Sell or Seize: Navigating Mortgage Default

Power of sale and foreclosure are the primary tools for mortgage enforcement. While the strategic choice between them still hinges on the lender’s own goals and capabilities, the property's equity, and the state of the real estate market, recent case law shows that courts are increasingly scrutinizing how these remedies are exercised.

A Tale of Two Remedies

To sell or to seize, that is the question. The key difference between a foreclosure and power of sale lies in who takes title. Power of sale is typically the faster option and handled outside of court, with the lender selling the property to recover the debt. Foreclosure, by contrast, is a court-driven process that ends with the lender becoming the new legal owner. Since formal court proceedings are required, retaining a lawyer is necessary. Once foreclosure is granted, the borrower’s right to repay and reclaim the home, known as the “equity of redemption,” is permanently cut off.

The path that a lender takes can have serious financial ramifications. A power of sale can result in a surplus for the borrower or a deficiency for which they remain liable. In contrast, in a foreclosure, the lender keeps the property, as well as any potential windfall, but the debt is generally considered satisfied. The decision is not just about the numbers, it’s about navigating a minefield of judicial expectations.

Mistakes Get Measured in Dollars: The Cost of a Flawed Process

Lenders exercising a power of sale should be mindful that they are under a legal duty to take reasonable precautions to obtain the true market value of the property being sold. Recent jurisprudence shows that courts take this duty seriously, and that a lender’s rush to have a property sold can backfire spectacularly. In Arkland Homes v. Liu^[1], for example, concerns were raised when the lender prioritized a quick closing over achieving the best price and acknowledged that they did not accept the highest available offer.^[2]

There is no rigid procedure a lender must follow when exercising a power of sale. However, courts will deem a sale improper, or “improvident,” if the lender’s conduct appears to be “plainly on the wrong side of the line.”^[3] Provided that the lender accepts the best price that can be obtained, it is free to close any sale at undervalue, provided that none of the adverse factors affecting the sale price are the result of its conduct.^[4]

The provision of notice is another frequent battleground. Prior to exercising a power of sale, a lender must provide proper notice to the borrower. While courts are increasingly moving towards a “commercially reasonable” standard with respect to the content of the notice and may overlook minor errors, recent case law confirms that the failure to serve the requisite notice may be fatal to the exercise of a power of sale.^[5]

Judicial oversight is especially strong in foreclosure actions. Courts possess a broad power to intervene based on the “overall justice of the case.” This power is routinely exercised by Ontario courts. In Martin v 11037315 Canada Inc.,^[6] a default judgment for foreclosure was set aside by the court where the overall fairness favoured the borrower, who lost significant equity after a single missed payment and a sale which was for below fair market value.^[7] Conversely, in Gupta v Manirambona^[8], the court declined to intervene where the borrower had ample warning and there was no reasonable prospect of payment.^[9] These cases illustrate a clear judicial trend: the court may intervene to protect a borrower from a catastrophic loss of equity but will not rescue a borrower from the consequences of their own inaction. 

With these legal duties in mind, the lender’s decision often comes down to a clear financial calculus driven by one factor: equity. Where a property’s value exceeds the outstanding mortgage debt, the path is clear: a power of sale is the more prudent course, as it ensures the debt is recovered with any surplus returned to the borrower. But where equity in the property is “underwater” (i.e. the debt outweighs its value), the lender's gambit changes. Foreclosure may be more appropriate in those circumstances, specifically where taking ownership can mitigate loan losses, despite the intense judicial oversight the process invites.

The Bottom Line

Lenders have options when dealing with a borrower in default, but not unlimited freedom. Whether selling or seizing, the process must be fair, well-documented, and legally sound. Courts are watching, and the cost of cutting corners can be steep.