What is Power of Sale
In a mortgage contract, the power of sale
is the lender's right to sell the mortgaged property if the borrower fails to pay their debt on time. In this context, power of sale property is referred to any real estate that has been put up for auction so that it may be sold to the benefit of the lender. However, not all sale proceeds must go to the mortgagee - if there is any sum remaining after the satisfaction of the debt, it will be granted to the debtor. For example, if a property is sold at $100 000, and the debt to be returned is only $60 000, after the subtraction of the auction sale costs, let’s say $5 000, the borrower will receive $35 000 from the sale of their property.
Although the power of sale
is most often part of mortgage documents (in which case it is called contractual power of sale), this needs not always be so. Thus, the Canadian Mortgages Act considers a second type of power of sale, which is not included in the mortgage contract but can still be exercised if the mortgagor has defaulted for a period of three or more months.
Both of these types are started in the same way - the holder of the power of sale sends a notice to the borrower and any other interested party (subsequent encumbrances, statutory lien gilders, etc.) after 15 days of the default have passed.
In the relevant Canadian legislation, the power of sale coexists and serves as an alternative to another practice for mortgage debt satisfaction, the judicial sale, from which it differs in three key aspects:
• The extent to which the court is involved is different. In the power of sale procedure, there is virtually no involvement on the part of court i.e. upon default, the lender can declare the mortgaged property for sale, without first having to make a court appeal. With the judicial sale, on the other hand, the court is a part of the whole debt recovery process: it orders the property to be sold, confirms its sale, and hears any application for a deficiency judgment;
• The power of sale and judicial sale differ in the manner of initiation. Whenever there is an applicable power of sale, sending a notice to the borrower is enough to start the sale of their property. However, upon a judicial sale clause, a lawsuit against the defaulting party must be filed before any further action takes place;
• The way in which a deficiency judgment is sought is different in both mortgage debt satisfaction practices (the deficiency judgment is a ruling which confirms that the sale of the mortgaged property was not enough to fully satisfy the mortgagee). If there is a power of sale, the mortgagee must start an action after the sale, whereas with a judicial sale, the deficiency judgment is a part of the main action, i.e. the suing of the borrower.