As real estate lawyers practicing in Ontario, we find ourselves navigating a landscape that seems to be constantly shifting beneath our feet. A particularly pronounced trend, and one that’s increasingly demanding our attention, is the notable uptick in Power of Sale proceedings. These now form a significant, and growing, portion of the sales and refinance transactions crossing our desks. Now, while the concept of an "improvident sale" has recently gained traction in broader real estate discourse—particularly concerning the challenging fallout for purchasers in failed preconstruction transactions, a complex arena we've recently delved into in our article, [Against the Current: Acting for Preconstruction Buyers in a Downward Market – Part II])—its application within the realm of mortgage enforcement presents a distinct, though equally critical, set of considerations. This piece aims to offer an overview of the Power of Sale process as governed by Ontario's Mortgages Act, R.S.O. 1990, c. M.40, coupled with some commentary on this rising tide and an examination of pivotal case law, zeroing in on the mortgagee's crucial duty to steer clear of an improvident sale.
I. The Statutory Framework: Power of Sale under the Mortgages Act
The Power of Sale is both a contractual and statutory remedy available to mortgagees here in Ontario. It’s a mechanism that allows them to recover outstanding debt by selling the mortgaged property, sidestepping the often more cumbersome route of a full judicial foreclosure. This process is primarily codified in the Mortgages Act (the "Act"),[1] particularly within Parts II, III, and IV.
Statutory Powers (Sections 24-30) Section 24 of the Act grants a statutory power of sale to a mortgagee when the mortgage money has become due. This power typically kicks in three months after a default in payment of any money due under the mortgage. While this statutory power is on the books, most modern mortgage agreements pack their own punch with express power of sale clauses. These usually allow for a shorter default period (15 days, for example) before the power can be exercised. Section 30 is clear: if a mortgage contains its own power of sale provisions, the statutory rules of Part II take a backseat.
Notice of Exercising Power of Sale (Sections 31-41) This Part gets down to the nitty-gritty of notice requirements.
- Section 31(1) is unequivocal: notice of the exercise of the power of sale must be given to every person who appears to have a stake in the mortgaged property. This means the mortgagor, any guarantors, subsequent mortgagees, and other encumbrancers are all on the list.
- Section 32 lays down the timeline: the notice can't be given until the default has persisted for at least 15 days, and the sale itself can't happen for at least 35 days after the notice is given. This window is what we commonly call the "redemption period."
- Sections 33-34 detail how notice should be given, generally greenlighting service by prepaid registered mail.
- Sections 35 and 36 offer "safe harbour" provisions for purchasers. In essence, a purchaser's title isn't to be impeached just because the mortgagee might not have dotted every 'i' or crossed every 't' in the Act, provided certain statutory declarations are made.
General Provisions as to Power of Sale (Sections 42-43)
- Section 42 puts some brakes on proceedings. It prevents a mortgagee from launching other enforcement actions (like taking possession or suing for the debt) during the redemption period without getting explicit court approval.
- Section 43 shores up the mortgagor's right to redeem the property by paying the arrears and costs, right up until the sale is actually completed.
So, how does this typically play out on the ground?
- Default: The borrower stumbles, breaching a mortgage term (e.g., missed payments, unpaid property taxes).
- Notice of Sale: After the default period, the lender issues a Notice of Sale Under Mortgage. This document spells out the default, the sum needed to fix it, and the redemption period.
- Redemption Period: This is that statutory 35-day window for the mortgagor to get things back on track.
- Possession and Sale: If the default isn't cured, the lender can move to take possession (perhaps by getting a Writ of Possession) and then market the property for sale. Crucially, the lender has a duty to act in good faith and take reasonable steps to get a proper price.
- Distribution of Proceeds: Once the property is sold, the proceeds are divvied up in a specific order: first, to cover the lender's sale costs (realtor commissions, legal fees, etc.); second, to pay off the outstanding mortgage balance; third, to any subsequent mortgage holders or lien claimants by priority; and finally, if there’s any surplus, it goes back to the original homeowner. Conversely, if the sale comes up short, the lender might still pursue the homeowner for that deficiency.
