance of notices and in which the lender is ultimately entitled to sell the property to a third party.
  • The third and fourth bulletins in this series will discuss the power of sale process in greater detail.

D. JUDICIAL SALE

  • The lender can commence an action for sale in which the court regulates the sale and directs the payment of the proceeds of sale.
  • The judicial scrutiny of the sale helps to insulate the lender from procedural and substantive liability, but comes at a higher cost in terms of time delay and procedural expense.
  • A successful judicial sale has the same effect as a private power of sale.

E. ACTION FOR ARREARS

  • The lender can commence an action for payment of the arrears and seek judgment against the borrower (and others liable).
  • This may be strategic where the prospects for recovery are good without the need to resort to security, where a closed mortgage interest rate is above market and the lender does not wish to provide the borrower with the opportunity to redeem, or where there are problematic issues related to the property or the security.
  • A successful action for arrears will result in the recovery of all or a portion of the debt and will not directly involve the property or other security.

F. ACTION ON THE COVENANT (AND GUARANTEE)

  • This is an action for payment on the contractual covenant contained in the mortgage when a default occurs under the mortgage.
  • This action may be commenced concurrently in conjunction with a power of sale proceeding.
  • A successful action on the covenant will result in the lender recovering a greater proportion of its outstanding debt (particularly where it is clear that the value of the property is insufficient to satisfy the amount of such outstanding debt if power of sale is the only remedy used).

G. ACTION FOR POSSESSION 

  • Where the lender cannot obtain possession of the mortgaged property (e.g. uncooperative borrower), the lender must commence an action for possession.
  • The lender may feel it is necessary to obtain vacant possession of the mortgaged lands because the state of maintenance and repair, insurance coverage or building security may not be satisfactory to the lender.
  • A lender in possession is potentially exposed to environmental liability and other risks associated with possession of the property.
  • A successful action for possession allows the lender to deal with the property directly when there are concerns that the property is not being appropriately preserved and protected or cannot be delivered to a purchaser.

H. NOTICE TO PAY RENTS

  • With income producing properties, the lender will likely wish to serve notice to tenants to pay all future rents to the lender.
  • Priority issues between the tenants (e.g., rent deposits) and the lender will become relevant in these situations and will need to be reviewed on a case-by-case basis.
  • A successful and timely notice to pay rents will ensure that rents can be credited to the indebtedness.

I. RECEIVERSHIP

  • The lender may wish to hire an independent manager for the property. This can be achieved either by way of private appointment or by court appointment.
  • Usually, this occurs when the property involves a going concern and the lender wishes to prevent the borrower from dealing directly with the property and other security following default.
  • A privately appointed receiver is in a similar situation to that of a mortgagee-in-possession in that, if the receiver has assumed management and control of the mortgaged property, the receiver may be exposed to environmental liability for contamination of the property both before, and after, the appointment as well as other risks associated with possession of the mortgaged property.
  • A court appointed receiver has a duty to comply with various legal obligations, including environmental law.
  • There are several reasons that a creditor might choose a court appointed receiver including the fact that many purchasers of multi-residential and commercial properties are now requiring that title to assets be provided through a court-issued vesting order.
  • The lender should keep in mind that court appointed receivers are responsible to the court, whereas a privately appointed receiver has a principal duty of care to its appointing creditor.

J. STRATEGIC PLANNING

Once the lender is aware of the various available remedies, it is necessary to create a strategy that will consider the pros and cons of each remedy, whether multiple remedies should be considered and when the remedies should be pursued throughout the process.

Multiple Remedies

  • Foreclosure and power of sale remedies are mutually exclusive while the ancillary remedies can be used in conjunction with either an action for foreclosure or a power of sale proceeding.
  • BLG can assist you in developing a well planned strategy which exercises some or all of the ancillary remedies prior to commencing the power of sale or foreclosure proceedings in order to avoid being prevented from doing so during the redemption period. Keeping a Closed Mortgage Closed
  • Consider commencing an action for possession or on the covenant for arrears where it appears that the borrower is deliberately defaulting under the mortgage so as to induce the lender to issue a notice of sale.
  • Conversely, the issuance of the notice of sale under the power of sale proceedings will open the mortgage for full redemption.

Control of the Mortgaged Property

  • The mortgage security may give the lender the right to have the property inspected for environmental issues prior to taking possession.
  • Under the Environmental Protection Act, lenders are entitled to conduct site investigations, secure and provide services to the property and take preventative measures without attracting liability for an order under the Environmental Protection Act.
  • Consider the different implications of taking control of the property either by way of a lender in possession acting through an agent or the appointment of a receiver-manager. Not only will environmental liability be an issue, but arrears of accounts (e.g. taxes and utilities) and service contracts will need to be reviewed.

Timing

  • Be aware of the timing constraints associated with each remedy.
  • A lender who takes too long in providing notice / implementing remedies can be attacked for not taking reasonable steps to mitigate its damages by failing to take timely and reasonable action.