A. INTRODUCTION

Bulletin IV of this mortgage enforcement series deals with a mortgagee’s duties in Ontario under the power of sale proceedings and the types of clauses that can protect a mortgagee in an agreement of purchase and sale when selling under power of sale. In all power of sale proceedings, the mortgagee should have its lawyer review the agreement of purchase and sale prior to executing it, in order confirm that all necessary clauses have been included to ensure the mortgagee’s obligations are limited. We would be pleased to assist you in this regard, and any other aspect of the mortgage enforcement process.

(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. DUTIES UNDER POWER OF SALE PROCEEDINGS

  • There is an overarching duty imposed on the mortgagee to: 1) act in good faith and 2) to take reasonable care to obtain the true market value of the property.
  • In order to discharge this obligation, the mortgagee should obtain at least two appraisals for the property by a qualified appraiser.
  • A mortgagee is not obliged to enter into a listing agreement with a real estate broker as a mortgagee could proceed with a private sale, tender or auction.
  • However, given that the goal of selling the land is to obtain the best possible price and to discharge its duty, a mortgagee should consider entering into a listing agreement so that the property comes to the attention of a wide segment of the market.

C. AGREEMENT OF PURCHASE AND SALE

In order to save on costs and expenses, the mortgagee is capable of negotiating an agreement of purchase and sale with a potential purchaser by itself or through its real estate broker. In these cases, such an agreement of purchase and sale should always be conditional upon review by the mortgagee’s solicitors to ensure that the mortgagee’s obligations are limited.

Some matters that should be dealt with in the agreement of purchase and sale are as follows:

  • the purchaser should give an acknowledgment that the property is being sold by the power of sale remedy under the mortgage;
  • all standard form representations and warranties of the vendor/mortgagee should be removed, including the urea formaldehyde and "present use" wording; 
  • the purchaser should provide an acknowledgment that it is accepting the property on an "as-is whereas" basis;
  • if a standard form is used, then careful review should be completed to ensure that the mortgagee is not referred to as the owner;
  • real estate commission should only be payable upon the successful completion of the sale (i.e., not until title is transferred to the purchaser);
  • the mortgagee must be entitled to terminate the agreement at any time prior to the completion of the sale without liability (except for the return of the deposit);
  • possession of the property will need to be dealt with, whether it will be vacant possession or subject to tenancies (be careful if this a residential rental property as the only way to obtain vacant possession will be through the Residential Tenancies Act);
  • the purchaser must agree to accept the property subject to all matters which are not extinguished by the power of sale and the mortgagee must not be responsible to discharge or release any encumbrances which have a priority to the mortgage;
  • if there is a prior mortgage, the agreement should be conditional upon obtaining the prior mortgagee’s consent to the purchaser’s assumption of that prior mortgage;
  • the agreement should contain a clause that either excludes or amends the statutory covenant that the mortgagee will grant such further assurances as necessary;
  • if there are tax arrears or other utility arrears on the property, then the mortgagee should negotiate that the purchaser accept the arrears and adjust for that accordingly on the statement of adjustments;
  • clauses dealing with chattels will have to be removed unless the mortgagee is also selling personal property under the Personal Property Security Act;
  • depending on the likelihood of receiving payment from the mortgagor and the general relationship between the mortgagor and the mortgagee, the mortgagee may want to make the agreement conditional on not being redeemed;
  • the time period for acceptance by the mortgagee should be somewhat longer than the usual period for acceptance to ensure that the mortgagee is satisfied that it has or will have discharged its duties under the power of sale remedy; and
  • always provide that the agreement is conditional upon review by the mortgagee’s solicitor.