II. The Rising Tide: Commentary on Current Trends
From where we stand as real estate lawyers in Ontario, the sheer volume of Power of Sale proceedings has climbed noticeably over the past year. Our own files, and what we're hearing across the market, suggest that an increasing number of property owners, both residential and commercial, are finding themselves served with Notices of Sale. This isn't happening in a vacuum; several factors are likely fueling this trend:
- Rising Interest Rates: The rapid ascent in interest rates these last couple of years has really squeezed mortgage affordability. This is especially true for those with variable-rate mortgages or those who had to renew at much higher fixed rates, straining household budgets and leading to defaults.
- Cost of Living: At the same time, high inflation and the rising cost of everyday essentials has eaten away at disposable income, making it tougher for borrowers to keep up with mortgage payments.
- Maturity of Private Mortgages: We're also seeing many homeowners who took out private mortgages—often at higher rates or with shorter terms because they couldn't qualify with traditional lenders—now facing maturity dates they simply can't refinance. For these individuals, a "Notice of Sale" is often the first shoe to drop when the mortgage matures and isn't repaid.
- Economic Uncertainty: The general economic and geopolitical climate, with its undercurrent of uncertainty, can lead to job losses or reduced income, directly impacting a borrower's capacity to service their debt.
This surge means that a growing slice of our conveyancing and refinance work now involves properties caught in Power of Sale proceedings. This reality demands meticulous due diligence, an unwavering commitment to timelines, and often, some pretty urgent negotiations to safeguard our clients' interests, whether we're acting for the defaulting mortgagor, a subsequent encumbrancer, or a prospective purchaser.
III. Jurisprudence: The Guiding Hand of the Courts in Improvident Sales
The courts play an indispensable role in interpreting and applying the Mortgages Act, particularly when it comes to the lender's duties and the borrower's rights, especially when an alleged improvident sale is in the spotlight.
The Foundational Duty: National Bank of Canada v. Soucisse
Originating from Quebec, National Bank of Canada v. Soucisse,[2] stands as the Supreme Court of Canada's landmark decision establishing the duty of a mortgagee exercising a power of sale. Soucisse established that a mortgagee owes a duty to the mortgagor and subsequent encumbrancers to act in good faith and to take reasonable precautions to obtain the true market value of the property. This is commonly referred to as the "duty to act providentially." The principles articulated in Soucisse are as relevant today as they were then, perhaps even more so given the current uptick in Power of Sale transactions. They set the bar against which a mortgagee's actions in realizing the security will be measured.
Application in Ontario: Sheth v. Randhawa
The application of the Soucisse principles has been frequently tested in Ontario. A recent and illustrative example is the progression of Sheth v. Randhawa,[3] through the Ontario courts.
A. The Motion Judge's Decision: Justice Petersen
At the Superior Court level, Justice Petersen addressed the plaintiff's (mortgagor's) claims of fraud and conspiracy, which implicitly included an assertion of an improvident sale due to inadequate consideration. Her Honour's analysis directly engaged with the question of whether the property was sold for a fair price, a core component of the Soucisse duty.
- Adequacy of Sale Price: Petersen J. noted that the plaintiff had herself entered into an Agreement of Purchase and Sale to sell the property for $1,000,000. The property was ultimately sold by the mortgagee to a corporation for $970,000 in a private sale, meaning no realtor's commission was in the mix. Her Honour concluded that the $970,000 paid by the corporation was a "fair price," especially when factoring in the commission savings. She found that the consideration was "not inadequate, let alone grossly inadequate," thereby negating a key "badge of fraud" that would suggest an improvident sale. The plaintiff's claim of a higher property value (e.g., $1,200,000) was not supported by admissible evidence.
- "Badges of Fraud" and Mortgagee Conduct: While Justice Petersen acknowledged a "degree of secrecy" and "haste" in the transaction, she found reasonable explanations for the mortgagee's conduct. These explanations—which didn't point to fraud or a deliberate attempt to injure the plaintiff—included the plaintiff's history of defaults, perceived efforts to delay enforcement, and the mortgagee's belief that the plaintiff's own sale attempt had fizzled out.
- Validity of Notice of Sale: The validity of the Notice of Sale was also upheld. Justice Petersen found it wasn't incorrect or deficient when issued. She referenced case law supporting the idea that minor irregularities won't nullify a Power of Sale, as long as the mortgagor can "intelligently assess her position with respect to the redemption of the mortgage" (citing Grenville Goodwin Ltd. v. MacDonald;[4] Nadi Inc. v. Yahyavi;[5] and Sibyl Investment Holdings Inc. v. Vlachich.[6] She also distinguished Re Botiuk and Collison et al,[7] where a fresh notice was needed after payment terms were revised, noting that in Sheth, no payments were made under a settlement, so the amount owing hadn't changed in a way that demanded a new notice.
