FORECLOSURE
Overview
Through the legal process of foreclosure, a lender attempts to recover money owed by a borrower that
has stopped making payments on the loan. The lender then attempts to force the borrower to sell that
asset that was put down as collateral for the loan. This often occurs when a bank or other provider of
mortgages forces the borrower to sell the home that the loan was used to purchase, because the
borrower stops making the required mortgage payments and must repay the loan.
Foreclosures in Ontario are governed by the Mortgages Act, the Bankruptcy and Insolvency Act, and in a
few cases where farms are involved, the Farm Debt Mediation Act.
In most cases the province of Ontario follows the Power of Sale method (99% of all cases) to provide a
solution to delinquent mortgages. The term ‘delinquent mortgage’ means a mortgage in which the
borrower has not made the agreed upon mortgage payments. This Power of Sale method, unlike a
traditional foreclosure, is much faster than in some other provinces and reduces the amount of time
homeowners have to act. If the Power of Sale method is not available to a lender, they may pursue
traditional foreclosure.
There are two forms of Power of Sale in Ontario: contractual Power of Sale and statutory Power of Sale.
Contractual Power of Sale takes place when the mortgage agreement (contract) has conditions giving
the lender the power to sell the property put down as collateral by the borrower, without having to turn
to the courts to resolve the dispute. Even if Power of Sale conditions are not included in the mortgage
agreement, Power of Sale is now a part of the Ontario Mortgages Act. A statutory power of sale can take
place if the right to Power of Sale is acted on under the authority of the Ontario Mortgages Act. It is very
rare for the Power of Sale clause not to be inserted in the mortgage documents in Ontario. Even if they
are not, the creditor can still enforce its right to Power of Sale if the borrower has defaulted on
mortgage payments for a minimum of three months.
The Power of Sale lets the provider of the mortgage take possession of the property and sell it. Any
funds resulting from the sale are then used to pay back the lender’s mortgage as well as other debts
owed on the property. Any money remaining is turned over to the borrower of the mortgage funds.
If the property cannot be sold the provider of the mortgage can then sue the borrower for the money or
sue for the foreclosure of the home.
Power of Sale Process
1. The borrower defaults
A mortgage is in default when the borrower fails to make a payment as scheduled.
2. The mortgage lender serves notice
At least fifteen days from the date of the missed payment, the provider of the mortgage may deliver a
Notice of Sale (See Section 32 of the Mortgages Act (Ontario). According to the Mortgages Act (Ontario),
the Notice of Sale must be given to every person appearing to have an interest in the mortgaged
property (See Section 31(1)). Those receiving a notice of sale should include the following: original
borrower, current owner, spouses, subsequent mortgage lenders, etc. If this notice is provided by
registered mail it is considered to have been served on the date it was mailed not the date that it is
received.
While the law does allow a lender to act on its right of Power of Sale without giving notice to the
borrower, the lender would need permission from a judge to do this. This permission is likely to only be
granted where the borrower (and other interest holders) is unreachable. This occurs when the borrower
has abandoned the property and their whereabouts remain unknown after a reasonable search by the
lender.
NOTE: While a Power of Sale can be commenced after 15 days of default, most mortgage providers will
not attempt to use this remedy immediately. In most cases the process will begin with a letter sent from
the mortgage provider advising the mortgage borrower of the default and requesting that the missed
payment be sent.
If this letter does not resolve the default, the lender may then use a Demand Letter, which is a letter
sent from the lender’s lawyer demanding the payment of the amount. If neither of these remedies is
successful, the lender will then continue on to the Power of Sale process.
3. The borrower has a redemption period.
The redemption period is a period of time that the mortgage borrower has to either pay the outstanding
mortgage payments or pay the entire mortgage off. The borrower has the right to bring the mortgage
into good standing by making the payments required under the Power of Sale process as long as the
mortgage is not under renewal. If the term (time period) of the mortgage has expired, the mortgage
borrower does not have this option and must pay the entire outstanding principal balance of the
mortgage plus any other costs.
The mortgage borrower has 35 days after notice is provided in which to choose one of these options. In
a statutory Power of Sale, the borrower has 45 days to pay the outstanding amounts. If the mortgage
borrower does not select an option, A Statement of Claim for Debt and Possession is prepared and
served. This claim can be served personally to an adult member at the household where the default
happened, but it must be followed up by a mailed copy addressed to the defendant.
During the repayment period, the creditor is unable to take further action to foreclose on the property
and if the borrower pays the outstanding amounts, they can redeem the mortgage.
4. Possession of the Property by the Lender.
After the repayment period has expired and the Statement of Claim for Debt and Possession is served to
the mortgage borrower, he or she has 20 days to file a Statement of Defence with the Court. If the
mortgage borrower does not file this notice, the lender will obtain a Writ of Possession from the court.
The Writ is then filed with the sheriff in the jurisdiction in which the property is located, and sheriff
arranges for eviction.
5. Selling the Property
Once the mortgage provider has possession of the property, the property will be sold. In order to make
sure that the property is marketed for sale properly, the law sets guidelines for how the property should
be sold, including: listing the property on Canada’s multiple listing service system, conducting property
appraisals by accredited professionals and ensuring the property is on the market for a long enough
period of time.
6. After Sale of the Property
The Mortgage Act (Ontario) sets out that once the property has been sold, the mortgage lender must
pay out the funds received from the sale in the following order:





To pay all expenses involved in the sale of the property, including the Realtor’s fee, legal fees,
etc.
To pay all the interest owed on the mortgage as well as other costs associated with the Power
of Sale.
To pay the principal balance outstanding on the mortgage involved in the Power of Sale.
Payment of rental deposits made by any tenants, if applicable.
Any monies remaining must be paid to the borrower.
If, after the sale of the property, the amount received is not enough to satisfy the mortgage
borrower’s debt to the lender, the mortgage lender may still sue the borrower for the outstanding
balance.
Power of Sale with Mortgage Default Insurance
If the mortgage that has been defaulted on is insured through a ‘mortgage default insurance policy’, the
lender will make a claim on this policy and not sue the mortgage borrower for the outstanding balance.
The company insuring the mortgage will pay the lender and proceed against the mortgage borrower to
recover the money. A borrower is still liable to the insurance company for this amount.
Foreclosure
If Power of Sale is not available, or not appropriate for any reason, lenders may still sue for foreclosure.
Foreclosure is the process of suing a borrower in court to take ownership of the mortgaged property.
This can be time consuming, taking upwards of six months. Once complete, the lender becomes the
owner of the property, leaving the mortgage borrower with no interest in it. In Ontario, foreclosures are
rare due to the availability of the Power of Sale method.
Alternatives
A borrower may be able to prevent the lender from exercising its Power of Sale by filing a Consumer
Proposal or bankruptcy.
For More Information
Mortgages Act, http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_90m40_e.htm.
Bankruptcy and Insolvency Act, http://laws-lois.justice.gc.ca/eng/B-3.
Farm Debt Mediation Act, http://laws-lois.justice.gc.ca/eng/F-2.27.