Power of Sale vs. Foreclosure

When an Ontario homeowner fails to make mortgage payments (or otherwise defaults on the terms of their mortgage), the lender has legal remedies to recover the outstanding debt. The two main remedies under Ontario law are power of sale and foreclosure.

Mortgages in Ontario are registered as 'charges' under the Land Titles Act or as 'mortgages' under the Registry Act. The mortgagor (borrower) retains ownership of the property and the right to redeem (pay off the mortgage) even after default — up until the lender has completed the enforcement process.

The right of redemption is a fundamental protection for borrowers in Ontario. It means that a borrower can stop a power of sale or foreclosure at almost any point before completion by paying off the outstanding mortgage debt in full.

Ontario's Mortgages Act, R.S.O. 1990, c. M.40, and the common law govern the rights of lenders and borrowers in mortgage default situations.

Power of sale is the most common enforcement remedy used by mortgage lenders in Ontario because it is faster and less expensive than foreclosure. Under a power of sale, the lender sells the property on behalf of the borrower without obtaining a court order.

The process:

1. Notice of Sale: Under Section 32 of the Mortgages Act, the lender must provide the borrower with a Notice of Sale, giving the borrower a period (typically 35 days for residential property) to repay the full outstanding amount and cure the default. The notice must be served in accordance with the Act.

1. Redemption period: After receiving the Notice of Sale, the borrower has the redemption period to pay off the mortgage in full and stop the sale. If the mortgage is redeemed, the power of sale process terminates.

1. Listing and sale: If the mortgage is not redeemed, the lender can proceed to list and sell the property. Under Section 35 of the Mortgages Act, the lender has a duty to take reasonable precautions to obtain market value (or at least fair market value) for the property. The lender does not need court approval to complete the sale.

1. Distribution of proceeds: The proceeds of the sale are applied in order: (1) costs of the sale; (2) amounts owing under prior encumbrances; (3) the lender's mortgage balance, interest, and costs; (4) any surplus to the borrower or subsequent encumbrancers.

1. Deficiency judgment: If the sale proceeds are insufficient to pay off the mortgage, the lender may sue the borrower for the deficiency — the shortfall between the sale price and the outstanding mortgage debt.

Key advantage: Power of sale is relatively fast (typically 3-6 months from default to completion), does not require court proceedings, and preserves the lender's right to a deficiency judgment.

Foreclosure is an older common law remedy that extinguishes the borrower's equity of redemption — effectively giving the lender full ownership of the property. Unlike power of sale, foreclosure requires a court proceeding.

The foreclosure process:

1. The lender commences a court action for foreclosure in the Ontario Superior Court of Justice
2. The court issues a final Order of Foreclosure, setting a date for the borrower to repay (the 'redemption date')
3. If the borrower fails to repay by the redemption date, the court issues a final Order of Foreclosure vesting title in the lender
4. The lender becomes the owner of the property — the borrower's equity is extinguished

Why foreclosure is rarely used:

Foreclosure is much slower and more expensive than power of sale. The court proceedings can take 6-12 months or more. More importantly, once a lender obtains foreclosure, they become the property owner and lose the right to sue the borrower for any deficiency — if the property is worth less than the outstanding mortgage, the lender absorbs the loss.

Lenders generally prefer power of sale because: - It is faster and cheaper - The lender retains the right to a deficiency judgment - No court approval is needed to complete the sale

Foreclosure is sometimes used in unique circumstances — for example, where the lender wants to acquire the property for redevelopment, or where the power of sale process is complicated by multiple registered interests.

One of the most important legal protections for borrowers in Ontario power of sale proceedings is the lender's statutory and common law duty to obtain market value for the property.

Under Section 35 of the Mortgages Act, the mortgagee (lender) exercising a power of sale must 'take reasonable precautions to obtain at least market value for the property.' This duty is not just statutory — it has been reinforced and expanded by Ontario courts in cases such as Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. [1971] Ch 949 (English) and its Ontario equivalent.

What 'reasonable precautions' require: - Obtaining a current appraisal of the property - Marketing the property appropriately (typically through a real estate agent and MLS) - Allowing a reasonable exposure period for the market - Not accepting a price significantly below market value without additional justification

Consequences of failing the duty: If the lender sells at below market value without taking reasonable precautions, the borrower can sue the lender for the difference between the actual sale price and what proper precautions would have achieved. The borrower's liability for a deficiency may also be reduced.

This duty means that power of sale properties in Ontario are typically properly marketed and sold at or near market value — not secretly sold at deeply discounted prices to related parties, as occurred in less regulated jurisdictions.

Purchasing a property through a power of sale offers certain advantages but also involves risks that standard purchase transactions do not:

Advantages: - Power of sale properties are sometimes priced below market value, particularly when the lender wants a quick sale - Properties are typically vacant on closing, simplifying the transition

Risks and considerations: - As is — no representations: The lender selling under power of sale typically provides minimal representations and warranties about the property's condition. The APS typically states the property is sold 'as is' with no representations other than that the lender has the right to sell. - No access for inspection: Power of sale purchasers may have limited opportunity to conduct a thorough home inspection if the property is vacant and has been without regular maintenance. - Redemption risk: Until the power of sale is completed, the borrower retains the right of redemption. In theory, the borrower could pay off the mortgage on the day of closing and reclaim the property. In practice, this is uncommon, but the APS should address this risk. - Arrears: There may be outstanding property taxes, utilities, or other municipal charges. The buyer's lawyer must conduct a thorough search for any outstanding municipal obligations. - Condition of property: Power of sale properties may have been neglected or damaged — some borrowers, knowing they will lose the property, cause deliberate damage or remove fixtures before vacating.

Buyers of power of sale properties should retain a real estate lawyer experienced in these transactions and conduct thorough due diligence despite the 'as is' nature of the sale.

Reina and her spouse had a $680,000 first mortgage on their Scarborough home. After losing employment income, they fell behind on payments by 6 months, owing approximately $28,000 in arrears.

Under power of sale: The lender served a Notice of Sale under Section 32 of the Mortgages Act. Reina and her spouse had 35 days to pay the arrears (not the full mortgage — just the arrears plus costs, to reinstate). They were unable to do so. The lender listed the property, obtained two appraisals confirming market value of $920,000, and sold the property for $915,000 after 45 days on market. After paying the mortgage balance ($648,000), costs ($18,000), and the real estate commission ($36,000), the net proceeds to Reina were approximately $213,000 — her equity in the property. No court proceedings were required.

Under foreclosure (hypothetical): Had the lender elected to foreclose, the court process would have taken 9-12 months and cost significantly more in legal fees. The lender would have become the owner — and any equity (the $213,000) would have been extinguished. Reina would have received nothing, and the lender could not pursue a deficiency claim.

This comparison illustrates why power of sale is the rational choice for Ontario lenders — it is faster, preserves deficiency rights, and (in a scenario like Reina's where there is equity) actually produces a better outcome for the borrower as well.