Power of Sale
Power of Sale: Proceed with Caution
To prepare a Power of Sale Proceeding, Howard Nightingale conducts the following steps on the client’s behalf:
- Take instruction, searches, interviews, attendances, drawing and serving notice
- Handle negotiations leading to completion of the sale
- Draw the declarations of default and service and other supporting material
- Attend on making declarations and preparing deposits
The Latin expression, caveat emptor clearly applies to power of sale. As Howard Nightingale advises in the following article posted on Marisha Robinsky Real Estate Agent’s Website, and reproduced below, Power of Sale proceedings is indeed a case of BUYER BEWARE.
Power of Sale: Proceed with Caution
A Power of Sale happens when a mortgagor (borrower) cannot or does not pay his or her mortgage payments. The mortgagee (lender) then steps in to sell the property and from the proceeds of sale will pay itself back for the monies owing by the registered owner under the mortgage. Buyers looking for properties being sold under Power of Sale envisage a bargain, expecting to purchase the property for the proverbial “song”. However, it is best to recall the caution that if a deal looks too good to be true, it likely is.
At least one real estate company has injected some advice into the discussion, (see Buying a “Power of Sale”? Exercise Some Caution) but even that website doesn’t suggest that you will need legal advice to steer you through the pitfalls.
While the price may indeed be lower in a Power of Sale proceeding than in an ordinary real estate transaction, there are inherent risks, which sometimes make the supposedly ‘great deal’ not worthwhile.
In ordinary real estate transactions, the seller is the owner. The seller will provide to the buyer certain statements as to building and zoning compliance, urea formaldehyde foam insulation, payment of utilities, payment of property taxes, the existence of tenants, contamination of lands, etc. However, this does not happen in a Power of Sale proceeding.
In a Power of Sale proceeding, it may not be the owner but the mortgagee who is selling the property. The mortgagee is obligated to obtain fair market value for the property. As the mortgagee is not the owner, the mortgagee cannot provide the buyer with the same guarantees as an owner typically can. Therefore, the purchaser might not get statements from the mortgagee ascertaining that there is no urea formaldehyde foam insulation in the property, that the utilities are paid up to date, and that there is a last month’s deposit for tenants. The mortgagee will not know if proper permits were obtained for any renovations and additions to the buildings. The mortgagee is not obligated to provide a Declaration of Possession for any issues dealing with the use of the land, nor will the mortgagee provide a Survey Declaration for the positioning of the building(s) on the lands.
If this is a commercial or industrial property, the mortgagee will not provide a Declaration as to soil contamination, a requirement of any commercial lender in financing the purchase.
While title insurance can insure you against some of these risks, it cannot insure you against all of the hazards associated with a Power of Sale proceeding. The caveat “buyer beware” applies equally to an ordinary real estate transaction as it does to a Power of Sale transaction, but there are specific inherent risks along with those hoped for opportunities in a power of sale purchase.
Frequently Asked Questions
Because of the inherent risks and the “as-is” nature of these transactions, a lawyer is essential to review the Agreement of Purchase and Sale. We ensure you understand exactly what you are (and aren’t) getting and help mitigate the risks of undisclosed property issues.
Not always. In a standard sale, the owner guarantees these are paid. In a Power of Sale, the lender may not have this information. Part of our legal service involves investigating these arrears so they can be settled from the proceeds of the sale.
We handle the entire technical process, including conducting property searches, drafting and serving the Notice of Sale, handling negotiations with the borrower, and preparing all supporting declarations of default required to complete the sale.
Title insurance can protect against some risks, such as title fraud or existing liens, but it does not cover everything. It typically won’t protect you against physical defects in the home or zoning issues that were discoverable before the purchase.
Generally, no. Because the lender (mortgagee) has never lived in the property, they usually refuse to provide declarations regarding property boundaries, surveys, or the status of building and zoning compliance. Buyers must conduct their own due diligence.
Yes. In most cases, the homeowner has the right to “redeem” the mortgage by paying the full amount of the arrears, interest, and the lender’s legal costs at any time before the property is sold.
The biggest risk is “Buyer Beware” (caveat emptor). Lenders often sell the property “as-is,” meaning they provide no guarantees regarding the condition of the home, the existence of UFFI insulation, or whether renovations were done with proper permits.
Not necessarily. In Ontario, lenders are legally obligated to obtain “fair market value” for the property. While you might find a deal, the lender cannot simply sell it for a “song” to get a quick exit, as they could be sued by the original owner for underselling.
In a Power of Sale, the lender sells the property and must give any “extra” profit back to the homeowner after the debt and costs are paid. In a foreclosure, the lender takes full ownership of the property and keeps any equity or profit. Power of Sale is the most common method used in Ontario.
A Power of Sale is a legal remedy available to a mortgage lender (mortgagee) when a borrower (mortgagor) defaults on their mortgage payments. It allows the lender to sell the property to recover the outstanding debt without the lengthy court process required for a foreclosure.
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