- Protection of Bona Fide Purchaser: Furthermore, Justice Petersen determined that even if there had been deficiencies in the Notice of Sale, the corporate purchaser was shielded as a bona fide purchaser for value without notice. This relied on sections 35 and 36 of the Mortgages Act and section 99 of the Land Titles Act, with support from Stanbarr Services Ltd. v. Metropolis Properties Inc.,[8] which clarified how these statutory protections work in tandem.
B. The Ontario Court of Appeal Decision: Sheth v. Randhawa, 2022 ONCA 707[9]
The plaintiff took Justice Petersen's decision up to the Ontario Court of Appeal, which, in a decision released on October 26, 2022, dismissed the appeal.
- Upholding Findings on Improvidence and Fraud: The Court of Appeal saw no reason to disturb Justice Petersen’s thorough analysis. It specifically backed the finding that there was no evidence of fraud or conspiracy. Critically, the appellate court agreed that the sale was not improvident. It affirmed Justice Petersen's view that the corporate purchaser was an arm's-length purchaser and the sale was, in fact, beneficial. The Court of Appeal also agreed that the quick closing wasn't out of line given the plaintiff's history of default and delay, and that the mortgagee was, understandably, eager to see the deal through.
Commentary on Sheth v. Randhawa and the Soucisse Duty
The Sheth v. Randhawa case, both at the trial and appellate stages, offers valuable, practical insights into how Ontario courts put the Soucisse duty to the test. It underscores several key points:
- Evidentiary Burden: It’s a stark reminder that the onus of proving an improvident sale falls squarely on the party making that claim. Mere suspicion or unproven assertions of a higher potential value won't cut it; concrete, admissible evidence is crucial. The plaintiff's inability to use her appraisal was a telling factor here.
- Contextual Assessment of "Fair Price": The courts don't look at "fair price" in a vacuum. They consider the specific circumstances of the sale—including whether it was private (which affects commissions and costs) and the mortgagor's history of defaults. The goal isn't necessarily the absolute highest theoretical price, but a price achieved through reasonable efforts given the market conditions at the time.
- Interplay of Procedural Compliance and Substantive Duty: While the validity of a Notice of Sale is procedural, its proper issuance (or lack thereof) can certainly influence the overall fairness of the process. However, as Sheth and Stanbarr show, minor procedural hiccups or even a lack of communication by the mortgagee (where no legal duty to disclose exists) might not be fatal to a sale to a bona fide purchaser. That said, such issues could still potentially ground a damages claim against the mortgagee if a breach of duty is proven.
- Judicial Reluctance to Interfere: Both levels of court in Sheth were hesitant to unwind a completed Power of Sale without clear, compelling evidence of fraud, conspiracy, or a breach of the mortgagee's fundamental duty to get a proper price. This reflects the judiciary's task of balancing the protection of a mortgagor's equity with the need for certainty in real estate dealings.
Conclusion
The Power of Sale remains a potent and, it seems, increasingly utilized remedy in Ontario's mortgage enforcement toolkit. While the Mortgages Act lays down the procedural tracks, the courts, through enduring principles from cases like National Bank of Canada v. Soucisse and more recent decisions like Sheth v. Randhawa, continue to shape how these powers are applied. It's a constant balancing act: safeguarding a lender's right to recover their investment while upholding the fundamental protections afforded to homeowners. As real estate lawyers, our role in navigating this complex terrain for our clients—whether that means advising on redemption strategies, ensuring procedural integrity, or meticulously scrutinizing sales for any hint of improvidence—has never been more vital, especially in this evolving economic climate. The rising tide of Power of Sale proceedings demands our sustained vigilance, our deep expertise, and an unwavering commitment to the principles of fairness and due process in all real estate transactions.
[1]Mortgages Act, R.S.O. 1990, c. M.40
[2] [1981] 2 S.C.R. 339 [Soucisse].
[3] Sheth v. Randhawa CV-20-1816
[4] 1988 CanLII 4737
[5] 2015 ONSC 4386
[6] 2020 ONSC 2191
[7] 1979 CanLII 2060
[8] 2018 ONCA 244
[9] 2022 ONCA 707
