Real Estate Law
Power of Sales, Foreclosures / Judicial Sales
When a borrower has defaulted, the lender has three choices: The mortgagee may sell the mortgaged property (1) under the private power of sale provisions contained in the mortgage/ charge agreement; (2) pursuant to a court order made in a judicial sale action; (3) obtain title to the mortgaged property by means of a foreclosure action.
It has created a great deal of confusion, and many people don’t have a clear picture of the distinction between a Power of Sales, a Foreclosures and a Judicial Sale. These proceedings are complicated, and it is highly recommended that legal representation be obtained when you are trying to take legal actions in response of the borrower’s default; or when you are trying to defence against one of these proceedings as a borrower.
When the lender exercises the power of sale, which is generally contained in a mortgage/ charge agreement, the borrower conveys the mortgaged/ charged property to a purchaser free and clear of the interest of the lender and any other person having an interest in the mortgaged/ charged property subsequent in priority to the lender. A judicial sale has essentially the same result, but it’s a lot more complicated and involves a lot more steps and a much longer notice period. Alternately, by exercising a foreclosure action, the lender will become the owner of the mortgaged property, and those interests subsequent to the lender in priority will lose their interest in the mortgaged property.
A Power of Sale is by far the most popular form of the lender’s response to the borrower’s default. The borrower is generally required to pay the money due under the mortgage/ charge within 35–45 days after the issuance of the notice of sale as compared to 60 days for a judicial sale or foreclosure action.
The power of sale procedure is relatively cheap and simple in comparison, and in most cases only one court appearance is requirement. In a judicial sale or foreclosure action, there may be several attendances and motions before the courts.
Land transfer tax is not payable by the borrower in exercising a power of sale or in a judicial sale but is payable by the lender when registering a final order of foreclosure in the lender’s favour.
If the mortgaged/ charged is sold under a power of sale, or a judicial sale, prior encumbrancers’ mortgages/ charges (the mortgages/ charges registered on title before you) and other liabilities and legal obligations related to the said property flows from you (the lender) to the subsequent purchaser. On the other hand, if you (the lender) obtains title to the mortgaged/ charged property by means of a foreclosure action, you assume all prior encumbrancers’ mortgages/ charges and other liabilities and legal obligations related to the said property.
However, a judicial sale or a foreclosure action are to be used sometimes.
After the granting of a final order of foreclosure, the lender does not have to account to the borrower or any subsequent encumbrancers for any surplus realized on a subsequent sale of the mortgaged/ charged property. Under a power of sale, however, the lender has the responsibility to sell the property in good faith for a fair value, and account to the borrower and to subsequent encumbrancers for any surplus.
A Foreclosure may appeal to a lender in a depressed market where a sale of the property in the short term will not generate sufficient proceeds to repay the mortgage debt. A foreclosure might also be desirable if it involves the sale of commercial property of which a sale might not occur quickly. This is especially important in circumstances where the lender intends to spend considerable amount of money in improving the property for resale.
In a judicial sale or foreclosure action, the court is an available forum for the disposition of complex issues. This forum is not available in a power of sale procedure. For this reason, a judicial sale might be preferable if it involves the sale of a matrimonial property or a sale by an estate trustee when ownership of the mortgaged/ charged property, the agreed selling price, the distribution the proceed of sale are anticipated to be highly contentious.
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